JOINT REVIEW OF THE STRATEGIC PLANS AND BUDGET OF THE INTERNAL 

REVENUE SERVICE, 2000

HEARING

before the

Committee on Finance

Committee on Appropriations

Committee on Governmental Affairs

UNITED STATES SENATE

and the

Committee on Ways and Means

Committee on Appropriations

Committee on Government Reform

HOUSE OF REPRESENTATIVES

One Hundred Sixth Congress

Second Session

______

May 3, 2000

______

JCS-4-00
COMMITTEE ON FINANCE

William V. Roth, Jr., Delaware, Chairman Daniel Patrick Moynihan, New York

COMMITTEE ON APPROPRIATIONS

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

COMMITTEE ON GOVERNMENTAL AFFAIRS

Fred Thompson, Tennessee, Chairman Joseph I. Lieberman, Connecticut

____________

COMMITTEE ON WAYS AND MEANS

Bill Archer, Texas, Chairman Charles B. Rangel, New York

COMMITTEE ON APPROPRIATIONS

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

COMMITTEE ON GOVERNMENT REFORM

Dan Burton, Indiana, Chairman Henry A. Waxman, California
CONTENTS

Page

Press Releases of April 11 and 19, 2000, announcing joint review...........................

Opening Statements ...................................................................................................

WITNESSES

Internal Revenue Service, Hon. Charles O. Rossotti, Commissioner........................

Department of the Treasury, Hon. David C. Williams, Treasury Inspector

General for Tax Administration.................................................................................

Internal Revenue Service, Mr. W. Val Oveson, National Taxpayer Advocate .........

General Accounting Office, Mr. James R. White, Director—Tax Policy and 

Administration Issues.................................................................................................
JOINT REVIEW OF THE INTERNAL REVENUE SERVICE, 2000

____________

WEDNESDAY, MAY 3, 2000

The joint review met, pursuant to notice, at 9:30 a.m. in room 215 Dirksen Senate Office 

Building, Senator Charles E. Grassley, presiding.

[The press releases announcing the hearing follows:]
JOINT COMMITTEE ON TAXATION

PRESS RELEASE

JCT Press Release: 00-03

For Immediate Release: April 11, 2000

For Further Information, Contact: Michael Boren (202-225-3621)

(Michael.Boren@Mail.House.Gov)

The Internal Revenue Service Restructuring and Reform Act of 1998 (the AIRS Reform 

Act@) requires the chairman of the Joint Committee on Taxation to convene a joint review of the 

strategic plans and budget of the IRS. The joint review is to be held before June 1 of calendar 

years 1999 through 2003. The joint review is to include two Members of the majority and one 

Member of the minority from each of the House Committees on Ways and Means, 

Appropriations, and Government Reform and the Senate Committees on Finance, 

Appropriations, and Governmental Affairs. 

Pursuant to the IRS Reform Act, Senator William V. Roth, Jr., Chairman, Joint 

Committee on Taxation, has scheduled a joint review of the IRS strategic plans and fiscal year 

2001 budget for Wednesday, May 3, 2000, at 10:00 a.m. in room 215 of the Dirksen Senate 

Office Building. Witnesses will be announced at a later date. The joint review will be open to 

the public.
JOINT COMMITTEE ON TAXATION

PRESS RELEASE

JCT Press Release: 00-04

For Immediate Release: April 19, 2000

For Further Information, Contact: Michael Boren (202-225-3621)

(Michael.Boren@Mail.House.Gov)

JOINT REVIEW OF INTERNAL REVENUE SERVICE

ANNOUNCEMENT OF WITNESS LIST AND TIME CHANGE

The joint review of the strategic plans and fiscal year 2001 budget of the Internal 

Revenue Service will be held on Wednesday, May 3, 2000, in room 215 of the Dirksen Senate 

Office Building beginning at 9:30 am.

Witness List

A Panel Consisting of:

The Honorable Charles O. Rossotti, Commissioner of Internal Revenue,

Washington, D.C.

A Panel Consisting of:

The Honorable David C. Williams, Treasury Inspector General for Tax 

Administration, Washington, D.C.

Mr. W. Val Oveson, National Taxpayer Advocate, Internal Revenue Service,

Washington, D.C.

Mr. James R. White, Director, Tax Policy and Administration Issues, United States

General Accounting Office, Washington, D.C.
JOINT REVIEW OF THE STRATEGIC PLANS AND BUDGET 

OF THE INTERNAL REVENUE SERVICE, AS REQUIRED BY 

THE INTERNAL REVENUE SERVICE RESTRUCTURING AND 

REFORM ACT OF 1998

------------

WEDNESDAY, MAY 3, 2000

United States Senate

U.S. House of Representatives,

Joint Committee on Taxation

Washington, DC.

 

The joint review was convened, pursuant to notice, at 9:37 a.m., Senator Charles E. 

Grassley presiding.

Senators present: Hatch, Kerrey, and Dorgan.

Representatives present: Houghton, Portman, Coyne, Northup, Sununu, Hoyer, and Horn.

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

FROM IOWA

Senator GRASSLEY. Good morning, everybody. Thank you for your attention to our 

statutory responsibility of having this annual joint review of the IRS through our carrying out the 

responsibilities of the reform legislation that recently passed.

So, on behalf of Senator Roth, I want to thank everyone for attending this very important 

joint review of the Internal Revenue Service. This is the second time we have held a joint review 

of the Internal Revenue Service.

As many of you know, I was a member of the IRS Restructuring Commission which was 

ably co-chaired by Senator Kerrey of Nebraska and Congressman Portman of Ohio. The 

Commission found that the various congressional committees represented here today focus on 

different issues that change from year to year.

This creates a sort of lack of coordinated focus on the highest level in strategic matters of 

the IRS, and blurs the ability of the IRS to set a strategic direction and focus on priorities as law 

would require. Hence, the joint congressional oversight that we have legislated.
So we alleviate this situation through the IRS Restructuring Act mandating this joint 

review to include two members of the Majority and one member of the Minority from each of 

the House Committees on Ways and Means, Appropriations, and Government Reform, and the 

Senate Committees of Finance, Appropriations, and Governmental Affairs.

In accordance with the intent of the IRS Restructuring Act, the joint review will focus on 

the long-term objectives and strategic plans of the Internal Revenue Service, the steps that have 

been and will be taken to achieve those objectives and plans, and whether the IRS budget 

supports those objectives and plans.

While this joint review is intended to help provide coordinated oversight, I must say that I 

am disappointed that the IRS Oversight Board nominees that were promptly reported out of the 

Finance Committee have not been confirmed by the Senate, due, of course, to unrelated issues, 

as so often happens in the Senate.

The Oversight Board will provide Commissioner Rossotti with continuity and important 

strategic planning. I hope the nominees are cleared soon so that they may begin immediately 

doing their very important task.

In the past two years since the IRS Restructuring law was enacted, several press accounts 

have alleged that the law went too far and the IRS is now prohibited from enforcing the law and 

collecting taxes.

I believe I can speak for Senator Roth, and I can surely speak for myself, that we strongly 

disagree. The law constituted one of the largest and most significant government reform efforts 

in history.

While the IRS is in the throes of this enormous restructuring, we obviously know that it 

still must collect taxes. However, like the private sector, the agency must provide better service 

with a focus on efficiency and fairness. Taxpayers must be treated fairly and with due process.

However, taxpayers are still required to pay their taxes that are due. Despite 

Commissioner Rossotti's great efforts and substantial achievements, we all know the IRS 

continues to have serious challenges. IRS employees need to be retrained in the new law.

Egregious practices of the past still continue, including the illegal use of enforcement 

statistics, which may result in the violation of taxpayers' rights. We heard testimony at the 

Finance Committee hearing in February that over 46,000 innocent spouse claims had yet to be 

resolved.

In addition, we were greatly concerned to learn that the use of liens and levies had 

plummeted last year, yet the IRS does not necessarily follow the law or its own procedures a 

third of the time when it actually files a lien or seizes property.
Also, there is confusion as to how the IRS is interpreting portions of the law, which has 

made it more difficult to collect taxes owed. These conditions must be changed. We also have 

heard concerns about IRS funding and its computer modernization efforts.

It is imperative that the IRS be reformed and modernized. We must provide appropriate 

funding for the IRS, as well as appropriate oversight to ensure that the agency has a strategic 

plan and does not stray while implementing that plan.

Funding is part of the answer, but, as with most things, just throwing money at a problem 

will not fix it. I am still hearing from IRS personnel on the ground that money is being wasted 

and used inefficiently.

Before supporting increased funding, Congress needs to be assured that money is 

currently being spent as wisely as possible. It is our responsibility, as Members of Congress who 

hear these things, to point them out in whatever way that the Commissioner would like to have 

them pointed out.

Today we will hear from Commissioner Rossotti and a panel consisting of David 

Williams, the Treasury Inspector General for Tax Administration; Val Oveson, the National 

Taxpayer Advocate; and James White, Director of Tax Policy and Administration Issues at the 

General Accounting Office. I look forward to their testimony.

Now it is my pleasure to call upon the Congressman from New York. 

OPENING STATEMENT OF HON. AMO HOUGHTON, A U.S. REPRESENTATIVE 

FROM NEW YORK

Mr. HOUGHTON. Thank you very much, Mr. Chairman. It is always a pleasure to be 

with you. It is nice to be with you in this review of the strategic plans of the IRS.

A recurring theme, as we have seen in analyzing the operations of the IRS, is the role of 

new technology, enabling it to better serve the taxpayers. The IRS has long recognized the 

shortcomings of its computer system.

So, after years of false starts and slow progress, I believe the IRS has learned from its 

past mistakes. It has embarked on a new approach to computer modernization by retaining a 

PRIME contractor from the private sector to help design and integrate its new computer system.

But where does the program currently stand? Also, what milestone should we look for 

over the next 18 months in order to evaluate whether or not this program is on track? Also, how 

much resources will it require?
The IRS did a great job in terms of the Y2K problem. The effort was successful because 

the business side of the IRS's operations worked very closely with the information technology 

side. Hopefully, this will set a pattern for future success in computer modernization.

Mr. Chairman, I am delighted to be here with my associates. I trust that our joint 

oversight and support will help make this program a success.

Senator GRASSLEY. My list has Senator Kerrey next, then Congressman Portman, 

Congressman Coyne, Congressman Sununu, and Congressman Horn.

OPENING STATEMENT OF THE HON. J. ROBERT KERREY, A U.S. SENATOR 

FROM NEBRASKA 

Senator KERREY. Thank you very much, Mr. Chairman.

First of all, it is nice to see Charles Rossotti again. It has been nearly two years since the 

IRS Restructuring and Reform Act of 1998 was signed into law. I have deep regret, because I 

think it creates an awful lot of difficulty for Congress in evaluating the work that you are doing; 

indeed, I think it creates a great deal of difficulty in you accomplishing your mission, that we 

still, after two years, do not have the very important IRS Oversight Board in place.

First, the delay came about as a consequence of the administration being late in getting 

the names up, and now it is being held up in the Senate. It is quite unfortunate, in my view, 

because it makes it very difficult for us to evaluate many of the reports we are hearing about the 

1998 Act.

The GAO tells us that the number of seizures by the IRS has declined by 98 percent, from 

10,000 annually for 1990 to 1997, to about 200 in 1999. We were either seizing too much from 

1990 to 1997 or we are seizing too little now, and it is extremely difficult to evaluate that.

I am sure you have made an evaluation and will talk about that today, but it is an example 

of the sort of thing that the IRS Board is supposed to be able to assist you in doing so that you 

are not bouncing around back and forth between one committee and another explaining every 

single thing in a reactive way.

There are many examples, unfortunately, of situations that have been brought to my 

attention over the last two years of people saying, --A I think the law created a problem, it did not 

solve a problem, what do you think,@-- or urge me to support some additional budgetary 

resources, or urge me to take action on a technology plan in one way, shape, or another.

The Board is supposed to provide you, Mr. Rossotti-- and I am preaching to the choir 

here--with a resource that enables you to not only have an independent voice in dealing with the 

administration, but also an independent voice in dealing with Congress.
Unfortunately, if we are not happy with you, oftentimes what we do is merely take it out

on your budget or take it out in some other way that may end up being counterproductive.

This Board is not the typical advisory board. It is a board with a considerable amount of 

power and authority under statute and it is quite unfortunate--in many ways, indicative--of why 

we have trouble with the IRS. The IRS sort of gets caught in between, sometimes, congressional 

neglect and administrative neglect, and, as a consequence, the taxpayers are the ones that suffer.

The reason, in the first place, that we spent a great deal of time with the IRS Commission 

and recommended all these changes, is the IRS is a very unique agency and has a mission that 

contributes enormously to the confidence of the citizens of the United States of America that 

their government is working for them.

As the IRS Commissioner noted, voluntary compliance over the last 15 to 20 years has 

been dropping. This raised a great deal of concern on Congress' part that something needed to be 

changed in order to stabilize what appeared to be a declining confidence that the IRS was an 

agency working for the people.

You have got a difficult mission in that you have both a service mission and a law 

enforcement mission to carry out, but the IRS does a lot more than just efficiently collect taxes. 

It strikes at the heart of our capacity to continue to govern ourselves with the people's confidence 

that it still is a government of, by, and for the people.

So, Mr. Chairman, I appreciate the hearing and look forward to the testimony of Mr. 

Rossotti.

Senator GRASSLEY. Thank you, Senator Kerrey. Now, Congressman Portman.

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

FROM OHIO 

Mr. PORTMAN. Mr. Chairman, thanks very much. Thank you for convening this very 

important joint review.

As you noted earlier, this comes right out of the IRS Commission's work and out of the 

Restructuring and Reform Act. The notion is that we have all six of the committees that deal 

with the IRS come together, talk together, and communicate better together.

We also have the Joint Tax Committee here with us, a very important part of the 

oversight responsibility, so really seven committees to better coordinate the strategic plan and 

budget of the IRS. This is part of our responsibility on the Hill, at this end of Pennsylvania 

Avenue, to do a better job of, in this case, oversight of the IRS.
I want to commend Commissioner Rossotti for his good work and for staying true to the 

vision that was laid out in the Commission's report, and in the Restructuring and Reform Act.

I think, since becoming the Commissioner nearly two and a half years ago now, 

Commissioner Rossotti has done a good job in putting together a good group of top executives.

He has now hired the PRIME contractor, finally, to modernize the technology--and I 

think that is a very helpful step forward--and steered the agency, I think, very well through the 

Y2K crisis and had a good filing season. I want to, again, commend him for that.

I think, also, that the Commissioner has laid out a blueprint for a reform of the IRS that is 

a credible outline and that is very important. I think it is time to go to the next level, though. I 

think that is what Senator Kerrey, my co-chairman of the Commission, is referring to.

I think that is really the next challenge that we have. We are now entering what I view as 

a new and, I think, very risky stage of this experiment. If we do not succeed, we are going to 

have consequences for every taxpayer which are very serious.

I think the next two years are critical for the IRS to move beyond just the plans and 

blueprints that we have and begin to put together a very detailed strategic plan that actually 

creates the framework for moving this organization, this bureaucracy into the customer service 

age and building that modern institution that we all promised in the Commission and the 

Restructuring and Reform Act.

This is going to be difficult. This will entail bringing together people in the customer 

focus business unit, while simultaneously providing them with the training and the management, 

and the information tools that they need to ensure that we collect taxes fairly and with the least 

amount of burden. Again, the price of failure will be very high, and I think it is critical that we 

now focus on that. 

I do want to mention, Mr. Chairman, if I might, that in order to mitigate those risks and to 

move forward, we have got to have the Oversight Board in place. I would only make a comment 

again today that I have made many times, that the basic reasoning behind this Board, continuity, 

expertise, and accountability, are still lacking at the agency and are still needed, and nothing has 

changed with regard to the need for those qualities and the need for having the Board in place, 

frankly, to support Commissioner Rossotti and others who are trying to do the right thing at the 

IRS.

I am just amazed that, after the administration took 377 days beyond the statutory 

deadline to send the appointees up, that now there continues to be foot- dragging here in the U.S. 

Senate. I do not know exactly why; I have heard a lot of different stories.

But the point is, we need this Board in place. We need it in place now. I would hope that 

those Senators who are holding up the confirmation of the Board members would really think 

seriously about the impact their foot- dragging is having on the taxpayers of this country.
I wish, frankly, we had more accountability in the process, Mr. Commissioner, of getting 

your Board in place. Talk about the need for accountability.

 I believe this is a very important part of putting together that detailed master plan that 

Senator Kerrey referred to, and that I think also is needed at this point in terms of IRS reform.

So, again, Mr. Chairman, I thank you very much. I do believe we are going to hear from 

the Commissioner about the need for some resources, and I support that. We have a job to do 

here on Capitol Hill, just as we have now come together to coordinate.

We also have a job to provide the IRS with adequate resources to get the job done. If we 

short-change the modernization effort at this point, I believe we will increase that risk of failure 

that I mentioned earlier.

So I look forward to hearing from Commissioner Rossotti today, and participating in a 

good debate and lively discussion on what we need to do to make the goal of IRS restructuring 

and reform a resounding success.

Thank you, Mr. Chairman.

Senator GRASSLEY. Thank you, Congressman Portman. Now, Congressman Coyne.

OPENING STATEMENT OF HON. WILLIAM J. COYNE, A U.S. REPRESENTATIVE 

FROM PENNSYLVANIA 

Mr. COYNE. Thank you, Mr. Chairman.

I would like to congratulate the Commissioner and the employees of the Internal Revenue 

Service on an extremely successful 2000 filing season. Despite the challenges of the ongoing 

reorganization and the year 2000 roll-over, this year has marked one of the most successful filing 

seasons in recent memory.

Commissioner Rossotti has testified before the Ways and Means Committee in the House 

that it is vital that we support full funding for the IRS's proposed fiscal year 2001 budget to 

continue this trend. Without proper funding, we cannot expect continued improvements in 

customer service. Also, shortages of personnel, if they continue, could threaten the effective 

enforcement of the tax laws.

I look forward to this joint session as an opportunity to hear more about the continuing 

improvements in tax administration at the IRS. We have already come a long way toward 

making the IRS more accountable and raising customer service levels throughout the country.
This joint hearing of the House and Senate is a great opportunity for us to provide the 

IRS with clear bipartisan direction and support. 

Thank you, Mr. Chairman.

Senator GRASSLEY. Thank you. Congressman Sununu?

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

FROM NEW HAMPSHIRE 

Mr. SUNUNU. Thank you, Mr. Chairman.

At the beginning of the hearing this morning I mentioned to the Commissioner that it was 

good of him to testify, given that he has been before Congress nearly a dozen times this year. He 

was either polite enough, or pressured enough, to point out that it is an important part of his job.

I welcome him here today and give great credit to the clarity and the candor with which 

he has testified before our Subcommittee on Appropriations, and all the other House and Senate 

committees that share jurisdiction over the work that he does.

About two weeks ago on the eve of the filing deadline, I was really fortunate to be able to 

spend some time at the large New England filing center in Andover with a number of IRS 

employees, touring the pipeline and looking at the work that they do.

They were rightfully quite proud of the volume of returns that were coming in, the 

relative level of calm, even in an environment where they knew they were under a deadline to 

perform, and perform to standards that have been imposed, and a standard that has been elevated 

by the Restructuring Act.

But, even so, they really recognized that they could do better. They wanted to do better. 

They understand, probably better than most of the people in this room, that they can improve, 

that there are weaknesses in the system. I think that really does speak volumes of their 

dedication, but it also speaks to the opportunity that the Commissioner has and has already begun 

to take advantage of.

In doing so, I would ask that perhaps you address two points among the many in your 

testimony today. Those were raised by the employees in Andover. First, is the quality of the 

information systems, the integration of the databases, and the improvement of those systems so 

that they can fulfill their mission with regard to customer service, which has really been 

changing a great deal; and second, in customer service in particular, what can be done to improve 

the performance standards.

The call pick-up rate is one that is pointed to, one where there was really a slight decrease 

in performance, and one that the information presented by the GAO seemed to indicate was not 
driven by money, but was driven at least as much by organizational/structural issues, training 

issues, and putting in a good performance system for customer service.

So, I think that is where the opportunity lies. For better or for worse, that is where the 

majority of Americans interface with your organization and that is, rightfully, where the public 

deserves to have the highest level of performance.

So I am optimistic, in part, because your employees are optimistic even in the face of 

great challenges, and I look forward to hearing your testimony today.

Thank you, Mr. Chairman.

Senator GRASSLEY. Thank you. Now, Congressman Horn.

OPENING STATEMENT OF HON. STEPHEN HORN, A U.S. REPRESENTATIVE 

FROM CALIFORNIA 

Mr. HORN. Thank you very much, Mr. Chairman. I think this is a very worthy 

endeavor, with all of the committees working together. 

I have very high regard for Commissioner Rossotti; I think he has done an outstanding 

job. But we need to give him a little more help. One of the problems, and this is throughout the 

executive branch, is the financial management statements of the various agencies. They are 

really pretty pitiful.

We have asked the Comptroller General to take a look also at the hardware and the 

software because we need, in Congress, to upgrade that computing ability, and the IRS is among 

those needing an upgrade, although it is already on the road in some respects in that area.

But the one that concerns me the most, and has since 1996, is that the IRS has not been 

given the authority by its authorization committees--Finance in the Senate, Ways and Means in 

the House--to collect the tax debts that are owed the people of the United States. 

At a recent hearing by our Government Management Subcommittee, we learned that at 

the end of fiscal year 1999 the government was owed $231 billion in unpaid taxes, penalties, and 

interest. Of that amount, the Comptroller General of the United States and the General 

Accounting Office say at least $21 billion is collectible.

The Debt Collection Improvement Act that we put on the books in 1996, provides the 

Federal Government with a mechanism to collect delinquent Federal non-tax debts. The law 

provides the Treasury with a variety of tools to go after that delinquent debt, including the use of 

private collection agencies. The law, however, does not cover tax debt, and I would hope both 

committees would face up to that.
Senator GRASSLEY. Now, Congressman Hoyer.

OPENING STATEMENT OF HON. STENY H. HOYER, A U.S. REPRESENTATIVE 

FROM MARYLAND

Mr. HOYER. Thank you very much, Mr. Chairman. I appreciate this opportunity to 

join you and other members of the relevant committees. I am pleased to be here representing the 

Minority side of the House Appropriations Committee at this second joint review hearing.

Mr. Commissioner, as you know and as you stated in our appropriation hearing in March 

and will again today, the IRS is at a crossroads. I believe Mr. Portman, who has been so 

involved in this, made a similar comment in his opening statement.

The number of tax returns continues to increase. Returns for those making $100,000 or 

more has increased 63 percent since 1993. Yet, I am very concerned that the number of 

personnel at the IRS continues to decrease, by roughly 17,000 FTEs since 1993. That is a 17,000 

FTE decrease.

One of the things that was observed in the document that was the result of the IRS 

Commission chaired by Senator Kerrey and Mr. Portman was the fact that two things had to be 

present. One, was that we had to have a relatively stable Tax Code so we were not requiring the 

IRS to change its processes every year, and second, that we had to have certainty of budgeting so 

that the funding levels for staff and operations was consistent.

What concerns me about this trend and downturn, is that because of the Restructuring and 

Reform Act's justified emphasis on taxpayers' rights and customer service, IRS enforcement has, 

in my opinion, been weakened.

Now, as Mr. Portman and others will recall, I was one of four to vote against the bill the 

first time it passed the House. I raised the concern that if you were going to be for tax reform 

and you were going to be for taxpayer-friendly actions, you had to fund the IRS properly and you 

had to draw the Tax Code so that it was rational, reasonable, and relatively easy to enforce.

Recent research data concerns me greatly, released by Syracuse University, which shows 

that the poor are now more likely to be audited than the rich. One in every 74 taxpayers 

reporting income below $25,000 was audited last year, compared to one in every 87 taxpayers 

reporting income of over $100,000.

Since 1988, audits of the self-employed with gross income of $100,000 or more have 

been reduced by more than half, 55 percent, and only one in every 66 corporations was audited 

in 1999, an 86-year low.

On top of this, seizures of property from recalcitrant, non-paying taxpayers have dropped 

by 98 percent. In other words, we are no longer in that ball game. 
Mr. Commissioner, the National Commission on Restructuring the IRS recommended in 

1997 that Congress provide the IRS certainty in its operational budget, and that Congress work 

towards simplifying the tax law whenever possible.

As we continue to review the implementation of the 1998 Act, we must ensure, in my 

opinion, that the IRS has the resources necessary to have a stabilized workforce, while 

implementing the very important reforms of the Act.

I congratulate all of you who were so involved in that. I was involved myself, and think 

the Act is having a positive effect, but we also need to guard against its negative impact.

Thank you very much, Mr. Chairman, for allowing me to make this opening statement.

Senator GRASSLEY. Now, Senator Hatch.

OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 

UTAH

Senator HATCH. Thank you, Mr. Chairman.

As I see it, the purpose of this joint hearing is three-fold. First, we are to review the 

strategic plans and the budget of the IRS, second, is to question the witnesses before us today to 

learn how Congress can help the IRS to better fulfill its mission; and finally, it is our job to raise 

concerns, and even criticize the agency when warranted, on behalf of the American people. We 

must not forget that no other institution of the Federal Government touches the average taxpayer 

in a more vital and personal way than does the Internal Revenue Service.

Before we begin, especially with the criticism, I would like to make a key distinction 

between the myriad of rules and regulations that comprise our tax system and the hardworking 

and honest Americans who are the vast majority of employees of the IRS and who are doing 

their best to do a good job, in what is often a very difficult environment.

I especially want to highlight the excellent employees in the Ogden, Utah service center 

who serve taxpayers in 14 States. Since January 1, these employees have processed over 14 

million tax returns.

During the peak period from April 12 to 28, Ogden IRS employees processed over 1.5 

million payments, and, most importantly to many taxpayers, Ogden posted an excellent record 

for quick refunds, at an accuracy rate approaching 99 percent, which is pretty incredible.

Meanwhile, customer service representatives in Ogden have helped nearly 800,000 

taxpayers by telephone and answered more than three-quarters of a million pieces of mail since 

last October.
So, Mr. Chairman, amid all the concerns and problems of the IRS, which are serious and 

many, I hope we can focus on the real issues. One, is the capacity and effectiveness of the IRS 

to deal with millions of returns and taxpayer questions.

Another, is that too many taxpayers still believe they are being treated unfairly or in a 

non-responsive manner by IRS employees. Still worse is the byzantine complexity of the Tax 

Code. I hope we can all agree that a key to solving many of the IRS's problems is to simplify the 

Tax Code.

So I want to thank the Chair and ask that my full statement be put in the record at this 

point.

Senator GRASSLEY. Permission granted.

[The statement of Senator Hatch follows:]

STATEMENT OF SENATOR ORRIN HATCH

BEFORE THE JOINT REVIEW OF THE

INTERNAL REVENUE SERVICE

May 3, 2000

Good morning, Mr. Chairman. As I see it, the purpose of this joint hearing is threefold. 

First, we are to review the strategic plans and the budget of the IRS. Second, we are to question 

the witnesses before us today to learn how Congress can help the IRS to better fulfill its mission. 

 Finally, it is our job to raise concerns and even criticize this agency when warranted on behalf of 

the American people. We must no forget that no other institution of the federal government 

touches the average American taxpayer in a more vital and personal way than does the Internal 

Revenue Service.

Before we begin, especially with the criticism, I would like to take just a moment to make 

a key distinction between the myriad of frustrating rules and regulations that comprise our 

federal tax system and the hard-working and honest Americans who are the vast majority of the 

employees of the IRS and who are doing their best to do a good job in what is very often a 

difficult environment.

I especially want to highlight the excellent employees in the Ogden Utah Service Center, 

who serve taxpayers in 14 states. Since January 1 of this year, these employees processed over 

14 million tax returns. During the two-week peak period from April 12 to the 28th, Ogden IRS 

employees processed over 1.5 million payments totaling almost $6 billion. And, most 

importantly to many taxpayers, Ogden posted an excellent record for quick refunds averaging 

just 11 days for electronically-filed returns and 32 days for paper returns, all at an accuracy rate 

approaching 99 percent.
Meanwhile, customer service representatives in Ogden have helped nearly 800,000 

taxpayers by telephone and answered more than three-quarters of a million pieces of mail since 

last October. As with IRS employees throughout the nation, Ogden employees are also good 

citizens, volunteering in many worthy community activities, such as the Volunteer Income Tax 

Assistance Program and the “I Can Read” literacy program. Twelve customer service 

representatives from Ogden volunteered to leave their families for two months last year to help 

the Federal Emergency Management Agency assist hurricane victims with tax problems.

So, Mr. Chairman, amid all the concerns and problems of the IRS – Which are serious 

and many – I hope we can focus on the real issues. One is the capacity and the effectiveness of 

the service to deal with millions of returns and taxpayer questions. Another is that too many 

taxpayers still believe they are being treated unfairly or in a non-responsive manner by IRS 

employees. Still worse is the byzantine complexity of the tax code. I hope we can all agree that 

a key to solving many of the IRS’s problems is to simplify the tax code.

I thank the Chair.

Senator GRASSLEY. You should feel good, Commissioner Rossotti, about all of the 

appreciation that people have for your leadership work; bringing your management skills to the 

job and worrying about how the operation runs and exactly how the Tax Code is interpreted. We 

think that that is what is badly needed and we are glad that you are working towards that end.

Would you proceed?

STATEMENT OF HON. CHARLES O. ROSSOTTI, COMMISSIONER OF INTERNAL 

REVENUE

Mr. ROSSOTTI. Thank you, Mr. Chairman and distinguished members of the Senate 

and House committees.

What we at the IRS are doing is following the clear directions that we were given in the 

landmark Restructuring and Reform Act. Following this direction, we are planning and

implementing the most significant changes to organization, technology, and most importantly, 

the way we serve taxpayers, in half a century.

We think that the Restructuring Act asks the IRS to try to simultaneously achieve three 

goals. First, we must respect taxpayer rights and provide good service, as many members of the 

committee said in their opening statements. But, second, we also must ensure that the taxes that 

are due are paid. Third, in an era of tight budgets, we have to do all of this very efficiently.

I want to stress, as I have to our employees, that we really cannot succeed unless we 

achieve all three of these goals at the same time. It is not our purpose to move an imaginary 
pendulum in one direction or another a few degrees. We think our purpose is really to improve 

the entire way that the IRS works and to achieve all three goals.

Now, to achieve this, we do have to make many changes. We are already witnessing, I 

think, some positive results and I very much appreciate the comments that many of the members 

made in their opening statements about the filing season.

We have also implemented the 71 taxpayer rights provisions of the Restructuring and 

Reform Act. We have implemented, or at least begun to roll out, a whole new system of 

performance measures. Our reorganization, which is aimed at increasing focus on serving 

customers and on management accountability, is progressing rapidly, and we have a whole new 

top management team in place.

In the filing season that just ended, we did have a very smooth season. We did improve 

our phone service and we did solve the Y2K problem completely. We also are attempting to 

respond in the near term, as well as we can, to recommendations that we received from many 

different sources about how we can improve. We know there are many opportunities to do that. 

Since January of 1999, for example, we have received 80 audit reports from the Treasury 

Inspector General for Tax Administration, with 375 specific recommendations for changes and 

improvements, and 89 reports from GAO, with 94 specific recommendations. At the present 

time, we have 174 GAO and TIGTA reports under way.

Mr. Chairman, in the context of all of these demands on us, our first priority over the last 

12 months was, in fact, implementing the taxpayer rights and other provisions of the 

Restructuring and Reform Act. This did stretch our capacity to the limit, and our initial focus 

was on making sure that we were complying with the provisions of the law.

In fiscal year 1999, for example, we provided our employees over two million hours of 

training on the Restructuring and Reform Act, and we estimate that we are devoting the 

equivalent of about 4,560, as shown on this chart on the left, equivalent personnel for performing 

tasks specifically related to provisions of the RRA.

[Chart D follows:]

We are now at the stage, we believe, where we have completed, I will call it, that first 

phase of complying with the legal provisions. But as many members noted in your opening 

statements, we have several years of work ahead to really make these provisions work efficiently 

and with higher quality.

I have to also say, on an overall assessment, Mr. Chairman, despite the fact that we have 

had some significant accomplishments and improvements, I could not come before you and say 

today that I think we are meeting legitimate service expectations of the vast majority of 

compliant taxpayers at the level that they expect to be served.

I think Mr. Sununu mentioned that our employees in Andover said the same thing. I 

think our employees agree with that. We are making improvements, but we are not at the level 

that we need to be.

At the same time, as others including Mr. Hoyer mentioned, our compliance activity 

continues to drop. Finally, as Mr. Horn and GAO have pointed out, many of the systems we use 

to manage and to account for this $1.8 trillion of revenue are just inherently deficient. They do 

not meet acceptable accounting standards.

So these are very severe problems that we will still confront, and if they were not 

addressed, I think over time they would certainly undermine the fairness and viability of our tax 

system.

But I think it is also true that these problems are not newly identified. These are not 

surprises at this point, nor do I believe, after about two and a half years in office, that they are 

impossible to solve. I think they can be solved, and I think we now have in place the plans, at 

least at a top level, that we need to follow in order to solve these problems.

This is, however, an enormous program. In order to succeed in this program, we do have 

to have adequate budget resources in fiscal 2001 to address both our critical near-term 

operational needs and to invest in new technology.

I would just like to briefly cover this subject, just in a few paragraphs. I think the rapidly 

expanding economy, which is wonderful news for the American public and also for the Federal 

budget, does, however, continue to increase the IRS workload.

For example, since 1993, the number of individual tax returns with over $100,000 of 

income, which generally are more complex kinds of returns, have increased by 63 percent. In 

the meantime, our staff has decreased by 17,000.

I think, of course, as was noted in that previous chart, we have been required by the

Restructuring and Reform Act to devote specific numbers of personnel to administer certain 

provisions of the Tax Code.
So, as a result, the number of personnel devoted specifically to compliance activities, to 

audits and collections cases, has decreased even more rapidly than the overall decrease in our 

staff, which in turn has simply resulted in some of the statistics that were mentioned by some of 

the members in their opening statements, such as the declines in the numbers of audits.

I have a summary chart here that shows, in the last few years, some of our case coverage. 

 This is auditing and collection cases. As you can see, it has been declining very, very rapidly.

[Chart 1 follows:] 

That is a function of the decline in resources as well as, I have to honestly say, due to 

some internal confusion, uncertainty, relearning of how to do our jobs in the IRS among our 

employees and managers, which has had the effect of not only reducing the number of staff, but 

also increasing the time that is required to process each case. When you boil it all down, you get 

what is on that chart.

So to address some of these immediate operational requirements, we have requested an 

increase in staffing in our fiscal 2001 budget to provide for an additional 28,033 full-time 

equivalent staff for fiscal year 2001.

We would expect that, if we were granted this request, together with the other 

management changes we are making, we will be able to stabilize those activity levels. In other 

words, stop that downtrend, which, by the way, has been going on for almost 10 years. It is not 

just in the last two years.

So that staffing increase would help us to meet our critical operational needs, while we 

also then transition to the new, improved organization, and especially to our new technology.

Let me just finish up here a bit on technology. The IRS is totally dependent on 

technology. Almost every one of our 100,000 employees depends on our computer systems 

every day to do their job and to collect on a property account for almost $1.9 trillion of gross 

revenues that are coming in.

Yet we know that these systems are very, very old and, in many respects, fundamentally, 

and I would say irremediably, deficient. They cannot be fixed. They need to be replaced.

In my written testimony, we have provided great detail, and even more detail for the 

Appropriations Committees, on how we propose to go about this during fiscal year 2000 and 

2001. In our 2001 budget, we have requested $119 million to continue progress along the 

technology dimension.

Let me stress on this point that this is a large and risky program. There is no way to 

avoid some risks in managing a program of this size. But I believe that we can manage these 

risks, just as we did with our $1.4 billion Y2K program. We all recognized that, and several 

Members here were very active in that effort.

Mr. Horn had several hearings I appeared before which appropriately called attention to 

the risks that we faced. But, in the end, we did manage our way through that and got through 

them. I do not have time now, but would be happy to expound if anyone wants on some of the 

specific things that we have put in place to try to manage these risks.

This, most importantly, takes the form of top management, including myself, my chief

information officer, and my top management, constantly monitoring the level of activity we have 

in these programs to be sure that we are not getting beyond our management capacity.
At the same time, we have to do some things or we will not move forward. We have 

already made significant adjustments to try to make sure that we have appropriately set the level 

of activity we take in moving forward on projects in accordance with what we believe is an 

acceptable level of risk in management capacity.

So, Mr. Chairman, I do think we are making real progress on the goals and mandates that 

were set for the IRS by the Congress in the Restructuring Act. If the Congress will continue to 

provide us support in the form of proper oversight and support in that regard, as well as in 

support for our 2001 budget request, I believe that we will be able to provide visible and tangible 

changes in service, compliance, and productivity, which I think is what the taxpayers of America 

expect from us.

Thank you, Mr. Chairman.

[The prepared oral and written statements of Mr. Rossotti follow:]




PREPARED TESTIMONY OF

COMMISSIONER OF INTERNAL REVENUE

CHARLES O. ROSSOTTI

ON THE

ANNUAL JOINT REVIEW OF 

IRS RESTRUCTURING AND REFORM ACT OF 1998

CONVENED BY THE

JOINT COMMITTEE ON TAXATION

MAY 3, 2000

INTRODUCTION

Mr. Chairman, and distinguished Members of the House and Senate Committees 

represented today, I am pleased to testify on the Internal Revenue Service’s progress in 

carrying out the IRS Restructuring and Reform Act of 1998. 

Following RRA 98’s clear directions and intent, the IRS continues to plan and 

implement the most significant changes to its organization, technology, and the way it 

serves taxpayers in almost a half-century. 

We have implemented the 71 new RRA 98 taxpayer rights provisions. Just as 

importantly, we are carrying them out in the spirit of the Act, which is to treat 

taxpayers like people rather than statistics. We have completed the first phase of a 

new system of balanced measures of performance. Our reorganization to increase 

customer focus and management accountability is progressing rapidly and we have a 

new top management team in place for the four new customer-focused operating 

divisions. 

At the same time, the IRS continued to fulfill essential operational requirements 

including providing service to taxpayers during each filing season (see Appendix), 

administering roughly 801 tax law changes made by the Taxpayer Relief Act of 1997 

(TRA), including nearly 300 new provisions. We also completed the enormous and 

almost flawless Century Date Change program for IRS computer systems. 

Building on this foundation, we are beginning the long-term program of 

reengineering business practices and technology that will allow the IRS to deliver on 

RRA 98’s mandates for improved service and taxpayer treatment while also 

increasing compliance effectiveness. As the streamlined management and new 

technology become effective, the IRS can also improve efficiency and maintain a 

stable workforce in relation to the economy.

However, neither Congress nor the IRS could have anticipated all the 

implications, including resources, needed to implement the full scope of RRA 98. Yet, 

in the 21 months since this bill was enacted we have learned a great deal, and at this 
point I am convinced we can succeed through the combination of a limited increase in 

staff resources and critical investments in new technology and organization. 

As I have previously testified, the IRS depends entirely on its computer systems 

to administer the tax system and to collect and properly account for $1.76 trillion of net 

tax revenue, yet these systems are fundamentally and irremediably deficient and must 

be replaced. Let me stress that although there is no way to avoid risk in a program of 

this size and complexity, we can manage these risks and achieve our goals, just as we 

did with the $1.4 billion Y2K program. We now have in place most of the elements 

needed to do this properly, which were not in place in the past.

 These include: a single, centrally managed information systems organization; 

a very active top governance process, which I personally chair and which includes all 

the top executives who manage affected parts of the IRS; rigorous adherence to 

architectural, technology and methodological standards; reliance on the PRIME 

contract to manage development and integration activities, and, most importantly, an 

unwavering commitment to an open process that includes GAO, TIGTA, OMB and 

Treasury and which forthrightly confronts problems and issues and makes 

adjustments to schedules and scope as reality dictates. 

Although we have put in place most of the necessary elements, it will take time 

and practical experience executing projects for our management process to mature. 

Chart A indicates the expected normal pattern and time frame for this process.

Based on my experience in the industry, if we were to achieve the growth rate 

depicted in this chart, it would be a very rapid rate of progress and within 1-2 years 

would put the IRS in the very top category of institutions managing large technology 

modernization programs. Since this maturity process necessarily depends on practical 

experience, one of our most important responsibilities as top managers is to adjust the 

level of activity we are managing to that which is appropriate to level of our 

management capacity. 

We have already seen this process in action as we have unhesitatingly revised 

some initial proposals to slow down certain projects and to rearrange other activities to 

ensure that manage and architectural concerns were adequately addressed. On the 

other hand, I must also stress that there is no way to achieve maturity in the 

management process without the practical experience of actually executing projects. 

Mr. Chairman, I also want to stress that we have instituted a new strategic 

planning and budgeting process that reflects the modernized IRS, including the new 

organization structure, mission statement, strategic goals and objectives. Beginning 

with a strategic assessment, the strategic planning process will drive budget and 

program execution in a continuing cycle.

The new strategic planning and budgeting process is responsive to GPRA 
requirements and is consistent with strategic planning best practices. The process will 

help IRS senior management to make decisions around the four different operating 

divisions on the following areas: (1) the mission and goals that drive the IRS’ Strategic 

Plan; (2) the major strategies, operating priorities and improvement projects that will be 

employed to meet the goals and objectives found in the annual performance plans; (3) 

resources to be allocated to accomplish these strategies and programs; and (4) the 

effectiveness of the strategies and programs in helping the IRS achieve its mission, goal 

and objectives (annual performance report). 

 Let me underscore that as we develop, refine and adjust our plans, we have 

been consulting and will continue to consult with the Congress, Treasury Department, 

Office of Management and Budget and our many stakeholders. We have also initiated 

the strategic planning and budgeting process for FY 2002. In late March 2000, each of 

the four operating divisions presented a strategic assessment for the five fiscal years 

beginning with FY 2002. In addition, we will revise the IRS Strategic Plan during 2000. 

The recently completed annual program performance report will require modifications to 

the program (budget) structure to reflect the new processes and operations of the 

operating divisions, i.e. pre-filing, filing and post-filing. 

Mr. Chairman, I believe we are making real progress on the short- and long-term 

goals and mandates set forth by the Restructuring Act. If Congress can provide 

continued and assured support for IRS modernization, such as that contained in our FY 

2001 budget request, we will be able to produce the visible, tangible changes in service, 

compliance, and productivity that America’s taxpayers expect and deserve.

TWO DIFFERENT PATHS: ONE CLEAR CHOICE

Mr. Chairman, quite apart from RRA 98, or any remedies or initiatives the IRS 

is pursuing, the expanding economy continues to steadily increase the IRS’ workload. 

 Over a period of years, this expanding workload has compounded to reach fairly 

significant levels. For example, since 1993, the number of individual tax returns with 

over $100,000 in reported income, which are generally the more complex returns, 

have increased by 63 percent. Meanwhile, because of budget constraints, the IRS 

staff has dropped by 17,000 FTE since FY 1993. (See Chart B) At the same time, 

the new TRA and RRA 98 taxpayer rights required new procedures and increased 

time per case. These conflicting trends, increased demands, and reduced staff have 

not been addressed by new technology. During this period, almost all of the 

technology spending and focus were devoted to addressing the Y2K problem and 

responding to TRA and RRA 98.

This conflicting set of trends has left the IRS in a position in which we are not 

yet meeting the legitimate service expectations of the vast majority of compliant 

taxpayers who voluntarily pay their taxes, while compliance activity, such as 

examination coverage and collection enforcement activity, is dropping rapidly, thus 

potentially undermining the fairness of the whole tax system.
Broadly speaking, one can conceive of two ways to reverse this downtrend. 

The first is to add staff in the traditional manner to process more returns, answer 

more telephone calls and letters, and increase casework such as examinations and 

collection cases. This approach would require hiring more than 8,000 staff just to 

return to the FY 1997 level of activity and then adding 2,000 more staff annually to 

remain even with the increasing workload.

Given the growing economy and increased demands of complying with RRA 98,

this approach would be extremely expensive. For the vast majority of taxpayers, it 

would also not meet modern expectations for service levels because no amount of staff 

can fully compensate for the IRS systems deficiencies. In addition, in today’s labor 

market, the IRS would have difficulty attracting and retaining sufficient and qualified 

staff. 

There is, however, another way, and it is the basis for our FY 2001 budget 

request. By investing in reengineering IRS’ business practices and technology

together with limited staffing increases, we will be able to perform all aspects of the 

IRS mission more effectively and efficiently and in line with the best private and 

public sector practices. This second approach will, over time, enable the IRS to meet 

public expectations for its mission with lower growth in staff and future budgets. 

Although we need additional staff resources to succeed, the amount is only 

modestly more than present levels of staff and would still be less than the IRS 

staffing level of 1997. This approach is possible since our basic strategy to meet 

increased workload and service demands depends on reengineering business 

practices and technology. Freeing up positions through business systems 

investment is a critical requirement. By investing in technology and improved 

business practices, the FY 2001 budget request avoids the traditional staff increases 

that would otherwise be required. It is important to stress, however, that the 

investment in modernization is essential for this approach to work. 

STRATEGIC DIRECTION: “STANDING UP” THE NEW IRS

During the second half of FY 2000 and throughout FY 2001 and beyond, we 

will continue implementing the new IRS. This process includes realigning our 

personnel resources and putting in place: (1) revised business practices and 

strategies, (2) a new organization and management, (3) new information technology, 

and (4) a balanced performance measurement system. 

Revised Business Practices and Strategies

How the IRS interacts with taxpayers is defined by its business practices. 

They determine how tax filing is performed, what notices are sent under what 
circumstances, the way phones are answered, how collections of balances due are 

carried out and how examinations are conducted. 

Closely related to business practices are the IRS strategies that guide them, 

such as how returns are selected for examination, what compliance issues are 

emphasized, and how we encourage electronic filing. Both strategies and practices 

are also constrained by, and to a considerable degree determined by, the established 

organizational structure and the installed technology base. These are the two 

principal instruments through which the IRS executes its business practices and 

strategies.

The strategies the IRS will pursue include: (1) preventing taxpayer problems or 

addressing them as early as possible; (2) improving taxpayer communications; (3) 

making TRA and RRA 98 taxpayers rights work more efficiently and effectively; (4) 

broadening electronic tax administration use as mandated by RRA 98; (5) leveraging 

IRS resources through effective partnerships with tax administration organizations 

and groups that deal regularly with taxpayers; (6) tailoring practices and strategies to 

specific taxpayer needs and problems; and (7) addressing serious areas of 

noncompliance with specific strategies. 

New Organization and Management

Why is the IRS reorganizing? A key reason is that our slow progress to make 

improvements is due in large part to the twin barriers of organizational structure and 

obsolete computer systems. The traditional IRS structure does not adequately 

support taxpayer demands. It represents the way many businesses were organized 

for many years – around internal technical disciplines and geographical locations. 

Following the directions set by RRA 98, the IRS is creating a modernized structure 

similar to those widely used in the private sector: organizing around customers’ 

needs, in this case taxpayers. The future customer-focused organization consists of:

ß Four operating divisions – Wage and Investment Income (W&I), Small 

Business and Self-Employed (SB/SE), Large and Mid–Size Business 

(L&MSB); Tax Exempt and Government Entities (TE/GE);

ß Two service organizations – Information Systems and Agency-wide Shared 

Services; 

ß Separate specialized independent channels for taxpayers – Appeals and 

the Taxpayer Advocate Service; 

ß Criminal Investigation, which is a line unit and will have sole responsibility 

for investigation of criminal violations of the tax law;

ß Chief Counsel, which will provide tax advice, guidance and legislative 

services to all components of the IRS; and 

ß A smaller National Headquarters office which will assume the overall role 

of setting broad policy, reviewing plans and goals of the operating units, 

and developing major improvement initiatives.
Each operating division will be responsible for creating and executing business 

practices and strategies to meet those needs, and managers at all levels will be 

expected to be knowledgeable in the substantive problems and issues that arise in 

administering the tax law in their respective divisions. 

The organization will be led by management teams, including individuals with 

the broad range of experience needed to lead each unit in the dual task of managing 

current operations while modernizing business practices and technology to achieve 

the new mission and strategic goals. The leaders of these units have now all been 

selected and are rapidly putting in place the remainder of the management structure 

in each unit. 

The new divisions will become fully operational in stages, with Tax Exempt 

and Government Entities already operational since December. The Large and MidSize Business Division will became operational later this spring, to be followed by 

Wage and Investment and Small Business/Self-Employed in the fall of 2000. 

New Information Technology

Reorganizing the IRS’ outdated structure and replacing its archaic technology 

will take years to fully accomplish, but it is absolutely necessary if we are to reach a 

higher level of performance. For any information-intensive, service-oriented 

enterprise, such as the IRS, information technology will continue to be an essential 

resource on which all organizational performance depends. 

The IRS is no different from the private sector in this respect, but it faces some 

unique challenges. IRS’ core data systems are fundamentally deficient. The large and 

extremely fragmented nature of the IRS’ technology inventory creates many problems, 

including poor service to end users, high cost, long timelines to implement changes and 

improvements, and control and security difficulties. 

Technology modernization is essential to carrying out RRA 98, organizational 

modernization and providing additional services and efficiencies, but it is risky by its 

very nature, size and complexity. In fact, there is no way to avoid risk. However, we 

are not repeating past mistakes. As I discussed in the introduction to my testimony, 

we are prudently and carefully managing the process, providing for a careful review 

and external validation of each and every part of the program and making necessary 

adjustments. 

The IRS is establishing an overall architecture for a set of new systems that 

will accommodate all essential tax administration functions according to modern 

standards of technology and financial management. During this process, the new 

and old systems must co-exist and exchange data accurately for an extended period 

until data is gradually converted from old systems to new ones. In 1998, the IRS 
established the Core Business Systems Executive Steering Committee to provide a 

framework for the overall management of this process. This committee consists of 

top executives, chaired by the Commissioner, and supported by key staff groups. 

Balanced Performance Measures

The IRS Balanced Performance Measurement System is being developed as 

part of the effort to modernize the IRS and reflect the agency’s priorities, as 

articulated in the IRS mission statement and in accordance with RRA 98. 

In September 1999, a “Balanced Measures Regulation” was issued to formally 

establish the IRS’ new performance management system. The issuance of the 

regulation, which followed a public comment period, sets forth the structure for 

measuring organizational and employee performance within the IRS. The IRS has 

taken great steps to integrate its budget request with these balanced performance 

measures to ensure compliance with the Government Performance and Results Act 

of 1993. 

This year the IRS will adopt its strategic goals as its annual performance 

goals. This framework will assist the IRS in describing how programs and initiatives 

tie to achievement of the mission and goals as reflected in improvements in the 

measurement results. 

In CY 1999, balanced measures at the operational level were approved for 

Tax Exempt and Government Entities, Large and Mid-Size Business, Appeals, the 

Taxpayer Advocate Service, Research, Statistics of Income, and additional Customer 

Service product lines. These measures are undergoing final design and 

implementation for use in field operations units. Other measures teams formed in 

CY 1999 that are expected to have approved balanced measures in early CY 2000 

include Information Systems, Criminal Investigation, Counsel, Submission 

Processing, and Agency Wide Shared Services.

By necessity, our first performance measures priority was to develop 

measures that were consistent with the IRS’ strategic goals and with section 1204 of 

RRA 98 which prohibits use of enforcement statistics to measure the performance or 

set goals for any individual. In FY 2000, we largely completed the initial development 

of operational performance measures, and will begin development of strategic 

measures. Strategic measures will measure broad performance of our four major 

operating divisions and for the IRS as a whole. Our strategic performance measures’ 

objective is to provide quantitative indications of the overall success of each major 

unit and of the whole IRS in reaching our three strategic goals.

FY 2001 BUDGET REQUEST

To deliver on the RRA 98 mandates for improved service and taxpayer treatment 
while also increasing compliance effectiveness, IRS requires increased funding in FY 

2001. With improved management and technology enabling the delivery of improved 

service and increased compliance effectiveness, the IRS will be positioned to succeed 

with limited resources in future years. As the streamlined management and new 

technology become effective, the IRS can also improve efficiency and maintain a stable 

workforce in relation to the economy. However, we face a major budget challenge in FY 

2000 and FY 2001, which, unless addressed, will threaten not only the IRS reform and 

restructuring program, but the entire tax system.

The FY 2001 request is $8.841 billion (without the Earned Income Tax Credit 

Account), $769 million more than the final FY 2000 enacted level of $8.072 billion. 

This is $729 million over the FY 2000 proposed funding level of $8.112 billion, which 

includes a $40 million supplemental to stabilize the IRS workforce. Of this increase, 

$119 million is for resuming funding of the Information Technology Investment 

Account (ITIA) for which there was no funding in FY 2000. The IRS requires this 

increase in FY 2001 to deliver on the RRA 98 mandates, manage organizational 

modernization, and invest in critically needed information technology.

Our budget request has two broad management categories: (1) Maintaining 

Current Operations, and (2) Modernization. Increases to maintain current operations 

include more FTE to assist in stabilizing enforcement activity levels and modestly 

increasing service levels, and to provide adequate non-labor resources for increasing 

electronic tax filing capability and contractual support for critical operational activities 

of the agency. Increases for modernization include funds for completing 

organizational modernization, business line investments, and replenishing of ITIA. 

The requested resources provide for full implementation of RRA 98 along with plans 

to modernize and realign the IRS organization, and fund the workforce.

Maintaining Current Operations

To implement RRA 98, the IRS must modernize its organizational structure 

and technological base. However, during this time, we must also maintain 

operational activity at acceptable levels. 

As I discussed earlier in my testimony, RRA 98 established 71 taxpayer rights 

provisions, each of which imposed additional procedures or new requirements for tax 

administration. This increased the time required to handle existing cases and 

required the IRS to divert compliance personnel to handle new procedures such as 

Innocent Spouse and Third Party Notice provisions. In addition, other compliance 

personnel were re-assigned to provide extended hours of telephone and walk-in 

service. This came on the heels of declining staffing from FY 1996 through FY 1999. 

In part because of these changes and increased workload demands, the 

number of examination and collection cases handled declined by half. This illustrates 
the need to balance the continued improvements in customer service with funding 

adequate to maintain enforcement activity to collect unpaid taxes and address areas 

of potential under-reporting of income.

Current Services Level

The IRS is requesting a net increase of $336 million to maintain the current 

services level. The IRS is a labor-intensive organization and we must have a stable 

workforce. To maintain current operations, carry out a successful filing season, 

oversee tax administration programs, and implement organizational modernization, 

the IRS must have the resources to pay for the inflationary costs associated with 

statutory pay and other mandatory increases. 

Since 1992, the IRS workforce has decreased more than 16 percent while

handling significant increases in workload due to tax law changes and customer 

demand. The downward trend in FTE is the result of: (1) reduced funding in general; 

(2) inadequate funding for pay components, such as costs of within-grades (WIGs) 

and promotions; and (3) insufficient funding of non-labor inflationary costs for 

required agency-wide shared services support costs. During the last few years, costs 

for Support Services have been cut to a bare minimum. In addition, the IRS has 

proactively reduced rent costs. From FY 1996 through FY 1998, the IRS released 

2.5 million square feet of space for savings of $40.8 million. There is little room for 

further cost reductions. Any further cuts in agency-wide shared services support will 

result in further FTE reductions.

It is vital to note that the long-term decline in the IRS workforce due to funding 

constraints has led to a situation where virtually no hiring has been done since 1995 

in critical front-line skilled positions. (See Chart C.) For example, in a revenue agent 

workforce that was over 15,000 in 1995 and hovers at 12,000 today, the IRS has only 

hired 75 revenue agents since 1995. Funding of our current services request, 

together with the STABLE initiative discussed next, will allow us to begin the process 

of meeting the need for critical skilled positions. 

Stabilizing the Workforce (STABLE)

The IRS is requesting $144 million and 1,633 FTE to stabilize and strengthen 

tax compliance and customer service programs in FY 2001 and $39.8 million and 301 

FTE for a FY 2000 proposed supplemental. This request is collectively known as the 

STABLE (Staffing Tax Administration for BaLance and Equity) Initiative. I want to 

stress that even with the STABLE initiative, the IRS would still be slightly below FY 

1997 staffing levels, in other words before RRA 98 was enacted into law. 

Efforts have been made to improve toll-free service, improve access to new 

web-based products and information, and expand electronic filing/payment options. 

However, staffing resources devoted to critical compliance and enforcement 
programs have declined by more than 20 percent over the last five years.

Beyond the reduction in staffing levels, annual growth in return filings and 

additional workload from RRA 98 contributed to steady erosion of enforcement 

presence, audit coverage, and case closures in front-line compliance programs. 

Current estimates of additional work directly related to RRA 98 total nearly 4,560 FTE 

for Compliance and Customer Service activities. (See Chart D.) Although the IRS is 

fully committed to delivering on every mandate and objective of RRA 98, it is 

essential that we restore and maintain adequate staffing levels in our key program 

areas.

To ensure that the benefits of this initiative are realized as quickly as possible, 

the IRS has proposed a supplemental FY 2000 appropriation, which, if approved by 

Congress, would allow the hiring of 301 FTE in FY 2000. This would ensure that most 

training of new hires would be undertaken in FY 2000, allowing the impact of these new 

hires to be fully maximized in FY 2001. 

With this staffing level, we expect that in 2001, the IRS will be able to slightly 

increase levels of service and stabilize the level of exam and collection activity while 

complying with the taxpayer rights provisions of RRA 98.

Electronic Tax Administration (ETA)

The IRS is requesting $3 million for ETA to continue progress toward 

achieving the congressional goal that 80 percent of all tax and information returns be 

filed electronically by 2007. In RRA 98, Congress established the interim goal that all 

returns prepared electronically, but filed on paper (approximately 80 million) be filed 

electronically by 2003. Increasing taxpayers’ awareness and understanding of IRS efile products, services and benefits will help close the gap between the projected 

range of 44.1 – 49.4 million returns being filed electronically in 2003 and the 

aggressive goals established by Congress. This funding will be used to expand 

marketing efforts that communicate the benefits of IRS e-file to both taxpayers and 

practitioners. The IRS plans to advertise in the television, radio, and print media; 

continue the launch of a business marketing campaign; and conduct the necessary 

marketing research to ensure that ETA products and services meet our customers’ 

needs. A detailed description of our ETA progress in meeting RRA’s goals is found 

later in the testimony/

Contract Management

In FY 2001, we are requesting an increase of $44 million to fund necessary 

contracts that support general operations, mandatory contractual arrangements and 

necessary outside expertise. In prior year budgets, we funded these contracts – which 

were absolutely necessary to conduct business – by reducing funding available for 

staffing. This is in contrast to our FY 2001 request that simply requests the necessary 
funding. Mr. Chairman, I would like to stress that contractual support is critical to 

maintaining operations and implementing RRA 98 and the Modernization program. Our 

contractual support is in three categories: mandatory, operational and expertise 

contracts. I would like to describe for you the type of contracts and provide examples: 

• Mandatory contracts make up 44 percent of the total budget and are 

required by law, or agreement with other Federal agencies. These include 

National Archives storage of tax records; Treasury’s Financial Management 

Service activities for tax refunds and lock box collections; and Low Income 

Taxpayer Clinic grants.

• Operational Contracts make up 32 percent of total budget and support IRS 

operations. Examples include funding for Currency Transaction Report 

processing, FedWorld management of the IRS Web Site, and Multilingual 

Interpretation services for Walk-in offices.

• Expertise Contracts make up the remaining 24 percent and are required to 

obtain expertise outside the IRS for activities including outside services for 

customer satisfaction surveys and rewriting of IRS Forms and Publications in 

plain English. 

Modernization

The IRS budget is only a small part of the cost to the public of administering our 

tax system. Most of the costs, both tangible and intangible, are related to what the 

public encounters when it must deal with the IRS. The tangible cost is each taxpayer’s 

time and money. The intangible cost is the frustration of being treated poorly when 

making an honest effort to comply with a complex tax code. Moreover, this frustration 

has occurred at a time when the level of service that many people are receiving from 

other service providers has been increasing. In order to provide better service to 

taxpayers across the board, we need to reengineer the entire way the agency does 

business. 

In addition, the tax system depends on each taxpayer who is voluntarily paying 

the tax owed having confidence that his or her neighbor or competitor is also paying. 

Modernization will enable the IRS compliance activities to identify more effectively 

areas of non-compliance and to address them promptly, accurately and fairly. 

Organizational Modernization

In FY 2001, an additional $42 million is being requested to cover IRS 

reorganization expenses. These costs will peak in FY 2001, decline in FY 2002, and 

end in FY 2003. The IRS organizational modernization involves the first complete 

reorganization of the IRS since 1952. Essentially all management positions above 

the first line are being redefined; district and regional offices are being eliminated; 
and some new front-line positions are being created. This massive change is being 

done with the objective of minimizing physical relocation and associated costs. 

However, some relocation of personnel and a great deal of reassigning and retraining 

are required. In addition, some managerial and administrative positions are being 

eliminated and it is necessary to assist the incumbents in these positions either to 

find new positions in the IRS or to retire. 

Together with the $140 million included in the FY 2000 base for this effort, this 

request will be used to cover all the expenses of the reorganization. These costs 

include buyouts, recruitment, relocations, employee training, equipment, services and 

supplies, telecommunications moves and installations, and modifications of 

information systems to the new organizational structure. Resources are also 

requested for design work, space alterations, and contract movers to physically align 

employees with their operating divisions for the Area and Industry Offices, Chief 

Counsel Headquarters, Information Systems, and the National Office. These 

resources cover all aspects of organizational change that will complement the IRS’ 

systems modernization efforts and implement the RRA 98 reorganization mandate.

Business Reengineering and Technology Investments

The IRS depends entirely on its computer systems to administer the tax system 

and to collect and properly account for $1.9 trillion of tax revenue. Nearly every IRS 

employee depends on computer systems to perform his or her daily activities, such as 

processing returns, answering taxpayer questions, adjusting taxpayer accounts,

sending out notices and letters, conducting examinations and collecting overdue 

accounts. 

However, the IRS base of existing systems, which evolved over a 40-year period, 

is totally inadequate to support these activities at an acceptable level of service to the 

public, internal efficiency, or acceptable risk. GAO and TIGTA repeatedly identify 

serious problems and risks in IRS operations and financial management, many of which 

cannot realistically be rectified except by a near total replacement of IRS’ systems.

In addition, nearly all the numerous changes required to improve service to 

taxpayers under RRA 98, and to increase the effectiveness of compliance activities 

depend on improvements to IRS’ information systems. As indicated earlier in the 

testimony, it would be extremely expensive and require very large increases in staff to 

meet the service and compliance demands of an increasing economy and the RRA 98 

mandates by simply adding staff. Instead, the IRS must reengineer and replace its 

archaic processes and systems. 

Since reengineering the IRS’ business practices and systems is a massive job 

that will take many years, it is necessary to set priorities and adopt time-phased plans 

since the needs and opportunities for systems improvements are far greater than can 

be accommodated in any one year, or even a few years.
Business Line Investments

Most of the largest scale and most complex systems’ improvements will be 

accomplished through the agency-wide Core Business Systems program that is funded 

by the ITIA and is discussed below. However, there are dozens of smaller and more 

focused high-priority needs to support and improve operations. They are either too 

specific to be included in the Core Business Systems program, or, if they were included, 

would not be delivered for many years. The IRS has gone through a prioritization 

process for these business line investments and requests funding for $40 million in FY 

2001 for only the highest priority of such projects. 

We are requesting the $40 million to develop, redesign or acquire new systems to 

improve:

(1) The Taxpayer Advocate's ability to identify problems and recommend changes 

to the business process by redesigning and consolidating multiple, stand-alone 

systems into one management and control system;

(2) The management and reporting of taxpayer and employee complaints by 

designing a new system;

(3) The new Tax Exempt/Government Entities organization's ability to process 

determination requests, contacts with requestors and track the deposits of fees;

(4) The notices sent to taxpayers, including clarity and reduction of the need for 

multiple contacts with taxpayers;

(5) The Chief Counsel Case Management activities, including modernizing many 

business rules and updating the system to save costly manual work and improve

Counsel’s ability to timely deal with the Courts, taxpayers and IRS’ needs; and

(6) The walk-in sites’ efficiency and service to taxpayers by providing automated 

management tools of tax information to about 125 walk-in sites.

ITIA Funded Core Business Systems 

The Core Business Systems program is an agency-wide program designed to 

reengineer all of the basic IRS’ business processes and the computer systems that 

support them. After the award of the PRIME contract in December of 1998, the IRS 

spent CY 1999 and the early part of CY 2000 building the management and governance 

process necessary to manage this huge program; developing plans for the near-term 

and medium-term projects; and beginning to update architectural and technology 

infrastructure plans. This program is being very carefully managed at the highest 

levels within the agency and adjustments to plans are made frequently based on 

experience to date and on risks anticipated.

 The first, relatively small projects to be delivered will provide for improved 

telephone service during FY 2001 and provide improved tax computation capabilities to 

examiners. Further enhancements to taxpayer service over the Internet and increased 
electronic tax administration services will follow. Two critically important projects will be 

planned in detail in FY 2000 and are expected to proceed to development stages in FY 

2001. They will replace incrementally and over time the archaic tape-based system that 

maintains all taxpayer records and improve our financial management systems. Other 

critical projects to improve service and compliance programs, including 

correspondence, collection and exam are in the early states of design and further plans 

will depend on results of the design efforts.

In support of these business projects, work will proceed in FY 2000 to complete 

institutionalization of the ITIA governance process and the Enterprise Life Cycle 

methodology. This will provide for the first complete update of the technology blueprint 

since 1997 and complete major infrastructure and architectural work necessary to 

support the other projects. Security issues are being given special attention in this 

work. In FY 2001, continued update of the blueprint and other architectural and 

technology standards will be done and additional work on infrastructure will continue as 

necessary to support the business projects.

The Congress through the specified ITIA wisely planned the funding for this core 

business systems program. This account represents a practical means of funding a 

long-term program such as the IRS technology modernization program. Under ITIA, 

Congress appropriates the funds for the program as a whole and the IRS is allowed to 

plan for continuity of the program subject to stringent reviews and safeguards. No funds 

are released from the ITIA until the IRS prepares a plan for specific increments of 

funding and is reviewed and approved by the Treasury, OMB, GAO and the two 

Appropriations Subcommittees. This approval, however, still only provides the IRS 

authority to proceed up to a certain funding level. No funds are actually obligated except 

through a rigorous internal process within the IRS, which is managed by the IRS 

Executive Steering Committee chaired by the Commissioner. 

In FY 2001, we are requesting $119 million to continue progress as anticipated 

on the ITIA funded Core Business Systems program. In FY 2000, we requested no 

funds for ITIA. Remaining balances from prior year appropriations plus the new $119 

million request will support a spending level in FY 2001 of $330 million. To ensure 

continued funding, we are requesting an advanced appropriation of $375 million for FY 

2002.

In order to fulfill the mandate Congress gave us in RRA 98, many changes were 

required in every aspect of how the IRS works. These include implementing specific 

provisions of law, such as the taxpayer rights provisions of RRA 98 as well as changes 

in the way performance is measured, people are managed and evaluated, the way the 

organization is structured and the reengineering and replacement of nearly every basic 

business system. 

 At the same time, the IRS had to continue to fulfill essential operational 

requirements including providing service to taxpayers during each filing season, 
administering roughly 801 tax law changes made by the Taxpayer Relief Act of 1997, 

including nearly 300 new provisions, and completing the enormous program to make 

IRS computer systems continue to operate after the Century Date Change. 

Over the last two years, we have managed these major changes by grouping 

them into a few basic change programs, each with a management process and a 

carefully planned and controlled schedule that reflected our best current judgment about 

priorities, resource limitations and risks. Broadly, these major change categories were: 

the Year 2000 program, near-term changes to improve service and treatment of 

taxpayers, implementation of the balanced measures systems, establishment of the 

new organizational structure including recruitment of management, and finally, 

reengineering of major business systems and technology.

RRA 98 TAXPAYER RIGHTS IMPLEMENTATION

As discussed, RRA 98 required the IRS to implement 71 new or modified 

taxpayer rights provisions, many which were effective either on date of enactment, or 

within six months of it. At the same time, the IRS received recommendations from 

many sources about other pressing changes that were required to improve service or fix 

problems. These included such basic matters as availability and quality of telephone 

service, rewriting of notices and letters sent to taxpayers, control over inventory of 

assets and hundreds of other matters. 

For example, since January 1999, two-hundred eighteen Treasury Inspector 

General for Tax Administration (TIGTA) audits and 138 GAO audits have been initiated 

(both opened and closed). The 89 GAO reports that have been issued so far contained 

94 recommendations and the 80 TIGTA reports proposed 375 specific 

recommendations. The National Taxpayer Advocate identified the top twenty problems 

affecting taxpayers and made recommendations as to what should be done about them. 

 Addressing and managing these changes requires significant management attention, 

and many require additional resources, including information systems resources, to 

implement. 

In this context, the first priority was implementation of the taxpayer rights 

provisions of RRA 98 in accord with the law. Given the short time frames, and many 

competing demands, our capacity to provide guidance to the public and to employees 

and to conduct training for the 100,000 employees affected was stretched to the limit. 

The initial focus was on ensuring legal compliance. In many cases, we did not know 

the amount of time and resources that would be needed to carry out these provisions. 

In FY 1999, for example, we had briefings and training on 55 RRA 98 provisions and 

provided a total of two million hours of training. We estimate that nearly 4,560 full time 

equivalent personnel were required for the specific administrative provisions of RRA 98.

We are at the stage where we have implemented the RRA legal provisions. 

However, we have several years of work ahead to make them work more efficiently and 
with higher quality. Our immediate challenges are primarily training and management. 

We are continuing a high level of training in FY 2000. 

I want to stress that we are wholly committed to implementing each and every 

taxpayer rights provision and making them work as intended, while still fulfilling our 

mandate to collect taxes that are due. We will get the job done and we will get it right. 

However, we will also make mistakes along the way and we are not yet at an 

acceptable level of quality, efficiency and effectiveness in the way that we are 

implementing some of these provisions.

To describe more concretely some of the issues we face, I would like to cover in 

some detail our approach to three of the 71 taxpayer rights provisions: innocent spouse, 

due process in collections and third party notices.

Innocent Spouse

The innocent spouse provisions are some of the most important in RRA 98 

because of the often-difficult personal and financial situations of taxpayers covered by 

them. They generally permit one of the spouses who files a joint income tax return to 

be relieved of all or a part of the unpaid liabilities associated with a joint return. Unpaid 

liabilities can be caused by the failure to pay the amount due on the return when it was 

filed (underpayment), or because of assessments made by the IRS after the return was 

filed (understatement). 

RRA 98 required the IRS to implement a much more complex innocent spouse 

program than was previously administered. It added three new innocent spouse 

provisions to one already existing in the law. (RRA 98 also modified a provision that 

granted relief in community property states.) Each of these provisions defines a 

different set of conditions under which one of the spouses may be granted relief from all 

or part of the liability arising out of a joint return. Moreover, the newly enacted 

provisions were effective on the date of enactment and had retroactive application, 

which contributed to a high volume of requests for relief upon the enactment of RRA 98. 

 The chronology in Chart E shows the major steps and actions already taken in the 

innocent spouse program and some of the additional steps already planned.

Our biggest challenge in implementing the innocent spouse provisions cannot be 

overstated: learning to apply properly and accurately new and complex statutory 

provisions to very sensitive taxpayer situations has taken a great deal of time and 

resources. These provisions contain potentially confusing distinctions that must be 

understood and explained to the IRS employees who would work these cases. For 

example, certain provisions require the spouse requesting relief to show no 

“constructive knowledge” of a particular item on the return, while another provision 

requires the IRS to show the requesting spouse had no "actual knowledge” of a 

particular item on a return.
Certain provisions permit refunds while others do not. Certain provisions permit 

redress in the Tax Court, and others do not. Moreover, other provisions require 

examiners to determine whether, considering all the facts and circumstances, it would 

be inequitable to hold the spouse liable. These equitable relief provisions require 

special care in IRS interpretation and administration because equitable relief is a broad 

and relatively rare concept for the IRS to administer. Finally, certain provisions require 

the IRS to consider the facts and circumstances of both the spouse requesting the relief 

and the other spouse who would continue to have liability whether relief is granted or 

not. This introduced a novel concept to IRS employees in that they have to consider not 

only the interests of the party filing the request but also the interest of a related party.

Addressing this difficult learning curve has limited not only assigning resources or 

forecasting statistics, but more importantly, improving the timeliness and quality of the

process for resolving innocent spouse claims. The learning process required 

experience in actually adjudicating the claims and in understanding how best to train 

and manage employees, while resolving a continuing stream of legal and policy 

questions.

Fortunately, a great deal of progress has been made in this area, and guidance 

and training materials are now largely complete. Consequently, we estimate that by the 

end of this fiscal year, our inventory of claims in which the taxpayer has not yet received

a determination letter will be in the range of 14,000 claims (about 7400 taxpayers) 

compared to our long term target of 12,000 (6,300 taxpayers). Of course, we will 

continue to hold collection action in abeyance pending the resolution of the outstanding 

claims. 

The minimum target level is largely driven by required waiting periods to receive 

information and to communicate with taxpayers. (Chart F shows the current flow chart 

currently used to screen and evaluate requests. Chart G shows the necessary time 

frames for processing the innocent spouse cases.) For example, built into the process 

before we make a determination in a case and notify the taxpayer of that determination 

is a 45-day waiting period to hear from the non-requesting spouse. Additional waiting 

periods for communicating with and receiving information from the requesting spouse 

are also included. Moreover, a 30-day opportunity for a taxpayer to request an 

administrative appeal and a 90-day period for a taxpayer to petition the Tax Court is part 

of the post-determination process. The minimum target level recognizes that additional 

resources will not make these periods shorter and assumes that we will continue to 

receive about 700 claims per week.

We continue to apply the lessons gained from working cases and an increased 

understanding of the complex new provisions to improve the quality of the 

determinations that we make, thus ensuring the proper treatment of the taxpayers 

involved. Some of the most important steps taken were to: (1) centralize management 

of the program under a senior manager; (2) develop specific flow charts and other 

training and job aids for the employees doing the screening; (3) revise the procedures 
and training based on initial experience; and (4) institute a 100 percent review of 

completed claims to ensure quality and consistency. Moreover, a Management 

Information System to track innocent spouse cases has been operational since March 

of 1999, and we plan to enhance it and other computer support over the next 18 

months. 

Due Process in Collection

Section 3401 of RRA 98 provided significant new rights to taxpayers before the 

IRS can take enforcement actions to collect overdue taxes. Collection enforcement 

action by the IRS generally takes three forms: (1) a levy on the taxpayer’s wages or 

bank account; (2) placing a lien on the taxpayer’s assets; or (3) seizing the taxpayer’s 

business or personal assets.

RRA 98 affects each of these enforcement actions somewhat differently. The 

IRS must provide the taxpayer with written notification of the right to an impartial hearing 

before an appeals officer after a notice of lien has been filed or before a notice of levy is 

sent. The taxpayer has 30 days to request an appeal, and during this period the levy or 

seizure may not take place. Moreover, if the taxpayer requests an appeal, the levy or 

seizure may not take place until the appeals officer makes a finding. Finally, the 

taxpayer also has 30 days to challenge an appeals finding in the U.S. Tax Court or U.S. 

District Court during which time the IRS may not levy or seize. 

In addition to these notices and appeals provisions, the IRS, pursuant to RRA 98, 

also implemented an approval process under which certain liens, levies or seizures 

must be approved by a supervisor and/or senior technician who would review the 

taxpayer’s information, verify that a balance is due, and affirm that a lien, levy or seizure 

is appropriate under the circumstances. The circumstances to be considered include 

the amount due and value of the asset. 

In general, these provisions require the IRS to consider all alternatives to pay off 

a tax bill, such as installment agreements or offers in compromise, before taking 

enforcement action. During the appeals process, the appeals officer must consider 

whether the IRS has considered these options.

These new procedural provisions were added to a collection process that is 

already quite complex and time consuming because of existing notice and procedural 

practices, a fragmented collection organization, an existing collection appeals process 

that predates RRA 98, and IRS’ heterogeneous and obsolete computer systems. A 

chart showing the main steps in the collection process is attached. At a more detailed 

level, there are now six additional steps required to conduct a seizure for all cases. In 

addition, for assets owned by an individual and used in the course of a business, 

approval by the district director is required and an analysis must be conducted to show 

that the taxpayer’s other assets are insufficient to satisfy the liability. Seizure of a 

principal residence requires a court order and the revenue officer must complete a 
recommendation package. 

The due process in collection provision became effective after January 18, 1999, 

six months after the date of enactment of RRA 98. Our first priority was to comply with 

the provisions of the law requiring notice to taxpayers and review of cases. The Act 

states that no levy may be made on a taxpayer’s property unless the taxpayer has been 

notified in writing of the right to a hearing before such levy is made. This required 

significant reprogramming of computers as well as revised instructions for 12,500 

collection personnel. This objective was accomplished, although, as the TIGTA and 

GAO reported, certain problems were encountered. 

For example, in its September 28, 1999 report (Reference no. 199910074), 

TIGTA concluded that, generally, taxpayers were sent the RRA 98 lien notice. 

However, during the implementation period, the IRS was not consistently implementing 

RRA 98 when it filed tax liens and the associated IRS procedures. As a result, the IRS 

was not always informing taxpayers and their representatives of the taxpayers’ rights to 

a hearing once a federal tax lien is filed. In its November 29, 1999 report (GAO/GGD00-4), GAO concluded that the IRS’ use of seizure authority produced mixed results. 

GAO made 12 recommendations that the IRS agreed to use as guidance to improve the 

seizure and sale program. 

The initial effect of these provisions has been to drastically cut the number of 

collection enforcement actions instituted, as shown in Chart H.

After the initial implementation, our focus has been on understanding how to 

implement these provisions efficiently and consistently and to train our employees on 

how to take enforcement actions when appropriate while complying with the provisions 

of the law. 

To this end, substantial amounts of training have been conducted for both 

managers and collection employees, and new guidance has been issued on how to deal 

with specific collection situations. Later this year, we expect to provide new check 

sheets and job aids to assist our collection employees in following all the complex steps 

needed to take correct enforcement actions. We are currently working on improving the 

process and training for taking collection action in our automated collection operations. 

 New procedures for processing and accepting offers in compromise have also been 

issued.

Chart I shows a chronology of key events and actions associated with 

implementation of RRA 98 provisions relating to collection.

More fundamentally, the IRS collection approach needs to be basically 

reengineered in accordance with generally known best practices and technology. As 

shown in Chart J, the IRS devotes 90 percent of its collection resources to accounts 

over six months old, when commercial experience shows that the likelihood of collection 
is low. In addition, this delay increases the cost in interest and penalties to the taxpayer 

and makes it harder for the taxpayer to settle the debt. The delays associated with 

potential enforcement action then come into play and can elongate the process by as 

much as another year. 

A key goal of reengineering the IRS collection process is to greatly shorten the 

delay until an IRS employee contacts the taxpayer, by phone or in person, when there is 

a significant risk that a tax debt may not be paid, in order to resolve the issue as quickly 

as possible. The new modernized organization structure provides the management 

structure necessary to integrate the management of collection operations, and to 

manage the reengineering of the process and all underlying technology. 

Section 3417 concerning Third Party Notices is another 

provision that presents implementation challenges. It requires us to give a taxpayer 

reasonable notice before contacting any other person with respect to the determination 

or collection of the taxpayer’s taxes and then to periodically tell the taxpayer who has 

been contacted. The brevity and seeming simplicity of this statute belies its complexity. 

Chart K shows the chronology of events in implementing Section 3417.

When we first implemented this provision, we attempted a “one size fits all” 

approach by sending a broadly written notice to virtually every taxpayer in our 

administrative stream -- a total of 25 million in all. The reaction was immediate, strong, 

and negative. We were told that the generic nature of the notice did not provide its 

recipients with any indication of why we would contact third parties to talk about their tax 

situations or what information we would seek from third parties. We also were told that 

the tone of the notice was intimidating, implying that we would talk to anyone and 

everyone, including neighbors, about private tax return information. The notices caused 

undue (and certainly unintended) anxiety for many persons. 

We clearly needed to try a different approach to implement this provision, and we 

did. First of all, we listened very intently to the feedback we received, and solicited 

additional input from practitioner groups, the small business community, and other 

interested parties. In particular, I thank many of the Committee Members and your 

staffs who have worked collaboratively with us to enhance the implementation of this 

provision.

We knew from this input that we should provide a frame of reference for the 

taxpayer in the notices. For example, we should state that we are seeking unfiled 

returns or unpaid taxes and that we are following up on prior communications. We 

should alleviate concerns that we would disregard the privacy protections that are so 

fundamental to our tax administration system when we make these third party contacts 

and we should look to the taxpayer first to provide the information that we might obtain 

from third parties. 

Third Party Notice
Not surprisingly, when we moved to address these issues, we learned that the 

drafting of the notices, though challenging, was not the most difficult part of 

administering this provision. We quickly learned that if we did not blanket all taxpayers 

in our pipeline with a third party notice, we had to isolate those instances where a third 

party contact was most likely, develop a notice appropriate for that situation, and train 

our employees on how to identify and handle these situations, including the reporting 

requirements that occur when third party contacts are made. When all was said and 

done, our refinements narrowed the universe of taxpayers who may receive the notice 

to about eight million, with slightly more than half of those notices being sent through an 

automated process and the remainder being sent by employees only when a third party 

contact is imminent. Beginning in February, we issued new notices -- about 15 in all --

that are tailored to the specific situation of the taxpayer and that address many of the 

concerns that we heard.

However, we still have our work cut out for us. One troubling area is how to 

balance the interests of third parties with the rights of taxpayers and the need for 

efficient tax administration. We are required to record all third party contacts and to 

periodically report them to the taxpayer involved, except where the contact was 

authorized by the taxpayer, is with respect to a criminal investigation, would jeopardize 

collection, or the third party expresses a fear of reprisal. We have instructed our 

employees to take reprisal claims by third parties at face value. We made this decision 

to avoid a situation, where by virtue of our second-guessing of a claimed fear of reprisal, 

we make the wrong call and disclose the contact, only to have the third party suffer 

harm as a result. 

More difficult is the situation where a third party does not claim a fear of reprisal 

but asks us not to record their name or provide it to the taxpayer. In this situation, the 

statute requires us to disclose the name of the third party to the taxpayer. The vast 

majority of third parties do not wish to get caught up in another person’s tax dispute, but 

nonetheless recognize a public duty to assist law enforcement efforts. I am concerned 

that they undergo a great deal of anxiety when they learn that the disclosure will be 

made, and, as a result, become disenchanted with the tax system and their 

government. Though we do not track the instances where third parties ask not to be 

identified, I understand from reports from the field that it occurs frequently, which puts 

our employees in a very difficult position. This ultimately may have the effect of creating 

unwillingness on the part of third parties to provide any information at all to us in the 

normal course of business, even outside of the situations contemplated by the statute. 

I can assure you that we are committed to implementing this provision in a way 

that is fair to all of the respective players and carries out the intent of the legislation. 

While we are working on some of the remaining challenges, such as the ones I have 

described, we have moved forward with training and implementation. We estimate that 

we are dedicating approximately 500-600 FTE to administer this provision. 
Enforcement Statistics and Relation to Resources

I share the concerns about declining enforcement activity and the difficulties we 

have in providing both top-quality customer service and collecting the taxes that are 

properly due. In an era of budget constraints, we are facing an enormous challenge in 

achieving both of these goals. Our goal is to make the IRS more effective in serving the 

vast majority of taxpayers who voluntarily pay their taxes and in dealing with those who 

do not, or will not, pay what they owe.

Since the passage of RRA 98, the number of enforcement actions has declined 

substantially. For example, the fraction of individual returns examined in “face-to-face” 

audits has declined by about 40 percent, and the number of collection cases closed has 

declined by a similar amount. There are a number of reasons behind this decline. 

First, it is important to understand that the decline in audit rates has not been 

principally caused because agents have been transferred out of collecting revenue into 

customer service. From 1997-1999, less than three percent of total staff years were 

transferred from examination activities to customer service.

The decline in audit rates was caused by constraints, including the budget, which 

reduced the total number of employees available to conduct audits, while the number of 

tax returns increased. Also, the Restructuring Act imposed time consuming, but 

important, new administrative requirements to administer an increasingly complex tax 

code. 

Second, the Restructuring Act and the IRS’ plans for reform represent a major 

and pervasive change in an organization that for decades had a more single focus in 

which success was measured predominantly by money collected through enforcement 

actions. The Restructuring Act placed increased demands on the organization at a time 

when overall staff resources had been declining, not increasing. The IRS is also still 

dependent on some of the country’s most obsolete computer systems. 

Let me be clear that the IRS is not stepping away from its commitment to 

ensuring compliance with the tax law. But it is important for the IRS to stabilize the level 

of enforcement activity so that the proper action can be taken in each case. We have 

included additional compliance staffing in our 2001 budget proposal to help address the 

problem. While it will take some time and additional resources to better IRS overall 

performance in this area, we are taking some specific steps now to improve compliance 

levels in particularly critical areas. For example, we have begun an initiative this year to 

address the growing problem of corporate tax shelters -- complex transactions that have 

little or no business purpose other than the generation of tax benefits.

There has also been some recent discussion regarding examinations of 

taxpayers earning $25,000 or less. Most of the examinations of $25,000 or less involve 

asking taxpayers to substantiate a single item on their return, such as EITC or 
exemptions, by mailing documentation to one of our customer service centers. This is 

what the IRS calls a “correspondence exam.” Because these examinations take 

relatively little time per return compared to all other examinations, the number is 

disproportionately high compared to the Examination resources used. Although more 

than half of the individual returns examined in FY 1999 were correspondence, they 

represent only 11 percent of total Examination resources. (See Chart L.) The overall 

Examination activity includes individual and corporate income taxes as well as estate 

and gift, employment and excise taxes. 

ELECTRONIC TAX ADMINISTRATION

The IRS has made significant progress in implementing the RRA 98 provisions 

regarding electronic tax administration. (The 2000 Filing Season initiatives can be 

found in Appendix A.) In the nearly two years since the bill was enacted, IRS e-file

receipts increased from 24.6 million in 1998 to 29.3 million in 1999 and are expected to 

reach 35 million in 2000. Through April 21, 2000:

• Almost 35 million taxpayers filed electronically; a 20.4 percent increase over the 

prior year. 

• Over 24.9 million taxpayers e-filed through an authorized e-file provider; a 18.7 

percent increase over last year.

 

• On-line filing has also continued its dramatic growth, increasing over 104 percent 

with 4.9 million returns being filed on line via a home computer through a third 

party transmitter.

Contributing to this year’s successful filing season was IRS’ brand new marketing 

campaign, “30 Million Americans Use IRS e-file.” In conjunction with its advertising 

agency, and as authorized by RRA ‘98, the IRS developed a fully integrated campaign 

with TV, radio and print advertising.

The IRS also continued its efforts to move toward entirely paperless electronic 

filing. For the second year in a row, the IRS tested the use of a Personal Identification 

Number (PIN) code as the taxpayer’s signature, eliminating the need to file the paper 

jurat. The tests have been a resounding success.

• 5.4 million taxpayers participated in the Practitioner PIN pilot compared

to 499,606 taxpayers for all of 1999. Taxpayers were able to select a PIN when 

filing through 18,000 participating preparers.

• Use of the on-line filing Customer Numbers also increased significantly

from 660,209 to 1.4 million this year. Under this pilot, the IRS distributed

Customer Numbers to taxpayers who prepared their own returns using tax 

preparation software to file from their home computers.
This filing season, more electronic payments options have been made available 

to taxpayers, such as accepting debit payments through TeleFile and accepting credit 

cards for Forms 1040ES, estimated tax payments, and Forms 4868, extensions of time 

to file. As of April 22nd, 186,512 payments averaging $2,882 were made via credit card 

and another 231,108 payments averaging $1,617 were made by Automated Clearing 

House (ACH) Direct Debit where taxpayers can authorize either their checking or 

savings account to be debited.

The IRS also continues to expand the electronic filing options that are available 

to businesses. As authorized by RRA 98, payors who electronically transmit their 

information returns to the IRS had an extra month this year – from February 28 to March 

31 – to file over IRS’ new filing system -- Filing Information Returns Electronically. 

Partnerships were able to file Forms 1065 and related Schedule K-1s electronically as 

well. In April, employers had the added option of filing their quarterly Form 941 from 

their office computer in addition to current methods.

In addition, as required by RRA 98, the IRS issued its first Strategic Plan for 

Electronic Tax Administration, entitled A Strategy for Growth, in December 1998 and 

issued an updated Strategic Plan the following year. The Strategic Plan is designed to 

eliminate barriers, provide incentives, and use competitive market forces to make 

significant progress toward the Congressional goal of 80 percent of all tax and 

information returns being filed electronically by 2007. 

The IRS also established the Electronic Tax Administration Advisory Committee 

(ETAAC) in September 1998 to provide an organized public forum for the discussion of 

electronic tax administration issues in support of paperless filing. The ETAAC, which is 

comprised of representatives from various groups, was established to provide 

continuing input into the development and implementation of IRS’ strategy for electronic 

tax administration. The ETAAC issued their first report to Congress in June 1999, 

stating that “the IRS made a good start in setting out a program to achieve the 

electronic filing goals established by Congress.”

CONCLUSION

Mr. Chairman, I believe we are making real progress on the goals and mandates 

set forth by the landmark IRS Restructuring and Reform Act and to bring meaningful, 

positive changes to the IRS and America’s taxpayers. It is true that no one fully 

understood everything that would be required to implement this far-reaching Act. 

However, if Congress can provide continued and assured support for IRS 

modernization, such as that contained in our FY 2001 budget request, we can succeed. 
APPENDIX A – THE 2000 FILING SEASON, ELECTRONIC FILING AND

CUSTOMER SERVICE IMPROVEMENTS 

By continually managing all of the change and risk in an orderly and integrated 

fashion, I am pleased to report to the subcommittee that the 2000 tax filing season has 

been smooth and almost error free. Of equal importance, the 2000 filing season 

demonstrates some very important and positive trends in service to taxpayers on which 

we can build in the coming years, especially as our major technology and organizational 

initiatives take effect. 

Projected net collections for FY 2000 are $1.767 trillion. During FY 2000, we 

also project to receive 213.1 million returns, including over 127.3 million individual 

returns, and expect to issue over 93 million individual refunds. As of April 14, 2000, the 

number of refunds is up 1.95 percent over last year, and the average refund is $1,640 

up 5.8 percent over the same period last year. On-line filing is running 104.2 percent 

ahead of last year’s pace and already exceeded last year’s total volume by 2.5 million. 

Electronic Tax Administration

Meeting the Challenge

The IRS Restructuring and Reform Act of 1998 set forth 

the mandate that at least 80 percent of returns be filed 

electronically by 2007. We know that the stakes are high in Electronic Tax 

Administration (ETA), but so are the potential benefits to taxpayers, practitioners and 

our tax administration system. There are, of course, the obvious rewards. Increased 

electronic filing of returns can improve tax administration by speeding refunds to 

taxpayers, providing positive acknowledgment that a return has been received and 

reducing the need to correct errors. 

However, on a broader scale, improved electronic exchange of information with 

taxpayers and practitioners advances all three of the IRS’ strategic goals: service to 

each taxpayer, service to all taxpayers and productivity through a quality work 

environment.

A robust ETA program will reduce time spent by taxpayers dealing with the IRS. 

We will reduce the number of phone calls we have to answer and because of these two 

factors we will free up our compliance employees to focus on real compliance issues, 

rather than just retrieving or correcting information.

The IRS has made considerable progress in expanding electronic filing. During 

1999, approximately one out of every four taxpayers, over 29 million individuals, filed 

electronically using one of three convenient e-file options: filing through an IRSauthorized Electronic Return Originator, filing on-line via home computer through a third 

party transmitter, and filing over the telephone via TeleFile. The IRS expects to receive 

more than 34 million electronically filed individual income tax returns in 2000.
Businesses also enjoy the benefits of electronic filing and payment. During 

Fiscal Year 1999, taxpayers made over $1.3 trillion in tax deposits through the 

Electronic Federal Tax Payment System (EFTPS). This system allows taxpayers to 

make their federal tax deposits over the telephone or using the computer, eliminating 

the need for paper deposit coupons, checks, or trips to the bank. In addition, well over 

two million employment tax returns were filed electronically or over the telephone during 

Fiscal Year 1999.

The 2000 Filing Season

The 2000 filing season is turning out to be another growth year for ETA as more 

taxpayers than ever before are enjoying the benefits of filing taxes electronically. 

Through April 21, 2000, almost 35 million individual taxpayers filed using one of the 

three e-file options; a 20.4 percent increase over the same period last year. 

? Over 24.9 million taxpayers e-filed their tax returns electronically through an IRSauthorized Electronic Return Originator (ERO); a 18.7 percent increase over the 

same period last year. 

? Approximately 4.9 million taxpayers have filed their tax returns on-line via their 

home computer through third party transmitters. On-line filing is running 104.2 

percent ahead of last year’s pace and exceeded last year’s total volume by 2.5 

million returns.

? Almost 5.1 million taxpayers filed their returns over the telephone using the 

award winning TeleFile system. For the first time, taxpayers in Indiana and 

Kentucky were able to file both their federal and state returns in a single 

telephone call during the pilot of the first Federal/State TeleFile option.

? Overall, 11.8 million taxpayers have chosen to file both their federal and state tax 

returns simultaneously in a single electronic transmission. This year, 35 states 

and the District of Columbia are participating in the program.

In addition, many of the volunteer sites under the IRS-sponsored Volunteer 

Income Tax Assistance or Tax Counseling for the Elderly programs offer free e-filing to 

those seeking help. Taxpayers can locate the nearest volunteer site by calling the IRS 

at 1-800-829-1040. As described in the following section, the IRS is undertaking 

several initiatives to further expand the program this year. Individuals, businesses and 

practitioners are also seeing many improvements in 2000 and will see even more in 

future filing seasons. 

New in 2000 for Individual Taxpayers

Expansion of Signature Pilots: More individual taxpayers are able to file totally 
paperless returns in 2000 because the IRS expanded its Practitioner PIN Pilot to include 

about 18,000 tax preparers. The IRS also continued the On-Line ECN Pilot by mailing 

11 million postcards containing e-file customer service numbers (ECNs) to taxpayers 

who used a computer to file their own returns last year. In 1999, over 650,000 

taxpayers participated in the On-Line PIN Pilot, while nearly 500,000 participated in the 

Practitioner PIN Pilot. 

Expansion of Electronic Payments: More electronic payment options (credit card 

and ACH debit payment) have been made available to taxpayers this year, such as 

accepting debit payments through TeleFile and accepting credit cards for Forms 

1040ES, estimated tax payments, and Forms 4868, extensions of time to file. Last 

year, over 53,000 tax payments were made by credit card and approximately 75,000 

payments were made by ACH Debit.

Additional Forms and Schedules Accepted: More forms and schedules, including 

Schedule J, Farm Income Averaging, and Forms 8271, Investor Reporting of Tax 

Shelter Registration Number, 8582-CR, Passive Activity Credit Limitations, 6781, Gains 

and Losses from Section 1256 Contracts and Straddles, and 8586, Low Income 

Housing Credit, are being accepted through IRS e-file, making the program available to 

more taxpayers. In addition, the IRS is finalizing its plans for accepting all forms and 

schedules via IRS e-file; half of the remaining forms and schedules should be added for 

2001, with the balance by 2002.

Web-based e-file Options: Millions of taxpayers have discovered that the IRS 

home page on the World Wide Web is an excellent and convenient source for tax forms 

and tax information. They are also discovering that the IRS e-file Partnerships page on 

the IRS Web site provides links to various private industry companies that provide 

affordable, convenient, user-friendly e-file options. In the spirit of RRA 98, the IRS is 

partnering with the private sector to provide IRS e-file and electronic payment options 

for individuals and businesses.

2000 Marketing Campaign: To help move us toward the goal Congress set for 

us, ETA launched a brand new marketing campaign this year, “30 Million Americans 

Use IRS e-file.” It is a fully integrated campaign with new TV, radio and print 

advertising. 

New in 2000 for Business Taxpayers

Form 941 On-Line Filing: This April, employers will have the added option of filing 

their quarterly Forms 941 from their office computer, in addition to e-filing and TeleFile. 

Electronically Filed Information Returns: Effective for 2000, payors who 

electronically transmit information returns to the IRS will have an extra month – from 

February 28 to March 31 – to file over IRS’ new system, Filing Information Returns 

Electronically (FIRE).
New in 2000 for Practitioners

Account Management Pilot: The IRS is piloting an Accounts Management 

Program in the Kansas-Missouri and Southern California Districts to serve the needs of 

Electronic Return Originators (EROs), financial institutions, large and small employers, 

and payroll service providers who distribute ETA products and services to taxpayers.

Debt Indicator Pilot: Through the Request for Agreement (RFA) process,

selected tax professionals are participating in the debt indicator pilot.

Providing Information And Service

From web-based technology to 24 hours-a-day/7-days-a-week phone service to 

sitting down face-to-face with a taxpayer with a problem, the IRS continues to work to 

provide the easiest and most efficient ways for taxpayers to get the information and 

assistance they need not only during filing season, but throughout the year. 

An increasing number of taxpayers are discovering that 

the IRS site on the WorldWide Web (the “Digital Daily”) is an 

excellent and convenient source for tax forms and tax information. In preparation for 

the 2000 filing season, the IRS also has a shorter and easier to remember Web site 

address – www.irs.gov. Since coming on line in January 1996, taxpayers have 

downloaded over 201 million forms, publications and products. Through February 2000, 

there have been over 51.5 million downloads as compared to 24.3 million for the same 

period in 1999 – an increase of almost 112 percent.

Anyone with Internet access can receive: tax forms, instructions, and 

publications; the latest tax information and tax law changes; tax tables and rate 

schedules; and hypertext versions of all taxpayer information publications, including the 

very popular Publication 17, "Your Federal Income Tax"; all TeleTax topics; answers to 

the most frequently asked tax questions; a library of tax regulations; and the weekly 

Internal Revenue Bulletin, which contains all the latest revenue rulings, revenue 

procedures, notices, announcements, proposed regulations and final regulations.

The IRS Web site also now has a W-4 Calculator in its “Tax Info for You” section. 

 In addition, expanded use of online customer service technologies provides greater 

taxpayer access to IRS help while on the Digital Daily. 

Web Site and Innocent Spouse

The IRS Web site has become an important tool in the IRS’ efforts to educate 

and inform taxpayers of their rights under the new RRA 98 innocent spouse provisions 

and to help them to make correct and accurate claims. To this end, we developed an 

Web Site
interactive application on our Web site that provides taxpayers a general explanation of 

eligibility for spousal relief. This application has also been distributed to 50,000 tax 

practitioners nationwide and assists taxpayers in understanding the information IRS 

needs in order to evaluate innocent spouse claims.

The interactive application includes not only innocent spouse provisions, such as 

separation of liability and equitable relief, but it also takes taxpayers through injured 

spouse and community property issues, as well. Moreover, the interactive application 

will give taxpayers direct access to forms and publications so they can apply for any of 

the applicable relief options. We have shared this interactive Internet application with 

11 Internet sites associated with spousal issues, including the Oprah Winfrey Television 

Show Web site.

 

Web Site and Installment Agreements

In August 1999, the IRS announced a new aid for those interested in paying their 

taxes on an installment plan. The IRS Web site now has an interactive calculator that 

helps a person figure the monthly payment amount, and then prints out an installment 

agreement form for the taxpayer to file.

The calculator is for individuals who have filed their returns and are not already

paying taxes under an installment agreement. It is available through the “Interactive

Installment Payment Process” link on the “Tax Info for You” page of the IRS Web site.

Those qualifying for a “streamlined” agreement – generally, taxpayers with a tax 

debt of not more than $25,000 that they will be able to pay off within five years – will find 

out how long their proposed monthly payments would last. Taxpayers who do not meet 

the criteria for a streamlined agreement can compare their monthly expenses to the 

amounts allowed under the IRS’ Collection Financial Standards, to help determine an 

appropriate tax payment amount.

Users may print out the Form 9465, Installment Agreement Request, from the 

Web site – with the allowable expense worksheet, if used – and mail it to the IRS for 

review and approval. The Web site does not store or transmit any personal data. 

Persons who are already paying back taxes under an installment plan must pay all 

subsequent taxes on time or they will default on their agreement. 

The Small Business Corner located on the IRS web site 

was inaugurated in January 1999 to benefit the over 23 million small business taxpayers 

and the 800,000 start-up businesses begun each year. It is intended to provide these 

taxpayers with easy-to-access and understand information. This type of convenient 

“one-stop shopping” for assistance could provide most, if not all, of the immediate 

products and services that a small business needs. It also offers the potential for Webbased Q&As which can help the IRS identify and address trends and systemic 

Web Site Small Business Corner
problems. Improved electronic access to information should also result in decreased 

demand for telephone and walk-in assistance. 

Expanded Web Site Tax Professional Corner

The Tax Professional Corner offers practitioners the opportunity to order 

electronically tax products, including the Federal Tax Forms CD-ROM. Practitioners 

can also subscribe to electronic e-mail information services, such as the Digital 

Dispatch and Local News Net, giving them access to instantaneous news and 

information direct from national and local IRS offices. The Web site also provided 

highlights of the first conference on IRS Modernization, a joint effort between the IRS 

and private sector partners, including the American Tax Policy Institute, American Bar 

Association, American Institute of Certified Public Accountants, National Association of 

Enrolled Agents and Tax Executives Institute.

This filing season, the IRS continues to provide 

interactive electronic tax law assistance to taxpayers via its Web site. Users click on the 

mailbox icon on the Digital Daily home page and then proceed to the Tax Law Question 

section. This is not intended for highly complex tax issues or questions regarding 

specific tax accounts. Specific tax account or refund questions must still be handled by 

telephone or in person. IRS customer service staff will provide answers to “general” tax 

law questions to assist taxpayers in preparing their returns. Taxpayers select one of a 

number of categories, provide an e-mail address, and submit their questions. To 

answer taxpayers accurately, economically and quickly, the IRS will provide a “preprepared” response, if available. 

The Federal Tax Forms CD-ROM contains more than 

600 tax forms and instructions for the current tax year, and an archive of forms and 

instructions dating back to 1992, and some 3,000 pages of topic-oriented tax 

information. Users can electronically search, view-on-screen, or print any of the items 

contained on the CD on their own printers. The two-issue subscription is conveniently 

available through the Digital Daily for $21. If ordered by fax, mail, or telephone, the 

cost is $28. As of April 26, 2000, over 104,520 subscriptions were sold through all 

venues.

In conjunction with the Small Business Administration, the IRS also recently 

produced the joint small business CD-ROM, “Small Business Resource Guide: What 

You Need to Know About Taxes and Other Topics.” Last year’s prototype CD-ROM 

received highly favorable reviews from small businesses and external stakeholders. As 

a result, the Year 2000 version of the CD-ROM is being made available free of charge, 

one-per-customer, by calling our toll-free number at 1-800-TAX-FORM. It can also be 

ordered on the IRS Web site. 

The CD-ROM is an interactive multi-agency product utilizing the latest technology 

Web-based Customer Service

CD-ROMs
to provide the small business taxpayer with easy-to-access and understand information. 

 The CD-ROM provides an array of helpful information for business operators, including 

actions to take before going into business and tax filing and reporting responsibilities 

when starting, expanding, closing and selling a business. In addition, it includes all of 

the business tax forms, publications and instructions for e-filing. The CD-ROM also 

allows users with Internet access to link to other helpful federal and state web sites.

We are working with the SBA, the Association of Small Business Development 

Centers and the Service Corps of Retired Executives (SCORE) to help publicize and 

distribute the new CD-ROM so that we can get it to the people it will help most. 

Combined, these organizations have over 1,500 locations and the IRS is sending each 

site 100 free copies of the CD-ROM to share with their small business clients. Each 

Member of Congress will soon receive two copies, as well. 

EITC CD-ROM

IRS’ Earned Income Tax Credit CD-ROM is now available. The first EITC CDROM was shipped to the three IRS distribution centers on February 17th. Thirty 

thousand disks were produced. The EITC CD-ROM is aimed primarily at tax 

practitioners and contains hundreds of forms, along with electronic documents and 

publications to help tax professionals meet their obligations related to EITC due 

diligence. It is the IRS’ hope that the electronically searchable publications and 

electronically fillable forms will reduce practitioner burden and help in compliance.

New TAXi Module Debuts/TAXi CD-ROM Nears Completion

The new Tax Interactive module, "The Real Planet" debuted this year. Tax 

Interactive is IRS’ Web site for teens and is part of the “Digital Daily.” The original TAXi 

concept was created and produced through the joint efforts of the IRS and the American 

Bar Association’s Section of Taxation. 

The new TAXi module is a Web talk show about “teens in business for 

themselves” and explains planning and operating a business, with an emphasis on 

business related taxes. The module helps teens learn in the same relaxed and fun style 

as the other TAXi modules. “The Real Planet” gives teens a practical introduction to 

owning a business and the related tax obligations. 

IRS is again working with the American Bar Association’s Section of Taxation to 

develop a companion CD-ROM product for TAXi. When it is completed, teachers will be 

able to use the Tax Interactive materials on their local computers and networks, without 

an Internet connection. The CD-ROM will be completed next month. 

Telephone Assistance

24/7 Phone Service and Access
One of the hallmarks of the IRS’ commitment to providing top quality service to 

taxpayers is 24 hours-a-day/7 days-a-week toll-free telephone service (1-800-829-

1040). So-called “24/7'' phone service became a permanent IRS service feature on 

January 4, 1999, and we offer it throughout the filing season. After April 17, we will 

continue to offer around-the- clock service for refund and account callers, and service 

will be available for tax law assistance Monday through Saturday from 7:00 AM until 11 

PM. As of March 31, 2000, more than 37 million taxpayers have been served on all 

product lines in FY 2001, compared to almost 43 million over the same period last year. 

As the subcommittee is aware, the expansion to 24/7 service last year, combined 

with increased training demands to implement the new tax law requirements, caused 

the effective level of service to decline, especially during the beginning of the filing 

season. However, we believe we have turned a corner this filing season. The upward 

trends across the board in phone service are most encouraging and show that our 

investments in training, management and technology are beginning to pay dividends. 

For this filing season as a whole, our level of service is 63 percent so far compared to 

our target of 58 percent. In the last four weeks, the level of service averaged 66 

percent.

Some of our toll-free telephone strategies and initiatives for the 2000 filing 

season include: the Customer Service Field Realignment, implemented October 1, 

1999, that will help us to make the best use of staffing by routing calls to where we have 

trained people available; the increased ability to answer tax law inquiries by assigning 

additional compliance staff during regular hours and overtime and supplementing them 

with Appeals officers; improved accessibility to and service from the National Taxpayer 

Advocate; and expanded Spanish Language Assistance. 

One of the very important steps we are taking to improve telephone service is to 

change the way we measure service and quality to better reflect the real world way that 

taxpayers receive it. These are more stringent, but also more useful ways, of 

measuring.

For access, we have begun to measure the percentage of calls in which the 

taxpayer receives actual service, in relation to the percentage of time the taxpayer 

simply gains access to our system. 

 To promote consistency in call accounts quality, we established a Centralized 

Quality Review Site in October 1999 to replace the field review process we had 

previously employed. The reported quality rate is lower in FY 2000 because the IRS is 

reviewing more stringently for adherence to Internal Revenue Manual requirements. If 

Customer Service representatives do not perform all action required by the IRS, the call 

is marked as incorrect. 

In order to deliver truly high quality communication to taxpayers, we need to 
improve the management, organization, technology and training that support these 

operations. This is a major long-term objective of our overall modernization program. 

Forms By Fax

Taxpayers can receive more than 150 frequently used tax forms 7 days a week, 

24-hours-a-day from IRS TaxFax. Taxpayers can request up to three items per call. 

Taxpayers use the voice unit of their fax machine to dial the service at 703-368-9694. 

The only cost to the taxpayer is the cost of the call.

Recorded Tax Information

TeleTax has 148 topics available 24 hours-a-day using a Touch-tone phone. 

Taxpayers can call (toll-free) 1-800-829-4477 to hear recorded information on tax 

subjects such as earned income credit, child care/elderly credit, and dependents or 

other topics, such as electronic filing, which form to use, or what to do if you cannot pay 

your taxes. Nearly 11.5 million taxpayers used TeleTax last year for recorded tax 

information; as of March 25, 2000, over 22 million have taken advantage of the service 

so far this fiscal year. 

Automated Refund Information

In FY 1999, more than 34 million taxpayers used the Automated Refund 

Information system on TeleTax to check on the issuance of their refund checks. As of 

April 15, 2000, the number stands at over 26 million. Taxpayers may call 

1-800-829-4477 to check on their refund status Monday through Friday from 7 a.m. to 

11:00 p.m. if using a touch-tone phone, or 7:30 a.m. to 5:30 p.m. for rotary or pulse 

service.

Taxpayer Assistance Centers

Saturday Service

Delivering on our promise to supply even more reliable and helpful taxpayer 

assistance, the Internal Revenue Service is providing Saturday service for the entire 

2000 filing season at 275 locations nationwide, and for the first time, Sunday service on 

April 16th. Through April 8, we served 107,050 taxpayers on weekends. So far this 

filing season, we have served over 4.9 million taxpayers at all Taxpayer Assistance 

Centers – a six percent decrease from last year. 

The Saturday Service sites were selected based on their weekend accessibility, 

year-round operational status, and high traffic volume and include non-traditional 

locations, such as shopping malls, community centers and post offices. 

On each of the Saturday Service Days, IRS employees provided taxpayers with 

the following services: (1) distribution of forms and publications; (2) answers to account 
and tax law inquiries; (3) verification of Individual Taxpayer Identification Number 

documentation; (4) processing of alien clearances; (5) acceptance of payments; and (6) 

return preparation.

While some taxpayers prefer face-to-face meetings with IRS personnel to resolve 

their problems, we believe that in the long run, most taxpayers can be best served over 

the toll-free telephone services and the Internet. We also believe that by energizing the 

VITA return preparation program and co-locating these activities at the Taxpayer 

Assistance Centers, the IRS will be able to focus on simple account and collection 

issues. 





























Senator GRASSLEY. Thank you for your report to us. We will go to questions now. 

My staff suggested that Senator Dorgan wants to make a statement.

Senator DORGAN. I will defer the statement until we have questions.

[The statement of Senator Dorgan follows:]



Senator GRASSLEY. All right. We will do it in five-minute turns for each individual, 

and that will be in the order in which people arrived.

In your testimony, you argued that improved business practices will help the IRS meet its 

goals with lesser funding increases. Obviously, this is worthy and sounds very good, and we do 

not dispute your willingness to do that.

I would like to point out, though, a few problems that have been relayed to me by IRS 

employees from the field. I understand that one of your modernization efforts is to have 

collection managers manage auditors as well as have audit managers oversee some collections. 

One analogy that I have heard is comparing one to an engineer of a train and the other to 

a pilot of a large aircraft; they both have specialized jobs, but you would not want the pilot of the 

plane to try to engineer the train, or vice versa.

There are different types of time reporting, different kinds of reports, different computer 

programming, and different educational backgrounds. I am hearing that it is just a matter of time 

before the two-- meaning the collection manager and the audit manager-- crash into one another.

I am also hearing that agents are working without a manual. Everything is done, 

supposedly, by memorandum. Things do change, but it leads to confusion and frustration in the 

field. These employees say that they go to training which we're spending millions of dollars on, 

and no one seems to have answers. This leads to less audits and collections.

So I would like to have you respond to those criticisms, even to the point that you do not 

think that they are true, but I wanted to report to you what we hear.

Mr. ROSSOTTI. I appreciate that. And, of course, I travel around quite a bit and hear 

the same things. I have gone, so far, to every district, every service center, about 60 or 70 

different locations, and met with employees. I think I have got a pretty good idea of what is on 

their mind.

I think, first, let me say that some of those things that you said, and I could make a list of 

10 or 20 more, in part, just reflect the changes that we are going through. We are definitely 

making changes, which is what was required and requested. Whenever you change any large 

organization, there is a period of relearning that takes place.

Some could say it is confusion, and that would be another way of looking at it that would 

say the glass is half empty. If you want it to be half full, you say it is relearning. I think with 

respect to the issue of the manual, let me take that one, first, because that is the most vital one.

Certain sections of the Internal Revenue Manual-- which is an enormous set of 

documents that no one is really expected to read altogether but it is more of a reference 

document--particularly those that were most impacted by the Restructuring and Reform Act, 
have been rewritten and are in the process of being rewritten quite significantly, probably more 

than they have ever been rewritten, to try to conform with the Restructuring and Reform Act.

Quite honestly, it is a learning process to learn how to do that. The Restructuring Act 

gives some specific requirements for things like due process and collection. I could show you--I 

did not bring a chart here--that it takes about six or seven pages to outline on a flow chart exactly 

what that means, exactly when you have to notify a taxpayer when, for example, they have an 

appeal right.

What happens if they respond in so many days, what happens if they do not respond in so 

many days? Those are quite intricate kinds of things that have to be determined. We have been 

working very hard on that for the 18 months or almost two years since the law has passed.

It is absolutely correct, what the employees say, that the manual has not been fully 

updated in one place-- this is the collection part of the manual--to reflect all of those changes.

We have an initiative under way right now to bring in employees from the field together 

with people from our national headquarters to rewrite some sections of that manual in a more 

comprehensive and clear way. But this is an excellent example of something that is probably 

going to occupy us at least another year to 18 months.

I said we had met the legal requirements of the law, but we still had a couple years' worth 

of work to really make it work. This is a perfect example. We have put out documents that tell 

people how to comply with these intricate requirements, now we have to really go back and put it 

all together and put it in a more efficient way.

On the other point, in our reorganization we are making some changes which have been 

based on very careful analysis of what is the best interests of the taxpayer. One of the main 

criticisms from taxpayers, if you will recall in your hearings, is that they would get bounced from 

one place to another and never get a resolution.

From a taxpayer point of view, we expect the taxpayer to comply with the Tax Code. We 

do not tell the taxpayer that, well, this half of your brain is an exam brain and this half of your 

brain is a collection brain. They just say, if we have to comply with the Tax Code, they want to 

come in and deal with somebody inside the IRS to solve their problem.

At the same time, we do have these special areas of the law that need to be done. So 

what we have done in our reorganization--and I know I am getting my yellow light here--is we 

have----

Senator GRASSLEY. I am getting the yellow light, not you.

Mr. ROSSOTTI. Oh. All right. I am sorry. I do not mean to take too long to answer 

your question, but it is a very important question. The first thing we have done, is we have 
tried--we have not tried, we are-- reorganizing in such a way that we will not be expecting all 

managers as they are today to administer all the law for all forms of taxpayers.

Today, if you go into a district, they cover everything from the largest corporation to a 

simple tax return for somebody that just has some wages on a simple form. No one in the 

business world tries to do that because there is no manager that can be expert in that many 

things.

So what we are doing, is we are dividing it up according to the customer. In one of the 

divisions, for example, which is the small business division, we will have some managers that 

oversee all the compliance activities for those sets of taxpayers.

There will still be specialists and specialist managers that will be technical experts in 

those fields, but at a lower level than exists today. You will have someone that is in charge of 

that whole thing for the real purpose of just making sure that the taxpayer gets a solution closer 

to home. That is the purpose of it and it is very responsive to what we found in our problemsolving days.

I remember, Senator, when I came out to Iowa, you remember one of those special days 

that we had, those have become very, very successful in getting people's problems solved. Well, 

the reason is, we had all the people from the specialties there at once. That is the principle that 

we are trying to build into the organization so that it is there every day, not just on a special day 

once a month.

Senator GRASSLEY. Congressman Houghton?

Mr. HOUGHTON. Thank you, Mr. Chairman.

I have three or four questions, Mr. Commissioner, I would like to ask you, but I think I 

would really like to concentrate on one aspect of this.

We ask you to do certain things, you ask of yourself, you ask of the people to do certain 

things, and you talked about respecting taxpayer rights, making sure taxpayers pay taxes that are 

due, and also working efficiently.

If I understand it, we have increased your budget periodically and you are now asking for 

roughly 3,000 more people. Are we giving you the tools that you need to do the job? I think you 

have two and a half more years, and maybe many more after that, to do the job in the time that 

you have allotted for yourself to turn this thing around.

Mr. ROSSOTTI. I think that several Members in their opening statements said that we 

are at a crossroads. I think, just as I said in my statement, we have made some progress and we 

clearly have in mind what needs to be done. I really think we, collectively, know what needs to 

be done to really fulfill the vision of the Restructuring and Reform Act and the IRS Commission. 

 I also believe it can be done.
I do believe that we are at a crossroads where we are going to either show that this will or 

will not happen in the next, about, 18 to 24 months. I believe that the 2001 budget is particularly 

critical for that purpose.

The Congress did grant us our full request last year. We did not ask for any increase; in 

fact, we had about a level or slightly declined workforce last year. We did not know exactly 

where we were going to need these resources. I think today we do. 

We also were only at the very, very beginning. In fact, we are still at the beginning of 

our technology modernization, but we are now in the ramp-up stage. So I think that we are in 

that period where we really need to implement and make these things work at this point, and I 

think that in the next 18 to 24 months, which is the period of the rest of this fiscal year and the 

2001 fiscal year, will be critical to making that happen.

Mr. HOUGHTON. Thank you.

Senator GRASSLEY. Congressman Portman?

Mr. PORTMAN. Thank you, Mr. Chairman.

Mr. Commissioner, I have a lot of questions. I am going to try to focus on two, partly to 

get you on the record on a couple of tough issues. One is with regard to this IRS public/private 

Oversight Board.

You mentioned in response to Mr. Houghton that you think we now know what needs to 

be done. I am not sure that is true. I know that I believe that you know what needs to be done. I 

do not know how long you are going to be in this job; I hope it is for a long time. But one of the 

issues with the Board is to have some continuity.

If we found anything in our two years of studying the IRS, it was that every time there 

was a great-sounding reform, then a new administration would come in or a new Deputy 

Secretary, new Commissioner, or new Deputy Commissioner and things would change. Folks in 

the field kind of got to the point where they were going to outlive the latest reform.

I guess I have a very specific question for you in hopes of getting this Oversight Board in 

place. That is, you are a professional manager, you have an information technology background, 

you are an executive from the private sector, you have credibility on this issue. Do you believe 

that in the last year it would have benefitted you and the IRS to have had the Oversight Board in 

place?

Mr. ROSSOTTI. The answer to that is, unequivocally, yes. I did not mean to imply that 

we had all of the answers and we did not need any more help. I did not mean to say that. I just 

meant that we had made a lot of plans, we have done a lot of work, but it is absolutely true that 

we have to have continuity.
Mr. PORTMAN. My point was the continuity. My point was, people will change, 

personnel will leave. I know you have got some good, private sector people you have brought in. 

 I know they are also getting a lot of offers from the private sector right now, and it is going to be 

tough to keep everybody.

I just think we need to have some long-term continuity. You know we have five-year 

staggered terms on the Board. We have this ability to see these reforms through.

The second issue has to do with this notion that was raised by my friend Mr. Hoyer 

earlier, and I wish he were still here, which is enforcement. He essentially said, which has been 

repeated in a couple of articles recently, that the IRS is focusing more on the poor than on the 

wealthy in terms of enforcement.

The one point that we have made continually, is there is nothing inconsistent with better 

taxpayer service and customer service and good compliance and enforcement. Those two are not 

inconsistent at all. In fact, we believe that they are not only consistent with one another, but they 

complement one another.

I would just like to focus on this poor versus wealthy issue that seems to be coming up 

more and more. Again, with regard to the lower income audits, what portion of the audits of 

lower income taxpayers are correspondence audits? In other words, letter audits rather than 

face-to-face audits.

Mr. ROSSOTTI. I do not have exact numbers, but almost all of them, upwards of 90, 95 

percent of them, are letter audits. I think that is really a key point about this whole thing. If we 

have 10 revenue agents spend a year auditing a corporation, which we frequently do, that counts 

as one audit.

If we send a letter to a taxpayer, and this is frequently the case with the EITC audits, 

saying please send us some backup as to why you claimed this particular individual as a 

qualifying child, that still counts as one audit.

So if you just add up these numbers, you do come up with a large number of letter audits 

on the EITC because we had a special appropriation that was directed towards working on better 

administration of the EITC program.

If you look at it in terms of resources, it is about 6 percent. About 6 percent of our 

examination resources were devoted to the EITC program. But in terms of just numbers, it 

shows up as a higher number because of the relative scale of these things.

Mr. PORTMAN. Thank you. That is very important, and I am delighted that you got 

that on the record.
I would also like to point out with regard to the EITC, we do not have good data from the 

last couple of years. The best data we have indicates--this is from the IRS and from the Treasury 

Department--that there is at least a 20 percent mispayment rate with regard to EITC. It is not a 

job I personally believe the IRS ought to be doing, but you have to do it, and that is trying to 

enforce the EITC through the tax system.

Now, that means there is at least $6 billion in mispayments with the EITC every year, at 

least. You are devoting six percent of your resources to it when it is about the same as your 

budget, probably. In other words, the mispayments, the lack of revenue coming into the Federal 

Government because of the EITC, and a lot of that is fraud. We do not know how much of it is 

fraud.

But I just would make the point that folks ought not to be too critical of the IRS and the 

reform efforts in terms of focus of enforcement or uneven enforcement until they understand 

better what this results in. I am told that, for instance, upper income taxpayers are six times as 

likely to be audited, which seems appropriate to me.

But it is inappropriate to have the impression left out there that somehow the IRS has 

decided to focus on folks who make less than $20,000 a year. They are trying to make the EITC 

work better, and frankly, we have a long way to go on that as well.

One final point I just want to make and to be sure this is on the record, because there has 

also been some misunderstanding out there about your budget. The Congress has not cut your 

budget since the Restructuring and Reform Act.

In fact, we have had a stable budget, which is what, as Mr. Hoyer said, we recommended 

in the recommendation of the commission, and in the RRA it reflects the fact that a stable budget 

is needed. There needs to be certainty in budgeting. There needs to be a simpler Tax Code.

I personally support an increase in spending this year for some very specific purposes in 

order to make that transition. I do believe we are at a crossroads. I believe that there is a great 

risk if Congress and the IRS do not continue to focus on this.

We said at the outset this would be a three- to five- year process. Maybe that was a little 

optimistic. But we are now going into the third year, and it is absolutely critical that we have the 

resources available to be able to carry out the reforms that are so desperately needed.

Thank you, Mr. Chairman.

Senator GRASSLEY. I overlooked Senator Kerrey, so I will go back to Senator Kerrey.

Senator KERREY. I want to give Mr. Rossotti a chance to give his response.

Senator GRASSLEY. If you do, it will not count against Senator Kerrey.
Mr. ROSSOTTI. I would just add, back on the point of the Oversight Board on the 

matter of continuity, that one of the questions that I often get from employees--and I talk to 

hundreds of them all the time, and it really reinforces your point as well--we think that these 

things may work. There is always a little skepticism.

But how do we know that there is going to be continuity, that we are not going to go 

down this road and commit ourselves to it and then somebody else is going to come in? I do 

point out that I have, myself, a five-year term.

I also always point to the Oversight Board as another element that was put into the law by 

the Congress and that they do have the staggered terms. I think that has a significant effect on 

reassuring people that we are not just on kind of something that is going to turn around very 

quickly, that we do have continuity. So I would completely agree with the points you made 

about continuity being important and the Oversight Board being able to provide that.

Senator GRASSLEY. Now, Senator Kerrey.

Senator KERREY. Thank you, Mr. Chairman.

First of all, just keying off of what Congressman Portman was asking you, the stories that 

were reported about the likelihood of being audited increasing the lower your income was, is a 

very unhealthy story. I am not saying the story should be stifled in any way, shape, or form, but 

again, it illustrates why the Board is so important. This is a very politically charged issue.

My guess is, the facts would show that that did not occur as a consequence of the 1998 

Act at all. But, again, an independent board is much more likely to be able to provide both the 

people and the people's Congress with the information that they need to make a determination of 

whether or not, in fact, that is going on.

From what I have heard from you, the answer is that is not what is going on. You are 

more likely to get audited if you have higher income than if you have lower income. But, again, 

we have a voluntary system. If the sense of the taxpayers is that you are more likely to be 

audited if your income is low, that could contribute to our difficulty in achieving voluntary 

compliance.

So it is just one more example of why I think we have been negligent in providing you 

with support. I am concerned. If you and Mr. Cosgrave decide you want to leave all of a 

sudden, for whatever the reason, we may be back to where we were in 1997.

We could lose a lot of ground just with a couple of key people saying, AI understand 

Congress has difficulty getting things done, but if you do not get the Board up and running, I just 

cannot continue to operate here in this purgatory that you have put me in.@

Second, let me say that it appears to me that the IRS is continuing to achieve, compared 

to other industrial nations' tax collection agencies, rather impressive success. You collected, in 

the 2000 season, about $1.76 trillion. Less than half a percent of that collection is your budget, 
so you have less than half percent cost, which puts you at the top of the pack in terms of 

industrial nations that collect taxes.

Third, I am encouraged as well by the increase in electronic filing. Over 10 percent of 

the 210 or so million tax filings were done electronically, and there has been an increase both 

there and in web activity. Part of what we attempted to do with the legislation was increase the 

likelihood that you will have more electronic filing.

The reason is that the error rate is so much lower than it is in a paper world and it 

increases the likelihood that you will have lower costs of administration.

One other thing I would like to talk about is your budget. Again, I would just underscore 

that, under the law, the Oversight Board would be making that presentation of the budget rather 

than just you, and I think it makes it easier to get people to understand what you are trying to do. 

 You have got an increase of $769 million, $729 million if the $40 million supplemental is 

funded. 

Can you describe, just sort of briefly, and perhaps you did in your opening statement and 

I missed it, what you intend to do there with some of that money to improve the quality of the 

data? I noticed in the Wall Street Journal's tax report this morning that the last major study of 

compliance was done in 1988.

That would make it very difficult to know whom to audit and increase the likelihood that 

you have to resort to random audits, which can be very annoying and not very productive.

It is much better, it seems to me, to use accurate, up-to-date data about who has been 

good, who has been bad, and go after people who have been bad in a more precise fashion.

It seems to me it gets back to the central question, which is, when are we going to have a 

database that allows you, in a very real-time fashion, to answer taxpayers' questions about how 

much they owe and when do they owe it?

Mr. ROSSOTTI. That is very true. I mean, the whole strategy of our budget is that there 

are really two major pieces of this. One, is providing some additional staff, which we just badly 

need in the short run just to cope with the specific mandates of the Act and to avoid having these 

audit rates and other enforcement statistics go down, because until we can make some of the 

other improvements we just have to do that with staff.

But the longer term is exactly as you say, to leverage the people we have to make them 

more effective by using information more effectively. Part of that is information technology 

computer systems, which is what our whole technology modernization is about.

I mean, we are in the situation today where employees are like employees in a bank that 

do not know precisely, up-to-date, how much money the customers of the bank actually have on 
deposit in that bank. They kind of know, but they do not exactly know. That creates all kinds of 

problems for the employees and the taxpayers.

The other kind of information you mentioned in your statement, Senator Kerrey, is 

information about taxpayers' behavior. It is true that we do not really know what the compliance 

with the tax laws that Congress passes is. I mean, we have these numbers that say it is 87 

percent compliant, and those are extrapolations from numbers of studies that were done in the 

1980s.

I think it is extremely important that the IRS come up with a practical way of measuring 

what voluntary compliance is. We are working internally very hard on a project which I hope we 

will be able to get to a point where we can lay it out this year, which has the objective of getting

the information we need about the amount of voluntary compliance the taxpayers have with 

significantly less intrusive a process than the IRS used in the past, which is really the hard part of 

this. So, we are working on that very hard.

Senator KERREY. I appreciate that.

I just have a yes or no question, Mr. Chairman, if I could, even with the red light being 

on, ask it.

Senator GRASSLEY. Yes.

Senator KERREY. I have heard a number of concerns that Congress, in trying to correct 

the problem with Treasury employees doing things that should obviously result in termination, 

we may have made it difficult for you to manage the agency and may have also, by the way, set a 

double standard in place, since one of the things was delinquent taxes could cause you to be 

terminated from employment. At least, there has been some published analyses that show there 

is more delinquency of paying taxes in Congress than there is in Treasury employees themselves.

Have you done any independent evaluation, and if so, would you provide that to me, of 

those rules that we put in the statute, those provisions we put in, is it section 1203?

Mr. ROSSOTTI. 1203. We can certainly provide you with the details.

Senator KERREY. Have you done an independent analysis of that?

Mr. ROSSOTTI. We have quite a bit of analysis. I would be happy to provide it to you.

Senator KERREY. I would appreciate it.

[IRS report on section 1203 follows:]






























Senator GRASSLEY. Now it is Congressman Coyne's opportunity.

Mr. COYNE. Thank you, Mr. Chairman.

Commissioner Rossotti, you indicated that the audit rate for higher income individuals 

has been declining for the last 10 years and that this decline was not a result of the recent 

structural reform. 

Do you have any statistics that show that this trend did accelerate in the last two years, 

however?

Mr. ROSSOTTI. Well, yes, it did. All right. In fact, if you could put that chart up, you 

can see that it declined significantly in the last two years. As a matter of fact, the red line on this 

is audit coverage for individual returns over $100,000.

[Chart 1 follows:]

You can see, it has declined about 60 percent just in the last two years. That is basically 

due to two things. One, again, is a lot more returns, fewer people. I mean, it takes a person to 

audit a person. We have fewer persons. That is one reason. That is the biggest reason.

But there is another reason, which is that, as Senator Grassley commented he heard from 

some IRS employees, there is partially a relearning process. The way of doing it is not the same 

as it was before, so it is taking our employees more time to complete each case.

We hope that, over time, as we train them better, that may level off. But it is really a 

combination of more returns, fewer people to do them, and the additional learning, additional 

requirements of the Act that has led to that red line.

Mr. COYNE. So the decline in audits has accelerated at a faster pace over the last two 

years than the prior eight years.

Mr. ROSSOTTI. Yes. I did not have on the chart the eight years, but it did go down 

faster. It was on a steady decline, and then it took, as you can see, a rather strong decline in the 

last two years, three years.

Mr. COYNE. All right. 

On March 28, when you testified before the Ways and Means Committee, you indicated 

that there was a study under way to determine the extent of EITC fraud that may exist within the 

Code, within the IRS. When do you expect that study to be completed?

Mr. ROSSOTTI. Are you speaking of the EITC program?

Mr. COYNE. Yes.

Mr. ROSSOTTI. Well, we have most of it done and I am hoping that we can get it out 

within the next several months.

Mr. COYNE. But certainly before the end of the year?

Mr. ROSSOTTI. We would hope so, yes.

Mr. COYNE. When Senator Dorgan was in the House of Representatives, he served on 

the Ways and Means Committee and he was always making a point about the outstanding debt 

owed to the IRS from people not paying their fair share.

At that time, I recall, he made the point about $119 billion being outstanding. Now we 

find out it is in the neighborhood of $231 billion. Is there anything that can be done about 

collecting that outstanding debt?
Mr. ROSSOTTI. Well, first, let me just say that I think it is important to get these 

numbers straight. I think with the help of GAO, we have been able to get a clearer picture on 

this.

There is a number which is published which is around $220 billion, which is simply the 

accumulation, including interest and penalties, of every debt that has ever been incurred for 10 

years, because by statute we are required to keep it on the books.

Most of that debt represents companies that have gone out of business, bankrupt 

companies, assessments that have not been agreed to. It is not, frankly, a realistic number.

In the financial statements for fiscal 1999 which GAO audited, we estimated, and they 

audited, that it was about $21 billion of that which is actually collectible money. So that is 

really, I think, if you want to use a number, a better number to use as to what is collectible.

Now, of course, as a percentage of the total amount that is paid, $1.8 trillion, it is actually 

not that large a number and it has not increased, actually, a great deal in the last year.

But I think what is most important, is that our own internal collection activities, which 

have, as you can see on that chart, declined some, not be allowed to continue to decline, because 

then what will happen is that will continue to go up. So that is part of the reason for our budget 

request, so we can get on that debt and collect it.

Now, I also think, if you look longer term, this is, again, an immediate, what we can do in 

2001. There are significant opportunities to improve the way we collect debt in the IRS, and 

they basically get to the same kind of practices people in the private sector use.

The principle thing is just to get to those debts a lot faster than we do now. We are 

probably the slowest- reacting debt collection agency of any sort that I have ever been involved 

with, and a lot has to do with our computer systems, it has to do with organizational practices 

that have existed for a long time.

As we move forward in the modernization process, one of our objectives, and this is 

something that is very doable but is not easy to do because there are so many pieces to it, is to 

greatly speed up the way that we go after collecting this debt, which actually is good for the 

taxpayer because if we get to collecting it sooner there is less interest and penalties and the 

chances of them being able to actually pay the debt rather than getting to a hopeless situation is 

greater.

So I think that there is great opportunity to improve the way we do debt collection in the 

IRS. I think we can do it. There are some immediate things that we need to do, which our 

budget will help us do, so that we do not get even further behind than we are, which is my 

immediate worry, and then we can go to work, as we already are, on redesigning completely the 

way we do debt collection so that we will be much more efficient. I think it is clear that we can 

be much more efficient and effective in collecting debt.
Mr. COYNE. Thank you.

Senator Grassley. Congressman Sununu?

Mr. SUNUNU. Thank you.

Senator Kerrey raised the issue of electronic filing, and I would like to begin by asking 

for a little bit more information about the initiatives regarding electronic filing.

What was the rate of returns filed electronically this year, and what is your goal for next 

year?

Mr. ROSSOTTI. Well, actually, that was a really great result, we think, of the filing 

season. We hit slightly over 35 million individual returns filed electronically this filing season, 

which represents a little more than 27 percent of the total returns filed.

It also represents a 20 percent increase over last year in the number filed, and it also 

represents more than a million over what we had previously estimated. So, no matter how you 

figure it, that was a very successful result and certainly is a very good trend in terms of where we 

want to go.

We have not yet reset our goal for next year. We still have to do that. But certainly we 

will increase it over what it previously was, because we are starting at a better level.

We also, in our technology program, have quite a few initiatives under way to make it 

more attractive for people to file and pay electronically, as well as to promote the service more 

extensively.

Mr. SUNUNU. I guess that means that I am not going to get you to give a number today 

for next year. But it would seem to make sense, and I recognize the amount of material that is on 

your plate already, to try to forecast out not just one year, but two, three, or four years, because, 

clearly, a 20 percent growth rate in electronic filing, it is going to make an enormous difference 

in terms of not only the overall level of work load, but also in the type of work that your 

employees are going to have to deal with.

Mr. ROSSOTTI. We do have those forecasts, and we do have them out. It is just that 

we are now about to re-update them, because of two reasons. One, frankly, is we have been 

more successful.

I mean, as a matter of fact, we have to update quite a few numbers because this filing 

season was significantly, in a number of ways, more than we anticipated. But we definitely are 

going to do that and we are building that into our strategic plans out five or six years.
The other thing is, we are very much updating our plans for the electronic filing based on 

what we are able to do with the technology modernization, because that will enable some 

additional kinds of returns to be filed.

[Data on electronic filing follows:]

The Office of Research within the IRS released the following preliminary projections of 

electronic filing on May 30, 2000:

Preliminary Calendar Year Projections of the Percent of Individual

Returns to be Filed Electronically 2000-2010 for the United States

Total Individual

Returns (millions)

Total e-file

Returns (millions)

e-file percent

of total

1999 124.9 29.3 23.5

2000 127.4 35.3 27.7

2001 129.8 42.3 32.6

2002 131.9 50.1 38.0

2003 133.4 56.9 42.7

2004 135.0 62.0 45.9

2005 136.8 66.1 48.3

2006 138.9 69.7 50.2

2007 141.2 72.8 51.6

2008 143.4 75.7 52.8

2009 145.4 78.1 57.7

2010 147.0 80.2 54.6

Mr. SUNUNU. What is the savings to the agency from electronic filing?

Mr. ROSSOTTI. Well, I think that we have to look at the savings in two parts. The 

direct savings from just the mechanics of processing the returns are perhaps not as significant as 

you might think. They are certainly there, but only about----

Mr. SUNUNU. Has the agency quantified those direct savings?

Mr. ROSSOTTI. Yes, we have got that. But, roughly speaking, about 6 to 7 percent of 

our budget-- that is a lower number than most people realize--actually goes to just the processing 

of the returns, and about 60 percent of that is for individual returns, 40 percent is for business 

returns.

So I think you can see, it is not the biggest portion. When you went into the Andover 

Service Center and you went through it, the people in what is called the pipeline that actually 
process the return, there are a lot of them there during the filing seasons, but then they go away 

during most of the non-filing season. Really, most of the people up at Andover are not 

processing returns. What they are doing, is they are answering questions on the phone with 

taxpayers, and that sort of thing. That is where most of the money really goes, is one-on-one 

service to the taxpayer.

So we will save. It is really one of the things that we are counting on to be able to 

improve compliance and improve service. We want to save money in things like just raw 

processing, which is really something that we can use technology to do and use that as the way 

of meeting the gaps we have in service.

We still only answered 65 percent of the phone calls this year in the filing season, which 

is a heck of a lot better than 50 percent last year and 20 percent a few years ago, but it is still 

only 65 percent and we need to get to 90 or 95 percent.

Mr. SUNUNU. Which provides an outstanding segue to my second set of questions 

which deals with customer service. In the GAO material, the most recent material that they 

prepared for this hearing, they highlight organizational structure, problems with information 

systems and human capital management as underlying some of the weaknesses in the customer 

service delivery rate that you talked about.

Can you elaborate a little bit on those weaknesses and how you prioritize improvements 

and changes for dealing with them?

Mr. ROSSOTTI. Those are absolutely accurate assessments of the problems we have. I 

tend to look at them as opportunities. I mean, it says we have got opportunities to improve 

significantly.

We have taken advantage of some of those opportunities already in this filing season, 

which is why we got the rate of answering up to 65, and actually it went up to 70 percent during 

some parts of the year, which was more than we had forecast, and significantly more than last 

year.

It was not primarily due to more personnel being put on, it was primarily due to major 

reorganization, getting planning done sooner, and better use of some call routing technology that 

we put in. However, it is still a long way from the goal.

Next year, what we are hoping is that we will be able to do an even better job of 

planning. We have some additional new technology that we hope to get in, and we will need 

somewhat more staff.

Mr. SUNUNU. If I might ask one final question about the call routing approach and 

technology, in particular. As I have talked to taxpayers and IRS employees about this, it seems 

to me that, unfortunately, there can be a conflict between the goal of answering as many calls as 

possible and the goal of actually providing good customer service.
You want the customer service representative to have some flexibility to stay on the 

phone to make sure the problem gets resolved, and to be able to call back a taxpayer without 

necessarily having to go through a chain of command to get approval.

You want calls to be routed on the basis of where cues exist, not just on the basis of, well, 

send 50 calls, or 100 calls, or 1,000 calls to every center regardless of the ability to really deal 

with them effectively.

Where, in the organization, have you seen those kinds of problems, and do you feel that 

your approach to call routing is really on par with a private sector company, a Fidelity, or 

something along those lines?

Mr. ROSSOTTI. Actually, your question is, I think, very perceptive as to what the 

challenge is. The answer to your final question is, no, we are not on a par. But I think, again, we 

know where we need to go, and we have been making some major changes.

I mean, if we go back to where I came in two years ago, we had 25 different call sites, 

each run their own way, and it was kind of a rough allocation. Furthermore, the way the 

performance was managed was almost entirely quantitative and basically just said, get as many 

calls through as you can.

I heard some cases where people were saying, well, we are being asked to get taxpayers 

off the phone just so we can take another call, which is not really good customer service. We got 

rid of that, actually, partly because of the Restructuring Act.

That was the reason why, on a statistical basis, our performance actually slipped last year 

a little bit compared to the previous year. That is one of the main reasons why, because we got 

rid of some of those, what I would consider, artificial kinds of statistical measurements.

But now what we are doing, is we are now climbing back up. The goal is to provide both 

access and quality service when people get through by directing the call to the right person, 

taking every call and directing it to the person who is best qualified and best available to answer 

that call, which is what the private sector is all about. When you are getting 160 million 

incoming calls and you are starting with a system that, two years ago, was based on 25 

independently managed call centers, that is a pretty big transition. But I think this is one area 

where we have some of the better plans, and really the progress will be more rapid than in some 

other areas.

I think if I were to look ahead over the next two or three years, I think we will get to the 

point in this area where, if we do get some additional resources and we can implement the 

technology, you will see, as we have had actually this season, significantly improved progress.

Ultimately, the point being exactly as you say, the taxpayer, when they call, they get 
through. Or not only call, but actually increasingly, hopefully, over the Internet and through 

other means, that they get to the person that can answer their question and get an accurate quality 

response quickly. That is what taxpayers want.

Senator GRASSLEY. Now we go to Senator Hatch.

Senator HATCH. Commissioner, the National Taxpayer Advocate has suggested 

repealing the individual alternative minimum tax, with which I wholly agree.

In your view, would this be a significant step towards easing the complexity burden that 

will come upon what Treasury estimates will be 17 million AMT taxpayers by 2010? Does not 

the AMT also place a big complexity burden on the IRS?

Mr. ROSSOTTI. Yes. I think there is no question, and anyone that has studied it has

indicated that the AMT is a very complex provision. Unfortunately, there were some provisions 

enacted in the tax bill last year that eliminated what could have been a large number of middle 

income taxpayers being potentially subject to this. But, of course, as time goes on, more and 

more could get back in.

Senator HATCH. It is still estimated that there will be about 17 million for 2002.

Mr. ROSSOTTI. I think, from a purely administrative standpoint, anything that could be 

done to reduce the number of taxpayers that might be subject to that kind of a confrontation 

would certainly be beneficial.

Senator HATCH. Would it not be just better to get rid of it?

Mr. ROSSOTTI. Well, I think that----

Senator HATCH. Say yes. Say yes. It would be really helpful. [Laughter].

Mr. ROSSOTTI. I think, clearly, the policy angle has to be weighed there, which is not 

my job, but certainly administratively, it would simplify things.

Senator HATCH. Well, we would like your advice. I am concerned about the integrity 

of our voluntary compliance system. It seems to me that the system rests, perhaps, on three 

pillars: understandability of the tax rules by taxpayers; the perception by taxpayers that the 

system is fair; and the belief of taxpayers that tax cheating carries a significant risk.

Now, what more can we in Congress, and you the Commissioner, do to ensure our 

voluntary compliance system does not disintegrate?

Mr. ROSSOTTI. Well, I think that, really, as I indicated, we really have to stop that 

downtrend, because the point that you made, if people begin to think that their neighbor or their 

competitor across the street is not paying their fair share or paying what is due and we are not 
able to do anything about it, that, I think, is a danger.

I am not saying that we are at that point now, because actually we have been pretty 

effective in using what resources we have to try to find where there is non- compliance. But, I 

mean, if you extrapolate that downtrend further, it gets to the point where the probability that we 

can find the person that is not paying gets too low. Then we also have the uncollected tax debt 

issue.

So I think that it is very important that we at least stabilize this. I think then we need to 

invest in ways of improving the way we target our compliance resources. Those are the things 

that we can do to solve that problem.

Senator HATCH. All right. The IRS proposes billions of dollars in adjustments and 

penalties to taxpayers each year as a result of mistakes and other problems discovered upon the 

examination of returns.

Can you estimate the percentage of these adjustments in penalties that result from 

taxpayers not understanding the tax law, and what percentage results from tax avoidance? In 

other words, let me put it this way. Can we estimate how much the complexity of our tax system 

contributes to IRS adjustments and penalties?

Mr. ROSSOTTI. Unfortunately, Senator, I am not aware that we have any studies. That 

is a very important question, and I have asked it myself internally, but I am not aware that we 

have any. It is a very hard question to answer.

Senator HATCH. What is your view? Even though you do not have the studies, what 

would be your view?

Mr. ROSSOTTI. I really do not have a percentage. I do believe that there is some of 

each.

Senator HATCH. But do you not think the highest percentage would be those who do 

not understand the tax laws and have difficulties?

Mr. ROSSOTTI. Well, let us put it this way. We believe that, whether it is the most 

percentage or a large percentage, it is certainly a significant problem. It is a significant part. In 

our whole reorganization, we are acting on that because a large part of our strategy is to try to 

use somewhat more resources to work with taxpayers. It is especially true in the small business 

arena.

In the small business area, the small business person gets into some additional complexity 

that an individual taxpayer does not have, yet they do not have the tax professional resources to 

deal with it.

So we are going to put significantly more emphasis, exactly for the reason you say, on 
trying to work with taxpayers up front, and especially small business. We have had some pilot 

programs. They have been quite successful. We are trying to work with things like the Small 

Business Administration, Small Business Community Development Centers.

We have programs that help. There are almost one million start-up businesses a year, for 

example, in this country and many of them have limited knowledge of what they need to do from 

a tax standpoint. Well, they can get into trouble, be in business a year, before they even realize 

it.

So we really think there is a real opportunity, as you say, to head off those problems by 

making sure that people do not make mistakes unintentionally, or just because they do not have 

the time to deal with it.

Senator HATCH. Well, based upon what I have read, there has been a drastic decline in 

IRS enforcement action since 1998. Now, this, I would think, must be the result of changes from 

the restructuring legislation. Now, I applaud your focus on taxpayer service. I am not sure I am 

ready to refer to taxpayers as customers, but I believe the shift is a good one.

However, like you, I am also concerned that Americans should pay their taxes. Do you 

have all of the tools you need to reach the appropriate balance between treating taxpayers with 

the respect they deserve and still collecting the taxes that are really due?

Mr. ROSSOTTI. Well, I think that the two principal tools we need are what we have 

asked for in the budget. In the short term, we do need some more staffing because we have been 

given some additional requirements. I think in the long term, with the reorganization and the 

better management we are doing, better technology, we can then leverage those people to do a 

job on both better service and better compliance.

Senator HATCH. Well, thank you, Mr. Commissioner.

Thank you, Mr. Chairman.

Senator GRASSLEY. The secretary of the committee said that Congresswoman 

Northup is next, but Mr. Horn was here previously. Under the practice of the Senate, we would 

call on Congressman Horn.

Mr. HORN. Thank you very much, Mr. Chairman.

Commissioner, in my opening remarks I noted that the government was owed $231 

billion in unpaid taxes, penalties, and interest, and the Comptroller General informs us that, of 

that amount, $21 billion is collectible, according to the General Accounting Office.

I would just like you, maybe, to explain to the joint review group, what your feeling is on 

the debt collection system of the IRS you inherited from others, and what your plans are to 

improve it. It makes me pretty angry when the rest of us pay our taxes, and you have got people 
that are let off.

And it was not you that did it, it was way back in 1990, 1991, when it started. The pile 

got up, which got my attention, over $100 billion, and that is when I talked to your predecessor.

I said, frankly, I think it is a national scandal that we are not making those collections. 

We did start that way in the Debt Collection Act of 1996, but it did not have the tax collections, 

it had only non-tax, because nobody wanted to face up to it.

Mr. ROSSOTTI. Well, I think, Mr. Horn, as we have discussed at length, and you have 

called attention to this very well in your committees, the IRS is a large debt collection agency.

I think, for a variety of reasons having to do with historical evolution of this system and 

very much related to the technology, it is a very slow system, which is really the wrong word that 

you want to use, if you want to have effective debt collection.

Ninety percent of our debt collection resources, in terms of our people that collect debts, 

are currently working on accounts that are more than six months old, and many of them are

working on very old accounts. That is partly because of the complexity of what you have to do 

before we get to actually applying those resources. So, I think our approach is to really 

reengineer this completely.

This is part of what we are going to be doing as part of our technology modernization. 

We now, at least, or will very soon by the end of this year, have our collection resources more 

centrally managed so that at least we will have the first step, which is the management process.

The next step, is we need to reengineer this with better technology. Of course, we can, 

and are, going to use best practices and people from the private sector to help us do that.

Mr. HORN. Do you feel that you could use some more authority from the Congress in 

order to get at the debt deadbeats, shall we say? And have you ever had a chance--and I do not 

expect you to do it right now--to look at the 1996 Act which applies everywhere but here?

Mr. ROSSOTTI. Yes. I would be glad to look at that. I do not think I can answer that 

right off the top of my head, but I would be glad to look at that.

Mr. HORN. Yes. Mr. Chairman, if the response of the Commissioner would be put in 

this part of the record, I would be most grateful. So, we would be delighted to hear from you.

Mr. ROSSOTTI. Yes, sir. We will.

[The requested information follows:]

Currently the provisions of the Debt Collection Improvement Act of 1996 (Public Law 

104-134) do not apply to the collection of delinquent tax debts. The legislation uses the 
term non-tax debt throughout and amends section 3701 of title 31, United States Code, 

in subsection (a) by adding at the end a new paragraph; “(8) ‘non-tax’ means, with 

respect to any debt of claim, any debt or claim other than a debt or claim under the

Internal Revenue Code of 1986.” At this time, we are not asking for additional authority 

from Congress pertaining to this legislation. As we consolidate the organization, we will 

have a more managed, intergrated collection process, which should allow us to work 

more rapidly to resolve debt issues. We will use our existing technologies to accelerate 

some steps in the debt collection process and will continue to evaluate the possibility of 

contracting portions of the debt collection process to private sector debt collection 

agencies.

Mr. HORN. But do you have in your next go-around improvement of the existing 

collection system within the IRS?

Mr. ROSSOTTI. We do. Again, we are trying to tackle that, short-term, by just doing 

some patches and by applying some additional staff where we can. There are some things we 

can do immediately.

In fact, we are going to be doing some within the next few months just within our current 

systems. But, frankly, as you will remember the chart that I brought to your hearing, it is not 

something that you can get very far on just by patching. It has to be redesigned.

The basic principles are quite simple. It is basically, find out where your risks are and get 

to those people as quickly as possible, resolve the case quickly so it does not build up and 

become an impossible case. Right now, our employees are working on, in some ways, mission 

impossible. They are trying to collect money much later than anyone else would try to collect 

money.

Mr. HORN. Are you willing to use private collectors to help in this?

Mr. ROSSOTTI. I think that, as we get to the point where we are reengineering the 

whole thing, there could very well be a role for them. I have worked with these people before.

I think this is a particular issue that we are going to face that we have not figured out how 

to solve. If we want to transition to a much more proactive debt collection approach, what do we 

do with the old inventory that we have got that is currently what most of our employees are 

working on? We need to study that and there might be an opportunity there, for example.

So, we will consider all those options. I think if we needed legislation at that point, and I 

am not sure we do because I do not know enough at this hearing to say, but we would certainly 

be willing to come in and talk about that.

Mr. HORN. When I raised that in 1996, I was told by some in IRS at that time that, 

well, gee, we have privacy problems. It just seems to me, it is not a privacy problem if you give 

them the address and say, here is what they owe the taxpayers. If you feel that is a problem, 
maybe we need some exceptions.

If it has something to do with the fact that they do not feel they should pay that tax, that is 

your job and that of your experts and professionals. But we ought to at least collect. I guess we 

ought to also think about all these bankruptcies, and is there a pattern and practice where they 

take the taxpayers right down the primrose road.

Thank you, Mr. Chairman.

Senator GRASSLEY. Thank you, Representative Horn. 

Now, Representative Northup.

Mrs. NORTHUP. Thank you. I would like to return to what the previous two 

questioners discussed and follow up. I am looking at the IRS mission statement, and I appreciate 

all of the services that the mission statement reflects are the IRS's goal to meet, and the three 

strategic goals, too. I am not sure, under any part of those, where enforcement and debt 

collection fall.

Mr. ROSSOTTI. Well, actually, it is in the mission statement. I mean, that is two of the 

three goals. One of them is to provide each taxpayer with proper service and respect their rights, 

and the second one is to provide service collectively to all taxpayers by making sure that people 

comply with the law.

We put it in terms of, apply the law with integrity and fairness because we think that is 

the way we should do it. We should apply the law with integrity and fairness. But that is using 

our enforcement powers and our other tools to make sure that people comply with the law.

We have translated that even further into a specific series of what we call balanced 

measures, which have now been rolled out throughout the organization, which, again, track with 

those goals. One of them is what we call the business results goals.

We are constrained, in some ways, by how we do that in the collection area and in the 

exam area by Section 1204 of the Restructuring Act, which prohibited the use of enforcement 

statistics to set targets or measure the performance of any individual.

So we have set a regulation. This was one of the things that we worked on the hardest 

over the last two years, and finally last September we published the regulation which specifically 

said how we were going to interpret Section 1204 in the enforcement area, how we were going to 

measure performance, and it laid out certain quantities that we can use. For example, we can set 

goals on the number of cases that we do. We cannot set goals on precisely how many dollars we 

collect.

But we have developed those balanced performance measures and they have been rolled 

out throughout major parts of the agency. I have stated repeatedly to every group that I have 
been before, including the first testimony that I ever presented, that I thought we could not 

succeed unless we did both of these things, unless we provide taxpayer rights, provide good 

service, but also collect the money that is due.

I think this is a harder job than just looking at one or the other, but it is what we are 

expected to do. I mean, it is just like a business. You have to keep your customers happy, but 

you also have to make a profit.

Mrs. NORTHUP. And I agree. I am thinking of Senator Hatch's earlier question, where 

he asked, I think, do you have the tools you need? You talked about the financial tools, but my 

question is, do you also have the legislative tools that you need? Do you think that the balance is 

there for you, and if not, do you intend to send us legislation to meet the need?

Mr. ROSSOTTI. Let me say that I think at this point, with respect to the Restructuring 

Act, it was a very comprehensive and pervasive act. I have to say, I think we are still learning. 

We are learning, really, how to make it work. I think, for example, in Section 1204, which is 

directly at the heart of your question, how do we measure performance, this was at the heart of 

some of the problems that were raised at hearings, and even internally in the agency.

Prior to that, the focus was almost entirely on enforcement dollars in terms of the way 

performance is measured. I think it is clear at this point it would not be appropriate to return to 

that. The question is how to put something positive in its place.

We have developed something that I think is well- received as positive, which is our 

balanced measure system. We have only got six months of experience with really learning how 

that works, and I think that we need to get a little bit more experience with that before we see----

Mrs. NORTHUP. So the answer about legislation is, yes, you think you have the 

balance and the tools you need.

Mr. ROSSOTTI. I think that we have, as best as I can tell. There are clearly some 

sections that are difficult to administer. I think, as we get a little bit more experience with them, 

if we feel that there are adjustments that are needed, we would certainly ask for them.

At the moment, I think, though, our job is to try to work with these tools. I do not know 

how much time we have to go into it, but certainly some sections of this law have proven to be 

difficult to administer and have had some either direct administrative or psychological effects.

Obviously, I am sure you have heard from employees that Section 1203, which is the one 

that deals with the so-called 10 Deadly Sins, creates a great deal of consternation.

Mrs. NORTHUP. Let me just follow up, because I see my time is limited. If there are 

things in the law that need to be changed, I asked, and I will just leave it because I want to ask 

one more question, if you would be proposing changes.
I also have heard that you have changed the all-or-nothing requirements of collections, 

that it used to be the IRS would negotiate with delinquent taxpayers, people that perhaps have 

gone out of business, have lost money, in order to at least recover some.

Mr. ROSSOTTI. Right.

Mrs. NORTHUP. The employees seem to be discouraged by the fact that there is only 

an all-or-none policy now, and if they cannot collect all, that they are precluded from collecting 

any.

Mr. ROSSOTTI. That is another one of those complicated provisions. I mean, actually, 

we are not an all-or-none. We have a program called Offer in Compromise, which has actually 

been expanded, which deals exactly with the situation you are talking about. It is a little more 

technical. There was a particular technique that was used at the IRS for dealing with that 

situation which, under the law, has been stopped. But there is another technique which has been 

used to replace it.

So there is a way to deal with that, and we think we have got it largely solved, but there 

has been some confusion in getting from here to there. I would be glad to come and talk to you 

about that.

That has been one of the trickiest provisions to deal with in the law. There are three or 

four of these that are very tricky, and we are working on trying to see how well we can make 

them work. I would be more than happy to come visit with you and talk about those.

Mrs. NORTHUP. Or you might submit them for the record.

Mr. ROSSOTTI. Sure.

[The requested information follows:]

The Offer in Compromise (OIC) program is a collection tool used to resolve outstanding 

tax debts when the Internal Revenue Service (IRS) will not be able to collect the tax in 

full or when there is doubt as to whether it is owed. The purpose of the OIC program is 

to allow certain taxpayers who may be in financial trouble to settle their tax debt for the 

maximum amount they can pay.

The OIC Process

Most of the OICs submitted by taxpayers are based on doubt as to collectability. 

Taxpayers must submit Form 656, Offer in Compromise, and 433-A, Collection 

Information Statement for Individuals, or 433-B Collection Information Statement for 

Businesses, for consideration of an OIC. The IRS corresponds with taxpayers or their 

representatives to correct omitted items on Forms 656 and/or 433-A or 433-B.
The offer is evaluated to determine if the taxpayer is offering the maximum amount that 

he or she can pay after basic living expenses. Internal and external information is used 

to verify the taxpayer’s financial statement. Taxpayers may also be required to submit 

information to substantiate asset values, expenses, etc. If necessary, the IRS 

employee will negotiate an acceptable offer amount.

The final disposition of the offer will be acceptance, rejection, return or withdrawal.

Changes to the OIC Program

The IRS may now legally compromise the tax liability for one of the following reasons:

Doubt as to Liability: Doubt exists that the tax assessment is correct.

Doubt as to Collectability: Doubt exists that the taxpayer could ever pay the full 

amount of tax owed.

Effective Tax Administration (ETA): There is no doubt the tax is correct and no 

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

exists that allows the IRS to consider the taxpayers’ offer. To be eligible for the 

compromise on this basis, taxpayers must demonstrate the collection of the tax 

would create an economic hardship or would be unfair and inequitable. (ETA is 

new based on the provisions from RRA 1998 and allows access to taxpayers that 

were omitted from the OIC process in the past.)

Taxpayers can now pay the offer amount in three ways:

1. Cash (paid in 90 days or less),

2. Short-term Deferred Payment (more than 90 days, up to 24 months), or

3. Deferred Payment (offers with payment terms over the remaining statutory 

period for collecting the tax). With this option, the taxpayer is best able to 

settle the tax debt by paying it off over a period of time. It was simplified, 

effective January 1, 2000, to provide taxpayers a fixed monthly payment 

option.

This new Deferred Payment option will also assist taxpayers and practitioners in 

situations where taxpayers are willing to pay their debts, but the maximum 

amount they can pay is not sufficient to pay off the full amount of the debt. In this 

situation, taxpayers are not eligible for ordinary installment agreements, but they 

will be eligible for the new, fixed monthly payment option under the OIC program. 

 The IRS anticipates that this will not only help taxpayers but will also translate 

into increased collections in these situations.
Other changes have also been made recently to enhance the program. These include 

all instructions for an OIC and are now contained in the New Form 656 package. This 

consolidated package replaces Form 656-A, which appeared as a new, separate form 

last year. This means that taxpayers who previously had to fill out two forms – 656 and 

656-A – will now just fill out one. Also, Form 656 is now available on the Internet at 

www.irs.gov. The IRS now uses OIC specialists to process OICs (facilitates case 

processing and timely resolution) and established a quality review system for OIC cases 

to provide data for continuous improvement of the OIC process.

Senator GRASSLEY. I thank everybody.

Before you go, I just was going to ask a question, but it has already been twice asked, 

once by Representative Northup, and then by Senator Kerrey, about the assault on and lack of 

cooperation on what are called the 10 Deadly Sins.

We want to make sure that you report to us according to what Senator Kerrey asked you 

to do, and I may have some follow-up on that because I want to make sure that there is not an 

attempt out there to sabotage what we wanted to accomplish through our legislation and make it 

more egregious, purposely, for the purpose of doing that. So, I want to associate myself with 

those questions and tell you of my interest in that area.

Then, one thing that is a little bit afar from what we are talking about here, but it is in 

regard to the efficiency of taxpayer processing. This is what I heard, that our Treasury 

Department is helping the country of Romania to implement scanners for paper returns, and 

apparently we do not even have scanner processing of paper returns in our own country, and for 

the most part we are doing this by hand.

Now, is that true, that we are trying to bring those reforms to some other country, and 

efficiencies, and not to our own?

Mr. ROSSOTTI. I honestly do not have any idea what might be being done in Romania.

Senator GRASSLEY. No. Our Treasury. Our Treasury is advising them. So we are 

involved.

Mr. ROSSOTTI. Yes. I do not know what the Treasury program is in that area.

Senator GRASSLEY. All right.

Mr. ROSSOTTI. It is true that scanners are not used. Scanning is one particular kind of 

technology which the IRS does not use. It is really quite difficult to use that technology on a 

very large scale. It is much easier on a small scale.

One of the programs that was attempted in the earlier days, the prior technology 
modernization that did not succeed, was to use some scanning technology for tax returns. That 

was abandoned as not successful. 

So at the present time, we key in the paper returns as traditionally done, then of course 

we use the electronic returns, which are really our main strategy for reducing the burden of 

filing.

There is a possibility of using scanning technology for certain limited purposes, and we 

are studying that as part of our technology modernization program.

Senator GRASSLEY. All right. Thank you very much. We appreciate very much your 

cooperation with us.

I will call the second panel now. I have already announced who the second panel is, so I 

will not go through any further introduction. Would the panel please come? Unlike 

Commissioner Rossotti that we gave 10 minutes to, we have asked this panel to summarize their 

statements in 5 minutes each, and then we will go to questioning. 

I would like to have Mr. Williams start first, then Mr. Oveson, then Mr. White.

Mr. Williams?

STATEMENT OF HON. DAVID C. WILLIAMS, TREASURY INSPECTOR GENERAL 

FOR TAX ADMINISTRATION

Mr. WILLIAMS. Thank you, Mr. Chairman and members of the Joint Review. I 

appreciate the opportunity to appear here today to discuss the IRS's progress in implementing the 

long-term objectives of the Restructuring and Reform Act of 1998.

While some of the IRS's reforms are complete, several major initiatives are in the early 

stages of implementation where risks are high. In this regard, my office is focusing on programs, 

activities, and functions that are at the most vulnerable stages of their development.

It should also be noted that the IRS's capacity for change is quickly reaching a saturation 

level, particularly when we consider that its many reforms are occurring against a backdrop of 

implementing complex tax legislation and processing increasing numbers of tax returns.

Because of the significant role that it plays in carrying out the 1998 reforms, we are 

closely monitoring the IRS's progress in modernizing its organization.

A cornerstone of the IRS's restructuring efforts is the initiative to reorganize the agency 

into four operating divisions that will have end-to-end responsibility for a defined group of 

taxpayers with similar characteristics.
Of these four, the tax-exempt and government entities operating division is the first to 

begin operating under the new structure. The division started operating on December 5, 1999, 

and is currently in the adjustment phase.

The other three divisions and support units are in various stages of development with 

questions remaining about how they will be organized. Despite its effort to stay on track, the 

IRS is experiencing delays in its computer systems modernization efforts.

The IRS recently reviewed its key systems initiatives and found that about half of the 

work products required during the planning phases of these projects had not been completed.

Had an effective performance monitoring process been in place, the IRS would have 

identified these problems sooner and perhaps taken actions to avoid scaling back and delaying 

projects intended to provide improved service to taxpayers in 2001.

Additionally, we have identified weaknesses in security controls over IRS computer 

systems. Until these weaknesses are resolved, the IRS systems and taxpayer data are vulnerable 

to tampering, loss, and unauthorized use.

Even though the IRS has improved many of the controls, its computer systems are still 

vulnerable to threats such as unauthorized use. For example, in the six months ending March 31, 

our Strategic Enforcement Division has opened 120 investigations regarding possible violations 

of the Taxpayer Browsing Protection Act.

My office is also involved in investigating allegations of willful acts by IRS employees 

involving the taxpayer 10 Deadly Sins specified in Section 1203 of the Restructuring and Reform 

Act.

Since passage of the Restructuring and Reform Act, my office has opened 279 of these 

investigations. Of these, 159 have been completed and referred to the IRS for action. The IRS 

has notified us that 17 employees have been removed or resigned as a result of the investigations 

and IRS's own efforts.

On a broader scale, the IRS's progress in improving customer service and lessening the 

burden on taxpayers brings with it new vulnerabilities. The Restructuring and Reform Act 

requires that the IRS receive 80 percent of all returns and information electronically by the year 

2007.

As of April 23, the IRS reported that it had received approximately 35 million individual 

Federal income tax returns electronically. This is an increase of about 20 percent over 1999. 

While this improvement is noteworthy, IRS stress tests in the processing system indicate that it 

may not have the capacity needed to handle the 80 percent requirement.

By their nature, the current reforms are at a high- risk stage where there is little 

immediate return on the investments. Additionally, some of the declining trends in revenue 
collection activities have continued. For example, the IRS's internal management reports show 

that there were only 28 seizures in the first five months of fiscal year 2000, compared to 10,000 

in fiscal year 1997.

Furthermore, the IRS's progress is hard to monitor because of weak or incomplete 

management information systems, and some reforms are proceeding more slowly than had been 

planned.

The computer modernization is particularly worrisome because of the IRS legacy 

involving costly and wasteful efforts that have previously been experienced.

I am dedicated to accurate reporting on the process of these reforms and making 

recommendations to stakeholders to improve the direction and the pace of the progress. The 

agency's initiatives, while unfinished, are vital if the IRS is to achieve real reform.

The committee's continued attentiveness to the issues under examination today is critical 

to helping the IRS accomplish those objectives.

I would be pleased to respond to any questions at the appropriate time. Thank you.

[The prepared oral and written statements of Mr. Williams follow:]



PROGRESS AND PROBLEMS IN IMPLEMENTING THE 

INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM 

ACT OF 1998

JOINT HEARING BEFORE COMMITTEES OF THE UNITED STATES 

SENATE AND HOUSE OF REPRESENTATIVES

MAY 3, 2000

STATEMENT FOR THE RECORD

THE HONORABLE DAVID C. WILLIAMS

TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
Mr. Chairman and Members of the Committees, I appreciate the opportunity to appear 

before you today to discuss the progress the Internal Revenue Service (IRS) has made 

in implementing the Restructuring and Reform Act of 1998 (RRA 98). In July of this 

year, we will be observing the second anniversary of the RRA 98.

During these past two years, the IRS has undertaken a complex and multifaceted 

approach to restructuring the way it conducts business. As an example, the IRS has 

been transforming itself so that it will operate better and serve its customers more 

efficiently. In this regard, the IRS has changed its mission statement to more clearly 

address its role in helping taxpayers meet their legal obligations. 

Some of the positive results the IRS is achieving can be seen in the outcomes of the 

recent filing season. By April 23, 2000, the IRS reported that it had processed 83.1 

million tax returns, which is 3.2 million more than the same period last year. The IRS 

also reported that it had certified over 73 million refunds, which is an increase of 2.9 

percent over the 1999 filing season. For Fiscal Year 2000, the IRS estimates it will 

collect more than $1.9 trillion in revenue, which is an increase of one percent over 

Fiscal Year 1999. However, there are still some challenges facing the IRS in reversing 

some of its declining trends in collection activities. For example, during the first 5 

months of Fiscal Year 2000, the IRS had only conducted 28 seizures, compared to 

10,000 in Fiscal Year 1997.

While some of the agency’s efforts are complete, several major reforms are in the early 

high-risk stages of implementation. Full implementation of the RRA 98 provisions 

should result in enhanced taxpayer protection and rights, as well as organizational 

changes intended to achieve a more efficient and responsive agency. As we monitor 

the progress that the IRS is making, the Treasury Inspector General for Tax 

Administration (TIGTA) is focusing on those programs, activities and functions that are 

subject to the highest risk. 

The IRS Restructuring and Reform Act of 1998

The Office of Inspector General was created to replace the IRS Inspection Service. 

This transition was successfully completed in January 1999. Since that time, TIGTA 

has been dedicated to ensuring that IRS employees treat taxpayers with the highest 

degree of integrity and fairness so as to maintain trust in our tax administration system. 

To better accomplish our mission, we immediately abolished the regional structure of 

our predecessor organization, which eliminated an unnecessary and remote layer of 

management. We reorganized the Office of Investigations into direct report field offices, 

and we have assumed comprehensive responsibility for investigating internal 

misconduct cases. The Office of Audit also reorganized into specialized issue areas 

that parallel the new IRS business unit structure. In addition, we created an Office of 

Investigations’ 
Strategic Enforcement Division (SED) to meet threats of computer crimes against the 

IRS, and to ensure that these irregularities are prosecuted to the fullest extent of the 

criminal and civil law.

In carrying out our new statutory responsibilities, TIGTA has issued 10 reports in 

response to specific requirements for evaluating the IRS’ compliance with key RRA 98 

provisions. We evaluated the IRS’ compliance with these provisions, starting from their 

effective dates. We concluded that, although the IRS has made some progress in 

implementing the RRA 98, the requirements addressing taxpayer protection and rights 

issues had not been successfully implemented.

At a Senate Finance Committee hearing on February 2, 2000, I reported that:

• The IRS identified approximately 525 violations of the prohibition against using 

records of tax enforcement results to evaluate employees during its first independent 

reviews and quarterly certifications. TIGTA identified an additional 96 violations 

where IRS management used tax enforcement results to evaluate employees, or 

imposed or suggested employee production quotas or goals (e.g., evaluations 

contained references to fraud referrals, dollars assessed or collected, or case 

closures). 

• The IRS did not consistently implement federal tax lien provisions. Thirty-three 

percent of the cases TIGTA reviewed involved potential violations of legislative or 

procedural requirements. For example, taxpayers were not given the full 30 

calendar days to request a hearing, or sufficient documentation was not retained to 

prove that lien notices were sent to taxpayers, or that they were sent timely.

• The IRS did not always follow all legal and internal guidelines when conducting 

seizures. Thirty-six percent of the 92 taxpayer seizure cases reviewed did not follow 

all legal and internal guidelines, including business property that was seized without 

obtaining the required approvals, or taxpayers who were not personally warned 

before the seizure occurred.

• The IRS had not fully implemented new procedures to notify taxpayers before taking 

funds for payment. Thirty-two percent of the 284 taxpayer accounts reviewed did 

not follow legal provisions in that taxpayers were not notified of the IRS’ intent to levy 

or of their appeal rights before levies were issued.

In our Fiscal Year 2000 audits, TIGTA is following up on the IRS’ corrective actions for 

most of the previously reported problem areas. In addition, we are reviewing one new 

provision, Assessment Statute Extensions, that became effective January 1, 2000. We 

are conducting, too, an audit related to one of the RRA 98 provisions to determine the 

effectiveness of the IRS’ actions for identifying and reporting potential Fair Debt 

Collection Practices Act violations.
The IRS has completed some of its corrective actions in response to our 

recommendations in the prior report. The early analyses of our Fiscal Year 2000 audits 

indicate that the IRS has significantly improved its compliance with two of the RRA 98 

provisions, as follows: 

• All 35 seizures conducted by the IRS from May 1 to September 30, 1999 were in 

accordance with legal seizure provisions and agency guidelines. We identified 

significant improvement in the way the IRS conducted seizures and disposed of 

properties compared to our prior review. For example, all of the seizures were 

reviewed and approved by the Collection Division Chief (third level of management 

in the district). In addition, the IRS implemented a pre-seizure checklist in April 1999 

to assist employees in meeting legal and internal guidelines. All 23 seizures 

approved after that date had a completed checklist in the file. While the IRS has 

improved its procedures, the continued reduction in the number of seizures raises 

questions about potential problems with the sufficiency of the IRS’ collection efforts.

• The IRS has significantly improved its compliance with legal and internal guidelines 

to notify taxpayers of their rights at least 30 days before levies are issued. We 

believe these improvements are the result of several enhancements to computer 

systems and the implementation of new procedures to ensure legal requirements 

are met when issuing levies. For example, a national computer change was made in 

April 1999 to systemically prevent district office employees from issuing levies before 

the 30-day period has ended. Another national computer change, made in June 

1999, systemically prevents Customer Service computers from automatically 

generating levies on past due accounts.

We will not be able to determine the IRS’ compliance with three of the RRA 98 

provisions--Direct Contacts with Taxpayers and their Representatives, Joint Filer 

Requests, and Taxpayer Complaint Processing--because the IRS does not have 

management information systems that specifically track these activities. Accordingly, 

our Fiscal Year 2000 audits of these areas will be limited to the IRS’ internal procedural 

changes to correct some of the previously identified problems. 

In addition to our audit responsibilities, the RRA 98 charges TIGTA with investigating 

Section 1203 violations. Section 1203 provides that the IRS Commissioner shall 

terminate the employment of any IRS employee found guilty of misconduct as defined 

by ten acts or omissions. This firm approach to employee discipline caused some 

confusion and consternation among IRS employees. There were rumors that 

thousands of investigations were opened and employees would be terminated for 

unintentional errors. Because of this, we participated in IRS briefings in Chicago, Illinois 

and Washington, DC to help ensure that IRS managers have an accurate 

understanding of the Section 1203 requirements they convey to their staffs. The 

presentations focused on the following results of our experience to date. 

The majority of Section 1203 allegations we received claimed that an IRS employee 

violated a provision of the Internal Revenue Manual or the Internal Revenue Code in 
order to retaliate against or harass someone. The second largest type of allegation we 

received involved civil rights violations, including EEO violations. These are followed by 

allegations of willful destruction of documents and understatement of federal tax liability.

Since passage of the RRA 98, TIGTA has received 683 allegations involving Section 

1203 violations. These allegations resulted in 279 investigations by TIGTA. We have 

closed or referred 159 investigations to the IRS. The IRS has notified us that 17 

employees have been removed or resigned as a result of TIGTA and IRS investigations. 

 Ten investigations by TIGTA resulted in a

lesser discipline. IRS management is emphasizing to its employees that disciplinary 

action will not be imposed on those employees who make honest mistakes.

Strategic Planning

The IRS developed a Balanced Measurement System as part of its effort to modernize 

and to reflect the agency’s priorities. This approach to measurement is intended to help 

shift the focus of employees and the agency away from achieving specific production 

targets or numbers to achieving the overall mission and strategic goals of the IRS. 

While these changes are in response to the RRA 98, they are also related to the 

implementation requirements of the Government Performance and Results Act of 1993 

(GPRA).

TIGTA previously reported to the Commissioner that the IRS’ strategic plan 

demonstrated progress. However, the plan did not explain how performance measures 

and strategic goals relate to each other, did not address external factors that impact its 

mission and goals, and did not describe program and system evaluations. TIGTA 

recommended, and the agency agreed, to designate an office responsible for oversight 

and coordination of GPRA implementation activities throughout the IRS.

The IRS’ first Annual Program Performance Report was recently submitted with its 

Fiscal Year 2001 Congressional Justification. A TIGTA audit of the Annual Program 

Performance Report found that the IRS’ processes used to generate the report did not 

provide adequate time for management to assemble and analyze the data for the report 

or to ensure that the report clearly assessed program goals. Additionally, we reported 

that the IRS needs to develop a process for ensuring that data are verified and validated 

before being reported. This problem may be resolved when the IRS implements its plan 

to establish an office with the responsibility to oversee the verification and validation of 

data included in future Annual Program Performance Reports.
Modernization of the Agency 

Commissioner Rossotti first introduced the concept of modernizing the IRS in January 

1998. A cornerstone of his initiative was to organize the IRS into four operating 

divisions. Each operating division will have end-to-end responsibility for a defined group 

of taxpayers with similar characteristics. The four operating divisions are:

• Tax Exempt and Government Entities Operating Division 

• Large and Mid-Size Business Operating Division 

• Wage and Investment Operating Division 

• Small Business and Self-Employed Operating Division 

The Tax Exempt and Government Entities Operating Division is the first and only 

Division to stand up.1 This Division has been standing up since December 5, 1999, and 

is currently in the adjustment phase of its modernization efforts. During the adjustment 

phase, the Division will be formulating plans to meet and discuss issues concerning 

changes in conditions of employment with the National Treasury Employees Union 

(NTEU). 

The Large and Mid-Size Business Operating Division is now scheduled to stand up in 

June 2000. The Division is currently in the establishment phase, and the NTEU will be 

provided with an advanced copy of a placement notice. IRS employees will also be 

given the opportunity to request a review of the placement notice. The Division will be 

in the establishment phase for at least 90 days.

The remaining two Divisions are scheduled to stand up in October 2000. The 

Commissioner is expected to approve the Divisions’ design packages in May 2000. 

After approval by the Commissioner, the Divisions will begin the establishment phase of 

their modernization efforts.

Additionally, the following nine functional divisions will provide support to the four 

operating divisions: 

• Taxpayer Advocate

• Customer Service/Submissions Processing

• Information Systems

• Appeals

• Communications and Liaison

• Agency Wide Shared Services 

• Criminal Investigation

• Chief Counsel 

 

1 Standing Up: The establishment of a new organization with at least the minimum requirements of operating, 

including a finance office, separate budget, key management positions filled, temporary solutions to problems, 

personnel actions for realignment completed, and necessary business authorities in place.
• National Office Headquarters

Only three of the nine functional divisions--Taxpayer Advocate, Information Systems 

and Customer Service/Submissions Processing--have stood up and are in the 

adjustment phase. Two divisions--Communications and Liaison and Agency Wide 

Shared Services--are in the establishment phase and should stand up in either the early 

summer or fall of 2000. The remaining four divisions are in the design phase. 

Computer Systems Modernization

Key IRS goals, such as receiving 80 percent of tax returns electronically by the Year 

2007 and significantly improving service levels in answering taxpayers’ questions, are 

contingent on the development of new technology. For more than a decade, the IRS 

has been attempting to modernize its outdated, paper-intensive tax processing systems. 

 During that period, the IRS spent over 

$3 billion with minimal improvement, despite intense scrutiny from the Congress. The 

IRS is now in the early stages of a new effort to modernize its systems and is employing 

contractors to assist in this effort at an estimated cost of over $5 billion. 

Previous General Accounting Office audits of computer systems modernization 

initiatives identified serious management and technical weaknesses. A recent TIGTA 

audit indicated that the IRS has made progress in correcting the organizational 

weaknesses of past systems modernization efforts by ensuring that top level IRS 

executives, including the Commissioner, are heavily involved in the modernization 

initiative. These executives have recognized the need to build systems modernization 

program management disciplines, risk management processes and quality assurance 

policies and procedures. 

While the involvement of top management is noteworthy and is essential to the success 

of systems modernization, the IRS stumbled out of the starting blocks in executing the 

early phases of the effort. A recent IRS review of key systems modernization initiatives 

found that as many as 68 percent of the work products required during the planning 

phases of these projects had not been completed. One of the primary reasons these 

problems were not identified earlier is the lack of a stable program management 

organization to oversee the modernization initiative. For example: 

• Key processes for managing the risks in the modernization effort and monitoring the 

performance of the contractor need to be improved.

• Roles and responsibilities inside the program management organization and 

between the IRS and the contractor are not clearly defined.

• Program management2 staffing needs have not been determined.

 

2 Program management is the coordinated support, planning, prioritizing and monitoring of a portfolio of projects to 

achieve the objectives of systems modernization.
These growing pains were a primary cause of the IRS’ decision to scale back or delay 

delivery of several modernization initiatives originally slated to provide improved service 

to taxpayers by the 2001 tax filing season. These first projects were intended to 

improve communications with taxpayers by centralizing IRS’ nationwide call 

screening/routing for selected toll-free numbers, providing telephone and Internet 

automated self-service applications, and providing upgraded electronic filing and 

research technology. However, the IRS still believes it is on track to deliver some of the 

scaled-back systems enhancements in 2001 that will improve responsiveness to 

taxpayers, such as increasing the capacity for handling and routing incoming telephone 

calls. Examples of initiatives that have been delayed include:

• A telephone application that would allow taxpayers to determine whether their tax 

returns have been received.

• An Internet application that would allow taxpayers to determine the status of their 

refunds.

• An application that would provide taxpayers electronic access to their tax account 

information. 

These problems could have been identified much sooner and corrective actions taken 

without the delays the projects are now facing if an effective performance monitoring 

process had been in place. If the IRS does not address these issues soon, there is a 

risk that the planned systems enhancements for 2001 may not be delivered on time. 

Some of the actions the IRS has underway to address these problems include:

• A proposed organizational structure to oversee systems modernization with 

associated roles and responsibilities.

• A redefined relationship between the IRS and the contractor to build in more 

accountability. 

• A draft listing of reporting requirements for modernization projects.

• A request that the contractor develop a “get well” plan to deliver needed 

performance monitoring information. 

• A plan to implement systems modernization program-wide and project level risk 

management policies and procedures.

• An identification and evaluation of the top risks to systems modernization.

The IRS is beginning to make progress toward implementing an effective systems 

modernization management approach. However, significant risks need to be addressed 

to ensure that the IRS overcomes the management and technical weaknesses that 

plagued its prior efforts for more than a decade.

Another significant initiative involves the system used for receiving electronic tax 

returns. The RRA 98 requires that the IRS receive 80 percent of all tax returns 

electronically by the Year 2007. As of April 23, 2000, the IRS reported receiving 
approximately 35 million electronic income tax returns, which represents 30 percent of 

all individual federal tax returns filed. The electronic filing system had sufficient 

telecommunications capacity to receive and store the expected tax return volumes this 

year. However, a TIGTA audit of the system showed that the IRS needs a performance 

and capacity management plan to determine whether the system is capable of handling 

80 percent of all transactions electronically. The IRS completed stress tests in late 

1999 that indicated the system might not have the capacity needed for these higher 

volumes. 

Computer Security

Progress has been made in bolstering computer security at the IRS, but further 

improvements are needed. The IRS has conducted comprehensive security reviews of 

its major facilities and has significantly reduced the number of security weaknesses 

previously identified by the General Accounting Office. These efforts should help 

reduce the risk of unauthorized access to sensitive taxpayer information and/or 

destruction of major IRS systems and data.

However, recent TIGTA audits and investigations have identified additional weaknesses 

in security controls over the IRS’ computer facilities, networks and systems, including: 

• Most IRS systems containing sensitive taxpayer information were not certified as 

having adequate security controls. This has been an issue for years that has not 

been resolved.

• The IRS does not effectively use audit trails to detect unauthorized access or abuse 

of taxpayer data, except for the Integrated Data Retrieval System.

• The IRS needs to improve its program for computer virus prevention and detection.

• The IRS needs to develop plans and increase the resources available to more 

effectively recover from disasters or failures at its facilities. This issue has been 

reported to the IRS before, but adequate actions have not been taken.

• Approximately 35 million electronically filed individual federal income tax returns are 

grouped and transmitted in batches from third parties over public telephone and data 

communications lines without being encrypted. 

• The IRS has not developed overall policies and guidance for securing its local area 

networks and related telecommunications processes.

• The IRS needs to do more to protect its critical infrastructure by defining which of its 

systems are critical to its operation, and taking actions to reduce vulnerabilities to 

disruptions in service. 

Striking an appropriate balance between maintaining systems’ security and conducting 

day-to-day operations is not simple. In some cases, adding security controls may slow 

systems down and result in less timely service to taxpayers. However, until these 

weaknesses are resolved, IRS systems and taxpayer data are vulnerable to tampering, 

loss or unauthorized disclosure. We believe the IRS should strengthen security in its 
existing computer systems, networks and facilities and ensure that adequate controls 

are built into new systems before they are rolled out. 

To address computer issues, TIGTA has developed a computer security program to 

investigate improper internal and external access to IRS computers. TIGTA’s SED is 

responsible for developing an aggressive program to investigate any attempts to 

interfere with the operation and security of the IRS’ computer systems. In the six 

months ending March 31, 2000, our SED opened 120 investigations regarding possible 

violations of the Taxpayer Browsing Protection Act of 1997. 

The SED’s operation is a collaborative effort between the IRS and TIGTA involving the 

use of computer technology and computer matching to identify criminal violations, 

secure evidence, and detect and prevent improper accesses. This group focuses on 

the threat posed by IRS employee misconduct as it relates to misuse of taxpayer 

information. The group is also responsible for identifying and investigating internal and 

external unauthorized electronic accesses to federal taxpayer records.

The SED also maintains computer research and reference equipment and assesses 

technical threats to the integrity of the IRS computer network. The Division conducts 

proactive security testing to ensure that adequate safeguards are in place to defend 

against newly identified network vulnerabilities, as well as newly disseminated hacker 

tools found throughout the Internet. Our work transcends tax administration as we 

disseminate threat advisories beyond the IRS to the Department of the Treasury and to 

a number of other federal agencies.

Conclusion

Improvements emanating from the IRS’ current reform efforts will not be immediately 

apparent. The full impact of the reforms may only be recognizable once the RRA 98 

has been completely implemented and managers and employees have embraced 

cultural changes. However, I do believe that the 

current approach, while daunting, is the right one. Past efforts at reform have been 

ineffective and focused on symptoms and surface issues, rather than on the ailments 

that have plagued this agency. 

Instances of faltering speed and misdirection for the RRA 98 reforms dictate that the 

IRS and its stakeholders need to closely monitor the outcomes. All participants in these 

reforms need to maintain a determination that this time they are committed to making 

long-term improvements in the IRS. It will be a while before the American public can 

readily identify the benefits of these reforms, but the initiative is vital if we are to provide 

the quality service that taxpayers should expect and are entitled to from their 

government.
Senator GRASSLEY. Mr. Oveson? Is that right?

Mr. OVESON. Yes, it is.

STATEMENT OF W. VAL OVESON, NATIONAL TAXPAYER ADVOCATE, 

INTERNAL REVENUE SERVICE 

Mr. OVESON. Thank you, Mr. Chairman and distinguished members of the Joint 

Review. Thank you for inviting me to testify before you today. I have now served as the 

National Taxpayer Advocate for 20 months and have implemented the provisions within the 

Restructuring and Reform Act for the Taxpayer Advocate Service.

I have worked with the old organization and experienced the changes, challenges, and 

opportunities with the restructuring. I firmly believe that the restructuring will provide taxpayers 

the opportunity to have their problems with the IRS resolved faster and more completely.

The Restructuring and Reform Act amended the Tax Code, creating my position and 

strengthening the independence of the office. In the spirit of this legislation, we restructured the 

organization, we revised our mission statement, and we renamed the organization the Taxpayer 

Advocate Service. I am pleased to report that we officially transitioned as a modernized 

organization within the IRS on March 12 of this year.

The Taxpayer Advocate Service continues to be a geographically-based organization. 

Every State now has at least one taxpayer advocate who works to resolve taxpayer problems with 

the IRS on a local basis.

Between October 1 of last year and April 21 of this year, we dealt with 127,000 taxpayer 

cases. During fiscal year 1999, we worked with more than 292,000 taxpayers to resolve their 

issues, and 93,000 of those met the expanded hardship criteria as called for in the Restructuring 

and Reform Act.

We also identify, recommend, and monitor systemic changes designed to benefit 

taxpayers. In this process, we also seek the input from stakeholder groups as we identify the 

administrative and legislative changes and recommendations that we make, many of them to you.

In my last report I included several recommendations related to penalty and interest. I 

also proposed that you give the IRS the authority to correct errors in a comprehensive manner, 

which they do not have today, amazingly enough. I am pleased that some of these provisions are 

included in the proposed Taxpayer Bill of Rights 2000. 

The IRS faces many challenges in the years ahead; implementing the modernization is 

one of the biggest. Four other issues deserve attention and mention today. 
First, I have stated before that Congress had liberated the IRS from the philosophy of 

maximizing revenue.

That philosophy is epitomized by the phrase "protecting the interests of the government," 

which you hear all the time in tax administration. I asserted that the new mission of the IRS was 

to balance the interests of the taxpayer with the interests of the government.

It is imperative that we stay the course so that the changes that have been undertaken take 

root and become a part of the IRS culture, and it will take some time for that to happen.

Second, the IRS must be able to communicate with taxpayers regarding their account 

activity, as any financial institution would be required to do. This means that toll-free telephone 

service must be expanded. The IRS must dedicate the resources necessary to answer the phones.

There have been substantial improvements made during the last year, as mentioned 

before during this hearing, but still the IRS is not meeting the standards demanded by the public. 

 The IRS budget request is the first step in addressing the need to improve taxpayer service.

Third, the handling of innocent spouse cases must be improved. The new statute 

expanded the relief available to taxpayers, who are filing these claims in large numbers, and the 

IRS faces a major challenge in properly staffing the program, reducing the processing times, and 

ensuring that all levels of the organization internalize the philosophical shift that is embodied by 

the new law.

Fourth, the Offer and Compromise program must be improved. The IRS has new 

authority to compromise cases. Again, the challenge is to adequately staff the program to deal 

with the increased volume and to ensure that the spirit, as well as the letter of that statute, is 

followed.

Thank you very much for inviting me to be with you today. I am confident that, with the 

sustained commitment of all of us, we can provide better service and greater equity to America's 

taxpayers. Thank you.

Senator GRASSLEY. Before Mr. White begins, just a comment. Not on anything you 

said now, but the extent to which we worked very hard in the IRS Commission to make sure that 

there was considerable independence for your office. I do not know to what extent that is being 

carried out. I hope fully, and I hope you will fight for that independence.

If there is anybody above you that makes a decision on the amount of that independence, 

I hope they take into consideration at least the spirit of the law, which is independence, and there 

ought to be considerable deference to that independence. In fact, there ought to be some sort of 

caution to make sure that we lean over backwards to maintain that independence. 

[The prepared statement of Mr. Oveson follows:














Senator GRASSLEY. Mr. White?

STATEMENT OF JAMES R. WHITE, DIRECTOR, TAX POLICY AND 

ADMINISTRATION ISSUES, U.S. GENERAL ACCOUNTING OFFICE

Mr. WHITE. Mr. Chairman and members of the committee, I am pleased to be here 

today to discuss IRS's modernization progress as we approach the second anniversary of the IRS 

Restructuring and Reform Act. In the Act, Congress signaled its concern that IRS has been 

over-emphasizing revenue production at the expense of fairness and consideration of taxpayer 

interests. 

Building on the direction set forth in the Act, IRS has embarked on a multi-faceted, 

integrated modernization effort. This effort, more so than past efforts, has the potential to 

provide improved service to taxpayers and to address IRS's long-standing management 

weaknesses.

Our statement today discusses IRS's progress in implementing its modernization and the 

challenges that lie ahead. Specifically, we make three points. First, IRS is as challenged today 

as it was almost two years ago when the Restructuring Act was passed.

Despite successes such as managing to process hundreds of millions of tax returns with 

its fragmented organizational structure and antiquated information systems while making Y2K 

fixes, IRS continues to face serious operational issues in its two key mission areas, enforcement 

and customer service.

With respect to enforcement, we have seen instances where IRS collected amounts from 

taxpayers who were actually due refunds, and many cases where collection should have been 

pursued but was not, leaving potentially billions of dollars in lost revenue to the government.

Further, liens are down 69 percent, levies are down 86 percent, seizures are down 98 

percent, and audit coverage of high income taxpayers is down from 2 percent in 1996 to less than 

half that now.

With respect to customer service, taxpayers continue to be frustrated by their inability to 

reach IRS by telephone. The answer rate this filing season is below what it was in 1998.

The root causes of such problems are complex, interrelated, and longstanding and reflect 

weaknesses in fundamental IRS operations such as its organizational structure, information 

systems, performance management, and human capital management.

My second point today is that, recognizing the complex and interdependent nature of its 

longstanding problems, IRS has developed a massive modernization effort encompassing 

changes to its organizational structure, performance management system, information systems, 

and business practices.
About two years into a process that is likely to take more than 10 years, IRS has begun to 

lay a foundation that should facilitate further changes. For example, IRS has developed a 

modernization strategy integrated across all of IRS, something missing from previous 

modernization efforts. Also, IRS's reorganization into four operating divisions focused on 

particular taxpayers is going reasonably well. 

However, substantial challenges remain. One challenge is revamping business practices 

to better meet taxpayer needs. Responsibility for finding better ways of doing business with 

taxpayers rests with the four new operating divisions, but the effort will require overcoming 

IRS's internal cultural barriers in order to assure that the new business practices are properly 

supported by new information systems.

Information systems modernization itself is a challenge. Work this past year fell well 

short of expectations, and IRS is trying to get it back on track. Yet another challenge is 

performance management, where IRS lacks a measure of voluntary compliance. 

Now, my third point. In implementing its long-term modernization, IRS is taking an 

incremental approach, an approach recognized by Congress in the Clinger-Cohen Act of 1996 as 

a best practice. One advantage of this approach is that it provides some indicators for gauging 

IRS's progress in the coming year.

Such indicators for this year include: improved performance in customer service, where 

IRS's telephone customer service should improve based on investments being made this year; 

improved performance in enforcement, where the Commissioner has said he expects to see a 

reversal in the downward trend in enforcement actions; progress in developing a measure of 

voluntary compliance, which would monitor a key aspect of IRS's performance and help target 

compliance and customer service resources where they can do the most good; incremental 

implementation of a new employee evaluation system designed to create incentives to support 

the agency's new mission; and, last, satisfaction of systems modernization commitments such as 

development of an updated modernization blueprint and business cases laying out the 

justification for proposed spending. Actually, I have got a last one: improvements in basic 

internal controls, such as security for handling receipts.

While the benefits to taxpayers from some of these incremental steps will not be felt for 

years, the steps should indicate whether IRS's multi-year modernization effort is on track.

Mr. Chairman, this concludes my statement and I would be happy to answer questions.

[The prepared statement of Mr. White follows:]













Senator GRASSLEY. I thank all three of you. We will, again, take five-minute turns at 

questioning.

First of all, I am going to start with you, Mr. White. What I am going to raise as an issue, 

it is my understanding you did not oversee an investigation that I am going to criticize, so I am 

not here to point criticism at you. But I am asking you, as a bottom line, the extent to which you 

could arrange a meeting based upon what I am going to say now.

That would be to comment and express concern over the General Accounting Office 

report that was tasked with corroborating witness testimony from our 1998 Finance Committee 

hearings. I have had a chance to look over a redacted version of what was recently given to the 

media.

From what I have seen, it does not look like the General Accounting Office did any real 

investigating at all. And this is uncharacteristic for me to criticize the General Accounting 

Office because, through my work as chairman of the Aging Committee and through all the work 

I have done on Department of Defense reform and investigation, I have been very, very satisfied 

with the professional work of the General Accounting Office.

We have seen media headlines like the one in The Washington Post that said, "GAO 

Report Exonerates IRS on 1998 Accusations." I am already hearing negative comments about 

the witnesses that had the courage to come forward and to testify. 

The point is, the General Accounting Office absolutely did not exonerate anybody, if you 

read the report and actually looked into the matter itself. Unfortunately, most reporters for the 

papers apparently have not actually looked into the cases.

At most, the report says that the General Accounting Office was not able to substantiate 

many of the allegations. That certainly does not mean that the allegations are not true, especially 

since there was not really an investigation.

First of all, the released report does not even cover a number of the most important 

witnesses at our hearing. There is no mention of Jennifer Long, Tom Henderson, Bruce Strauss, 

and others.

The fact is, the General Accounting Office never even interviewed these witnesses, which 

I find unbelievable, if you are really going to get to the bottom of anything. At least some of the 

witnesses GAO says it did talk to claim nothing was done with the many documents provided to 

the General Accounting Office.

I am told that the General Accounting Office investigators never even asked the 

witnesses about the documents provided them, and in one case, I am told, the investigator opened 

up the interview with one of the whistle-blowers by saying, "So you ratted on your boss."
Now, reading the report, you find that mostly what the General Accounting Office did, 

was talk to IRS supervisors or review people and files that were involved in already-completed 

internal investigations, so there was no real independent investigation, is my conclusion.

I have been involved with many GAO investigations. I have had some very good 

experiences with what the General Accounting Office does. So I am coming to you, realizing 

that you did not oversee this investigation, but I would like your help in setting things straight.

I would like our staffs to sit down and go over what was done, or what was not done, and 

how it was done, because from my perspective the so-called investigation of these allegations is 

not one of GAO's finer moments.

Could you help with this?

Mr. WHITE. Yes, Mr. Chairman. I can set up such a meeting. The work was led by our 

Office of Special Investigations. They have teams of people there who are experienced at 

gathering information to support these kinds of allegations, and that is why they were assigned to 

the work.

I would say that the work that they did was exhaustive. They interviewed the witnesses 

many, many, many times, and it was not just one person doing these interviews, there were a 

number of people involved in this work. They interviewed the witnesses many, many times. 

They reviewed all the files that they could find.

Part of the reason for the many interviews was to make sure that all of the information 

that was available was uncovered and reviewed. But I would be happy to set up the briefing that 

you asked for.

Senator GRASSLEY. Yes. The only addition I would make to what you just said is that 

some of the most important witnesses were not contacted by your investigators.

Mr. Oveson, in your 1999 report to Congress you had 53 legislative recommendations to 

help taxpayers. Some of those would have been addressed in last year's tax relief bill if the 

President had not vetoed it.

Out of those 53, or any new ones you have come up with, what are the top two or three 

issues that stand out in your mind that you believe are essential for Congress and the 

administration to act on?

Mr. OVESON. I mentioned in my testimony the abatement of interest. Expanding the 

authority to abate interest and dealing with penalty administration, which has been called for in 

the Restructuring and Reform Act, has been the subject of a lot of study. An excellent study was 

done by the staff of the Joint Committee on Taxation. I think that would rate number one.
The Earned Income Tax Credit has been talked about quite a bit here today. Reconciling 

the confusing definitions and the conflicting definitions in the administration of that program, I 

think, would be number two.

Senator GRASSLEY. Thank you.

Now we go to Congressman Coyne.

Mr. COYNE. Thank you, Mr. Chairman.

Mr. Williams, you indicated in your testimony that there has been a dramatic reduction in 

seizures--you cited a 98 percent reduction.

Mr. WILLIAMS. Correct, sir.

Mr. COYNE. To what do you attribute that?

Mr. WILLIAMS. We are seeking to understand that completely. The factors that are at 

play are that the IRS got off to a slow start. The IRS could not implement the law immediately. 

It had to develop procedures and train people, and then it had to pull people off-line in order to 

develop the procedures for the training.

There was some concern on the employees' part with regard to the 10 Deadly Sins. In 

taking those most aggressive actions that this agency takes, they are on the line for the kind of 

allegations that might be leveled against them. I think there was a kind of wait-and-see attitude 

with regard to how those were going to be implemented. 

As the Chairman said, there was some information that circulated in the beginning that 

caused those fears to be heightened that were not warranted and were ungrounded. We have 

taken pretty aggressive action to try to put those back in perspective, and I can share some of that 

with you.

I think that those are the principal actions. Some of the enforcement actions take longer 

than they used to take. That would be a marginal factor. 

The decline in enforcement actions is troubling and everyone is worried about it, and we 

do not completely understand, but those are some of the factors that are most important.

Mr. COYNE. From the testimony that the committee has received today, both from Mr. 

Rossotti and the panel that is here now, one common thread in the testimony is the need for 

human resources.

I wonder if any of you want to comment on that? Could you let us know your feelings 

about the human resource concerns expressed today? To what extent do our tax administration 

problems stem from human resource concerns?
Mr. WILLIAMS. I am new to IRS oversight, but I clearly have the sense that in the 

areas touched by the budget request, IRS is not keeping up. 

I think that some of those additional manpower requests might be a kind of bridge effort. 

 IRS does have the computer modernization coming to the rescue, but it is not going to be quick, 

and it might even be slower than we had hoped. So my general feeling is that the resources are 

badly needed. IRS is not keeping up in vital, important areas that I know that you want IRS to be 

on top of.

Representative COYNE. Does anyone else care to comment?

Mr. WHITE. I would like to pick up on the point that Mr. Williams made. IRS staff 

need support to be able to do their functions well, to be able to provide good customer service to 

taxpayers.

Right now, for example, they do not have real access to up-to-date taxpayer accounts. 

The accounts that they have access to on the computer systems at IRS can be a week or two out 

of date. This creates all kinds of problems for both taxpayers and IRS staff.

So part of the human capital management problem at IRS is developing the kinds of 

systems and information systems to adequately support IRS staff. At the management level, the 

same sort of point applies. 

The Commissioner has provided very strong leadership. He has a clear vision of where 

IRS needs to go. But implementation, as has been discussed here today, is key to this 

restructuring effort or modernization effort at IRS. For that to succeed, implementation has to be 

carried out by managers below the level of the Commissioner.

The Commissioner cannot implement this. IRS management has a history--we have 

pointed this out for many years--of weaknesses. Part of these weaknesses were due to lack of 

support in the areas that I mentioned, cost accounting systems and information systems.

Mr. COYNE. So your response would indicate that it is not necessarily a matter of 

volume of personnel, but in the way that they approach the responsibilities that they have.

Mr. WHITE. Yes.

Mr. COYNE. Thank you.

Senator GRASSLEY. Thank you, Congressman.

Now, Congressman Horn.

Mr. HORN. Thank you very much, Mr. Chairman.
First, Mr. Oveson, I want to congratulate you, at least from my experience. As you 

know, we have got 435 Members from the States and 5 from the territories, and they have district 

offices. We have 900 cases, not, thank heavens, with IRS, in our district office in Lakewood.

But with those cases we have had with IRS, your people at Laguna Niguel have done an 

outstanding job and we congratulate you on that. There is no question that part of the IRS has 

been putting a lien on a person, then the other person wants to get the money from them, and 

there had not been coordination before. I think we are finally getting at that.

Now, let me ask Mr. Williams, on page 2 at the bottom, you note that, "In addition, we 

are reviewing one new provision, Assessment Statute Extensions, that become effective January 

1, 2000. We are also conducting an audit related to one of the RRA 98 provisions to determine 

the effectiveness of the IRS actions for identifying and reporting potential Fair Debt Collection 

Practices Act violations."

I just wonder, since that opens the situation, to what degree is the Treasury Inspector 

General for tax administration concerned about the uncollected debts within IRS? I would just 

like your feeling for that since you obviously have a lot of knowledge about it.

Mr. WILLIAMS. Well, we know that that is an important area for us to audit in the 

coming year, and we wanted to let you know that that was a body of work that we were about to 

undertake. Knowing of your interest, we certainly want to make sure that your office is aware of 

it.

We have immersed ourselves in the philosophy that the Commissioner has put us all in 

mind of, IRS has to make efforts much earlier than they have been made in the past if collection 

efforts are to be successful. They have tried to learn from the private sector the dangers of 

delaying and taking a slow approach to collections.

At the same time, they need to have the balance between the aggressive collection and 

fairness in making those collections. That is a very difficult area. We hope that our audit efforts 

inform the debate and we are pleased to know that we have at least one customer for that body of 

work when it arrives.

Mr. HORN. Well, we thank you, because under Secretary Rubin I think the Treasury did 

a very fine job of going after the non-tax debt throughout the administration, and we appreciate 

that. But I am obviously beaming in on where the bank money is, as Willie Sutton says, and that 

bothers me when you have got billions to be collected on the IRS side.

That is not letting the people know the fairness of it. Because if you can get away with it 

for years, and pretty soon everybody forgets it and the taxpayer that has violated it a number of 

times, I just feel when you have got people that consistently go in and out of business and 

declare bankruptcy, they are just cheating us. It seems to me we have got to get at that. I would 

hope the new Secretary of the Treasury would be doing that and would continue to find work 
that started under Secretary Rubin with non-tax debt.

Mr. WILLIAMS. I do not think there was much of an understanding in the past, at least 

I have not found evidence of it, as to the nature of debt collection. The figure was so large that 

IRS could not really find the opportunities among that enormous front that IRS was trying to 

cover.

I think now that the IRS has focused on these more modern approaches to understanding 

debt and debt collection, it has set up the possibility of being increasingly effective, and TIGTA 

wants to monitor IRS= efforts.

Mr. HORN. When I talked to Mr. Rossotti's predecessor, there was about $110 billion in 

one pile. When I said, can you collect it and are you organized to have a collection system, well, 

I was dubious about it when she said, Aoh, we have $60 billion we think we can collect.@

Well, the figure I read into the record earlier shows that the General Accounting Office 

does not think it is $60 billion, it thinks it is in the $20-30 billion range, as I remember.

Somehow we have got to get a handle on it, because every day that there is another lag, 

some taxpayers are cheated by the government not doing what it should do as a government.

Mr. WILLIAMS. I gather that the GAO work was very good, and it did help us. We 

relied on it in helping to understand the nature of the problem and the opportunities to be more 

aggressive.

Mr. HORN. Well, the Commissioner, in response to one of my queries, said he is not 

against private collectors. Do I feel that you, as the Treasury Inspector General for Tax 

Administration, are not against private collectors either if they get the job done?

Mr. WILLIAMS. At this point, we would be very open- minded to any approaches that 

the study group comes up with. We certainly would not enter it with any bias or closing off any 

options, and we would be very pleased to look at that as an option.

Mr. HORN. Well, I am glad to hear that, because before Commissioner Rossotti became 

the Commissioner, the IRS put in some really phony collections.

They were five years old--already dead,--and never really had been collected. They said, 

well, let us give those to the private collectors. Clearly, they had no interest in it, and they had 

this phony competition, and it did not go anywhere.

Thank you, Mr. Chairman. I appreciate the opportunity.

Senator GRASSLEY. Mr. Horn and Mr. Coyne, I am going to follow up on what you 

just asked. But before I do that, we are about ready to close this down. Since I have a couple of 
more questions, I should have deference to you to have the same privilege if you had anything 

that did not get done.

Mr. White, let me follow up where he left off, or where this discussion left off. Since 

your agency did suggest $20 billion in uncollected taxes could be collected, just your opinion, 

why is that not being done?

Mr. WHITE. Part of it is the antiquated information systems at IRS, the point that the 

Commissioner made about needing to get to these debts sooner. Right now it takes too long to 

get to them, and by the time we finally get to them, businesses have gone bankrupt. Many of 

these debts represent employment taxes, for example. A business has gone bankrupt and it is too 

late.

Senator GRASSLEY. All right. Thank you.

I want to read into the record the last point I made with Commissioner Rossotti, which 

was following up on questions that Senator Kerrey was asking about the 1203 regulations, and I 

think Congresswoman Northup also discussed that, so at least everybody, including you, Mr. 

Williams, will know where I am coming from on this point. It is not something we have to 

discuss right now.

But I mentioned in my opening statement what I believed is an effort by some within the 

IRS to undermine the law, and particularly the so-called 10 Deadly Sins that have come under 

fire.

I think most of this criticism is misplaced. All of these provisions require some kind of 

willful misconduct or assault and battery, retaliation or threats.

Unfortunately, it appears that employees in the field are being told otherwise. For 

instance, we have heard that some employees are being told that if they make mistakes on their 

own W-2 form they can be fired. Now, Senator Kerrey already referred to that, so my statement 

on that is not any different than what he has been told.

These employees are also being told that if they make a typographical error and 

somebody's tax return pops up accidentally, that they can be punished. So it seems like some 

managers are almost trying to scare employees in order to undermine the law.

On top of that, it appears that the 1203 regulations are only being applied against the 

employees and not the managers, at least I am being told this is the case. So I know that we will 

get comment from Commissioner Rossotti on this for me and Senator Kerrey, but I am 

specifically asking that I be provided, for me and the committee, with statistics on the number 

and type of 1203 sanctions that have been taking place since 1203 was implemented.

Now, one closing comment from me. This is an admonition to the Senate, because I 

cannot admonish the House, under comity. That is, we are just finishing the second annual 
multi-committee oversight of the IRS, put in the statute because we wanted, at least once a year, 

a unified approach of all three of the Senate committees and the three House committees that 

sporadically, and maybe not often enough, deal with the IRS in our constitutional responsibility 

of oversight.

As we were proceeding up to the Restructuring Commission's work of a year and a half, 

through that year's work, and then through the period of time that the Finance Committee had our 

oversight hearings of the IRS that kind of laid the groundwork for eventually getting the 

restructuring bill passed, I came to the conclusion that maybe over the last 20 years we in 

Congress do not do our job of oversight adequately.

Consequently, it leads to a mind-set within various bureaucracies--in this case the IRS--of 

a great deal of independence, and it can get away with things of that nature. I think we found 

that to be the case in our Commission's work.

So just to avoid, not only through this process that we have gone through today, which is 

a partial step in that direction, allowing bureaucracies to get too far outside the law, I think we 

ought to keep in mind whether or not on a very regular basis, not just once a year, we are doing 

an adequate job of oversight of bureaucracies generally, and in this case, and for the Senate 

Finance Committee, the IRS.

That is not a criticism of anybody's leadership, that is just a statement of what I have 

observed in the 20 years that I have been a member of this committee.

I thank you all. Consequently, the hearing is adjourned, since there are no more 

questions.

[Whereupon, at 11:55 a.m., the hearing was concluded.]