U.S. GOVERNMENT PRINTING OFFICE

67–584 CC WASHINGTON : 2001

IMPLEMENTATION OF THE INTERNAL REVENUE

SERVICE RESTRUCTURING AND REFORM ACT

HEARING

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

JULY 22, 1999

Serial 106–77

Printed for the use of the Committee on Ways and Means

(

For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ii

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

SCOTT MCINNIS, Colorado

RON LEWIS, Kentucky

MARK FOLEY, Florida

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

LLOYD DOGGETT, Texas

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON OVERSIGHT

AMO HOUGHTON, New York, Chairman

ROB PORTMAN, Ohio

JENNIFER DUNN, Washington

WES WATKINS, Oklahoma

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

J.D. HAYWORTH, Arizona

SCOTT MCINNIS, Colorado

WILLIAM J. COYNE, Pennsylvania

MICHAEL R. MCNULTY, New York

JIM MCDERMOTT, Washington

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records

of the Committee on Ways and Means are also published in electronic form. The printed

hearing record remains the official version. Because electronic submissions are used to

prepare both printed and electronic versions of the hearing record, the process of converting

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process

is further refined.

iii

C O N T E N T S

Page

Advisories announcing the hearing ........................................................................ 2

WITNESSES

Internal Revenue Service, Hon. Charles O. Rossotti, Commissioner .................. 14

U.S. General Accounting Office, James R. White, Director, Tax Policy and

Administration Issues, General Government Division, accompanied by Randolph C. Hite, Associate Director, Governmentwide and Defense Information Systems, Accounting and Information Management Division .................. 60

Implementation Group, and Electronic Tax Administration Advisory Committee, Charles A. Lacijan ................................................................................... 49

(1)

IMPLEMENTATION OF THE INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM ACT

THURSDAY, JULY 22, 1999

HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, SUBCOMMITTEE ON OVERSIGHT, Washington, DC.

The Subcommittee met, pursuant to notice, at 9:05 a.m., in room

1100, Longworth House Office Building, Hon. Amo Houghton

(Chairman of the Subcommittee) presiding.

[The advisories announcing the hearing follows:]

2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON OVERSIGHT

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721

July 15, 1999

No. OV–10

Houghton Announces Hearing on

Implementation of the Internal Revenue Service

Restructuring and Reform Act

Congressman Amo Houghton (R–NY), Chairman, Subcommittee on Oversight of

the Committee on Ways and Means, today announced that the Subcommittee will

hold a hearing to review the progress of the implementation of the Internal Revenue

Service (IRS) Restructuring and Reform Act of 1998 (P.L. 105–206) one year after

its enactment. The hearing will take place on Thursday, July 22, 1999, in the main

Committee hearing room, 1100 Longworth House Office Building, beginning at

10:00 a.m.

Oral testimony at this hearing will be from invited witnesses only. Invited witnesses will include IRS Commissioner Charles O. Rossotti; Tax Policy and Administration Issues Director James R. White, U.S. General Accounting Office; and Chairman Charles A. Lacijan, Electronic Tax Administration Advisory Committee. Any

individual or organizational not scheduled for an oral appearance may submit a

written statement for consideration by the Committee or for inclusion in the printed

record of the hearing.

BACKGROUND:

The passage of the Internal Revenue Service Restructuring and Reform Act (RRA)

reflected the recognition by the Congress that the IRS required major reform. The

RRA established an Oversight Board within the U.S. Department of the Treasury,

including a super-majority of members from the private sector, to monitor the

administration, management, conduct, direction, and suppervision of the execution

and application of the tax laws. The RRA also mandated specific structured and

management reform including:

(1) an independent appeals function,

(2) authority to hire experts and high level managers,

(3) an independent National Taxpayer Advocate who represents the interests of

taxpayers with broad authority,

(4) provisions to hold IRS employees accountable for their actions, and

(5) streamlined oversight by the Congress and the Treasury Inspector General.

Congress also took steps to ensure that taxpayers are treated fairly and that they

are accorded additional rights when dealing with IRS officials. The RRA created

more than 50 taxpayer rights including:

(1) providing that divorced or separated individuals are not liable for taxes as an

innocent spouse or only responsible for taxes on his or her own income,

3

(2) shifting the burden of proof to the IRS in court proceedings,

(3) suspending interest when the IRS does not provide appropriate notice within

18 months, reducing the failure to pay penality by one half while the taxpayer is

participating in an installment agreement, and requiring management approval of

non-computer generated penalities,

(4) making it easier for taxpayers to enter into installment agreements, and

(5) ensuring due process for taxpayers in collections activities.

In announcing the hearing, Chairman Houghton stated: ‘‘One year ago, the President signed into law the most significant reform of the Internal Revenue Service in

its history. We intend to review the progress that the IRS has made to reform itself

into a modern, efficient, customer-friendly agency and what challenges remain to be

met. We also intend to review the effectiveness of taxpayer rights created by the

law.’’

FOCUS OF THE HEARING:

The Subcommittee will review the efforts of the IRS to reorganize, modernize, and

reshape itself into a service-oriented agency.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Any person or organization wishing to submit a written statement for the printed

record of the hearing should submit six (6) single-spaced copies of their statement,

along with an IBM compatible 3.5-inch diskette in WordPerfect 5.1 format, with

their name, address, and hearing date noted on a label, by the close of business,

Thursday, August 5, 1999, to A.L. Singleton, Chief of Staff, Committee on Ways and

Means, U.S. House of Representatives, 1102 Longworth House Office Building,

Washington, D.C. 20515. If those filing written statements wish to have their statements distributed to the press and interested public at the hearing, they may deliver 200 additional copies for this purpose to the Committee office, room 1102 Longworth House Office Building, by close of business the day before the hearing.

FORMATTING REQUIREMENTS:

Each statement presented for printing to the Committee by a witness, any written statement

or exhibit submitted for the printed record or any written comments in response to a request

for written comments must conform to the guidelines listed below. Any statement or exhibit not

in compliance with these guidelines will not be printed, but will be maintained in the Committee

files for review and use by the Committee.

1. All statements and any accompanying exhibits for printing must be submitted on an IBM

compatible 3.5-diskette in WordPerfect 5.1 format, typed in single space and may not exceed

a total of 10 pages including attachments. Witnesses are advised that the Committee will rely

on electronic submissions for printing of the official hearing record.

2. Copies of whole documents submitted as exhibit material will not be accepted for printing.

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material

not meeting these specifications will be maintained in the Committee files for review and use

by the Committee.

3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments

by the Committee, must include on his statement or submission a list of all clients, persons,

or organizations on whose behalf the witness appears.

4. A supplemental sheet must accompany each statement listing the name, address, company,

telephone and fax numbers where the witness or the designated representative may be reached.

This supplemental sheet will not be included in the printed record.

The above restrictions and limitations apply only to material being submitted for printing.

Statements and exhibits or supplementary material submitted solely for distribution to the

Members, the press and the public during the course of a public hearing may be submitted in

other forms.

4

Note: All Committee advisories and news releases are available on the World

Wide Web at ‘HTTP://WWW.HOUSE.GOV/WAYSlMEANS/’.

The Committee seeks to make its facilities accessible to persons with disabilities.

If you are in need of special accommodations, please call 202–225–1721 or 202–226–

3411 TTD/TTY in advance of the event (four business days notice is requested).

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above.

NOTICE—CHANGE IN TIME

f

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON OVERSIGHT

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721

July 21, 1999

No. OV–10–Revised

Change in Time for Subcommittee Hearing on

Thursday, July 22, 1999,

on Implementation of the Internal Revenue

Service Restructuring and Reform Act

Congressman Amo Houghton (R–NY), Chairman of the Subcommittee on Oversight of the Committee on Ways and Means, today announced that the Subcommittee hearing on the Implementation of the Internal Revenue Service Restructuring and Reform Act scheduled for Thursday, July 22, 1999, at 10:00 a.m., in the

main Committee hearing room, 1100 Longworth House Office Building, will now

be held at 9:00 a.m.

All other details for the hearing remain the same. (See Subcommittee press release No. OV–10, dated July 15, 1999.)

come to order.

Mr. HOUGHTON. Good morning, everybody. The meeting will

f In June 1997, after a year of work, the National Commission on

Structuring and Internal Revenue Service issued its report, which

was a vision for the new IRS. The Commission was co-chaired by

our Subcommittee colleague, Rob Portman, along with Senator Bob

Kerrey. Our Ranking Democrat, Bill Coyne, served on the Commission as well. An enactment of the report’s recommendation began

with hearings and a report from the Subcommittee, culminating in

passage of the IRS Restructuring and Reform Act of 1998, which

was signed into law about a year ago.

5

Now, the Commission identified three broad concerns, including

No. 1, a lack of long-term vision, No. 2, difficulty in developing

structured plans to obtain specified goals, and No. 3, an inability

to follow through and sustain efforts to meet those goals.

So in addressing these issues, it is not as glamorous as enacting

new taxpayer rights. And it is equally important. Mac McKinney

had a wonderful story that I was going to tell, but it took about

half an hour to tell it, so I’m eliminating that story, it had to do

with Will Rogers. I’ll tell you, Commissioner, about it a little later.

As difficult as I’m sure it was to achieve a consensus within the

Commission, and as challenging as it was to secure passage of the

reform implementation, that of course is the hard part. We are now

entering a time of risk, a time of changing processes, spending

large dollars and moving people around.

So the responsibilities of the Commissioner, the Treasury and

the Oversight Board, and I’m assuming that a board will soon be

in place, are clear. And of course, Congress is equally responsible

for making it clear that these reforms are not just a flash in the

pan, and for making sure that they are implemented effectively.

The RRA requires us to coordinate congressional oversight, and

our first joint review was held last May. The review provided an

excellent overview of the many challenges facing the IRS, completing our Y2K readiness, modernizing systems, reorganizing

major business groups and implementing a new taxpayer protection policy.

So today we need to focus on specifically the implementation of

the RRA. We need to determine whether the Service has the financial and management and personnel resources it needs to do the

job. And we need to learn more about what the Service is doing to

train employees to implement the new taxpayer rights. Also, we’d

like to find out about the reports that collection and enforcement

activities have dropped.

So as we consider the difficult steps that lie ahead, the Subcommittee will be examining them against the backdrop of the

Commission’s findings and the need for long-range vision and strategic business plan, and a consistent follow-through.

What I’d like to do now is recognize the Ranking Democrat, Mr.

William Coyne, for his opening statement.

Mr. COYNE. Thank you, Mr. Chairman.

On the first anniversary of the enactment of the IRS Restructuring and Reform Act of 1998, it is appropriate that the Ways and

Means Oversight Subcommittee hold today’s hearings. Over the

past 2 years, the Subcommittee has served as the catalyst for the

development of the IRS reform legislation. Most recently, the Subcommittee has engaged in continued oversight of the IRS. Today

we have discussion of the progress the IRS has made to date in

implementing the 1998 IRS reform bill.

This major reform legislation included over 70 taxpayer rights

provisions, including those providing innocent spouse relief, abatement of interest and penalties, streamlined installment agreements

and offers of compromise, a more powerful Office of Taxpayer Advocate and funding for low-income tax clinics. Also, the new law provides for IRS reorganization, hiring of management experts and the

creation of public-private IRS oversight board.

6

The IRS reform legislation enacted last year has had a positive

effect on the taxpaying public. A new IRS management team, a

modernized tax system, and improved taxpayer services are beginning to have an effect. Taxpayers are seeing the impact of reformed

innocent spouse rules, improved taxpayer notification of audit

issues, and clearer IRS forms and instructions.

However, there is disconcerting news as well. Press reports raise

serious questions about recent trends in tax compliance and IRS

enforcement. IRS statistics show that the IRS has largely shut

down its compliance programs, with liens, levies and seizures at an

all-time low and dropping. Interviews with IRS employees have

indicated that they considered their jobs at risk when talking to

taxpayers, should they commit one of the 10 deadly sins, or worse,

fear that they would be subject of the next Senate hearing alleging

that they abused taxpayers.

I have attached three recent news articles which raise these

issues and should be discussed by the Subcommittee today. Now is

the time for us to assess the current state of the IRS and to make

any adjustments that we need to. We must make sure that our tax

system is balanced, fair, for all taxpayers, especially the 98 percent

of individual taxpayers who voluntarily pay taxes on time by April

15.

Finally, it is unfortunate that the House last week adopted an

amendment to cut the IRS budget for fiscal year 2000 by $135 million. The IRS Commissioner had communicated to the Congress

before the vote in no uncertain terms that such action would result

in the inability of the IRS to deliver the mandates of the IRS reform bill.

In the words of the IRS Commissioner, Mr. Rossotti, by letter

dated July 15:

A funding reduction would severely restrict, if not completely impair, IRS’ ability

to deliver the Restructuring and Reform Act mandated by Congress in 1998. Every

aspect of the agency’s commitment to reorganize the organization and improve customer service and taxpayers’ rights would be in jeopardy. It would constrain the

agency’s ability to implement the initiatives so critical to changing how IRS delivers

on customer service and improves its treatment of taxpayers and focus on taxpayer’s

rights.

The cut would result in reduced plans to deliver better telephone service and tax

assistance in Spanish. IRS staff has already been reduced 14 percent since fiscal

year 1993, thereby continuing the rapid decline and exam collection and criminal

tax compliance operations. It would reduce funding for the electronic tax administration program, thereby jeopardizing the congressionally mandated goal of 80 percent electronic filing by the year 2007. It would impair the creation of operating

units to help in specializing groups of taxpayers, including small business and ordinary wage earners. Finally, it would delay the implementation of important taxpayer rights initiatives.

I have attached a copy of this letter, which discusses the threat

that inadequate funding poses to the IRS reform effort. I look forward to working with Subcommittee Chairman Houghton and others to ensure proper implementation of IRS reform as well as the

necessary funding for IRS in fiscal year 2000 and into the future.

Thank you.

[The opening statement and attachments follow:]

7

Statement of Hon. William J. Coyne, a Representative in Congress from the

State of Pennsylvania

On the first year anniversary of enactment of the IRS Restructuring and Reform

Act of 1988, it is appropriate that the Ways and Means Oversight Subcommittee

hold today’s hearing.

Over the past two years, this Subcommittee served as the catalyst for the development of the IRS reform legislation. Most recently, the Subcommittee has engaged

in continued oversight of the IRS, review of the 1999 tax return filing season, and

consideration of the IRS’s fiscal year 2000 budget.

Today I look forward to discussion of the progress that the IRS has made in implementing the 1998 IRS reform bill. This major reform legislation included over

seventy taxpayer rights provisions, including those providing innocent spouse relief,

and abatement of interest and penalties, streamlined installment agreements and

offers-in-compromise, a more powerful Office of the Taxpayer Advocate, and funding

for low-income tax clinics. Also, the new law provides for IRS reorganization, the

hiring of management experts, and creation of a public-private IRS Oversight

Board.

The IRS reform legislation enacted last year has had a positive effect on the taxpaying public. A new IRS management team, a modernized tax system, and improved taxpayer services are beginning to have an effect. Taxpayers are seeing the

impact of reformed innocent spouse rules, improved taxpayer notification of audit

issues, and clearer IRS forms and instructions.

However, there is disconcerting news as well. Press reports raise serious questions

about recent trends in tax compliance and IRS enforcement. IRS statistics show that

the IRS has largely shut down its compliance programs, with liens, levies and seizures at an all-time low and dropping. Interviews with IRS employees indicated that

they considered their jobs at risk when talking to taxpayers (should they commit

one of the ‘‘10 deadly sins’’) or, worse, feared that they would be the subject of the

next Senate hearing alleging that they abused taxpayers. I have attached three recent news articles which raise these issues and should be discussed by the Subcommittee today.

Now is the time for us to assess the current state of the IRS and to make any

adjustments needed. We must make sure that our tax system is balanced and fair

for all taxpayers, especially the 98 percent of individual taxpayers who voluntarily

pay taxes on April 15.

Finally, it is unfortunate that the House last week adopted a Republicansponsored amendment to cut the IRS’s budget for fiscal year 2000 by $135 million.

The IRS Commissioner had communicated to the Congress before the vote, in no uncertain terms, that such action would result in the inability of the IRS to deliver

on the mandates of the IRS reform bill.

In the words of the IRS Commissioner, by letter dated July 15, 1999, ‘‘A funding

reduction of $135 million would:

• Severely restrict, if not completely impair, IRS’s ability to deliver on the Restructuring and Reform Act mandated by Congress in 1998. Every aspect of the

agency’s commitment to reorganize the organization, improve customer service and

taxpayer rights would be in jeopardy

• Constrain the ability (of the IRS) to implement the initiatives so critical to

changing how IRS delivers on customer service and improves its treatment of taxpayers and focus on taxpayer rights. For example, the cut would result in reduced

plans to deliver better telephone service and tax assistance in Spanish.

• Require reduced staffing levels in order to free up the funds necessary to implement congressionally mandated RRA requirements. IRS staff has already been reduced 14 percent (or 15,600 FTE) since FY 1993—thereby continuing the rapid

decllne in exam, collection and criminal tax compliance operations.

• Reduce funding for the Electronic Tax Administration program, thereby jeopardizing the Congressionally mandated goal of 80 percent electronic filing by the

year 2007.

• Impair the creation of operating units to help specialized groups of taxpayers

including small businesses and ordinary wage earners.

• Delay implementation of important taxpayer rights initiatives.’’

I have attached a copy of this letter which discusses the threat that inadequate

funding poses to the IRS reform effort.

I look forward to working with Subcommittee Chairman Houghton to insure proper implementation of IRS reform, as well as the necessary funding for IRS in fiscal

year 2000 and into the future.

8

9

10

11

12

13

Mr. H

Mr. Hayworth, Mr. Watkins, do you have any comments?

OUGHTON. Thank you very much, Mr. Coyne.

f All right, fine, thank you. We’re honored to have Hon. Charles

O. Rossotti, Commissioner of the Internal Revenue Service, here

today. Commissioner.

14

STATEMENT OF HON. CHARLES O. ROSSOTTI, COMMISSIONER,

INTERNAL REVENUE SERVICE

Mr. ROSSOTTI. Thank you, Mr. Chairman, and thank you, Mr.

Coyne. I appreciate your holding this hearing on the anniversary

date. It does give us a good opportunity to look back and see what

our progress has been so far on implementing this important legislation. But I think it’s also important, to look forward and see what

we need to do in the future to continue on course.

As important as are all these individual provisions of this Act,

I think it’s even more important what the legislation told us about

the IRS. I think it told us that we needed to fundamentally change

direction. We must not only collect taxes, but we must see our job

as serving the people who are paying the taxes, America’s taxpayers.

In the 20 months that I’ve now been in office, I have become

even more convinced than I originally was that we can succeed in

this mandate that Congress has given us, provided we are given

necessary resources. I do not believe that this mandate implies or

requires less effective tax collection. What I do believe is that we

can have a tax agency that does a better job across the board on

all aspects of our mission.

One of the Act’s critical components was the expansion of taxpayer rights. I think a year ago when this bill was passed none of

us fully understood the consequences of some of the dramatic

changes incorporated in some of these provisions. Especially the

tremendous amount of time and resources that were going to be

needed to implement some of these rights. I think it’s honest to say

that we did not fully understand the budgetary consequences either

until recently.

I want to stress that we are completely and wholly committed to

implementing every one of the taxpayer rights in RRA 1998. It is

a No. 1 priority for us and we are committed to getting the job done

and getting it done right, notwithstanding the fact that we have

made some mistakes and we’ve been delayed in implementing some

of these changes. But we’re going to persist until we get them

right.

But we do have to understand that delivering on the hundreds

of specific changes and major implications for the way we do business in our organization is a large undertaking. It has placed a

strain on our resources.

I would like to just mention one important example, which is the

innocent spouse provision. From April 1998 until the passage of the

Act, there were about a total of 3,000 claims under the innocent

spouse provisions at that time. Since the passage, there have been

about 27,000 claims. And we are continuing to receive these claims

at a rate of 4,000 per month.

This is far greater than we ever thought, and in addition, the

complexity of implementing these provisions is quite large. The net

effect is that we’ve had to increase the number of staff assigned by

about tenfold, from 30 to about 359. In spite of adding these resources, there is still a very large backlog.

Also related to this one example is the fact that the old technology we have in place just does not allow us to do what this provision requires, namely separating a single tax liability on a single

15

return into spouses with multiple liabilities. So, we have to do this

kind of tracking manually, which of course increases the time and

increases the risk of error.

So this is an example of one provision that is very important. We

do have a backlog. We will clear it up and we will get it right, but

it’s going to take some time and resources.

Very closely related to this problem of resources is the amount

of training that is required in order to meet the Act’s mandates and

provide better service. Essentially, every one of the more than

100,000 IRS employees requires training. For example, Congressman Coyne mentioned section 1203, which is dealing with termination of employment for misconduct. Every employee needs this

training.

We gave training to every employee within 6 months of the passage of the Act. And frankly, it had the effect of probably raising

concerns about employees, but without necessary answering the

specific questions they had about this. So we are now continuing

to work and going forward with another set of training. In June,

we began to implement additional instructions on procedures.

We know that some IRS employees have been reluctant to pursue some collection actions for fear of 1203 violations. However,

this is only one factor that has reduced the number of collection actions. The additional processing time required by the Act and the

reduction in resources have also been important factors, which we

are working on.

The Act not only contains specific taxpayer rights, it also created

an expectation that every taxpayer would receive a better level of

service, while ensuring that the law is applied fairly. We have a

new mission statement that reflects that expectation and three

strategic goals needed to achieve the mission, which are listed on

this chart over here. By clarifying this mission and our goals,

through a series of new balanced performance measures, we are

transmitting in a practical way this new set of goals and mission

to every employee in the IRS.

These directional changes and communications are very important. But we won’t succeed without also revamping the way we do

business. We need to take advantage of better business practices

and better technology. We don’t have time to go into them here, but

listed on that chart are just an example of some of the major kinds

of business changes that we are beginning to make and will make

over time that can help us on all aspects of our goal, both service

to taxpayers and compliance. In the short term, we’re concentrating

on 161 near term actions to move in this direction.

Another important part of RRA, which I think is essential to

achieving our goals, is the reorganization into customer focused

units, so that we can manage according to the way the customer

sees the world, rather than just the way the IRS sees the world.

We’ve made some progress on that, although there is a great deal

of work to do.

The first two of the four operating divisions are going to be coming up later this year or early next year, and we’ve selected the

heads of those units and announced them, which was an important

step. You’re going to have more information on electronic tax administration later. We have prepared our first strategic plan to enVerDate 20-JUL-2000 12:30 Jan 05, 2001 Jkt 060010 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 K:\HEARINGS\67584.TXT WAYS1 PsN: WAYS1
16

able us to move toward the goal of 80 percent electronic filing by

2007. We conducted several important pilots which next year we

hope to build on for the 2000 season.

Finally, let me mention something about technology. We clearly

are not going to succeed in achieving these new business practices

and goals without replacing this 30-year old base of fundamentally

deficient technology, which really does not provide us up-to-date,

accurate information about taxpayers, which is the foundation of

everything we do.

I’m very pleased to report to the Committee that earlier last

month we received from the Appropriations Committees authorization for the first release of funds from the Information Technology

Investment Account. This is $35 million that really will enable us

to complete planning. The important thing is it’s really the first installment toward developing a complete new set of systems.

This is going to take years to do and a significant financial investment. But it will be a foundation for everything that the IRS

does in years to come, including transitioning all of our taxpayer

accounts eventually from our tape-based master file system to a

modern data base.

Finally, just let me comment briefly on our budget request and

not really so much in terms of the details of the current budget request. Which I believe is the bare minimum that we need to move

forward, but just look a little bit more broadly at the relationship

between the IRS mission and goals, the assignments that Congress

has given us and our resources.

I think if you look at this colored chart over here which says, IRS

shrinks as a fraction of the economy, you can see that even before

RRA and continuing now, we have shrunk by about 30 percent relative to the economy. And even if the full budget request of 2000

is granted, we will continue that shrinkage during 2000.

So what we have here is a case of increased demands due to the

increased economy and the additional provisions of the law, while

we have reduced resources. The effect of this is simply to reduce

the level of activity, especially in the most case-oriented, laborintensive activities, which are examinations, criminal investigations and collections.

So for example, the number of individual tax returns with over

$100,000 income has increased by 56 percent over the last 5 years.

But the number of returns that have been examined in that category has decreased by 21 percent. And now with RRA, because of

the other increased resources, even fewer resources are going to be

available for initiating new such cases. So this decline will continue.

I think doing business the same way and continuing this trend,

resources declining, economy growing, is eventually going to undermine our whole tax system. I think as we’ve discussed in earlier

hearings, there is a better way to do this, and we can succeed. But

it does depend on getting assured investment funds every year for

the improvements that we need to make in organization, training,

business practices and technology, while we stabilize the level of

activity in our current operations.

We are obviously doing what we can with short-term changes.

But in the meantime, we have just in the taxpayer rights area, a

17

requirement of about 3,000, the equivalent of about 3,000 full time

employees just to implement these new requirements on existing

cases. We do need, of course, at the same time, for funds to make

the investments needed to implement these new practices.

So we have a stress on resources that is really quite severe, in

current year and going forward over the next several years.

Mr. Chairman, I believe that the IRS is fundamentally changing

in the direction that was mandated by the Restructuring Act. It’s

changing in virtually every aspect.

But we are at a crossroads. I think we need the understanding

of the Congress for the magnitude of this challenge. We need the

understanding in really two ways, one in that it is going to take

some time to carry out all these mandates, and it will take some

resources.

One forecast that I made when I took office was that it would

take the better part of a decade to reach our goals for the IRS. Now

having been here for 20 months, I think that’s one forecast that I

will stand by. I believe it is doable, I believe it is worthwhile. But

it is a long and difficult journey, and we need your support.

Thank you, Mr. Chairman.

[The prepared statement follows:]

Statement of Hon. Charles O. Rossotti, Commissioner,

Internal Revenue Service

INTRODUCTION

Mr. Chairman, I am pleased to testify before the Subcommittee on the anniversary of the signing of the IRS Restructuring and Reform Act of 1998 (RRA ’98 or

Act).

Today’s hearing presents an excellent opportunity to examine our progress on the

mandates set forth by this landmark bipartisan legislation, the challenges and obstacles, and more importantly what we must do now and in the future to keep on

course to achieve all of the RRA ’98 goals.

As important as the individual provisions of the RRA ’98 are, the Act as a whole

said something even more important. It told the IRS we must fundamentally change

direction. We must not only collect taxes, but we must think of our job as serving

the people who are paying the taxes, America’s taxpayers.

In the nearly 20 months that I have been in office, I have become even more convinced that we can succeed in the mandate Congress gave us if we are given the

necessary resources. I do not believe this mandate implies or requires less effective

tax collection. I firmly believe we can have a tax agency that does a far better job

across the board on all aspects of our mission.

Today I would like to discuss how we are interpreting and implementing the RRA

mandate and how it relates to the resources we will require. I am also submitting

for the hearing record a document entitled ‘‘Modernizing America’s Tax Agency,’’

which describes our overall change program.

TAXPAYER RIGHTS AND EMPLOYEE TRAINING

One of the critical components of RRA ’98 was the expansion of taxpayer rights.

However, the Act also differed strikingly from other tax legislation the IRS previously implemented. RRA ’98 not only changed the Tax Code; it broke new ground

by substantially altering the internal processes and procedures needed to manage

these changes.

A year ago, no one fully understood the consequences of such a dramatic change,

especially the enormous amount of time and resources needed to implement these

new taxpayer rights. Certainly, the IRS did not fully appreciate the budgetary consequences of RRA ’98 until recently.

I want to stress that we are wholly committed to implementing each and every

taxpayer right in RRA ’98. It is our number one priority and we will get the job

done, and we will get it right, not withstanding some delays and mistakes.

Delivering on the Restructuring Act and the hundreds of specific changes to both

the tax code and our organization is an enormous task. We are in the process of:

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(1) implementing 82 near-term RRA ’98 initiatives to improve service and treatment

of taxpayers; (2) implementing 423 tax code changes, many of which require significant and complex interpretations to guide taxpayers and employees; and (3) providing essential training related to these many changes to nearly every one of our

over 100,000 employees, including technical training for 75,000 of them.

Let me highlight some of the progress to date in implementing RRA ’98: a massive

training effort is underway; two new forms are being developed; 153 forms have

been revised; 39 publications have been revised; 33 items from Chief Counsel were

published (14 regulations, 8 revenue procedures, and 11 notices/announcements);

more than 75 guidance memoranda have been issued; and 1,300 implementing actions have been identified. Obviously, this is an enormous undertaking that has

placed an enormous strain on IRS’s resources. The direct effect on operations is

equivalent to nearly 3,000 FTEs.

I want to particularly stress that increased training of our employees is essential

for delivering on the mandates that Congress gave us and the service that taxpayers

expect. About 70 percent of IRS employees deal directly with taxpayers. Taxpayers

have every right to expect that in every such encounter with an IRS employee,

whether it is a phone call asking a question about how to fill out a return, or a

meeting with a revenue agent in an audit, the IRS employee should understand the

current tax law and have the skills to understand the facts and circumstances of

that taxpayer.

A year and a half ago, when I took office, it was abundantly clear that there was

already a serious deficit in this area. Since then, Congress has given us the responsibility of implementing 1260 changes to the Tax Code, including those in RRA ’98,

and a mandate to restructure the whole way we do business with taxpayers. This

will require extremely complex training for our employees. The money in our FY

2000 budget request, including that part included for the modernization program,

is essential and will only begin to rectify our training deficit.

There are three phases to our RRA ’98 training, and even prior to enactment of

RRA ’98, we began to take action. In July of 1998, we established a National Resource Center to coordinate policy and program questions to insure that consistent

messages were sent to stakeholders. Also in July, approximately 185 RRA ’98 field

coordinators in each IRS district, region and service center were identified and

trained to be local points of contact for coordination and questions. I held my first

RRA video conference on July 17, five days before the President signed the legislation into public law.

RRA ’98 Phase I training took place from July 1998 to January 1999. Some of

the actions we took included: (1) providing 60,000 front-line employees with up to

1.5 million hours of basic implementation training on new statutory requirements

and key procedures; (2) developing individual training plans for each IRS function;

(3) implementing a course completion certification process; (4) establishing weekly

conference calls with over 180 RRA ’98 Coordinators and Education Branch Chiefs;

and (5) posting information on our Corporate Education Web Site and links to the

National Resource Center.

We are now in the midst of RRA ’98 Phase II training. Our overarching goal is

to provide formal training with clear learning objectives, testing and evaluation. We

have developed video courses on: Collection Due Process, Installment Agreements,

Offers in Compromise, Seizures, Relief from Joint and Several Liability, Third Party

Contact and Interest Netting.

The goals for RRA Phase III Technical Training for FY 2000 are to: (1) embed

specific provisions of RRA ’98 and the newly revised Internal Revenue Manual into

IRS day-to-day operations; (2) supplement Phase I and Phase II training as needed;

(3) deliver Phase II of Customer Service Training; and (4) continue to evaluate,

monitor and update training as necessary.

Another one of our critical training needs is Section 1203 (Termination of Employment for Misconduct) for which all 100,000 IRS employees must be trained. The initial mandatory training that all employees received was certainly an important first

step, but we found that it raised concerns among employees without answering their

specific questions. In March, all employees received with their pay stub a special

brochure on Section 1203. It includes a plain language summary of all the provisions, how potential violations are reported, employee appeal rights and other important reminders. We are also encouraging our employees to take advantage of the

IRS Labor and Employee Relations Resource Center that can help answer many of

their Section 1203 questions.

We will then build on this information with better training and guidance. In June,

we began to provide employees with detailed instruction on the procedures to be

used in handling Section 1203 cases. This instruction, including a training video,

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was based on a new Section 1203 Procedural Guide issued in May. It emphasizes

good customer service and case management practices.

Some IRS employees have been reluctant to pursue collection actions for fear they

will be charged with a Section 1203 violation. However, this is only one factor that

has reduced the number of collection actions. The additional processing time required by RRA ’98 and a lack of resources have contributed to the overall decline

in compliance activity.

We are working very hard to re-enforce the message among all IRS employees

that the Section 1203 provisions are intended to address serious and willful incidents of misconduct. Simple mistakes in the course of doing your job in good faith

are not Section 1203 violations.

At this point, I would like to address the implementation of three specific RRA

’98 taxpayer rights that I believe illustrate the challenges we faced, the lessons we

learned and how we are better managing the implementation process: innocent

spouse, third party notices, due process and offers in compromise.

Innocent Spouse

In January 1999, the IRS issued new versions of its form and publication for innocent spouse relief, each revised to incorporate the changes made by RRA ’98. This

is the latest of several steps we have taken in our ongoing effort to help innocent

spouses. We hope that our materials will effectively explain the new law to taxpayers and assist them in taking full advantage of their rights. We also appreciate

the comments we received last fall on the draft form and welcome suggestions on

how we might further improve these items. In addition, the IRS plans to incorporate

additional feedback from taxpayers and practitioners—as well as our own experience in processing these requests—so we can provide even better products.

Nevertheless, there have been problems associated with processing the innocent

spouse claims. Foremost are the number of claims. From April 1998 until the passage of RRA ’98, there were 3,000 innocent spouse claims; since passage of RRA ’98,

there have been approximately 27,000 claims. Claims are continuing to rise at a

rate of 4,000 per month. Nevertheless, this growth in claims is a good sign that

America’s taxpayers are learning about the innocent spouse provision from many

sources, including our aggressive outreach program and the Taxpayer Advocates.

However, to meet this unprecedented demand, the estimated number of FTEs

needed to process these cases surged from 30 to 359, and the estimated time per

case grew from 10 hours per-case to 12 hours per-case. In spite of shifting resources,

there is still this very large backlog in these claims. We are also hamstrung by our

current technology that does not allow separating single tax liability for spouses into

multiple liabilities. We still must use manual tracking that increases costs, errors

and delays. Furthermore, to insure that we get these important claims right, we are

subjecting them to a thorough review.

We are taking steps to address not only the backlog of cases, but the process for

handling them. We recently developed a method for identifying the simpler cases

that can be examined in a correspondence/telephone contact with the taxpayer. The

complex cases will be examined through a face-to-face contact with the taxpayer.

We are also identifying two, full-time, innocent spouse issue specialists whom IRS

examiners can contact to receive guidance on innocent spouse relief as they are

working these cases. We are also identifying a part-time innocent spouse issues specialist for community property states as these states present unique innocent spouse

issues.

Beginning this month, additional training will be provided to examiners looking

at the simpler cases to ensure that taxpayers provide the specific documentation

needed to qualify for innocent spouse relief.

Third Party Notices

The third party notice was a classic example of the IRS trying to implement an

RRA ’98 improvement but not succeeding the first time. The third party notice was

intended to help taxpayers, including small business owners, by requiring that the

IRS give notice to taxpayers whenever we might be contacting a third party, such

as a bank, about that taxpayer’s situation.

I want to stress that in the vast majority of cases, it is the IRS’ practice to get

information directly from the taxpayer. In only a small percentage of cases is it necessary to get information from third parties.

In implementing this provision, the new notice was sent to many more taxpayers

than needed. In addition, it was poorly written, causing undue concern to many taxpayers. Senate Small Business Committee Chairman Christopher Bond, as well as

several practitioner groups, called this mistake to our attention. With his assistance,

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we moved as quickly as possible to fix the problem, including soliciting input from

practitioners and other interested parties.

We have now issued internal instructions so that in audit cases, the notice will

only be provided when there is a possible need to contact third parties. We are continuing to work on improving the content and distribution of the notice to cover all

situations appropriately, and as I noted, we are accomplishing this with the active

involvement of our various stakeholder groups. When we finish this process, we will

have a clearer, better written notice and process for distributing this notice.

Mr. Chairman, obviously, we would have preferred to have gotten the third party

notice right the first time, but we didn’t. However, we recognized our mistake and

took actions to fix it. More importantly, we learned some important lessons from

this experience that can be used beyond the third party notice. Foremost, we must

always apply one of our modernization guiding principles when we implement these

important RRA provisions, or anything affecting taxpayers, namely: ‘‘Understand

the customer’s point of view and use this understanding to prevent and solve problems and provide quality service.’’ That means that we get Congress, stakeholder

groups and taxpayers involved earlier in the process to make sure that we are meeting their needs and expectations.

Due Process in Collection

In the area of due process, taxpayers now have the right to request a hearing before an impartial appeals officer after a notice of lien has been filed or a notice of

intent to levy has been sent. In addition, the IRS must provide the taxpayer with

a written notification of this appeals right. If the taxpayer requests a hearing during

this period, the proposed levy may not take place until after the appeals officer

makes a finding.

The taxpayer also has 30 days to challenge the appeals finding in U.S. Tax Court

or U.S. District Court, during which the IRS may not levy. During the appeals process the taxpayer can also request the IRS to consider establishing collection alternatives, such as an installment agreement, to pay off the tax bill. Under the new

law, the IRS must consider all other payment possibilities before seizing the assets

of a business.

The significant changes to the notice of levy process have not been without effect.

First, is the number of levies. From February to April 1998, there were 586,685 levies. For the same period in 1999, there were 16,490. Most of this drop in levies can

be attributed to the process time. Prior to the changes to the notice of levy process

made by RRA ’98, the turnaround time was 156 days. Following last year’s changes,

the turnaround time is estimated to be anywhere from 156–411 days.

As I discuss in greater detail in the ‘‘Resource’’ section of the testimony, in the

exam and collection compliance functions, the combination of reduced total staff and

mandatory allocation of staff to implement new RRA provisions will also significantly reduce available staff for audits and collections.

MODERNIZATION AND RESTRUCTURING

Mr. Chairman, as I mentioned at the beginning of my testimony, the Restructuring Act is not only specific taxpayer rights. It also created an expectation that

all taxpayers would receive far better service while ensuring that the law is applied

fairly and that the highest level of compliance is achieved. In addition, RRA ’98

mandates an entire reorganization of the IRS from its present geographic structure

to one based on serving distinct groups of taxpayers with similar needs. The Act

includes sweeping directives on electronic filing, improved customer service and balanced measures of performance, to name some of the more prominent. The challenge

is whether we can pull together all the pieces and make the entire change program

work.

As required by RRA ’98, we have restated our mission to clarify the purpose of

the agency. It is: ‘‘Provide America’s taxpayers top quality service by helping them

understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.’’ To make this mission a reality we have reformulated

our strategic goals—the standards by which we will measure our own performance

in achieving our mission.

As shown on the chart entitled ‘‘IRS Mission and Goals,’’ we have three strategic

goals. We will not achieve our mission unless we achieve all three of these strategic

goals. The first two are derived directly from our mission statement that describes

the two ways we serve taxpayers. Individually, we must provide each taxpayer the

service he or she expects and protect the rights he or she deserves. Collectively, we

must serve all taxpayers by administering the law fairly, ensuring that those who

do not comply are not allowed to unfairly burden those who do. Finally, our third

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strategic goal is to conduct our mission with the fewest possible resources, which

we will achieve by providing a high-quality, productive work environment.

One of the most important steps we have taken is to clarify and communicate our

mission and goals through the new system of balanced performance measurements

we are beginning to implement this year. In this fiscal year, we are conducting extensive training for every executive and nearly every manager on this balanced

measurement system. We are also revising our job descriptions and appraisal system for most employees, aligning it with the mission and goals.

Business Practices

As important as are the changes in mission, goals and measurements, we will not

succeed in achieving all three strategic goals without revamping the way we

actually go about doing business. We must take advantage of modern and wellestablished business practices and strategies.

Within the IRS itself and in other private and public sector organizations, there

are innumerable successful examples of how we can improve our way of doing business. These improvements hold out the prospect of advancing all three of our strategic goals to a great degree. However, these kinds of advancements often depend

on making investments in organization, training and technology.

The chart entitled ‘‘Improved Business Practices Advance All Three Strategic

Goals’’ lists some of the areas for improvement in IRS business practices. This is

not a complete list; yet, each one of these broad areas implies hundreds or even

thousands of more specific changes in the way business is done at the IRS. We have

a process in place to set priorities for improvements to be made over the next 12–

18 months and have settled on 161 near-term actions. These are but a small beginning on what we can do over the longer term.

Reorganization

As directed by RRA ’98, the modernized IRS will be organized around the needs

of specific groups of taxpayers. Four operating divisions will be responsible for serving specific groups of taxpayers. They are: Wage and Income, Large and Mid-sized

Business, Small Business/Self Employed and Tax Exempt and Government Entities.

This structure is similar to one widely used in the private sector. Four functional

organizations will be responsible for specific issues and cases. Two support organizations will be responsible for providing common services across the entire agency. Finally, a much smaller National Office will provide high-level strategy and policy setting.

Working with our management consultants, the IRS is undertaking a phased-in

approach to designing and implementing this new organization structure. Implementation will proceed on a separate track based on the size, complexity and level

of change required of the specific organization. For example, the Information Systems and Taxpayer Advocate organizations began implementation in April, while

the four primary operating divisions will be established over the next few years. Implementation will include physically establishing new offices, transitioning employees and managers to the new organization and reassigning workflow. The entire implementation will take approximately 2–3 years.

The IRS recently announced that we are recruiting for the newly-created, top executive positions of Division Commissioner, Wage and Investment Operating Division, and Division Commissioner, Small Business and Self-Employed Operating

Division. These are four-year appointments with special pay rates, as outlined in

RRA ’98. The head of the Tax Exempt and Government Entities Division was selected earlier this year and our choice for Division Commissioner for the Large and

Mid-size Business was announced last week.

Electronic Tax Administration

The IRS made significant progress implementing the Restructuring Act’s Title II

provisions relating to Electronic Filing. The following are some of our accomplishments to date.

As required by RRA ’98, the IRS issued its first-ever Strategic Plan for Electronic

Tax Administration (ETA), entitled a Strategy for Growth. It was released for public

comment on December 3, 1998. Based on the comments received and current developments, the IRS will be issuing an updated version of the Strategic Plan in December 1999. A Strategy for Growth is designed to eliminate barriers, provide incentives

and use competitive market forces to make significant progress toward the congressionally-mandated goal of 80 percent of all tax and information returns being filed

electronically by 2007.

As also required by RRA ’98, the IRS established the Electronic Tax Administration Advisory Committee (ETAAC) in September 1998 to provide an organized pubVerDate 20-JUL-2000 12:30 Jan 05, 2001 Jkt 060010 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 K:\HEARINGS\67584.TXT WAYS1 PsN: WAYS1
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lic forum for the discussion of ETA issues in support of paperless filing. On June

30, 1999, the ETAAC issued its first annual report to Congress on the status of

Electronic Tax Administration. In the report, the ETAAC compliments the IRS for

making a good start in setting out a program to achieve the electronic filing goals

established by Congress. However, it also notes that the IRS faces a number of strategic challenges and opportunities while seeking to achieve these goals.

During the 1999 filing season, the IRS also took advantage of the provision contained in RRA ’98 which authorizes the use of mass communications to promote the

benefits of and to encourage the use of ETA programs. The IRS’ use of paid advertising in the print media, radio and television contributed to another successful filing season during which over 29 million taxpayers filed their tax returns electronically.

The IRS is on target to implement successfully the provision that extends the date

that information returns are due to the IRS if they are filed electronically. Beginning next year, electronically filed information returns will be due to the IRS by

March 31 instead of by February 28.

In conjunction with the Department of Treasury, the IRS plans to issue an interim report to Congress in the near future regarding the feasibility of extending

the due date for providing information returns to taxpayers from January 31 to February 15. Although an across-the-board extension of the due date would not be advisable because of the millions of taxpayers who file early to obtain a refund, the

findings also indicate that there must be a balance between the needs of early filers

of tax returns and the need for correct and complete information returns that avoid

confusing taxpayers and causing subsequent amendments to income tax returns.

As also envisioned by RRA ’98, the IRS conducted two pilots during the 1999 filing season which provided a paperless filing experience for over one million taxpayers. These pilots involved the use of Personal Identification Number (PIN) as the

taxpayer’s signature, eliminating the need to file the paper jurat.

Over 650 thousand taxpayers participated in the On-Line Signature Pilot where

the IRS distributed e-file Customer Numbers to taxpayers who prepared their own

returns using tax preparation software to file from their home computers.

Another 490 thousand taxpayers participated in the Practitioner Signature Pilot

where taxpayers choose a PIN when filing through 8,100 participating practitioners.

Technology

Updating our business practices to better serve taxpayers requires almost a complete replacement of IRS’ information technology systems. They are built on a 30-

year old fundamentally deficient foundation that cannot provide accurate up-to-date

information about taxpayer accounts. GAO has repeatedly reported that IRS cannot

provide reliable taxpayer account and financial information to manage the Agency.

Implementing new technology based on revamped business practices is critical to

properly supporting our modernization concept and fully complying with the mandates of RRA ’98. If properly funded, we expect our technology modernization initiative to realize the following benefits. In the short term, there will be: improved access to IRS customer service representatives; improved service to internal and other

Federal customers; the start-up of electronic communication with taxpayers; and

timely, accurate information for personnel systems.

Mid-term benefits include: improved financial management; expanded electronic

filing and payment options; and expanded electronic interaction with taxpayers. And

the long-term benefits are: more accurate and timely information for increased customer service; more customer friendly collection capabilities; faster refund processing; secure and auditable access to all taxpayer account information through a

single terminal; and far greater productivity for all IRS employees.

On December 9, 1998, the IRS awarded a Prime Systems Integration Services

Contract (PRIME) to Computer Sciences Corporation (CSC) and their partners to

help begin the long process of modernizing IRS’ core business and technology systems.

Earlier this month, we received from the Appropriations Committees authorization for the release of funds from the Information Technology Investment Account.

This is a first installment toward developing a new computer set of systems and a

significant financial investment in our overall modernization plan.

This $35 million in funding was released from the overall Investment Account in

which $506 million was set aside in 1998 and 1999 for use in modernization. To receive the funding, IRS met stringent requirements, including demonstrating improvements in our management of the program and a strong partnership between

the business and IT organizations.

The IRS received approval from the Treasury Department, the Office of Management and Budget, and a favorable review from the General Accounting Office. GAO

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praised the IRS’ plan, calling it an appropriate first step toward a successful systems modernization. House Appropriations Subcommittee on Treasury, Postal Service and General Government Chairman Jim Kolbe wrote: ‘‘The incremental approach that you have proposed for proceeding with the modernization should help

avoid many of the problems associated with past attempts at modernizing the Internal Revenue Service’s information systems.’’

With this money, we can continue to roll out improvements for the 2001 filing season. Some of these include enhancing our customer service call-management capabilities, improving electronic tax administration, and upgrading systems security.

The funding will also allow us to complete a business systems plan which will define the major projects to be undertaken over the next two to five years, including

transitioning taxpayer accounts from a tape-based Master File to a more modern

database. We will make a full report of the five-year plan available in October.

In addition to technology modernization work performed in partnership with the

PRIME partners, IRS is undertaking significant work to build bridges between today’s systems and modernized systems. This requires sustaining the old while planning and implementing the new. The transition also requires a large training effort.

IRS will be training its IT professionals to ensure they can operate successfully in

the new environment as well as training the entire workforce on new end-user software to be implemented over the next few years.

This year, IRS successfully delivered several technology improvements even as we

are continuing to finalize and test our Y2K work. The new Integrated Submission

and Remittance Processing System (ISRP) combines and improves the processing of

return submissions and payments. And the consolidation of mainframe computers

into central computing sites upgraded the IRS’ disaster recovery capabilities. These

efforts will need continued support over the next few years. In addition, IRS will

continue the Service’s commitment to ensure adequate testing of its tax systems.

One of the most significant challenges over the next few years will be system realignments and technology changes needed to implement the new IRS organization.

These requirements include applications changes to align taxpayer segments and

employees with the new operating divisions and modifications in payroll, financial

management, personnel, accounting, reporting relationships, and workload management. Finally, determining changes and reworking infrastructure based on capacity,

performance, and telecommunications assessments for the new organization structure are a major part of our modernization effort.

RESOURCES

At many of my hearings so far this year, I have been asked what resources are

needed to accomplish the mandate we have been given. I do not believe I am different from most other heads of organizations in the philosophy that we can do more

if we are given more resources. And given the enormous job we have at the IRS,

more resources can most definitely be put to good use to benefit taxpayers. At this

hearing, however, I think it would be most useful to step back from the details of

our current budget request—which I consider to be a bare minimum—and consider

the relationship between the IRS and our mission and goals and resources over the

next few years.

Looking at the chart titled ‘‘IRS Shrinks as a Fraction of the Economy,’’ we can

see that the IRS has been shrinking in size relative to the economy, and this trend

will continue through FY 2000. Over this period, the economy grew in real terms

by 20.1 percent, and the number of full-time equivalent employees shrank by 13.7

percent. Thus, in relative terms the IRS shrunk by 28.7 percent. It is also important

to note that about 70 percent of IRS employees deal directly with taxpayers, either

in providing information or assistance or in working on specific cases.

While some of the shrinkage in staff has been offset by real productivity improvements, for the most part this shrinkage has simply resulted in less activity, especially in the most expensive, case-oriented activities such as examinations, criminal

investigations and collections. For example, the number of individual returns with

over $100,000 income increased by 56 percent over the last 5 years, while the number of such returns examined decreased by 21 percent. The recent press publicity

about the decline in examination coverage simply reflects this basic arithmetic. Furthermore, as it has become evident that service to taxpayers is inadequate and a

backlog of problem cases has built up, and with the passage of the many new taxpayer rights provisions of RRA ’98, even fewer resources are available for initiating

new cases.

Clearly, doing business the same way while the economy grows and resources decline will eventually undermine the whole tax system of the U.S. Fortunately, as

I have discussed briefly here today and in more detail in the document submitted

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for the record, I believe there is a better way. One part of it is to take advantage

of improved management and business practices and new technology to improve the

way we accomplish our mission and goals.

This approach also critically depends, however, on obtaining assured investment

funds every year for improvement of organization, training, business practices, and

technology. I want to stress again that in the past five years, the IRS has shrunk

28.7 percent relative to the economy. IRS staff has declined by 11,000 FTEs while

the economy and the tax code have been growing in size and complexity.

In addition to the continuing decline in relation to the economy, the IRS is responding to RRA ’98 with a program of both short-term and long-term changes

aimed at fulfilling its mandates efficiently. As I previously discussed, in the short

term we are implementing taxpayer rights provisions, such as innocent spouse, due

process in collections and offers in compromise. We are also implementing service

improvements, such as electronic filing, longer hours of phone service and walk-in

service at times and locations convenient to taxpayers. In the long-term, we must

modernize our organization and management.

The short-term changes have required us to divert resources, training and contract support from other areas (specifically compliance programs). In particular, the

taxpayer rights provisions (e.g., innocent spouse) call for 2,955 person years of staff

time for procedural requirements to process existing cases.

The long-term changes require investments in contract support, training, technology and related costs (e.g., relocation, buyouts and facilities renovation), but will

also result in improved long-term efficiency and effectiveness.

In the exam and collection compliance functions, the combination of reduced total

staff and mandatory allocation of staff to implement new RRA ’98 provisions will

reduce available staff for audits and collections by 19 percent compared to FY 1997.

Combined with the continued growth of the economy, the effect will be a continued

decline in audit coverage and collection action.

While enforcement levels are declining, service levels are also still below acceptable levels. Phone service is available for longer hours, but the chances of a taxpayer actually getting through were only 54 percent in 1999, lower than in 1998,

and may not improve in 2000. About 80 percent of these ‘‘customer service’’ calls

are taxpayers calling because they have received a notice from the IRS or because

there may be an error in their account with the IRS. Mr. Chairman, answering

these calls is not optional.

The IRS will need continued support for its modernization program in order to

succeed. In particular, it will need support for its technology modernization program, begun earlier this year, and, resource requirements resulting from the passage of RRA ’98.

CONCLUSION

Mr. Chairman, I believe that the IRS is fundamentally changing in the direction

mandated by RRA ’98. And it is changing in virtually every aspect—in mission,

goals and principles, practices and procedures, management and organization, training, performance measures and technology. Through these changes, we can succeed

in producing an IRS that better serves America’s taxpayers—individually and collectively—but we must realize that there are no quick fixes, magic bullets or low risk

plans. We must realize too that RRA ’98 comes with a price tag.

Mr. Chairman, we are at a crossroads. Without adequate funding, the entire reform and restructuring program demanded by Congress and the public could stall,

and in the worst case scenario, fail.

What we need most of all, given the current situation at the IRS, is the sustained

support of Congress and the public while we make these fundamental changes and

while we administer a huge and complex tax system. And I have been very pleased

at the support we have received to date from all quarters.

However, we will also need your understanding of the enormity of our challenge.

We need your understanding of the time it will take to carry out all of RRA ’98 and

the resources it will demand. One forecast I made at my confirmation hearing before

this committee was that it would take the better part of a decade to reach our goals

for the IRS. Having now been in office for l7 months, this is one forecast that I

stand by. But I believe that the destination is worth the long and difficult journey

we have begun.

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Mr. H

I’d like to ask a question or two, and then I’ll pass it off to Mr.

OUGHTON. All right, thank you very much, Commissioner.

f Coyne and then go down the row.

Let’s get right into this budget issue, because this is obviously

very important to you and very important to us. There were three

areas I understand that you felt would be impacted here. One is

the law enforcement. Second would be the processing and third

really is the Y2K computer repairs, or the Year 2000 computer repairs. Do you want to break that down a little bit?

28

Mr. ROSSOTTI. Basically what you have is a budget which no

matter how many labels you put on it has mainly two components

that drive most of the budget. One is the staffing that we need to

do, process cases and process returns. The other is the supporting

technology that we need to help do both of those.

So when we cut the budget, or have less budget, it has to come

out of one of those two places. When we cut the staff, the only

thing that we can do is reduce the number of cases. In the shortterm, the only thing we can do is reduce the number of cases that

we follow. That is why the statistics that you cited and Mr. Coyne

cited are going down so rapidly, because we’ve had a decline in resources. Before RRA, we’ve had an increased demand in processing

time as a result of the new rights in the cases. The net of those

is that the enforcement or compliance activity goes down.

The other part of it is the technology, there is really very minimal investment money, in fact, virtually none in the 2000 budget

request as it is. So to the extent that it is cut, what happens is that

basically, we would have to cut the few things that are deferrable,

such as purchase of equipment, which leaves us then with obsolete

equipment, which then costs more money to operate in the long

run.

Then finally, with respect to some of the change initiatives that

we have underway, I mean, we are in a situation where we have

a 100,000 person organization that is undergoing a massive

change, not only organizational, but cultural. It’s very, very risky

in my view, to leave that in a state of suspended animation.

Actually, our employees and our managers are asking me now,

not what they said a year ago, do we need the change, but they’re

saying, let’s get this done, let’s get this change done so that we can

really operate according to the new way. To operate in a state of

suspended animation is a very risky and difficult thing to do. I

think, Mr. Houghton, you know that from your work with some

large organizations.

The impact of cutting, even compared to the minimal budget request we had I believe is going to increase risk as well as reduce

in very tangible ways current operational activities.

Mr. HOUGHTON. So you don’t believe this is chump change, as indicated in the article?

Mr. ROSSOTTI. Mr. Chairman, I do not believe it is chump

change. We have to remember that we started with the request as

a result of a tight budget situation, which was virtually level to

begin with. It was not a budget request that was in any sense

inflated. In fact, I would say to put it in the most optimistic way,

the bare minimum that you would need to continue to make

progress if we got every dollar of it.

Mr. HOUGHTON. I wonder whether Mr. Portman at some point in

his questioning could refer to the plan, I think it was, of set a level

funding over 3 years, which was originally accepted. But anyway,

that’s enough for my questions, and I’ll turn it over to Mr. Coyne.

Mr. COYNE. Thank you, Mr. Chairman.

Commissioner, how many taxpayers have claimed since enactment of the IRS Reform bill that IRS employees are abusive in a

manner prohibited by section 1203 and what is the basis for most

of the complaints?

29

Mr. ROSSOTTI. Well, let me see if I’ve got the statistics here. The

number of complaints that have been accepted by the IG under the

section related to harassment is, I believe, somewhere, I will have

to get you the precise number, but it’s somewhere in the vicinity

of about 60 that have been accepted for investigation. The precise

number, I can’t quite find it here, but it’s in that vicinity.

This does not mean that they were found to be substantive.

That’s just the number that got through the preliminary screening

to be accepted. I think that the important thing I’ve tried to communicate to employees, that is not, compared to some of the beliefs

out there that hundreds of thousands of complaints are coming in,

willy nilly, it is really not the case. There are complaints, but they

are in relatively limited numbers.

And of course, that’s only the first step. Then they have to be investigated, evaluated, and you know, many of those will be found

not to be substantiated.

[The following was subsequently received.]

August 18, 1999

Memorandum for all IRS Employees

From: Charles O. Rossotti, Commissioner of Internal Revenue

Subject: Report on Actions Concerning Misconduct Allegations and Disciplinary

Actions

Bob Wenzel and I are committed to open communications on all matters affecting

IRS employees. Few matters are of greater interest than the actions taken by the

agency to investigate and resolve allegations of misconduct. Surveys over the years

have indicated great concern about how such matters were addressed in the Service,

including concerns over lack of appropriate action, disparate treatment among various groups and levels, and, most recently, how Section 1203 of the Restructuring

and Reform Act of 1998 would be administered.

One of the factors that fuels concern is lack of accurate information about actions

actually taken in these matters. Therefore, in accordance with our policy of open

communications, with this memo we are beginning some important steps to share

with all employees on a continuing basis information about how misconduct allegations at all levels have been resolved. You may recall that this was one of the key

recommendations of the Bowsher report that I commissioned in 1998. Earlier this

year, we established the Commissioner’s Complaint and Analysis Group, headed by

Steve Whitlock, a former DoD executive with experience in these matters. An important part of the responsibility of this unit is to prepare regular reports to employees

on how allegations are resolved.

With this memo, we are taking three important steps:

1. We are announcing a plan, in agreement with the National Treasury Employees Union (NTEU), to report periodically on every disciplinary action taken in the

IRS.

2. We are including a review of the results of the first year of activity under Section 1203.

3. We are releasing a detailed review of all of the actions taken over the past two

years to investigate and resolve allegations related to misuse of enforcement statistics and inappropriate seizures. This includes a summary of all disciplinary actions

taken.

Summary of Plan for Release of Disciplinary Actions

We have entered into an agreement with the NTEU regarding the release of information on disciplinary actions. Under this agreement, we will provide regular periodic summaries of disciplinary actions taken. The summaries will not identify the

particular employees affected, but will include enough information to understand

the nature of the offenses, the actions taken and the level and general positions of

the employees. The first report will be issued this fall, and will address actions involving IRS executives and GS–15s. Future reports will cover all IRS employees.

Results of Investigation into 1203 Allegations

The second issue relates to Section 1203 of the Restructuring and Reform Act of

1998. I know that Section 1203 has been a source of concern for many of you. The

30

processes we have established are designed to ensure protection of the rights of taxpayers, taxpayer representatives, and IRS employees—including employees who are

the subject of Section 1203 allegations. We will provide updated information in the

future so that you can see how those processes are working.

The key point is that we are committed to investigating and resolving every case

based on the facts of the case and in accordance with the intent of the law, which,

as I have said repeatedly, is aimed at serious and willful instances of misconduct.

The missing element in our communications on this subject to date has been information about our experience in applying Section 1203 to the allegations received.

We now have preliminary data to share with you, and will provide more on a regular basis.

As of July 15, 1999, we have received 449 allegations that, if substantiated, would

be violations of Section 1203. When a Section 1203 allegation is made, we must determine the relevant facts and then make decisions about what those facts mean.

We must then decide whether those facts indicate a violation of Section 1203 or

some other type of misconduct. The inquiry and analysis is essential to our commitment to ensure fair and equitable treatment for taxpayers, for their representatives,

and for IRS employees—including those employees who are the subjects of a Section

1203 allegation. This takes time, and so far we have completed the analysis of 214

of the 449 allegations.

The results of the analysis and inquiry into the 214 completed so far indicate that

15 percent are probable Section 1203 violations (probable pending final Deciding Official or Review Board determination), 75 percent were not substantiated, and 10

percent indicate other types of misconduct that do not meet Section 1203 criteria,

but are serious nonetheless. Following is a summary of the analysis, and Attachment I to this memo contains a breakdown of the types of allegations received. Attachment II flowcharts the process from allegation and inquiry to disposition.

Summary of Analysis of Section 1203 Allegations

In percent

Probable 1203 Violations ....................................................................... 33 15%

Probable Other Misconduct ................................................................... 20 10

Allegations Not Substantiated .............................................................. 161 75

Total ................................................................................................. 214 100

Of the 33 allegations that involve Section 1203 violations, the Service has completed action on 4 cases, all of which demonstrated willful non-compliance with tax

laws. Three of the four employees claimed that the tax laws do not apply to them,

and one had a series of disciplinary actions for previous non-compliance. All four

employees were recommended for removal; the Review Board, which evaluates the

potential for lesser penalties in these cases, concurred with the recommendation;

and the employees were removed. The Service is continuing to work the remaining

29 cases using the process illustrated in Attachment II.

When I hear employees’ concerns about Section 1203 conduct provisions, I hear

most about Section 1203 (b)(6) which involves violations of the Internal Revenue

Code, Treasury Regulations, or IRS Policy with the intent to harass or retaliate. It

is also the most frequently cited provision of the cases in inventory, accounting for

over 60 percent or 269 of the total allegations. Inquiries have been completed on

141 of these 1203(b)(6) allegations with one substantiated as a probable violation,

14 as other misconduct, and 126 not substantiated.

While we are just beginning to gather enough data to start identifying trends and

drawing conclusions, I think there are two important observations to make at this

stage. First, we are taking a very thoughtful and thorough approach to making the

best determination regarding willfulness and intent to be sure that mere mistake

or inadvertent action does not trigger the mandatory removal penalty. Second, while

the majority of allegations made have been determined not to be potential Section

1203 violations, there have been some substantiated violations, and these should not

be tolerated in the IRS.

Finally, I will continue to share information with you about these types of conduct

cases and their disposition as we gain more experience in the process. As we learn

more, we can identify problem areas on which to concentrate our education efforts

and provide information to you that can help you do your jobs with confidence.

31

32

RESULTS OF INVESTIGATIONS CONCERNING MISUSE OF ENFORCEMENT STATISTICS AND

INAPPROPRIATE SEIZURES

Chronology of Events

The Service has taken a number of actions regarding misuse of enforcement statistics, identified in the September 1997 hearings before the Senate Finance Committee. The Special Review Panel noted that ‘‘there is a tension between the requirement of the IRS to perform effectively in collecting the largest amount of lawful taxes due at the least cost to the taxpayer and the equally rational view that,

in a free society, fairness is questioned when the performance of tax collection workers is driven by quotas or goals in their work plans.’’ I am confident that effective

implementation of our balanced measures will ensure that we do not again allow

our priorities to be skewed in favor of the collection at the expense of fairness. While

33

a few individual cases remain to be resolved, I am pleased to report that Servicewide efforts to review past practices in this area have concluded, and we can now

focus on the future.

In September 1997, the Senate Finance Committee held three days of oversight

hearings on the Internal Revenue Service (IRS). During these hearings, several taxpayers testified that they felt the IRS used unreasonable enforcement tactics. Several current IRS employees testified that certain IRS practices violated restrictions

on the use of enforcement statistics. These practices, the employees believed, might

have resulted in inappropriate actions against taxpayers.

Following the hearings, the IRS Inspection Service conducted internal audits overseen by the Office of the Inspector General, Department of the Treasury. These reports documented considerable historical pressure on the IRS to improve productivity, resulting in a strong emphasis on productivity results throughout the organization. Congressional scrutiny, General Accounting Office reports, the Government

Performance and Results Act of 1993, and various Administration initiatives required the IRS to generate more revenue with fewer resources. In response, the IRS

measured and reported progress against dollar productivity goals. The reports found

that the IRS environment emphasized revenue production without always providing

a corresponding emphasis on quality or the fair treatment of taxpayers.

In January 1998, IRS Commissioner Charles Rossotti established a Special Review Panel comprised of executives from outside the IRS to objectively and independently review and assess the evidence developed by IRS Inspection Service concerning allegations of misuse of enforcement statistics, and to recommend, if appropriate, disciplinary or adverse actions. The Panel members were Douglas Browning

(Assistant Commissioner for International Affairs, U.S. Customs Service), Stephen

Colgate (Assistant Attorney General for Administration, Department of Justice) and

Richard Hankinson (Assistant Director, Office of Inspection, Bureau of Alcohol, Tobacco and Firearms).

Over the course of its 6-month thorough investigation, this Panel found that, in

IRS’s efforts to achieve greater productivity, IRS policy guidance was modified regarding the use of enforcement statistics and the importance of safeguards was

minimized or lost.

In addition, Commissioner Rossotti sponsored an independent review of the IRS

Inspection Service, led by former Comptroller General Charles A. Bowsher. This review reported that management’s lack of attention to early warnings about the inappropriate use of enforcement statistics illustrated the need for an effective system

to track and manage the handling of employee and taxpayer complaints within IRS

from time of receipt to final disposition.

Following up on the Special Review Panel issues, Commissioner Rossotti asked

John Layton, former Inspector General for the Department of Energy and the Department of Treasury, to head the Disciplinary Action Review Project (DARP). Mr.

Layton reviewed the investigative reports concerning statistics and seizures and,

using the same criteria as the Special Review Panel, recommended any necessary

disciplinary action. Mr. Layton also considered the findings of the audit reports, and

other reviews conducted by Chief Operations Officer, Chief Counsel and regional

staffs.

The disciplinary actions resulting from these four very thorough reviews underscore the IRS’s commitment to thoroughly investigating every allegation of misconduct or failure to observe taxpayer rights, and to take action based on the specific facts of each case.

Internal Audit Reports: Key Findings

The IRS Chief Inspector’s Internal Audit function produced two reports immediately after the Senate Finance Committee September hearings: one concerning the

use of statistics in the Collection field function and the other on the Arkansas-Oklahoma District. From those initial audits, IRS requested two further audits on the

use of statistics in the Examination Division and on the use of seizure authority in

the Collection field function. The audit of the use of seizure authority in the Collection field function resulted in a more focused review of ‘‘special projects’’ in the New

Jersey District Collection Division. The table below describes each report’s key findings.

34

Internal Audit Report Date Key Findings

Review of the Use of Statistics and

the Protection of Taxpayer Rights in

the Arkansas-Oklahoma District Collection Field Function

This report evaluated managment’s

use of enforcement statistics in Arkansas-Oklahoma, including whether

the alleged impropriety led to the

abuse of taxpayers.

Dec 1997 The audit concluded that this District office had an unbalanced focus on measuring performance by productivity. Statistical goals and expectations had become

the primary means to measure productivity. The audit also concluded that although legal requirements were met in all

of the seizures examined, some cases

might not have followed all of the IRS

procedures.

Use of Enforcement Statistics in the

Collection Field Function

This report evaluated the use of statistics in the district Collection field

function at national and regional levels and twelve districts.

January

1998

The report concluded that the IRS had

created an organizational environment

driven by statistical accomplishments that

placed taxpayer rights and a fair employee evaluation system at risk. Four

issues created this environment:

• Statistical ranking of Districts encouraged an emphasis on enforcement results

without a corresponding emphasis on case

quality.

• Guidance focused on productivity, did

not have appropriate coordination or oversight, and encouraged sharing group

goals.

• The environment inappropriately emphasized statistical goals and use of enforcement tools.

• Taxpayer Bill of Tights (TBOR) certification was perfunctory.

Use of Seizure Authority in the Collection Field FunctionJuly 1998 The IRS did not properly exercise its seizure authority in 130 of 467 cases reviewed; in 116 other cases, established

procedures may not have been followed.

These seizures resulted in part from a desire to enhance statistical measures without a corresponding focus on the appropriateness of the actions taken and on adherence to policy and procedures.

Examiniation Division’s Use of Performance Measures and Statistics

This report evaluated the use of statistics in Examination at national

and regional levels and twelve districts.

July 1998 This report found inappropriate use of Examination statistics in all twelve districts

reviewed, due in part to unclear and inconsistent guidance given to Examination

personnel. In addition, Examination Division’s corporate measures focused primarily on enforcement statistics, which

fostered improper use of enforcement statistics in the regions and districts. There

were no corporate measures that addressed case quality, treatment of taxpayers, and the proper amount of tax assessed. This led to an environment at the

group manager and employee levels that

put emphasis on revenue and other statistical goals.

35

Internal Audit Report Date Key Findings

Review of Special Project in the New

Jersey District

March

1999

This audit found that special projects

were used to ensure the Collection Division of the New Jersey District met statistical goals. Those projects resulted in mistreatment of taxpayers. For example, as a

result of instructions to initiate levy actions without ensuring notices had been

issued or performing initial analysis, some

levies were issued on taxpayers who were

deceased, had financial or medical hardships, or were not liable for the tax.

Note: The functions of the Office of Chief Inspector were transferred to the new Treasury Inspector General

for Tax Administration (TIGTA) in January 1999. Prior to that date, Internal Audit examined, evaluated and

reported on the operation of IRS management policies and procedures. It referred to Internal Security any possible violations of law or IRS rules of conduct by individual IRS employees. In its Reports of Investigation

(ROIs) and Special Inquiries, Internal Security determined whether any such violations did indeed occur.

Internal Audit Reports: Actions Taken

Beginning with the release of the very first Internal Audit report, the IRS has

announced a series of actions that it had already taken or planned to address the

various issues raised in the Senate hearings and the Inspection reports. Some of

these corrective actions were subsequently legislated in the IRS Restructuring and

Reform Act of 1998. Among these actions were:

• Stopping the practice of ranking regional and district offices and evaluating employees on enforcement-related statistics, for both the Collection and Examination

functions.

• Suspending distribution of goals relating to revenue production to field offices.

• Requiring higher management approval of proposed seizures of property.

• Updating and clarifying seizure procedures, as required by the IRS Restructuring and Reform Act of 1998, to incorporate consideration of reasonable alternative collection methods before deciding to seize assets.

• Forming an executive task force to develop balanced performance measures that

will promote quality, customer service, taxpayer rights and productivity.

• Implementing new quarterly certification requirements that affirm Collection

Divisions are following the restrictions on use of statistics.

• Establishing a task force (part of the Disciplinary Action Review Project) to institute improved ways of evaluating and acting on complaints made by or against

IRS employees. As has already been noted, John Layton, former Inspector General

for the Department of Energy and the Department of Treasury, was appointed to

head this effort.

In addition, Internal Revenue Commissioner Rossotti announced the following

• A complete management evaluation of all open and recently closed seizures for

compliance with legal requirements and IRS procedures to be completed in all 33

District offices by the end of September 1998.

• A directive to all employees underscoring the importance of an the need to comply with Taxpayer Bill of Rights, and the severe consequences of failing to do so.

• The creation of an independent panel from outside the IRS to objectively determine disciplinary actions to be taken in cases arising from the Chief Inspector’s investigation.

Special Review Panel: Key Findings

On January 13, 1998, Commissioner Rossotti announced the creation of a panel

of senior officials from the other Federal agencies. The panel’s purpose was to objectively and independently determine disciplinary/adverse actions to be taken in cases

arising from the Chief Inspector’s investigation into the inappropriate use of enforcement statistics in the IRS Collection field function and possible abuses of taxpayer rights.

The Special Review Panel reviewed the Internal Audit reports as well as Reports

of Investigation and Special Inquiries resulting from the Internal Audit reports. One

Report of Investigation covered development and issuance of policy guidance in the

national office and two regions. The second Report of Investigation was specific to

the Arkansas-Oklahoma District office. The Panel’s report was delivered to the Commissioner of Internal Revenue in late August 1998.

36

While the Panel’s specific recommendations concerning disciplinary action covered

the national and regional office and one district office, the Panel’s general findings

took into account all of the information available to the Panel, comprising some

5,000 pages of information.

The Panel’s report stated that the IRS felt external pressures from the Administration, Congress, and GAO to close the revenue gap through improved productivity.

The Panel found that ‘‘there is a tension between the requirement of the IRS to perform effectively in collecting the largest amount of lawful taxes due at the least cost

to the taxpayer and the equally rational view that, in a free society, fairness is questioned when the performance of tax collection workers is driven by quotas or goals

in their work plans. This is not an easy difference to reconcile or administer; and

managing between those two principal goals is greatly complicated in an organization with over 100,000 employees in 33 district offices and ten service centers nationwide.’’ During this period, the IRS was shifting to a more productivity-focused

work environment, managed primarily by revenue statistical goals and measures,

with heavy emphasis on use of enforcement statistics.

As policy guidance was modified regarding the use of statistics, safeguards on use

of enforcement statistics to measure or set goals for front-line employees were minimized or lost. The Panel found that policy guidance documents both in the national

office and in two regions were flawed both in process and content. Proper coordination did not occur on all issues, and executives at the national and regional levels

failed to exercise due diligence in administering Collection programs and policies.

As a result, provisions in the documents allowed the sharing of enforcement statistics in a manner that led to violations of the Taxpayer Bill of Rights (TBOR) and

the IRS Policy Statement P–1–20, The Use of Enforcement Statistic. In fact, violations of P–1–20 and TBOR occurred in the Arkansas-Oklahoma District, as well as

other districts studied.

Special Review Panel: Actions Taken

As the Special Review Panel recommended, disciplinary actions were taken concerning executives and managers, primarily at the national office. The table below

summarizes those disciplinary actions. The panel did not have investigative reports

concerning seizures before it for consideration. In addition, the Panel did not consider additional investigative reports on possible misuse of enforcement statistics at

the District level.

Employees Reprimands Admonishments

Executives 6 0

Managers and Management Officials 6 2

Disciplinary Action Review Project Action on Misuse of Statistics and Levy and Seizure Cases

The DARP, as a successor to the Special Review Panel, reviewed 81 specific matters concerning possible misuse of enforcement statistics developed by the IRS Inspection Service. These matters included the use of enforcement statistics in performance appraisals and the establishment of collection goals that followed the pattern identified by the Panel. The DARP was also provided 72 cases developed by

the IRS Inspection Service concerning levies and seizures that may have violated

the Internal Revenue Code, the Internal Revenue Manual, or both. At the request

of DARP, inquiries were also made by the TIGTA into managers’ conduct related

to the approvals of the defective levies and seizures. A total of 94 levy and seizure

matters were considered by the DARP.

The DARP reviewed the results of the Inspection Service/TIGTA investigations of

levy and seizure actions and found that deficiencies in individual performance occurred at the group manager levels as well as with the revenue officers. There also

were deficiencies at the district, division, and branch levels. In most of the instances

the supervising managers, at a minimum, approved the seizures.

The authority to levy and seize taxpayers’ property is a function of the IRS Collection program and with significant impact on taxpayers. The levy and seizure cases

provided to DARP by both the former Inspection Service and TIGTA contain evidence of failures to correctly apply the Internal Revenue Code and the Internal Revenue Manual. Taxpayers were not provided with adequate notice of seizures, and

group managers were not adequately reviewing seizure documentation prior to approving. Levies were issued within a particular industry segment as part of a disVerDate 20-JUL-2000 12:30 Jan 05, 2001 Jkt 060010 PO 00000 Frm 00040 Fmt 6633 Sfmt 6602 K:\HEARINGS\67584.TXT WAYS1 PsN: WAYS1
37

trict project that focused on the expeditious levying of a large number of sources

without verification of the validity of the sources. IRS management failed to effectively control levy and seizure activities. Failures to adhere to the specific requirements of the IRM were neither adequately identified or corrected. Ambiguous provisions of the IRM were not clarified. The IRS emphasis on statistical results, as reported by the Special Review Panel, when combined with a lack of compliance with

the IRM and the IRC created an environment where taxpayer interests were not

adequately considered with conducting levies and where taxpayer interests were not

adequately considered when conducting levies and seizures.

Application of Criteria for Discipliary Action

The DARP considered the impact on the IRS and the taxpayers of the failures to

follow the Internal Revenue Code, the Internal Revenue Manual, or both. Further,

DARP considered the relationship of the nature and seriousness of the offenses to

the employee’s position, the employee’s duties, and the notoriety of the offenses. For

example, in cases, where revenue officer’s inappropriate levy and seizure actions

were expressly directed by others, or approved or allowed to happen as a result of

the negligent or careless performance or reviewers, the DARP recommended a lesser

penalty than otherwise suggested. The violation of taxpayer rights was considered

an aggravating factor. Also the DARP considered the clarity with which the employee was on notice of nay rules violated, and did not recommend disciplinary actions in cases where IRS guidance was ambiguous. Finally, some matters for which

the DARP recommended closing without action involve practices that, because of

legislation and policy changes, would be incorrect today. However, the DARP could

not say the actions were inconsistent with the guidance and expectations applicable

to collection activities when the enforcement actions occurred.

Disciplinary Action Review Panel: Actions Taken

The DARP reviewed 81 specific matters concerning possible misuse of enforcement

statistics, and recommended disciplinary actions were taken with regard to seven

managers. Seventy-two matters concerning misuse of enforcement statistics were

closed because the actions taken by the emoloyees appeared to be based on the

flawed guidance discussed in the Special Panel report, and two others remain open

with the Treasury Inspector General for Tax Administration (TIGTA).

The DARP also reviewed 94 matters involving levies and and/or seizures, including an organized effort in one district to issue mass levies and conduct seizures that

resulted in a failure to provide adequate notice to taxpayers of the pending seizure

or levy. Analysis of the quality of the levy sources and the likelihood of collecting

taxes were not adequately considered in the haste to turn over approximately 3400

cases in a few months prior to the end of an evaluation period. The problems with

levies and seizures in that district were linked to the misuse of enforcement statistics.

Based on its review of the 94 matters involving levies and seizures, the DARPrecommended disciplinary actions were taken with regard to 19 managers employees. Sixty-nine matters were closed without action, and six others remain.

Disciplinary Action Review Project Dispositions

Type of issue Closed without

action

Disciplinary actions proposed Open Total

Misuse of Enforcement

Statistics

72 7 2 81

Inappropriate Levy and

Seizure Activity

69 19 6 94

Total 141 26 8 175

Disciplinary Action Review Project Disciplinary Actions Proposed

Employees Reprimands Admonishments Suspensions Total

Managers 6 12 2 20

Revenue Officers 0606

Total 6 18 2 26

f38

Mr. COYNE. On another subject, what is the overall individual tax return audit rate? Just for returns over $100,000.

Mr. ROSSOTTI. For fiscal year 1999, we are estimating that the

audit rate overall for individual returns, and I’m talking now about

field audits, which is what most people think of, that’s when you

actually have a person, because there are some other audits, what

we call correspondence audits which is a letter, basically, that’s

sent to the taxpayer. But just talking about field audits, the overall

rate for fiscal year 1999 is going to be approximately .38 percent,

that’s .38 percent. For returns over $100,000, it will be 1.31 percent.

Just to compare that to 2 years ago, it’s almost a reduction in

half for the overall coverage, because it was .65 percent in 1997.

For the over $100,000 returns, it was down from 1.98 to 1.31. So

that’s about a 30- or 40-percent reduction in 2 years.

Mr. COYNE. Today we’re going to act in the House of Representatives on H.R. 2488, the Financial Freedom Act of 1999. It contains

over 250 major tax changes as a result of it.

Is there any provision made in your budget to implement that,

or have you had a chance to look at the proposed changes?

Mr. ROSSOTTI. As far as the provision in the budget, there’s no

specific provision in the budget, because obviously we didn’t know

what the provisions would be in the Act. With respect to having

had a chance to look at it, under the provisions of the new law, we

have given some information to the Joint Committee commenting

on the so-called complexity analysis of some of the provisions.

We’ve provided that information to the Joint Committee.

Mr. COYNE. Well, whether it’s this legislation that we’re going to

act on today or any piece of legislation that contains 250 changes,

could you talk about what impact that might have on your operation?

Mr. ROSSOTTI. Of course, what happens when there are these

changes, and it depends very much on what they are, but when

there are provisions that basically change forms, for example, or

change the way that a provision is interpreted, or particularly

when there’s a brand new provision in, like a new kind of credit,

it ripples through the system in a number of ways. No. 1 is, we

have to change all of our forms, or many of our forms and instructions and publications.

We then have to train our employees in these new forms. We

have about 25,000 employees right on the frontlines that answer

questions from taxpayers over the phone. We then of course have

to reprogram the computer systems to deal with these matters.

Then finally, downstream, there are the compliance issues, that if

people don’t follow the new rules, correctly, we need to check on

those returns and we need to train our examiners, provide the support to them that we need to do the compliance activity.

So when we do make a tax law change, it does ripple through

the entire system.

Mr. COYNE. Thank you very much.

Mr. HOUGHTON. All right, Mr. Watkins.

Mr. WATKINS. No questions, thank you.

39

Mr. HOUGHTON. Mr. Portman.

Mr. PORTMAN. Thank you, Mr. Chairman, and Commissioner,

thank you for being here.

I’m sure I do have problems in the district, but I won’t get into

those at this point, because there’s a lot of other questions I’d love

to ask you and our time is limited. But just following up on Mr.

Coyne’s comments if I could, I was delighted to see that under the

law that we passed to reform the IRS, we also asked Congress to

do some things. As you know, we had a joint meeting which you

attended with the seven Committees who have jurisdiction over the

IRS, which I thought was very productive.

We also have in place in the Committee report of the tax bill that

we’re going to consider later today the complexity analysis that

many of us fought for over some objections here on the Hill. I think

it’s very valuable. I’ve read through it. It’s useful for me to see, in

response to Mr. Coyne’s question, what some of the new tax provisions that we’ll be voting on today will do with regard to the Code,

and specifically with regard to your administration of those provisions.

I think we did a pretty good job this time of not, as you know,

adding a lot of new complexity, including the Chairman’s admonition that there be no new credits, which we stuck with through unbelievable pressure from both sides of the aisle, probably particularly our side. When you look at the complexity analysis, you also

note that at the end, again, printed in the Record for the public to

see and for all members to see, the IRS comments on the major tax

provisions that were identified for complexity analysis. I think this

is also very helpful.

I will say that the repeal of the AMT, the repeal of the estate

tax, the small savers provision, which is going to take millions of

Americans out of dealing with interest and dividend income, should

lead over time to remarkable simplification for you all. Now, these

provisions, as you know, are phased in over time, particularly the

AMT and the estate tax. So it’s not going to be immediate. But that

will, I imagine, just as it will help a lot of taxpayers, lighten your

load considerably in terms of compliance.

My question to you would be, were you pleased with the way in

which this process worked this year? Did you have adequate interaction with the Joint Tax Committee to feel as though you had opportunity to make your views known?

Mr. ROSSOTTI. I was very pleased, it was something new, it was

a little bit of learning, but we worked with the Joint Committee I

think very well, and were able to provide some information. As we

learn more about this, we may be able to be a little more elaborate.

Right now we started on kind of the basic thing, such as Mr. Coyne

noted, the impact on the forms, the impact on the processing. But

over time, I think we’ll learn how to explain even more clearly. But

I was very pleased with the process.

Mr. PORTMAN. OK, well, again, I’m delighted that you were part

of the process and that you were able to give some very specific information, for example, whether a new form was needed or not,

what new boxes were needed and so on. I would encourage you to

continue to focus on that, because that will help us legislate better.

Most importantly, it will help the taxpayers and the administration

40

and you all over time to be able to administer this code, this monstrosity that we all have to deal with at this point.

Quickly, with regard to performance measures, as you know, the

employee evaluation piece I feel very strongly about. So does the

Subcommittee. It was part of the legislation and part of the Commission’s report. This is not an easy task moving from quantitative

measurements, i.e., how much money you bring in from a taxpayer,

to more qualitative ones. Can you give us a report on how you

think the employee evaluation system is going, and could you talk

briefly about how it fits in with the overall mission?

Mr. ROSSOTTI. The whole issue of measurement and performance

measurement and evaluation is what we call one of the five major,

to use our buzz word, levers of change, the things that are going

to move us in the direction we want. So we’ve got a whole set of

activities going on in that regard.

The first thing to do is decide what direction you want to change,

too, which is why it was important to get the new mission statement and the goals out. Then we have been working on this new

set of quantitative, what we call balanced performance measures,

which we spent a great deal of time the first year developing and

are now rolling out, as we call it. In other words, we’re actually implementing these, not in every part of the organization, but most

parts. By the end of this fiscal year, we’ll have the first set of those

done.

Then the other major piece, the really big, big piece, is actually

rewriting the job descriptions and the performance appraisal systems for essentially every employee. And we’re well on the way to

doing that. We will have the managers evaluations done basically

by the end of this calendar year. We’re working with our union, by

the end of 2000 we will have basically most of those done.

In the meantime, we have done one of the specific things that

was called for by the law, which is putting in a new standard in

every evaluation that talks about fair and equitable treatment of

taxpayers. That’s already been done, including the frontline employees. So on top of all this, of course, the big thing is training.

Because it doesn’t do a lot of good to have a lot of new measures

and a lot of new performance standards without training people in

them. We are going through, we have about 400,000 hours just this

year of training for managers in this new system, and it will escalate next year as we get the frontline employees.

So this is one of the most immediate change agents, if you will,

that we are employing to move toward the mission and the goals,

and basically the direction that was given us by the Act.

Mr. PORTMAN. Thank you, Mr. Chairman.

Mr. HOUGHTON. Mr. Weller.

Mr. WELLER. Thank you, Mr. Chairman, and Mr. Rossotti, good

to see you this morning.

Mr. ROSSOTTI. Good morning.

Mr. WELLER. Good to have you before us, we appreciate the good

work you’re doing in moving forward on the reforms that this Congress passed and the President signed into law.

I believe one of the greatest victories of IRS reform, first-ever

IRS reform, of course, was addressing the issue of innocent

spouses, a case where in many cases, you have a single working

41

mom with the kids who not only is dealing with a child support

deadbeat but also that child support deadbeat is a tax deadbeat. Of

course, in the past, they couldn’t find the deadbeats, so they went

after the single working mom with the kids who’s struggling to

make ends meet who wasn’t receiving her child support.

And we worked to address that in the IRS reform. I guess the

first question I’d like to ask of you, focusing on this issue is, tell

me how you’re implementing that. How many cases have you dealt

with and how has this process been working?

Mr. ROSSOTTI. First let me say that this is one of the most important taxpayer rights provisions, new taxpayer rights provisions,

and is one that we’ve been spending a great deal of time on. I have

to honestly tell you that we’ve found that the implementation of

this has been more difficult than perhaps was initially anticipated

for two reasons. One is that there simply have been more claims

than I think, we really didn’t know how many there would be, but

we’ve gotten a whole lot of them. We’ve gotten approximately

32,000 this fiscal year, and they’re coming in at a rate of over 1,000

a week. Which is far in excess of the innocent spouse provision

under the old law, this is far in excess of what there is.

So first of all this is just a sheer number of claims. The second

thing is what we’ve learned is that the law provided really three

different kinds of relief under different kinds of circumstances.

Only one of which was incorporated under the old law. So you have

really a whole new method of doing this. And just to give you an

example, this is a flow chart that we have of what it takes to process one case. It’s about 10 pages of flow charts that you have to

look at. Each one of these requires a determination. The process of

training people to get this right has turned out to be quite significant.

And finally, there’s just the issue of interpreting, for example,

what is meant by equitable relief. We had to get a regulation out

that interpreted that, and even after we had the regulation out, it’s

a new concept, and we have to work on it to get it right. So these

are some of the things that we’ve been facing.

But we have also made a real determination that we’re going to

get this right, we’re going to get every case right, and we’re going

to process them. The collection action, by the way, on any given

case, is held in abeyance while these cases are in inventory. So at

the present time, we have about 29,000 cases in inventory, which

is far more than we should have. We have applied a special task

force to basically try to work on getting this right, getting this inventory down. We’re coming up with some new job aids and some

new training for the employees.

We have actually employed, in addition to what we originally

planned to do, which was to have most of it centralized in a couple

of places, we’ve had to, just because of the resources, use resources

in basically all of our districts. So we have just recently done that,

to farm some of these cases out to more places.

We’re also forming, in some of these districts, teams so they can

work together with some examiners that get extra support from experts. I could go on with more details.

But the net effect is that this has turned into something that is

really quite a substantial effort. I think once we get through this

42

initial backlog and we learn how to do this more, hopefully the

number of claims will stabilize and we will become more efficient

in processing them. But in the meantime, it has been a very, very

challenging effort.

I do think, however, I must say that I’m not saying any of this

along the lines of criticizing the law, because I think it’s absolutely

the right thing to have done, and your point was, I think in your

opening statement, quite accurate, that there were some really

very bad cases that came to our attention under the old law which

just didn’t fit the modern circumstances.

So notwithstanding the difficulty of this, it is absolutely the right

thing to do, it’s the way the law should work. And it’s just an example of the challenge we have in trying to work under this new

way.

Mr. WELLER. Commissioner, of course, 32,000, 1,000 a week, is

quite a few.

Mr. ROSSOTTI. It is.

Mr. WELLER. Compared, I’m sure, to the past number of applicants under what was a very weak innocent spouse opportunity at

that time, probably you’re receiving much more in applications.

Do you have any, as you are now implementing what we provided for you in the law, do you have any recommendations and

changes in the law that would ease your ability to process it?

Mr. ROSSOTTI. No, I don’t at this point. I think we might at some

future time, but frankly we’re still learning about how this applies.

I mean, one of the things we’re going to do is on most of the cases,

those that get into the more complex provisions of the law, we’re

actually going to do 100 percent quality review on these cases in

order to first of all make sure they’re right. Because we can’t be

really sure they’re right the first time.

But second, I think it will help us to learn more about what are

some of the particular aspects of this law. I think especially

through the Taxpayer Advocates Report, which will come to Congress next year, if there are any issues like that, we would be able

to surface them. But right now, I think the problem we have is

more internal. It’s a matter of understanding this law, of learning

from the cases that we process under the law, and I just want to

stress that we are determined that we are going to make every one

of these cases right, even to the extent of doing 100 percent review

of the more complex cases.

Mr. WELLER. Thank you, Commissioner. Mr. Chairman, thanks

for the opportunity. I see my time has expired, Mr. Chairman.

Mr. HOUGHTON. Mr. Hulshof.

Mr. HULSHOF. No questions, thank you.

Mr. HOUGHTON. Mr. Coyne.

Mr. COYNE. Thank you, Mr. Chairman. Commissioner, I referred

earlier to the 10 deadly sins that we have had some experience

with. I was just wondering if you think based on experience so far

that they need to be modified. Would that be something?

Mr. ROSSOTTI. I think as I just answered to Mr. Weller, I think

with all the complex provisions of this law, we’re going to learn as

we apply them. I think if there are needs to change them, we

would certainly come back to the Congress and ask. I think with

respect to this one in particular, we really are still in a learning,

43

we’re just barely getting the experience of having these cases go

through.

So I don’t think we’re ready yet on any of these provisions, to

come back and ask for changes. But I do want to say that just as

with innocent spouse, 1203 is one of the most important, those are

probably the two provisions of the law, two of the three or four

most important provisions that we’re working on the hardest to get

right.

Right now our concentration is on making sure that we train our

employees correctly what this means and we set up the right procedures to make sure everything is fair. The last step is that once

these cases work through the pipeline they do come up, if there are

any cases where there’s a recommendation of termination of an employee, they do come up to the Commissioner, to me, for final review. We have set up a special process to do that. I think by that

process, I will have the opportunity to learn very concretely how

this law is working, and I can assure you, if there are any cases

of what I consider to be unfair treatment of employees under this

Act, I do have the authority to mitigate that and make sure it

doesn’t happen.

But I also then would have the information, potentially, if necessary, to come back to the Congress and discuss it. But we just

haven’t gotten through that pipeline yet. So I think as with all the

provisions, we’re not quite in a position yet to really say anything

really intelligent or informed about what should be done with these

provisions.

Mr. COYNE. Well, I would hope, based on experience that comes

about moving into this operation that you wouldn’t be hesitant to

come back to the Congress and make recommendations about

whatever changes would be helpful.

Mr. ROSSOTTI. We won’t be. Thank you, Mr. Coyne. We will.

Mr. HOUGHTON. Mr. Watkins.

Mr. WATKINS. Thank you, Mr. Chairman. A little while ago I was

kind of asking about some things in my district. Mr. Commissioner,

I want to say thank you for the cooperation that we received on

some past problems and concerns.

Mr. Chairman, if I could make this statement, I came from the

business world into the political, I know my Chairman has done

the same thing. If I can put it this way, I think you’ve been a

breath of fresh air coming into an agency that’s criticized so much,

and sometimes rightly so. But then there are other times probably

you’ve got to do the Lord’s work for this Uncle Sam of ours.

With the positive attitude that you’ve had about trying to bring

changes, which I think is quite significant, have you seen internally the kind of changes come about that you’ve been hoping to

bring?

Mr. ROSSOTTI. Well, Mr. Watkins, you have to sort of categorize

these changes. The first change was a change in direction and attitude. That was the first thing that we really tried to work on

through communication. We’ve got a new mission statement, we’ve

got a new set of goals. We’re now, as I answered to Mr. Portman,

changing the whole set of evaluations for people to track with these

things.

44

I think frankly, most of what you’ve seen in your districts and

from your constituents so far has been the result of a change in direction and attitude more than any tangible changes that we’ve

been able to implement yet so far in terms of improved service.

So my answer is, I think we have seen among our employees a

very significant understanding of the direction we’re trying to go.

I think our employees in the IRS, as I’ve learned, and I came into

this without knowing one of them, literally not one, basically are

good employees who want to be given clear direction as to what it

is that’s expected of them and try to do that. So we’ve spent a lot

of time trying to give them just that, clear direction.

Now, in some areas, like in collection, there are so many changes

that they are a little confused at times what the new role is, because it’s so different as compared to what it was in the past. But

on the whole, our employees have responded very well to this

change in direction, and have tried to figure out in their own ways

how they can implement it. I think most of what we have accomplished so far has been in that area, because we have not yet been

able to implement many of these new business practices and new

technology that are really in the long run, the way that we’re going

to deliver them through service to taxpayers.

So this whole change really includes some very intangible things

like attitudes and directions, which are reinforced with communication goals. But then in the long run, we really have to follow

through to give these employees and to give the taxpayers the

treatment they deserve through better ways of doing business.

So I guess that’s the best answer I can give you as of now.

Mr. WATKINS. Like you said, you didn’t know one single employee. But Mr. Chairman, I think the example, you didn’t come

with an ax to grind, you came with an attitude, and I think that

attitude is probably filtered all the way down and around and

among all the personnel. I think that is so revealing, or in my

mind, I think that.

That’s why I’m asking in my own mind, is it really happening.

Because I feel like you have brought a new direction and attitude

to the lot. And I think that’s very meaningful and very significant.

We all run into different problems out there. You and your good

people will find the same thing. It depends on how we handle those

problems and what kind of a way. You can make people walk away

gnashing their teeth, wanting to commit suicide, do all these other

things, or you can really work with them through some real problems they have out there. It all goes back to attitude. I think in

this case, definitely the attitude that you have brought about has

really brought some changes, I think.

Mr. Chairman, I feel down in the district, people are trying to

solve problems. And that’s one of the things that I want you to

know I appreciate very, very much. I know you cannot control

every single employee, you cannot change their thought or their attitude. There’s no way any of us dealing with personnel can. But

you can try to convey to them and let them know what you’re

wanting to try to do. I think some of that’s been kind of falling into

place out there.

45

I know there’s things that we’ll go through and have many other

problems that we’ll have coming before us. But I want to say, I appreciate your attitude very much.

Mr. ROSSOTTI. Thank you very much, Mr. Watkins.

Mr. HOUGHTON. Thanks, Mr. Watkins.

Ms. Dunn.

Ms. DUNN. Thank you very much, Mr. Chairman.

Commissioner Rossotti, can you give us an update on the status

of the oversight board? Are they being appointed, and as you move

toward working with them, are you sacrificing anything right now

in long range policy planning because they’re not all in place?

Mr. ROSSOTTI. Well, of course, the oversight board is something

that is not handled by me, it’s handled by the Treasury and the

White House. So I don’t have too much detail to be able to provide

on that. But some of the names have been provided to the Senate

Finance Committee. There are still, I believe it’s two or three, that

still need to be provided.

So that’s basically all I know about the status of the nominations.

But I will say this. What we’re trying to do is put in place from

one of the key things that was in the legislation, and you noted it,

is to work with the board on strategic planning and budgeting.

That’s another area where a lot of work is needed in the IRS, to

really improve where we are. We in all honesty don’t really have

what I would consider to be viable strategic planning and budgeting process in place.

And I think if we had the oversight board in place, they’d be

wanting to know where it was. So in some ways I count myself

lucky that I feel like I’m one step ahead of the sheriff here in trying to get this process in place, so that we’ll have something that

I think any board that I’ve ever worked with would expect.

We are making some progress on that in the sense that internally we’re getting ready, we’re defining what we mean by a strategic planning and budgeting process. We’re putting some staff in

place, hiring some people. And I think very importantly, these performance measures and the organization structure are necessary

because without having a clear set of goals, and without having

people to carry it out, you really can’t put a strategic plan and

process in place.

So I think what we are doing internally is doing what I would

anticipate our board, when it does come into place, would want us

to have, based on my experience. So that when they do come in,

we will at least be able to talk to them in some intelligent way

about. Even though we don’t have it all in place, where it’s going

to be. That’s what we’re attempting to do to get ready.

From my personal point of view, I’m looking forward to having

this board appointed and working with a set of people that I hope

will provide good oversight for us, but be good people to work with

in terms of helping us make sure we’re on the right direction and

supporting us where we need support.

Ms. DUNN. Good. Mr. Chairman, maybe we could put a note in

the record that it’s time to start nipping at heels of folks who

should be appointing this oversight board. Because I’m sure that as

Commissioner Rossotti has said, that it would be useful as a supVerDate 20-JUL-2000 12:30 Jan 05, 2001 Jkt 060010 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 K:\HEARINGS\67584.TXT WAYS1 PsN: WAYS1
46

port group for him as he moves ahead in public policy planning in

the IRS.

I’m also interested, Commissioner, in the Office of the Taxpayer

Advocate and the continuing increase in independence from the

IRS. How is that moving right now? Have these budget cuts done

damage to that? I certainly hope we’ll be able to get those dollars

back in the conference. Could you just give us an update on the

Taxpayer Advocates’ independence?

Mr. ROSSOTTI. In our whole reorganization, one of the first areas

that we wanted to reorganize was in fact the Taxpayer Advocate,

both because it was important and because of certain provisions in

the bill. So we are actually on an accelerated schedule in implementing the Taxpayer Advocates new organization.

As a matter of fact, by the end of this fiscal year, which is only

a few months from now, we should have that new organization

pretty much in place. The essence of it is of course, first of all, we

recruited an outside person to be the National Taxpayer Advocate.

The new organization structure will parallel, it will not be as it has

been previously, where most of the people who do that work were

part of the compliance functions in the IRS. Instead, it will be an

independent parallel structure nationwide. There will be taxpayer

advocates in every State and an area-wide set of advocate organizations.

What we are doing is actually doing an internal competition for

every single job, or almost every single job, in the Taxpayer Advocate, which is around 2,000 people when it is all done. In other

words, all the way down the management chain we’ve reposted

these jobs, we’ve had internal competition, and we’ve now selected

most of the new management structure and we’re now selecting the

frontline employees.

You might be interested to know that we have gotten about an

eight to one, an eight to one response of people wanting to get into

the Taxpayer Advocate’s office. I can assure you, that’s a very, very

big change over where we were. It’s really quite remarkable.

Now, we haven’t selected them all yet. But by the end of this

year, this fiscal year, we will have those individuals selected. We

will have basically this taxpayer advocate organization all the way

up and down the line in place.

There are issues that we’re still working out over precisely what

their authorities are, since they are now an independent, within

the IRS but a parallel structure, precisely how they relate to the

other parts of the IRS, including the Appeals Office, which gets a

little complex. But we’re working on those kinds of problems, and

I’m very satisfied, I think you may have next Mr. Ovison, who is

the National Taxpayer Advocate. He’s taking a very strong leadership role in establishing this organization with the support of others.

So actually, of all the pieces of our organizational puzzle, the one

that will be in place absolutely first will be the Taxpayer Advocate

organization.

Ms. DUNN. Sounds good. Good news. Thank you. Thank you, Mr.

Chairman.

Mr. HOUGHTON. OK, thank you.

Mr. Portman.

47

Mr. PORTMAN. Thank you, Mr. Chairman.

Commissioner, as you know, there was a recent report by the

Electronic Tax Administration Advisory Committee established by

the legislation this Subcommittee worked on. We’re going to hear

later from the chair of that Committee.

Among their recommendations in their report that we’re going to

look at today is that there ought to be a single strategic plan that

integrates the multiple plans. And I would use as an example their

own strategic plan for electronic tax modernization, that you all are

working through the modernization blueprint, of course.

Also proceeding, of course, is the reorganization, modernization

of the IRS along the lines of taxpayers. This recommendation to

have a single strategic plan seems to make an awful lot of sense.

I would think from the private sector experience you have that

would be the way you would want to go. And yet you don’t have

one.

Can you tell me what kind of progress you are making in achieving a single strategic plan for all these multiple plans?

Mr. ROSSOTTI. Well, as I was just talking to Congresswoman

Dunn, in all candor, the IRS today does not have a good process

for doing what I would consider strategic planning. We have a process for doing some specific kinds of planning, which is very important, and some budgeting. But pulling the whole thing together, it

really is not in place.

And it’s not a simple thing to do with our organization, being the

scale it is. So that is one of the key processes we’re working on.

I would not say that we will have a complete strategic plan with

all components in place, in all honesty, probably for a couple of

years.

But that doesn’t mean there isn’t anything we’re doing. One of

the key priorities that is most immediately needed is the plan for

the technology aspect, and we can work on this because we now

know the direction we’re going in terms of organization.

By the end of this calendar year we will have the first version

of the technology, what we call business systems plan, in place,

which will lay out for at least the next 3 to 5 years what the overall plan is for the major pieces of the systems work we’re going to

do. In that plan, it will include as I think, what is the ETAAC’s

view of what it should be, the essential integration of electronic tax

administration systems aspect into the basic systems that we use

throughout the agency, as opposed to being as it is now, basically

just an add-on at the front end.

That will be an important step. But there are a lot more steps

we need to do, as was indicated in their report, to integrate not just

the business systems and the technology, but all of the other promotional activities and the way we outreach to taxpayers, the way

we do compliance, basically building that into the whole way we do

business. That’s going to take a little bit longer, and really depends

to some level on getting some of these new organizational structures in place.

Mr. PORTMAN. I guess it generally sounds as though you’re

speaking in support of the recommendations that are coming out

of ETAAC. I would ask, if you have concerns about the recVerDate 20-JUL-2000 12:30 Jan 05, 2001 Jkt 060010 PO 00000 Frm 00051 Fmt 6633 Sfmt 6602 K:\HEARINGS\67584.TXT WAYS1 PsN: WAYS1
48

ommendations, if you would forward those to the Subcommittee, so

the staff is aware of that, and the members are aware of it.

Let me just make a comment, rather than ask a question. I was

going to ask a question, but I think I know what your answer is

going to be. If the oversight board were in place, I would assume

the oversight board would play a very important role in the strategic plan. You said earlier in response to Ms. Dunn that a viable

strategic planning process and budgeting process is not in place

yet, or a viable strategic plan or long-term budget plan. And that

in many ways, that is better that the board’s not in place yet in

some senses, because you’d like to get ahead of the sheriff, as you

said.

I would just beg to differ, and I think this board can provide you

with the kind of support you need to develop those plans. As you

know, better than I, the kind of people who we’re looking for on

this board are precisely people who can help develop the strategic

plan and a budgeting plan and bring together, as this ETAAC report tells us today, the multiple plans on the information side.

I am very concerned, actually shocked, that the administration,

more than 6 months after it was required under the law, that this

Subcommittee began the process of enacting, has yet to send the

names forward in a formal way. You’re right, some names have

been floated. There are now I guess three missing, because one apparently has been dropped out.

But I would again make a very strong statement that needs to

be a part of the record, and we’ve been nipping at the heels, not

for 6 months, but for a year. And I think the record will show at

least 9 months of correspondence with the White House and with

the Treasury Department. I know that you share that concern.

But I would only feel constrained to comment, because of your

responses to Ms. Dunn, that I think at least it was the intent of

this Congress, based on the Commission’s report, based on the legislation, clearly based on the report language, that this group was

meant to help you do precisely what you are trying to do now. If

you don’t get these people in on the ground level now, as you’re undergoing all these major changes at the IRS, and again, I commend

you for your efforts in that regard, I think it will be a great loss

to the taxpayer. Because I think given the realities of the IRS, the

difficulty making these changes, the long-term viability of these reforms will be at risk.

Mr. ROSSOTTI. I just want to clarify. In responding, I was being

a little bit facetious, which is always a little risky. Basically my

point was saying that we are trying to put in place what I anticipate the board would want us to put in place if they were here. I

didn’t really mean that we wouldn’t benefit by not having them.

But what we’re trying to do is not wait until they get here, but

try and see if we can anticipate what I think a good oversight

board would want to have in the way of a strategic planning process, so that when they do get here, we’ll at least be somewhat

ahead of the game, rather than just waiting for them to come.

Mr. PORTMAN. That’s commendable, and you’re doing the best

you can in a bad situation. I just wouldn’t want to leave the record

stating that somehow the board is not necessary, because the plan

is in place, the board should be part of the planning process. I

49

thank the Chair for his indulgence, and Commissioner, thank you

for your great testimony today.

Mr. HOUGHTON. Mr. Hulshof, did you have any questions?

Mr. HULSHOF. No.

Mr. HOUGHTON. Could you give us sort of a feel when this board

is going to be there? I know you’ve got some inputs into this, but

you know, we keep talking about this thing as if it isn’t happening.

Mr. ROSSOTTI. Did you say when?

Mr. HOUGHTON. Yes.

Mr. ROSSOTTI. Well, it depends on when the remaining nominees

are put forward. I have some insight into it. I know that there are

two individuals that are being vetted, going through a vetting process. When that’s completed, I think they will be forwarded. But I

don’t have any insight as to when that would be completed.

Mr. HOUGHTON. Because it’s a little ridiculous, we keep talking

about this thing, and it really doesn’t take place. That was one of

the cornerstones of the report.

Well, Commissioner, thank you very much. Mr. Coyne has talked

about the 10 deadly sins, and I mentioned the three life-giving assets, which are people, money and attitude. We’ve got to work together on all of these. Thank you so much for the job you’re doing.

You’re a great credit to all of us. And we’ll have the next panel.

Thank you, sir.

Mr. ROSSOTTI. Thank you, Mr. Chairman.

Mr. HOUGHTON. I’d like to call Mr. Charles Lacijan, who is

Chairman of the Electronic Tax Administration Advisory Committee and Senior Policy Advisor of the Implementation Group. Mr.

Lacijan is here with his lovely wife. Welcome, thank you very

much, and any time you’d like to begin your testimony would be

fine.

STATEMENT OF CHARLES A. LACIJAN, SENIOR TECHNICAL

ADVISOR, IMPLEMENTATION GROUP, AND CHAIRMAN, ELECTRONIC TAX ADMINISTRATION ADVISORY COMMITTEE

Mr. LACIJAN. Thank you. Good morning, Mr. Chairman, Ranking

Member Coyne, Members of the Subcommittee. My name is Chuck

Lacijan, I’m the senior technical advisor to the Implementation

Group, a Washington, DC., consulting firm. But since September

1998, I’ve also served as chairman of the Electronic Tax Administration Advisory Committee, also known as ETAAC. It’s my pleasure to testify before you today in that capacity.

I have submitted a written statement that I ask be entered into

the record, which I now intend to summarize.

Let me preface my remarks by saying that electronic filing is a

very important part of a modern IRS. The IRS restructuring commission, which was so ably chaired by Congressman Portman, fully

recognized this fact. The inclusion of title II, electronic filing, into

the IRS Restructuring and Reform Act, is due in large part to the

leadership shown by this Subcommittee, which also clearly recognized the importance of electronic filing. In fact, in September,

1997, the Subcommittee had an entire hearing dedicated just to

that subject.

In electronic interaction with taxpayers, it has the potential to

improve the IRS’ ability to provide taxpayers with the type of cusVerDate 20-JUL-2000 12:30 Jan 05, 2001 Jkt 060010 PO 00000 Frm 00053 Fmt 6633 Sfmt 6602 K:\HEARINGS\67584.TXT WAYS1 PsN: WAYS1
50

tomer service that they receive from other modern financial institutions and have come to expect. Electronic filing also introduces productivity gains into the IRS, or productivity savings, that allows

them to shift both resources and focus from the labor intensive

processing of paper returns and shifting that to providing more

customer service.

Taxpayers also benefit directly because of the much lower error

rate associated with electronic filing. So for these reasons, the Act

established a policy that paperless filing should be the preferred

means of filing tax and information returns and actually set a goal

of 80 percent of those returns that should be filed electronically by

the year 2007.

Before I summarize the key findings of the ETAAC, I would like

to say a few words about the Committee members. The strength of

the ETAAC is its diverse membership, which covers a broad spectrum of stakeholder interests. Although our members are volunteers, they do work very hard at this. They take their responsibilities to serve very seriously and I would say are very thoughtful

in their work.

And our report, was delivered to Congress on time, June 30, and

because we’re a volunteer Committee, on budget as well—zero.

I think ETAAC believes that IRS has made a very good start in

setting out a program to achieve its electronic filing goals. My written statement does provide several examples of that.

However, I think the question of most importance to the Subcommittee is not whether IRS has made a good start, but whether

it will make a good finish. ETAAC believes that the IRS can

achieve the goal, but it does need to implement a broader set of initiatives than is currently planned.

Although the IRS has established a separate group responsible

for electronic tax administration within it, this goal is much too

sweeping in scope to be achieved by a single group within the IRS.

The goal must be an agency-wide priority, with the proper resources behind it. Continual progress evaluation and updating of

the plan is absolutely essential.

Now, the Act also requires the IRS to receive electronically by

2003 all information and tax returns that are prepared electronically. ETAAC believes that this is an excellent strategy and an

extremely important goal. But it requires that all paid preparers

who almost universally use computers to prepare their tax returns,

would actually file all their computer generated returns electronically by 2003. This would be very difficult to achieve. It would actually require a paradigm shift in the thinking of most preparers.

However, this level of acceptance by paid preparers must be

achieved by 2007 if the IRS is to reach the 80-percent goal.

Let me quickly summarize a few strategic challenges that face

the IRS. First, they must create new processes and incentives that

deliver value for all taxpayer segments, individual, small business,

large business and tax-exempt organizations. They must integrate

agency-wide strategic plans including some of the ones that were

mentioned earlier, the strategy for growth, the modernization blueprint, the reorganization, modernization, into one cohesive strategic

plan that serves the entire Service.

51

They have to develop the technology infrastructure to receive

electronically all forms from all types of returns from all taxpayers.

A strategy for growth indicates the IRS must position itself to take

full advantage of the public’s growing use of the Internet. We believe this is essential.

ETAAC also believes the IRS has opportunities to expand its

business partnerships with external stakeholders, the taxpaying

public, and businesses. In the view of ETAAC, businesses should

interact with a modern IRS much like they interact with other

businesses.

And let me quickly finish by identifying what ETAAC believes

that Congress should do to assist the IRS. First, we believe they

should maintain high visibility on these electronic filing goals in its

oversight efforts. Second, they should evaluate new legislative action where it is recommended by the IRS or by ETAAC. And third,

Congress should appropriate the necessary funds for electronic tax

administration and related technology infrastructure initiatives.

That concludes my testimony, and I will be glad to answer any

questions you may have.

[The prepared statement follows:]

Statement of Charles A. Lacijan, Senior Technical Advisor, Implementation

Group, and Chairman, Electronic Tax Administration Advisory Committee

Mr. Chairman, Ranking Member Coyne, and Members of the Subcommittee, my

name is Chuck Lacijan, and I am the Senior Technical Advisor for The Implementation Group, a Washington, D.C. consulting firm. Since September 1998 I have also

served as the chairman of the Electronic Tax Administration Advisory Committee

(ETAAC), and am testifying in this capacity before you today.

Two members of the Ways and Means Committee, former Oversight Subcommittee Chairwoman Nancy Johnson and Representative Rob Portman, nominated me for the ETAAC. I worked with both these Representatives while working

electronic filing issues on the staff of the National Commission on Restructuring the

Internal Revenue Service (IRS). It is with great pleasure and a sense of honor that

I testify today.

The IRS Restructuring and Reform Act of 1998 set a new direction for the IRS

in many areas, including electronic filing. Title II of the Act establishes a Congressional policy that paperless filing should be the preferred and most convenient

means of filing Federal tax and information returns, and sets a goal for the IRS of

having at least 80 percent of these returns filed electronically by the year 2007. The

Act expects that the IRS will achieve this goal by cooperating with the private sector and encouraging competition, and further requires that the IRS establish a private sector advisory committee to assist it in meeting these goals.

The inclusion of Title II, Electronic Filing, in the Act is due in large part to the

leadership shown by the Oversight Subcommittee, which recognized the importance

of electronic filing and other electronic tax administration services. Electronic filing

has the potential to improve the IRS’ ability to provide taxpayers with customer

service on a par with other modern financial institutions with which many taxpayers interact. It also introduces productivity savings to the IRS that allows it to

shift resources away from the labor intensive processing of paper returns into customer service. Taxpayers benefit directly also, as electronic filing has a much lower

error rate than paper filing.

The IRS Restructuring and Reform Act establishes two missions for the ETAAC.

Our first mission is to help the IRS meet its electronic filing goals by providing it

with private sector input. Our second mission is to provide Congress with an annual

report that describes IRS’ progress in meeting its electronic filing goals, the status

of its strategic plans, any legislative changes necessary to assist the IRS in meeting

the goals, and the effects of electronic filing on small businesses and the self-employed.

To provide the most comprehensive advice to the IRS, the ETAAC membership

covers a broad spectrum of stakeholder interests, including:

• tax preparers, including some who operate small businesses

• tax preparation software companies serving both individual and business filers

• payroll services

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• the financial community • big business • the academic community • state government

A list of the ETAAC members is attached to a copy of this statement.

The ETAAC has worked with the IRS since its establishment in September 1998.

Our priorities for this year included the following activity: • reviewing the IRS’ strategic plan, A Strategy for Growth, and assessing the

ability of this plan to meet IRS’ electronic filing goals • working with the IRS to develop an annual calendar for strategic planing and

evaluation • identifying the strategic challenges facing the IRS • developing our report to Congress

Our report documents the advice the ETAAC has provided the IRS and identifies

the major challenges, risks, and opportunities facing the IRS, as well as recommendations for further action.

The ETAAC believes the IRS has made a good start in setting out a program to

achieve the electronic filing goals established by Congress. Examples of progress include: • Release of a strategic plan, A Strategy for Growth, in December 1998, which

described IRS’ approach for achieving its electronic tax administration goals. • An increase of 19 percent in electronic filing during the 1999 tax filing season. • Initiation of programs in 1999 designed to increase the attractiveness of electronic filing and the development of plans for additional initiatives for 2000 and future years.

I believe the question of most interest to the subcommittee is not whether the IRS

has made a good start, but whether it will meet the 80 percent electronic filing goal

in 2007. The ETAAC believes the IRS can achieve the goal, but it needs to implement a broader set of initiatives than is currently planned. In fact, the IRS strategic

plan, A Strategy for Growth, estimates that the initiatives described in it will result

in up to 70 million electronic returns being filed electronically in 2007, far short of

the goal. Clearly, although the IRS has made a good start, the broadest possible set

of new initiatives must be considered, including those that require legislative action.

Reaching the electronic tax administration goals in 2007 will require a sustained

effort throughout the service to implement A Strategy for Growth. Although the IRS

has established a separate group responsible for electronic tax administration, the

goal of achieving 80 percent electronic filing by 2007 is too sweeping in scope to be

achieved by a single group within the IRS. The goal will only be achieved by placing

responsibility for achieving these goals on each business unit as well as the ETA

group. The plan established in A Strategy for Growth must be an agency-wide priority with application of the necessary resources throughout the agency. Continual

progress evaluation and updating of the plan, with input from each of the business

units, is essential.

In addition to the 80 percent goal for 2007, the IRS Restructuring and Reform

Act of 1998 requires the IRS to plan that, to the extent practicable, all information

and tax returns prepared electronically should be filed electronically by the 2003 tax

filing season. The ETAAC believes this to be an excellent strategy and an extremely

important goal, but achieving this goal requires that paid tax preparers, who almost

universally prepare returns using computers, file all their computer-prepared returns electronically by 2003. Achieving this level of acceptance from paid preparers

in four years is a very difficult challenge, and requires a paradigm shift in the

thinking of many paid preparers. However, this level of acceptance from paid preparers must be achieved by 2007 if the IRS is to reach the 80 percent goal.

Making this paradigm shift a reality requires that paid preparers see electronic

filing as a means of making their businesses more efficient and allows them to offer

additional services that paper preparers cannot offer. Every return would have to

be capable of being received electronically, and signature barriers eliminated. While

the IRS is moving to make electronic filing more attractive to paid preparers, the

ETAAC believes additional initiatives are needed. The IRS must make electronic filing so attractive to paid preparers that they couldn’t be competitive without offering

this service to their clients.

A similar reasoning applies to taxpayers who prepare their own returns. If the

IRS can capture 95 percent of the paid preparer market in 2007, then it must receive electronically approximately 65 percent of self-prepared returns to meet the

80 percent goal.

The ETAAC has identified in its annual report a number of strategic challenges

the IRS faces in seeking to reach its electronic filing goals. The ETAAC has categorized these challenges into the following three groups:

53

Business challenges

• Creating new processes and incentives for electronic tax administration that deliver value to all taxpayer segments (individuals, small businesses, large corporations, and tax-exempt organizations).

• Developing a strategy that provides strong incentives to all professional tax

practitioners to enroll as Electronic Return Originators.

• Convincing taxpayers and professional tax preparers, through communications

and marketing, that e-filing should be the filing method of choice.

Internal Management Challenges

• Transitioning to a customer-centric organization providing taxpayers with customer-segmented, tailored, and responsive products and services while concurrently

transitioning to electronic services and systems and maintaining legacy systems

that support paper filing.

• Integrating multiple agency-wide strategic plans, including A Strategy for

Growth, the Modernization Blueprint, and the organizational modernization plan,

into one cohesive business and strategic plan for the Service.

• Ensuring adequate resources are committed to the implementation of electronic

tax administration projects and initiatives.

• Holding the executives of each new operating division accountable for achieving

the electronic tax administration goals for the taxpayer segment assigned to the division.

Technology Challenges

• Implementing the necessary technology infrastructure to support the IRS electronic tax administration business goals, including security, privacy, database, and

communications systems.

• Developing and maintaining the ability to receive electronically all the forms

from all types of returns from all filers.

• Developing a scaleable technology architecture that will support the growing

volumes associated with achieving the electronic tax administration business goals.

A Strategy for Growth indicates that the IRS must position itself to take full advantage of the public’s growing acceptance and use of the Internet. The ETAAC

strongly endorses the formulation of an Internet strategy.

The ETAAC believes the IRS has opportunities to expand its business partnerships with professional preparers, large transmitters, software providers, payroll

and tax processors, and state taxing agencies, as well as expand its relationship

with the taxpaying public and businesses.

The ETAAC recommends the IRS take the following actions to meet its strategic

challenges:

• Ensure all initiatives identified in A Strategy for Growth are incorporated within overall IRS strategic planning efforts. If the IRS cannot establish an overall strategic plan and planning process quickly, the IRS may not achieve its electronic tax

administration goals.

• Apply the necessary resources to accomplish the initiatives described in A Strategy for Growth and create and implement an integrated strategic plan.

• Align electronic tax administration customer segments with the four business

units now being established by the IRS organizational modernization plan.

• Develop a strategy to encourage every professional tax practitioner to file electronically. Professional tax practitioners include tax attorneys, Certified Public Accountants (CPAs), Enrolled Agents (EAs), and unlicensed tax preparers.

• Implement a strategic management process that is based on continual progress

evaluation against established milestones, with provision for identifying new

projects and corrective action. Because of the importance of identifying new projects,

the ETAAC has assisted the IRS in identifying such a plan.

• Focus IT modernization on electronic transmission of information and engagement of the private sector for solutions rather than improvement of paper processes.

• Make electronic tax administration initiatives a high priority in the IRS IT

modernization so they are synchronized with major IRS modernization blueprints

rather than competing for attention in later years. It is imperative that IRS electronic tax administration projects be integrated into the IRS modernization blueprint at an early stage.

• Advertise taxpayer and preparer benefits for e-filing more aggressively. Effectively deliver and enhance such benefits to create taxpayer awareness and trust in

e-filing.

54

• Continue to assign authentication, security, and privacy initiatives a high priority and continue to move forward quickly in this area. The 1999 tax filing season

PIN and digital signature projects are major steps forward. • Use A Strategy for Growth to articulate how partnerships with the private sector and governmental partners, such as states, can be facilitated and supported.

The ETAAC believes that Congress can assist IRS meet its electronic filing goals.

Congress can do this by maintaining high visibility on these goals in its oversight

efforts, evaluating new legislative action where recommended by the IRS or the

ETAAC, and by appropriating the necessary funds for electronic tax administration

and related technology infrastructure initiatives.

That concludes my testimony. I will be glad to answer any questions you may

have.

ETAAC Members

Name Title

Fran Bartlett .............................................. President & CEO, Federal Liaison Services, Inc.

Michael P. Boyle ......................................... Chief Tax Counsel & General Auditor, Microsoft

Corp.

Margaret Drescher ..................................... National Advisor, Chair National Technology Committee, AARP.

Keith T. Dusenbery .................................... Professor of Accounting and Information Systems,

Johnson State College.

Edward B. Feinstein .................................. AVP, Electronic Commerce, H&R Block Tax

Services.

Connie L. Grimes ........................................ President, Grimes Income Tax, Inc.

Mary B. Harris ........................................... Jackson Hewitt Tax Service, franchise owner in

Arkansas

Yvonne D. Kirkendall ................................. Co-owner, W. R. Kirkendall, EA.

Charles A. Lacijan ...................................... Sr. Technical Advisor, The Implementation Group.

Frank L. Lanza ........................................... Director, Processing Services, California Franchise

Tax Board.

Robert O. Lewis .......................................... President, Tax Back, Inc.

Susan W. Martin ........................................ Professor of Accounting & Taxation, Grand Valley

State University.

Issac A. Nooe, III ........................................ Administrator, Information Resources Management

Division, South Carolina DOR.

Bette Rice .................................................... Director, Enterprise Technology Services, Merrill

Lynch.

Elizabeth M. Seymour ................................ Vice President, Wachovia Bank, N.A.

William C. Shepard .................................... VP & General Manager, Professional Products

Group, Intuit, Inc.

John A. Stauffer ......................................... Sr. VP of Product Planning, Ceridian Corporation/

fCeridian Tax Service.

Mr. HOUGHTON. Thank you very much, Mr. Lacijan.

Mr. Coyne.

Mr. COYNE. How are you?

Mr. LACIJAN. Good morning, it’s a pleasure to see you again, sir.

Mr. COYNE. One of the major IRS reforms involves elimination

of the barriers to electronic filing to be sure. Which barriers to expanding that base still exist and still need to be eliminated?

Mr. LACIJAN. I think there are several. When I think of barriers,

I like to think of individual segments of the taxpayer population

and think of barriers that might exist for different segments. So

over 50 percent of tax returns are done by paid preparers. So let

me address that first.

Several things still impede paid preparers. First, one of the biggest complaints they have is that the IRS doesn’t accept electronically all forms and all schedules. The IRS counterpoint to that is

that, the volumes we don’t accept are very low. However, the preVerDate 20-JUL-2000 12:30 Jan 05, 2001 Jkt 060010 PO 00000 Frm 00058 Fmt 6633 Sfmt 6602 K:\HEARINGS\67584.TXT WAYS1 PsN: WAYS1
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parers, I think, come back with the argument that, well, we’re running a business, we want to have a single method of doing tax filing in our office. We want a single pipeline.

So we don’t want to, in the middle of a busy tax filing season,

have to make a lot of decisions about, we can file this electronically, we can’t file electronically. They would like a single way to

do it so they can streamline their businesses and make them more

efficient.

Another barrier is the signature. IRS paperless, electronic filing

has not been entirely paperless in the past. There’s form 8453, a

signature form, which still must be mailed in. A barrier that this

presents to taxpayers, or tax preparers, a taxpayer will come in

early in the season, drop off all his records, and the tax preparer

will take those records, fill out the taxpayer’s return, normally

using a computer. Then he would take the paper, if it’s a paper return, he would send it to the taxpayer, and say, ‘‘If you approve

this, sign it and mail it in.’’ So the taxpayer, the client, only makes

one visit to the office.

With electronic filing, the taxpayer has to make a second visit to

the office to sign the return and have the spouse sign the return.

So it takes up more time for the preparer, especially in the middle

of tax filing season. So they would much prefer to have a one visit

model instead of a two visit model.

So I think those are a few of the barriers. It does cost them extra

money, because they have to pay their external transmitters to file

electronically. That would be another example.

Let me shift to another taxpayer segment where I still think we

have a problem. One of the advantages of electronic filing is that

if you’re a refund taxpayer, you get your refund in 2 weeks instead

of 6 weeks. So you have an acceleration of funds by 4 weeks.

If you’re a balance due taxpayer, which constitutes about 30 percent of the tax-paying public, you don’t have the advantage of a

rapid refund. In fact, filing electronically actually separates you

from your money more quickly than if you were paying by check.

There’s always been a lot of concern that electronic filing does not

present to the balance due taxpayer the advantages that it presents to the refund taxpayer.

Mr. COYNE. At the bottom of page 2 in your testimony, you say

clearly, although the IRS has made a good start with electronic filing, the broadest possible set of new initiatives must be considered.

Mr. LACIJAN. Yes.

Mr. COYNE. Including those that require legislative action. Would

you just touch on a few that you think require legislative action?

Mr. LACIJAN. Certainly. Let me give a few examples. It depends

on how far out of the box you want to think. But basically, things

that have been brought up in the past would be tax credits filing

electronically. This could be an expensive item. If you gave people

a $5 tax credit for filing electronically, 100 million returns end up

costing you a half a billion dollars.

On the other hand, if you think of it as a reduction of taxes for

people who help their government by filing electronically, maybe in

that perspective it’s not so expensive.

56

The IRS Restructuring Commission actually recommended due

date extensions for electronic filing. Really that would require legislative action.

Likewise, instead of a due date extension, if there was a

warehousing of payments so if people who filed and paid electronically would at least get the same type of float that paper filers do,

that would require a legislative extension, legislative action. And if

we wanted to introduce new legislation, or to change the signature

requirement around to allow IRS to waive the signature requirement, that actually has been done in the IRS Restructuring Act,

but apparently the IRS has not taken advantage of that. It’s possible that even more legislative action could be taken in that area.

Mr. COYNE. Thank you very much.

Mr. HOUGHTON. Thank you. Mr. Portman.

Mr. PORTMAN. Mr. Lacijan, thank you for your service as Chair

of this important Committee and your ongoing interest in the IRS.

I thought you might have had enough after being on the commission staff, and working at this diligently for about a year and a

half. But apparently you haven’t, and I’m very happy that you continue to focus on this so much and spend so much of your time on

it.

There’s nobody I know of who has a better grasp of this and has

a more objective approach to it. So we are lucky to have you, we

being the taxpayers of the United States.

As you know, I feel that we could have done more in the legislation, and I wish the IRS were doing more even with what we did

legislate in this area. I don’t want to get into a lot of issues where

we can’t make progress this morning. But if you could just briefly

tell us what your recommendation would be, either personally or

representing the Committee in your role as Chairman, with regard

to time extensions.

As you know, I believe that is something that could provide an

incentive to electronic filers. The 80 percent goal is going to be

tough to reach. I think by having a 19-percent increase in electronic filing, we have made a first good step. But every additional

percentage beyond that 19 percent is going to be harder and harder

to achieve, I would think.

And finally, to get that marginal increase at the end is going to

be, I would imagine, tougher than any of us had anticipated. So if

you could comment briefly on whether you think that’s a specific

issue where we could make some progress through legislation and

the IRS implementation.

Mr. LACIJAN. I think there are several issues surrounding this.

We did some analysis during the Restructuring Commission, which

you may recall, looking at when people file. Basically, there’s a

group of refund taxpayers who tend to file early, February, March,

because they want to get their refund quickly. Electronic filing is

very appealing to this group.

There’s also a group of balance due taxpayers who tend to wait

until the very end, April 15. They put their check in the mail along

with their return, and because of the flood of, there’s virtually 20

million returns that come in the last week. So their return and

their check goes up to the local service center. It might sit in a van

for a couple of days, it gets opened eventually. By the time the IRS

57

gets around to cashing that check, it probably doesn’t hit their account until maybe the 1st of May.

So people want to take advantage of that float.

Mr. PORTMAN. That’s the warehousing of tax payments you

talked about earlier.

Mr. LACIJAN. People who file on paper get an automatic

warehousing of 2 weeks, because it’s literally in the truck or in the

service center and doesn’t hit their accounts. Then you have a third

group of people who I would call the procrastinators, who are probably the best example of this. I once saw a cartoon during the Restructuring Commission, it showed this harried executive getting

on a plane. And it says, Harry is flying to the West Coast so he

can have three more hours to file his tax return.

So we have about 10 million refund taxpayers who also file during the last week of April, which doesn’t make economic sense, but

it’s somewhat human nature that people put things off. So if you

look at especially those last two groups, these are people who

would like to take the extra time, the balance due people obviously

have a rational reason for filing late, because they want to get another extension, and the procrastinators, clearly, they’re just too

harried.

One of the things we find is, if you talk to paid preparers, they

are responding to their clients’ needs. If clients would come to their

preparers and say, look, we don’t want to file until the 30th, we’ll

gladly file electronically just to get that extra 2 weeks, I think

there would be a lot of demand that would enter from the client

side of the preparer segment saying, we want to file electronically

just to take advantage of those 2 weeks.

Now, I would like to address the economic issues associated with

that for a second. Because if you do, if you allow either a time extension of two or 4 weeks, which is what the Commission recommended, for the balance due taxpayers, you would lose two to

4 weeks of float, of that money. However, if you consider the equivalent for paper, they’re already getting 2 weeks of float, so the IRS

actually is incentivizing them in a way to stay in paper.

Also, we have already accelerated the refunds for 70 percent of

taxpayers by cutting down their refund from 6 weeks to 2 weeks.

So no one has really ever costed that out in terms of the extra service we’re giving taxpayers. I say we should at least give balance

due taxpayers the same type of break we’re giving the refund taxpayers.

Mr. PORTMAN. But the other point you made, of course, was the

net cost to the Federal Government would probably be lower, based

on the analysis that you and others did at the Commission, because

of the savings to the government of not having all those costs, overhead, labor costs and so on, and error costs that are incurred in

paper returns as opposed to electronic filing.

Mr. LACIJAN. That is correct. Also, if people file electronically and

they pay electronically, that does reduce a lot of the processing

costs associated with the payment as well, not just the filing.

Mr. PORTMAN. Well, I hope that as you try to reach your goal of

80 percent, you will continue to encourage us, nip at our heels here

in Congress, try to get us to move forward with new initiatives to

58

meet what is a very ambitious but very important goal for the taxpayer. Thanks, Chuck.

Mr. LACIJAN. One thing I’ve discovered during the ETAAC meetings is that our members are definitely not bashful.

Mr. HOUGHTON. Thank you very much. Mr. Hulshof.

Mr. HULSHOF. Thank you, Mr. Chairman. Mr. Lacijan, welcome.

Earlier this morning I had the opportunity to address a group of

Washington interns. I had one bright, energetic young fellow who

actually is doing an internship right now with the Internal Revenue Service.

During the question and answer session, we talked about electronic filing. He posed the hypothetical that maybe we should provide some financial incentive to taxpayers, through a tax deduction

or tax credit. I think he’s got a bright future on the Ways and

Means Committee ahead of him. I think he’s from your district, Mr.

Portman, so you may want to inquire.

Earlier this Committee had a hearing on simplification, and it

was on the Chairman’s idea. I had a constituent who was sitting

where you are, a tax practitioner. The essence of his testimony was

that taxpayers really don’t have an intimate knowledge of their financial affairs, and thus, many more paid preparers are being

brought into the loop.

What can the Service do, the IRS do, to make it more attractive

for paid preparers? I notice on Table 1, Page 3, that there is an increase, at least a projected increase and an actual change of positive increase as far as practitioners. But what can be done to encourage paid preparers to utilize electronic filing?

Mr. LACIJAN. I think ultimately to attract paid preparers, and I

really believe that if we’re going to reach the goal in 2007, the IRS

needs virtually every paid preparer to file electronically. That’s a

big hurdle to overcome. But I think that’s actually what it’s going

to take.

What that means is the IRS will have to make it so attractive

to paid preparers that it really provides them such a competitive

edge over the paper preparer that there’s no choice, they have to

do it.

Now, let me talk about some of the things that might motivate

that. And I think that some recent research has indicated, it’s not

necessarily just money. It wouldn’t necessarily be reimbursing the

paid preparer like $2 or $3 per every electronically filed return

they sent in. It has more to do possibly with services they could

offer their clients that paper preparers could not.

Some of the things that have been considered here are electronic

power of attorney. If paid preparers could have electronic power of

attorney, they could intercept some of the notices or deal with IRS

directly on their client’s behalf much more easily. That would be

very attractive to paid preparers.

Another item might be access to account information. If paid preparers with the appropriate power of attorney could actually access

an IRS account for their clients, and this is especially true in the

business world, because you know, as individuals we pay once a

year and we file, but businesses pay many more taxes, withholding,

they have 941s, 942s, their own corporate tax. So if they could,

59

sometimes things are more likely to go awry in terms of payments

being misapplied over different periods.

So if a tax preparer could actually access the client’s account

electronically on his own and find out where his client stood, I

think that would be another very attractive service for tax preparers. We can’t know too much about how the tax preparers do

their businesses and what makes their businesses more efficient.

Those are the types of things, I think, that would make it far more

attractive.

Let me touch on one other item. The IRS calls this third party

rules. But right now, there are a number of different types of preparers. One would be a circular 230 preparer. These are tax professionals, they are either accountants, CPAs, they’re lawyers or

they’re enrolled agents. They have licenses, they have standards of

conduct, they have what they call continuing professional education, or CPE, requirements. They are regulated, CPAs and lawyers, they all have a different way of getting their license, but

they’re all basically regulated.

Then we have a process called electronic return originator. These

are people who have been licensed or approved by the IRS to file

electronically. They also have an application and approval process

they go through.

Then there’s another group, people who just file on paper. That

could be virtually anybody. I could go home and hang out a shingle,

as could you when you retire, and offer tax preparer services.

These people don’t go through the suitability checks that EROs go

through or the licensing checks that the circular 230 preparers go

through.

So one of the concerns of ETAAC, and this is mentioned in our

report, is that the IRS is sending out a clear, but somewhat unintentional message, that if you really want to avoid standards, stick

to the world of paper. We think this is something that deserves

some scrutiny. It’s been pointed out to me that it takes 1,000 hours

of training before someone is license as a barber. But yet we allow

anybody to do tax returns.

No one has suffered financially that I’m aware from a bad haircut. Yet anybody can do a tax return.

Mr. HULSHOF. Thank you, Mr. Lacijan. Thank you, Mr. Chairman.

Mr. HOUGHTON. Thank you very much. Thanks, Mr. Lacijan, certainly appreciate your testimony. It’s wonderful to have you here.

Mr. LACIJAN. It’s a pleasure to be here.

Mr. HOUGHTON. All right, thank you.

Now we’re going to hear from Mr. James R. White, Director of

Tax Policy and Administration Issues in the General government

Division of the U.S. General Accounting Office.

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STATEMENT OF JAMES R. WHITE, DIRECTOR, TAX POLICY AND

ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE; ACCOMPANIED

BY RANDOLPH C. HITE, ASSOCIATE DIRECTOR, GOVERNMENTWIDE AND DEFENSE INFORMATION SYSTEMS, ACCOUNTING AND INFORMATION MANAGEMENT DIVISION

Mr. WHITE. Mr. Chairman and Members of the Subcommittee,

I’m very pleased to be here today on the anniversary of the IRS Restructuring and Reform Act to discuss management challenges that

IRS faces as it modernizes. Accompanying me is Randy Hite, Associate Director responsible for our work on IRS’ information systems.

In passing the Restructuring Act, Congress signaled its strong

concern that IRS had been over-emphasizing revenue production at

the expense of service and fairness to taxpayers. In that spirit,

Commissioner Rossotti has provided a compelling vision of a new

IRS, one that provides top quality service to taxpayers.

The Commissioner has more than a vision, however. In addition

to a new mission statement and strategic goals, he has outlined

and begun to implement a modernization strategy that includes reorganizing IRS, new business practices, new accountability, new

performance measures and new technology. If successfully implemented the modernization strategy could fundamentally change

IRS’ culture to one that embraces taxpayer service as a core value.

Given the magnitude of what is planned, it should surprise no

one that IRS, an agency with a long history of stovepipe management and a culture driven by enforcement statistics, will be challenged to accomplish its ambitious agenda. Three areas of challenge stand out.

First, implementing such a comprehensive strategy while continuing the business of day to day tax administration will push IRS

managers and staff to their limits. While challenging, we agree

with the Commissioner that a comprehensive approach is proper.

Simply reorganizing IRS, for example, without concurrent changes

to work process and information systems, will do little to improve

the quality of service to taxpayers.

Second, if it is to deliver better service, IRS must deal with several challenges in how it develops and manages its human capital.

For example, performance measures can create strong incentives to

change behavior. But IRS has yet to develop one of its measures

of organizational performance, the taxpayer compliance rate. Without this, IRS has said that:

Informed decisions on strategies to encourage voluntary compliance . . . will be

impossible, and the historic tendency to fall back on enforcement revenue as a measure of performance may reoccur.

Another human capital challenge involves IRS’ employee evaluation system. In ongoing work for this Subcommittee, we found that

the current evaluation system does not support the new IRS mission, and some IRS managers seem confused about the distinction

between good customer relations and revenue collection. For example, one manager in commenting favorably on an employee’s customer relations skills wrote, ‘‘The agent always seeks to obtain full

payment of the deficiency, penalties and interest.’’

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1P.L. 105–206 (July 22, 1998).

While collecting outstanding tax liabilities is important, this is

not what is meant by customer relations. It may be years before

IRS has a new evaluation system fully in place. Fortunately, our

ongoing work also shows there are opportunities in the interim to

better utilize the existing evaluation system to support improved

taxpayer service.

One more human capital challenge is ensuring that IRS managers from frontline supervisors through the senior executive corps

have the skills they need to lead and manage the new IRS. Our

work has shown that basic management tools are not always routinely used. To illustrate, when we reviewed 19 of IRS’ customer

service improvement initiatives that had progressed beyond the

planning phase, we found many were missing basic management

information such as completion dates and performance measures.

To their credit, IRS executives have been responsive to our findings. But we believe generating and using such basic management

information needs to become routine.

The third area of challenge I want to discuss is information systems modernization. The challenges include completing the modernization blueprint, establishing the capability to build and acquire modern systems, and investing in small, low-risk increments.

The key to effectively addressing these challenges is to ensure that

longstanding modernization management and technical weaknesses

are corrected before IRS invests large sums of modernization funds.

There is some good news. Last month we reported that IRS has

initiated appropriate first steps to address these weaknesses. While

IRS is on the right track, these first steps will not fully implement

our past recommendations or eliminate systems modernization

weaknesses. IRS leadership says it understands and is committed

to fully implementing our recommendations.

Mr. Chairman, that concludes my statement. We would be happy

to answer questions.

[The prepared statement follows:]

Statement of James R. White, Director, Tax Policy and Administration

Issues, General Government Division, U.S. General Accounting Office

Mr. Chairman and Members of the Subcommittee: I am pleased to be here today

on the 1-year anniversary of the Internal Revenue Service (IRS) Restructuring and

Reform Act of 1998 (Restructuring Act) 1 to discuss management challenges that IRS

faces in modernizing its organization and reforming its culture. As my testimony

underscores, the challenges that the agency faces in implementing these reforms are

no less significant than the value of the improvements that could be achieved.

Depending on the outcome of IRS’ efforts, enactment of the Restructuring Act may

prove to be a significant turning point in the history of IRS. Its passage signaled

Congress’ strong concern that IRS had been overemphasizing revenue production

and compliance at the expense of fairness and service to taxpayers. It also mandated changes to improve the situation. Among other things, the Restructuring Act

required IRS to (1) adopt a new mission statement to place greater importance on

serving the public and meeting taxpayer needs, (2) develop and implement a reorganization plan to include the establishment of new operating units serving particular

groups of taxpayers having similar needs, (3) conduct training programs to ensure

that managers and frontline employees are schooled in the importance of customer

service and have the skills to provide it, and (4) carry out numerous specific actions

to enhance taxpayers’ rights.

Commissioner Rossotti has embraced the spirit of the Restructuring Act and provided a compelling vision of what he wants IRS to become—a fully modernized

agency providing top-quality service to taxpayers. The Commissioner has more than

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2 IRS’ new mission statement reads, ‘‘Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.’’ IRS’ supporting strategic goals are to (1) provide top quality service

to each taxpayer, (2) provide service to all taxpayers by applying the law with integrity and fairness, and (3) increase productivity by providing a quality work environment for its employees.

a vision, however. In addition to a new mission statement and supporting strategic

goals,2 he has also outlined and begun to implement a modernization strategy that

includes five interdependent components—what IRS has dubbed its ‘‘five levers of

change.’’ The five components are (1) revamped business practices, (2) organizational restructuring, (3) management roles with clear responsibility, (4) balanced

measures of performance, and (5) new technology. If successfully implemented, the

modernization strategy could fundamentally change IRS’ culture to one that embraces customer service as a core organizational value.

Given the reforms that are planned, it should surprise no one that IRS—an agency with a long history of stovepipe management and a culture driven by enforcement statistics—will be challenged to accomplish so ambitious an agenda. IRS has

a poor track record for implementation, and many of its past efforts would be considered modest in comparison to the current modernization.

My statement today is based on our past work and our ongoing reviews of IRS’

reorganization process, its performance management system, and systems modernization efforts. My statement makes the following points.

• We agree with the Commissioner that the various components of IRS’ modernization must be implemented in an integrated fashion. Simply restructuring the

organization, for example, without concurrent revisions to work processes and related information systems, will do little to improve the quality of service being provided to taxpayers. However, successfully implementing such a comprehensive modernization strategy, while continuing the business of day-to-day tax administration,

will push IRS managers and staff to their limits. Particularly important will be the

capacity of middle managers to lead and manage comprehensive change.

• No matter how much IRS changes its organization, work processes, and information systems, its ability to fundamentally change the way it interacts with taxpayers hinges on its ability to ensure that employees demonstrate the desired attitudes and behaviors. A results-oriented approach to managing human capital has

the potential to deliver such a result. To fully realize this potential, IRS must finish

developing key organizational performance measures, deal with an employee evaluation process that is not currently aligned with IRS’ new mission, and develop and

deliver a comprehensive training program for both frontline staff and middle managers.

• IRS continues to face formidable system modernization challenges. They include

(1) completing the modernization blueprint that IRS issued in May 1997 to define,

direct, and control future modernization efforts; (2) establishing the management

and engineering capability to build and acquire modernized systems; and (3) investing in small, low-risk, cost-effective modernization increments. The key to effectively

addressing these challenges is to ensure that long-standing modernization management and technical weaknesses are corrected before IRS invests large sums of modernization funds. IRS recently initiated appropriate first steps to address these

weaknesses via its initial modernization expenditure plan that represents the first

step in a long-term, multi-increment modernization.

ABILITY TO MANAGE AND INTEGRATE THE INTERDEPENDENT CHANGE EFFORTS IS

CRITICAL TO IRS’ SUCCESS

One great strength of IRS’ modernization strategy is its comprehensive approach

to change. If implemented in an integrated manner, the five levers of change can

fundamentally alter the way IRS interacts with taxpayers. However, this comprehensive approach also presents a major challenge for IRS. Effectively implementing such a broad and complex set of interdependent changes will strain IRS

managers and staff. Having to do so while continuing to operate the existing tax

administration process will strain them even further.

The Commissioner believes, and we agree, that to effect real change, IRS must

address all five components of its change strategy concurrently because the components are interdependent. Simply restructuring IRS, without concurrent changes in

processes for interacting with taxpayers and in the measures that are used to assess

those interactions, will have little impact on service to taxpayers. Similarly, it

makes little sense to design new work processes without providing employees with

the tools they need to effectively implement the new processes. For example, IRS

cannot provide top-quality service to taxpayers who have questions about their acVerDate 20-JUL-2000 12:30 Jan 05, 2001 Jkt 060010 PO 00000 Frm 00066 Fmt 6633 Sfmt 6602 K:\HEARINGS\67584.TXT WAYS1 PsN: WAYS1
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3 Numerous reports in recent years have discussed results-oriented management principles

and implementation of the Government Performance and Results Act (P.L.103–62) by federal

agencies. A major report addressing these issues was Effectively Implementing the Government

Performance and Results Act (GAO/GGD–96–118, June 1996). 4Taxpayer compliance is the extent to which taxpayers file required returns, correctly determine their tax liability, and pay the taxes they owe.

counts unless employees can quickly access a modern information system that contains accurate and up-to-date information on taxpayers’ accounts.

Undertaking all of the work associated with business and systems modernization

while continuing to process returns, maintain taxpayer accounts, and enforce the

tax law will push IRS managers and staff to their limits. Accordingly, the Commissioner and his senior executives are attempting, among other things, to set priorities

and adjust time frames. For example, in light of the provision in the Restructuring

Act that specified a goal of having 80 percent of all returns filed electronically by

2007, the Commissioner adjusted the sequencing of information system development

efforts by accelerating electronic filing elements.

For IRS modernization to succeed, however, middle managers will also have to

play a role. Because of the magnitude of the proposed changes, these managers will

have to take responsibility for developing many of the details of change initiatives

and pushing the initiatives down through the organization. Particularly important

is the capacity of middle managers to lead and manage comprehensive change. I will

talk more about management capacity later.

IRS will also have tough choices to make in balancing ‘‘stay-in-business’’ needs

with long-term improvements. For example, IRS will have to evaluate the trade-offs

between changing existing information systems to support or enhance current operations and waiting for the new business processes and systems to be rolled out.

Based on over a decade of work, we believe that a results-oriented, performancebased approach to management can provide IRS with the tools it needs to meet the

formidable challenges inherent in its comprehensive approach to change. We are

heartened by the fact that the modernization strategy outlined by the Commissioner

is consistent with such an approach. As noted earlier, reorganizing IRS alone will

not fundamentally change the way IRS interacts with taxpayers. Indeed, our case

studies of leading organizations using performance and accountability management

principles found that the organizations had varied structures, but similar resultsoriented management strategies.3 By integrating results-oriented management into

the day-to-day activities and culture of the organization and holding managers accountable for doing the same, IRS can help avoid the danger of its reforms becoming

hollow, paper-filled exercises. Among other things, results-oriented management includes (1) building, maintaining, and marshaling the knowledge, skills, and abilities

of employees (i.e., human capital) and (2) developing and effectively using information systems to achieve program results. As discussed in the next two sections, results-oriented management of its resources, both human capital and information

systems, poses significant challenges for IRS.

MANAGING FOR PERFORMANCE POSES SIGNIFICANT HUMAN CAPITAL CHALLENGES

New business processes, organizational structure, and technology—alone or together—will not significantly improve service to taxpayers without corresponding

improvements in how IRS manages and develops its human capital. A results-oriented approach to managing human capital—an approach that aligns employee performance management and training with IRS’ new mission statement, strategic

goals, and performance measures—has the potential to deliver such improvements.

However, to realize the potential, IRS needs to overcome three challenges. First, a

key organizational performance measure, the rate of taxpayer compliance with the

tax laws, has not been developed. Second, a new employee appraisal system aligned

with the organizational measures is years away from complete implementation. And

third, training that addresses the needs of different employee groups, such as middle managers, has not been developed.

Performance Measures

Performance measures can create powerful incentives to achieve the cultural and

behavioral changes that will be needed for IRS to effectively perform its new mission. IRS has begun implementing a new set of organizational performance measures that are to balance customer satisfaction, employee satisfaction, and business

results. However, some measures have yet to be developed.

Developing a business results measure of taxpayer compliance 4 that can be balanced with customer satisfaction will be particularly important. As IRS has stated,

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5Modernizing America’s Tax Agency (IRS Publication 3349, Feb. 1999, pp. 44–45). 6Tax Administration: Taxpayer Rights and Burdens During Audits of Their Tax Returns

(GAO/T–GGD–97–186, Sept. 26, 1997). 7 IRS Personnel Administration: Use of Enforcement Statistics in Employee Evaluations (GAO/

GGD–99–11, Nov. 30, 1998).

in the absence of such compliance measures, ‘‘informed decisions on strategies to encourage voluntary compliance . . . will be impossible, and the historic tendency to

fall back on enforcement revenue as a measure of performance may reoccur.’’ 5 In

a hearing held by this Subcommittee almost 2 years ago, we highlighted our concerns about overreliance on enforcement revenue as a measure of performance.6 We

concluded that such overreliance could create undesirable incentives for IRS auditors to recommend taxes that would be unlikely to withstand a taxpayer challenge,

imposing an unfair and unnecessary burden on some taxpayers.

In the past, IRS measured compliance through its Taxpayer Compliance Measurement Program (TCMP). Studies done under that program involved detailed audits

of a statistically valid sample of tax returns. IRS discontinued these studies because

of concerns about the additional burden placed on the taxpayers who were the subjects of the detailed audits. Since then, IRS has not identified a viable substitute

for TCMP studies to assess overall compliance.

Without a measure of taxpayer compliance, IRS cannot balance business results

with customer satisfaction. Further, taxpayer compliance studies have been used to

help IRS target audits on the most noncompliant taxpayers. Consequently, the lack

of current compliance data could actually decrease service to taxpayers. IRS is concerned that increasingly out-of-date information on compliance will result in more

and more compliant taxpayers being hit with unnecessary audits. For both these

reasons, we believe that IRS needs a strategy for ensuring the availability of statistically valid compliance data, while limiting the burden that collecting such data imposes on taxpayers.

Employee Evaluation Process

Because IRS’ current employee evaluation process is not aligned with its new mission and does not support the culture that IRS hopes to create, it must be revised.

Last year, we reported that 75 percent of IRS’ revenue agents, tax auditors, and revenue officers believed that tax enforcement results affected their evaluations—despite an IRS policy prohibiting the use of such results in evaluating employee performance.7 Our ongoing review of the two most recent evaluations received by these

employees bears out such perceptions. In examining a random sample of their evaluations, we found a strong emphasis on compliance compared to customer service.

Moreover, when supervisors made comments on customer service, they sometimes

seemed to equate good customer relations with success in obtaining full payment in

every case. To illustrate, when discussing customer relations skills, one manager

wrote in an employee’s evaluation:

Over the last year, the Service is emphasizing that payments be obtained at

the conclusion of the examination. It can truly be said that the agent has kept

to this philosophy. The agent always seeks to obtain full payment of the deficiency, penalties, and interest. This shows a strong commitment to the Service

programs.

IRS says that it recognizes the problems with the current evaluation process and

the important role that employees will have in modernizing the agency. IRS expects

to change the evaluation process when it revamps its entire performance management system.

Although IRS is on the right track, it will be years before a new evaluation process is fully operational. IRS cannot afford to wait that long. It is frontline employees—not their supervisors or other IRS managers—who have the most direct and

potentially confrontational interactions with taxpayers. Continued reliance on an

evaluation process that fails to adequately balance service to taxpayers with compliance potentially could undermine the success of the entire modernization effort. Although organizational structure and systems are important, it is the attitudes and

behaviors of employees that will ultimately affect taxpayers.

Fortunately, there are opportunities for reinforcing the importance of serving taxpayers within the current evaluation process. During our ongoing review of the existing evaluation process, we identified several features, such as narrative comments and field visits, that supervisors do not use systematically when evaluating

their employees. These features could be used to greater advantage to reinforce the

importance of customer service among enforcement employees. For example, the

narrative portion of an employee’s written evaluation provides supervisors with an

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8 IRS Customer Service: Management Strategy Shows Promise But Could be Improved (GAO/

GGD–99–88, May 5, 1999).

opportunity to focus on employees’ customer service skills and contributions. Also,

field visits that are to be conducted as part of the employee evaluation process could

provide excellent vehicles for supervisors to directly observe employee-taxpayer

interactions and to provide coaching and feedback to employees.

Training

Training has proven to be an important tool for agencies that want to change

their cultures. To have this kind of impact, IRS’ training will have to be comprehensive both in its subject matter and in who receives it. Training will need to (1) cover

the new organizational structure, new business processes, and new information systems; (2) cover performance measures and the use of such measures to manage IRS;

(3) be provided to all employees from frontline staff to senior managers; and (4) be

aligned with the performance management system and new mission. For training

to have real impact, it will have to be continuously reinforced in the day-to-day work

environment. IRS is still defining its modernization-related training requirements

and assessing its ability to deliver those requirements, but the plans we’ve seen

thus far address all four of the issues outlined above. However, implementing all

of this will be neither cheap nor easy.

After reorganization, most frontline employees and their immediate supervisors

are to be in the same or similar jobs. Job-specific training will be important, however, because IRS is beginning to implement significant changes to its organization,

processes, and information systems. For example, in lieu of hiring a large number

of seasonal employees to handle the return processing workload during the annual

filing season, IRS plans to increase the number of permanent employees and expand

their job responsibilities to include compliance work that they can do after the filing

season. Those employees will have to be cross-trained so that they can handle both

their return processing and compliance responsibilities. Other employees who will

have to be cross-trained to handle the responsibilities envisioned by IRS’ plans include (1) managers who are to supervise groups that include persons doing audit

work and persons doing collection work and (2) employees, referred to as ‘‘tax resolution representatives,’’ who are to provide an array of services, including certain

audit and collection services, to taxpayers visiting IRS walk-in sites. This kind of

cross-functional expertise is consistent with IRS’ efforts to provide top-quality customer service. It remains to be seen whether employees can effectively fill these

kinds of cross-functional roles, but it is clear that training will be a critical factor

in their success. Another factor will be the way training is reinforced outside the

classroom, for example, by supervisors acting as role models.

As I mentioned earlier, the changes envisioned at IRS are so comprehensive that

the agency’s top leadership cannot work below a very strategic level. Fundamentally

changing the way IRS interacts with taxpayers depends on the capacity of lowerlevel managers, from frontline supervisors up through the senior executive service,

to do the detailed planning, leading, and managing necessary for successful IRS

modernization. These lower level managers must be skilled in planning, performance measurement, and the use of performance information in decision-making. Our

work has shown that ensuring that IRS has the capacity it needs in this area will

be a challenge.

For example, in January 1998, IRS established a central Taxpayer Service and

Treatment Improvement Program to oversee implementation of numerous customer

service improvement initiatives that were on the books at that time. By January

1999, IRS had set priorities and assigned accountability for their completion to specific executives. However, when we reviewed 19 of the initiatives that had progressed past the planning and design phase, we found that many were missing basic

management information such as completion dates and performance measures.8

Such basic management information should allow IRS to track progress toward

goals and provide a better basis for organizational and management decisions.

To their credit, IRS executives have been responsive to our findings and now have

draft guidance for implementing our recommendations. Our point today is that such

guidance should not have been necessary. Generating and using basic management

information needs to become routine for all levels of IRS management.

IRS CONTINUES TO FACE FORMIDABLE SYSTEMS MODERNIZATION CHALLENGES

The challenges that IRS faces in modernizing its tax systems are significant, and

the stakes are high. IRS’ well-publicized, failed prior attempts to leverage information technology in administering our nation’s tax laws serve as an alert to the sigVerDate 20-JUL-2000 12:30 Jan 05, 2001 Jkt 060010 PO 00000 Frm 00069 Fmt 6633 Sfmt 6602 K:\HEARINGS\67584.TXT WAYS1 PsN: WAYS1
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9Tax Systems Modernization: Management and Technical Weaknesses Must Be Corrected If

Modernization Is To Succeed (GAO/AIMD–95–156, July 26, 1995). 10 High-Risk Series: An Overview (GAO/HR–95–1, Feb. 1995). 11For example, see Tax Systems Modernization: Actions Underway But IRS Has Not Yet Corrected Management and Technical Weaknesses (GAO/AIMD–96–106, June 7, 1996) and Tax Systems Modernization: Blueprint Is a Good Start But Not Yet Sufficiently Complete to Build or

Acquire Systems (GAO/AIMD/GGD–98–54, Feb. 24, 1998). 12Tax Systems Modernization: Results of IRS’ Initial Expenditure Plan (GAO/AIMD/GGD–99–

206, June 15, 1999). 13GAO/AIMD–95–156, July 26, 1995. 14GAO/AIMD/GGD–98–54, Feb. 24, 1998.

nificant challenges that lie ahead. The key to effectively addressing these challenges

is to ensure that long-standing modernization management and technical weaknesses are rectified before IRS begins investing large sums of money.

In 1995, we reported on the weaknesses that were the root causes of IRS’ past

modernization problems, recommended ways to correct them,9 and designated the

modernization as a high-risk or ‘‘challenged’’ federal program.10 Since then, we have

reviewed IRS’ actions to address our recommendations and strengthen its modernization capability, such as the development of a modernization blueprint in May

1997, and we have made additional recommendations in light of IRS’ actions.11

The good news is that IRS’ executive team, under the direction of the Commissioner and Chief Information Officer, have initiated appropriate first steps to begin

addressing system modernization management and technical weaknesses. Last

month, we reported on IRS’ initial modernization expenditure plan.12 We concluded

that the initiatives defined in the plan were consistent with our past recommendations for establishing effective modernization management and engineering capabilities and incrementally acquiring architecturally sound system solutions to satisfy

validated business needs. Additionally, we found that the plan satisfied legislated

conditions for systems modernization.

The initial expenditure plan defines modernization initiatives for a 5-month period ending in October 1999 and thus represents the first incremental step in a

long-term, multi-increment modernization process. Once implemented, this initial

expenditure plan alone will neither fully implement our past recommendations nor

eliminate the systems modernization weaknesses and challenges that our recommendations are intended to effectively mitigate. IRS leadership says that it understands this and is committed to fully implementing our recommendations and effectively addressing the many challenges that lie ahead.

Our recommendations and the challenges still confronting IRS fall into the following three groups, each of which is discussed below: (1) completing the modernization blueprint; (2) establishing project management and system/software engineering capability; and (3) investing in small, low-risk, cost-effective modernization increments. Until our recommendations are fully implemented, we will continue to

designate IRS’ tax systems modernization as a high-risk and ‘‘challenged’’ federal

program.

Completing the Modernization Blueprint

In response to our 1995 recommendations,13 IRS issued, in May 1997, its modernization blueprint, including about 3,600 high-level business requirements, a

target enterprise systems architecture that described in general terms the future

systems environment needed to satisfy the business requirements, and a general sequencing plan for transitioning from IRS’ current systems environment to its future

systems environment. In September 1997 congressional briefings and in a subsequent report,14 we concluded that the blueprint provided a solid foundation from

which to define the level of detail and precision needed to effectively and efficiently

build a modernized system of interrelated systems. At the same time, we noted that

the blueprint was not yet complete and did not provide enough detail for building

or acquiring architecturally compliant systems. Additionally, because the blueprint

was developed before the Restructuring Act and the Commissioner’s organizational

modernization, we reported in January 1999 that the blueprint needed to be validated in light of these organizational and business process changes.

IRS has acknowledged these limitations and plans to complete the blueprint. In

fact, its initial expenditure plan defines initiatives intended to validate business requirements and provide missing architecture precision and detail for ongoing system

initiatives. Additionally, the initial expenditure plan provides for a revised modernization sequencing plan as well as the selection of enterprise architectural standards in such areas as data base management, security, communications, user interface, and client and server platforms.

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15 A UNIX platform consists of UNIX operating system software (originally developed at

AT&T’s Bell Laboratories and commercially available from various companies) and compatible

hardware, which together support the operation of application software. 16GAO/AIMD–95–156, July 26, 1995. 17GAO/AIMD/GGD–98–54, Feb. 24, 1998.

Completing the modernization blueprint poses a formidable challenge for several reasons. • First, IRS’ organizational and business restructuring is ongoing, meaning that

both completion of IRS’ enterprise systems architecture and revision of its sequencing plan must be closely coupled with and validated against these restructuring efforts. Doing so will not be easy and will require an unprecedented integration of

IRS’ business and systems organizational cultures. To do less presents the risk that

modernized systems will not effectively and efficiently support IRS’ core mission

needs. • Second, IRS has a series of enterprise architectural decisions that need to be

made before investing in modernized systems, beginning with architectural principles (e.g., Will users be supported regardless of geographic location? Will IRS’ existing investment in mainframe technology be preserved?), followed by logical architectural characteristics (e.g., What data structure will facilitate business process reengineering efforts? Should a geographic or a business process ‘‘tiered’’ architecture

be adopted?), and culminating in how technology will be physically implemented

(e.g., What operating system, hardware platforms, and database management system standard should be used?). The long-term implications of these interrelated enterprise architectural decisions are enormous. If properly made and effectively implemented, these decisions can guide and constrain the architectural makeup of a

secure, interoperable, scalable, and maintainable future systems environment. If

not, IRS will likely remain mired in its currently inefficient and ineffective

stovepiped systems environment. • Third, IRS must minimize the number of new system development and acquisition projects that it undertakes until it addresses the above key architectural decisions. Otherwise, IRS will be forced to align certain system-unique architectures

with its ‘‘to-be-completed’’ enterprise architecture. A case in point is IRS’ ongoing

Integrated Personnel System project, which is part of a Treasury-wide effort that

will use an Oracle database management system running on a UNIX platform.15

Once IRS’ enterprise architectural decisions have been made, IRS will have to integrate this personnel system with its systems developed or acquired according to its

enterprise architecture. Depending on the extent of compatibility, this could mean

that IRS will have to incur the cost of additional hardware and software associated

with integrating the different products.

Developing Project Management and System/Software Engineering Capability

IRS has historically lacked disciplined and structured processes for managing information technology (IT) projects and internally developing software-intensive systems. In 1995, we made recommendations to correct these weaknesses,16 and, in response, IRS defined (as part of its 1997 blueprint) a systems life cycle framework

that described the ‘‘cradle-to-grave’’ processes for managing IT projects and building

systems. At the same time, IRS stated its intention to rely more on contractors to

build modernized systems, and thus become a system/software acquirer rather than

an in-house system/software developer as it had been in the past. To this end, IRS

also stated that it planned to ‘‘partner with’’ a Prime Systems Integration Services

(PRIME) contractor in the acquisition and integration of modernized systems.

In February 1998, we reported that although the systems life cycle overview provided a reasonable framework, it was not yet complete and did not provide the needed specificity to adequately build modernized systems.17 For example, IRS did not

have detailed process definitions for any of the systems life cycle phases. In addition, organizational roles and authorities had not been adequately specified, making

it unclear who does what in each systems life cycle process and phase. We also reported that IRS had not yet defined and implemented the mature software processes, including software acquisition processes, that would be essential for IRS to

effectively manage contractors under its strategy for acquiring, rather than developing, software-intensive systems.

IRS has since hired a PRIME contractor, and in association with the PRIME, has

initiatives under way that are intended to establish the requisite management and

engineering capability needed to effectively modernize its systems. In particular,

IRS’ initial expenditure plan provides for establishing ‘‘enterprise life cycle’’ or ELC

management and engineering processes. ELC is to be an adaptation of the PRIME

contractor’s commercially available systems life cycle management approach and asVerDate 20-JUL-2000 12:30 Jan 05, 2001 Jkt 060010 PO 00000 Frm 00071 Fmt 6633 Sfmt 6602 K:\HEARINGS\67584.TXT WAYS1 PsN: WAYS1
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18This model was developed by the Software Engineering Institute at Carnegie Mellon University to evaluate an organization’s software development or acquisition capability. 19GAO/AIMD/GGD–99–206, June 15, 1999. 20GAO/AIMD–96–106, June 7, 1996. 21P.L. 104–208, Sept. 30, 1996; P.L. 105–61, Oct. 10, 1997; and P.L. 105–277, Oct. 21, 1998. 22P.L. 104–106, Feb. 10, 1996. 23 Evaluating Information Technology Investments, A Practical Guide (Executive Office of the

President, OMB, Nov. 1995) and OMB Memorandum M–97–02, Funding Information Systems

Investments (Oct. 1996), referred to as the ‘‘Raines Rules.’’ 24GAO Executive Guide: Improving Mission Performance Through Strategic Information Management and Technology, Learning From Leading Organizations (GAO/AIMD–94–115, May

1994). 25 Assessing Risks and Returns: A Guide for Evaluating Federal Agencies’ IT Investment Decision-making (GAO/AIMD–10.1.13, Feb. 1997).

sociated tools, incorporating needs that are unique to IRS, such as key life cycle decision points. IRS concluded that adapting the PRIME contractor’s commercially

available methodology to meet IRS’ needs would be less costly and faster than completing the systems life cycle contained in its 1997 blueprint. We reviewed the

PRIME contractor’s commercially available methodology and found that it meets the

requirements specified in the blueprint’s systems life cycle overview and is consistent with the approaches that successful private and public sector organizations

use to manage large IT projects.

In addition, IRS’ initial expenditure plan provides for institutionalizing mature

software/system acquisition processes. That is, as part of the ELC, IRS intends to

define and implement software development and acquisition processes in accordance

with Software Engineering Institute capability maturity model requirements.18

Among this maturity model’s requirements are disciplined and rigorous processes,

procedures, and practices for effectively acquiring software-intensive systems

through the use of contractors, including processes concerning requirements development and management, contractor solicitation and selection, contractor tracking

and oversight, and evaluation of contractor delivered products.

Significant challenges still confront IRS in institutionalizing project management

and software/system engineering rigor and discipline and thus putting in place the

capability needed to effectively modernize. For example, the ELC processes, procedures, practices, handbooks, models, methods, and tools need to be established,

which means that the contractor’s commercially available methodology must first be

tailored to meet IRS’ needs. Next, IRS has to implement the ELC on its IT projects,

which requires training IRS personnel on how to use and apply the ELC. Further,

IRS will need to establish structures and processes to ensure that IT projects comply with the ELC.

Compounding these challenges is IRS’ simultaneous need to ensure that it effectively manages the PRIME and other contractors involved in each of the ongoing

modernization projects, pending completion and institutionalization of the ELC. For

example, we reported in June 1999 19 that IRS had not yet defined the respective

roles of the Service and its modernization contractors. Consequently, IRS undertook

an effort to develop a Concept of Operations document that defines the roles, responsibilities, authorities, structure, and rules of engagement for the PRIME, IRS,

and other IRS support contractors. To ensure that this important task is completed

before modernization begins, we recommended in our June report that IRS report

on its progress in completing this task in its next modernization expenditure plan.

Incrementally Investing in Modernized Systems

To minimize the risk of IRS investing in systems before our recommendations

were fully implemented, we have recommended every year since June 1996 that

Congress limit IRS’ IT spending to certain cost-effective categories, such as small,

low-risk, and cost-effective efforts that can be delivered in a relatively short time

frame.20 In IRS’ fiscal year 1997, 1998, and 1999 appropriations, Congress limited

IRS’ IT spending to efforts consistent with these categories.21 Such an incremental

approach to investing in modernized systems is used by leading public and private

sector organizations. In addition, the Clinger-Cohen Act 22 and Office of Management and Budget (OMB) policy 23 endorse this approach to funding large system development investments. Using this approach, organizations take large, complex

modernization efforts and break them into projects and subprojects that are narrow

in scope and brief in duration.24 This enables organizations to determine whether

a project delivers promised benefits within cost and risk limitations and allows them

to correct problems before significant dollars are expended, which in turn mitigates

the risk of program failure.25

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26GAO/AIMD/GGD–99–206, June 15, 1999.

Consistent with our recommendation for incremental investment, IRS has adopted

a modernization investment strategy under which it is to first develop and implement the management and engineering capability to build modernized systems and

then incrementally invest in manageable, discrete system initiatives that are to be

specified in its revised sequencing plan. IRS’ commitment to incremental investment

management is the initial step. The real challenge is translating commitment into

everyday practice. To do so, IRS must define structures and processes for project

selection, control, and evaluation that specify, among other things, who is responsible and accountable for making investment decisions, the criteria that will be used

to make decisions, the analysis and information upon which to base decisions, and

the tools and methods to be used in performing the analysis and generating the information. IRS will also need to ensure that these structures and processes are institutionalized through training and enforcement.

Central to IRS’ incremental investment management strategy will be the need to

break large system projects into a sequence of incremental builds that is economically justified on the basis of a compelling business case. Additionally, IRS will need

to track and monitor whether each increment is producing promised benefits and

meeting cost and schedule baselines and ensure that this information is reliably reported to executive decisionmakers. By doing so, organizations can address

variances from expectations incrementally, before significant dollars are expended.

To this end, we recommended in our June 1999 report 26 on IRS’ initial expenditure

plan that IRS fully disclose in future expenditure plans its progress against incremental goals, deliverables, and benefit expectations. As it has with each of our recommendations aimed at mitigating the systems modernization challenges that it

faces, IRS has agreed to do so.

In summary, the modernization effort under way at IRS has the potential to deliver improved service to taxpayers. IRS’ agenda, though, is both ambitious and

high-risk. We have been impressed by the Commissioner’s leadership and commitment to change as well as IRS’ efforts to date. However, sustainable improvement

in service to taxpayers will depend on IRS’ managers successfully marshaling the

agency’s resources, both human and systems, to deal with that challenging agenda.

Mr. Chairman, this concludes my prepared statement. I would be happy to answer

any questions you or other Members of the Subcommittee might have.

Contact and Acknowledgments

For future contacts regarding this testimony, please contact James R. White at

(202) 512–9110. Individuals making key contributions to this testimony included

Randolph Hite, David Attianese, Deborah Junod, Gary Mountjoy, Agnes Spruill, and

Lorne Dold.

Mr. P

Mr. Coyne.

ORTMAN [presiding]. Thank you for your testimony.

f Mr. COYNE. Thank you, Mr. Chairman.

Mr. White, the GAO and in recognizing the GAO’s ongoing oversight of the IRS, are there any additional taxpayer rights that this

Subcommittee should consider enacting into law?

Mr. WHITE. The work we do at IRS, or much of the work we do,

involves looking at IRS controls to protect, among other things, taxpayer rights. And as we do that work, for example, in the audit

process at IRS or the collections process at IRS, we do make recommendations about how to improve those controls.

We have ongoing work on the seizures process at IRS, for example. Part of that work was requested by this Subcommittee and in

that work, we may be making recommendations about improving

those controls.

Mr. COYNE. Does the GAO support the IRS budget as proposed

by President Clinton, that is $8.2 billion, and 97,800 employees for

the fiscal year 2000?

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Mr. WHITE. We reported on the budget 3 months ago. At that

point, we said that the steps the Commissioner has outlined for

modernizing IRS are crucial if there’s going to be fundamental

change in the way that IRS interacts with taxpayers. At that time

what we said about the modernization part of the request was that

we didn’t have enough detail.

IRS is still very much in a planning stage. They’ve started implementing, but there’s still a lot of planning, a lot of detailed planning that they’re doing. So we didn’t have a basis for judging

whether the specific amount of money was the right amount, too

much or too little.

Mr. COYNE. Do you care to comment on the number of employees?

Mr. WHITE. We know that changes in the plan will be difficult

to implement, but we’re working on it.

Mr. HOUGHTON [presiding]. Mr. Portman.

Mr. PORTMAN. All right, thank you, Mr. White, Mr. Hite. You

provide for us a window on the IRS that we simply can’t get otherwise. Looking behind you I see a number of members of your staff

who have spent a lot of time on this, too. We appreciate the expertise and experience you bring to it.

I have a lot of specific questions about your testimony, but I have

one general question for you. And that is whether the General Accounting Office believes that the oversight board that would otherwise be in place under the provisions of the RRA that passed,

again, this Subcommittee and the Congress, would be making a difference in terms of the issues you address.

Let me just list some of those issues. The middle management

challenges you talk about. The reorganization challenges you talk

about, the modernization effort. The issue of compliance, to have

some expertise on how do you get at the question of measuring

compliance and therefore changing your systems to adjust to that

and targeting better employee performance, which is much more

along the lines of the private sector with these more qualitative

measurements like taxpayer service.

And finally, of course, the information technology challenge. As

you know one of the specific expertises looked to for members of

the board is information technology. I just wondered if you had any

general thoughts on that, Mr. White.

Mr. WHITE. I think the GAO’s work supporting the Government

Performance and Results Act, for example, showed that the role of

external stakeholders is crucial in improving management at all

government agencies. I think the oversight board is a way of providing that, is one way of providing external oversight. The oversight that this Committee provides is obviously another very important way to do that.

But the oversight board, the oversight that they would provide,

and especially in some of the areas that you mentioned, such as developing performance measures, I think that oversight in an area

like that is very important.

Mr. PORTMAN. I appreciate that response. I also understand the

importance of GPRA, and I know this Subcommittee would look to

the IRS to reference that. This is an important overall Federal

Government approach to better management. The oversight board,

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as you know, goes well beyond GPRA in terms of providing external stakeholders, because these board members would be, in many

senses, like a board of directors having direct responsibility and

therefore accountability and also continuity because of the 5-year

terms and then finally the expertise we talked about earlier, bringing in information technology, and customer service.

So I appreciate your response, and I agree with you. I think if

anything, this would be an interesting model for the rest of government, if we can get it up and going. It would expand what GPRA

already provides.

I finally will say that as much as I have respect for this Subcommittee and this Full Committee and our staff, the kind of expertise we’re talking about simply doesn’t reside in Congress. So

we can’t play that role. We can play a role. And again, you give

us a window on the IRS in other ways in terms of analysis of how

they’re doing. But we can’t, the GAO, nor this Subcommittee, provide what we’re looking for.

But I’ll get off that and just briefly touch on your issues with regard to the current modernization effort, the effort to reorganize

along taxpayer lines, I know two of the heads have now been

named and the Commissioner is moving ahead with that. Can you

give me what you think they’re not doing right, and I think generally speaking, you’re inclined to think they are moving in the

right direction, but what are some of your concerns about the reorganization?

Mr. WHITE. I don’t know if concerns is the right word, but certainly there are challenges facing the reorganization as they go

ahead. I think one challenge is developing a complete set of organizational performance measures. What’s key to the sort of organization that the Commissioner has planned or that IRS has planned

is that it’s comprehensive and consistent.

They have a new mission statement, they have strategic level

goals, but the measures that they put in place to measure performance need to be consistent with those strategic goals and the mission statement. And finally at the level of individual employees, the

evaluation system at that level has to be consistent with the organizational performance measures as well as the mission. That also

still has to be put in place.

And as I indicated in my oral statement, there seems to be some

confusion on the part of IRS supervisors on what things like customer relations actually means. So it’s important that they get this

into place.

Mr. PORTMAN. According to the Commissioner this morning, they

are moving to implement those, I guess we’d call it, overall organizational standards and performance measurements and so on. Are

you satisfied that they understand the concern that you raise and

that that’s being put in place, or do you think there still is a lack

of appreciation for the problem?

Mr. WHITE. They clearly understand the issues. The Commissioner has made these things priorities. He talked about his five levers of change, for example, these are part of his five levers of

change. So he’s clearly made it a priority.

At the same time, doing this is going to be hard. Developing a

measure of taxpayer compliance, for example, is not an easy thing

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to do. It’s going to take time. Revising the employee evaluation system is going to take time.

We have ongoing work, as I said, that shows there are some

steps they can take in the interim with the existing evaluation system to reinforce the shift toward a more service-oriented IRS.

Mr. PORTMAN. For instance, the Commissioner noted that he already has fair and equitable treatment of taxpayers as one of the

evaluations that’s in everybody’s file. So they’re doing some things

even in the interim basis.

Mr. WHITE. Following up on that also, we’ve found in our work

that the narrative portion of the evaluations, for example, is underutilized. That’s an opportunity right now that could be better utilized to reinforce good customer service. Similarly, field visits, to

actually watch revenue officers in action as they deal with taxpayers, would be another thing that they could do right now.

Mr. PORTMAN. Thank you, Mr. White. Thanks, Mr. Chairman.

Mr. HOUGHTON. Mr. Hulshof.

Mr. HULSHOF. Thank you, Mr. Chairman.

Mr. White, on page 10 where you discuss in your statement completing the modernization blueprint, and I know in response to

GAO’s recommendations, I think back in 1995, the IRS began their

blueprint, which of course was before the Restructuring Act. But

what I want to talk about is, in your statement, you say that the

Service’s initial modernization efforts is a good step, but that it will

not fully correct past modernization weaknesses.

Now, what I want to know is why is that, and especially why is

there difficulty in implementing GAO’s recommendations in this regard?

Mr. WHITE. Your question is about the information systems at

IRS, and I’ll let Mr. Hite address that.

Mr. HULSHOF. Mr. Hite, welcome.

Mr. HITE. Thank you.

My point would be that the nature of our recommendations dealing with the modernization were a multi-year series of steps that

would have to be taken. For example, definition of a blueprint and

implementation of a blueprint is something that’s going to occur

over many, many years. I think Mr. Rossotti mentioned that organizational modernization is a 10-year endeavor. Modernization of

systems is, in fact, something that’s going to go along that same

time line.

The steps that you take initially in defining blueprint content

have been taken. They were actually initiated under the predecessor CIO’s blueprint document in 1997. Now, when we looked at

that blueprint in terms of the technical architecture and the sequencing plan for moving to that future systems environment that

you want to get to, so that you have the information to effectively

administer the tax system, that is going to take a number of years.

What Mr. Rossotti has done thus far in terms of his steps is to

put together the initial steps to complete some of the missing specificity that is associated with that technical architecture and that

sequencing plan and the initial expenditure plan that IRS put forth

to the Appropriations Committees in asking for that $35 million

over the period ending in October of this year is designed to complete those tasks, so that in fact you have architectural definition

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and a strategic business systems plan that shows how you’re going

to transition over time, many years, to that target systems environment.

Mr. HULSHOF. I appreciate that. Mr. Chairman, that’s all I have.

Thank you.

Mr. HOUGHTON. Thanks very much.

I’d like to ask you a question. I’m so interested in the people

functions here. Are you really saying that the plans and the vision

of Mr. Rossotti are good? There are some blips, but they’re good,

but they just haven’t gotten down into the organization?

Mr. WHITE. We are saying that the plans are good. I think the

plans are comprehensive, they’re consistent. Obviously, implementation is crucial. And in order to implement them, one of the things

we’re saying is that top leadership, no matter how good it is, and

IRS now has very good top leadership, but top leadership alone

cannot implement this kind of comprehensive change in an organization as large as IRS. It’s going to have to be implemented in a

very real way by managers below the Commissioner.

So those managers are going to have to be able to develop the

details of the plans, to lead at their level of the organization a

change in attitudes and a change in behavior, and develop things

like the employee evaluation system, to reinforce improved customer service.

Mr. HOUGHTON. Well, I guess the thing that I’m reaching for is

the practical impact in the organization. Because you’ve alluded in

many ways, for example, on page 6 of your testimony, you said the

employee evaluation process is not aligned with this new mission,

does not support the culture the IRS hopes to create. Now, you

know, that’s not a particularly helpful sign for the IRS, and yet at

the same time, are they moving in the right direction? Have they

got people ultimately when they get these two things aligned, to do

the job which is required? That’s the sense I don’t get.

Mr. WHITE. They understand the need for alignment. The Commissioner has talked repeatedly about the importance of alignment,

that how employees are evaluated must be consistent with the mission of the agency and with the strategic goals and with the organizational performance measures. So at that level, that’s understood.

They are beginning the process of trying to develop a new employee

evaluation system.

And as I said, in the interim, there are some things they can do

better with the existing system to reinforce improved customer

service.

Mr. HOUGHTON. Have you talked to the Commissioner about

your report?

Mr. WHITE. Yes, we have.

Mr. HOUGHTON. What is his reaction, and what are some of the

more important issues you have discussed?

Mr. WHITE. We have an entrance conference with IRS officials on

every report we do. He was so interested in this that he participated in the entrance conference on this report. So that shows the

level of his involvement in this.

He clearly understands the importance of this. He also recognized that it’s going to take some time to develop this.

Mr. HOUGHTON. How many reports have you done on the IRS?

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Mr. WHITE. On this particular issue?

Mr. HOUGHTON. No, just in general. Are you in constant contact

with them, or is it just periodic?

Mr. WHITE. We are in constant contact. We will issue 35 to 45

reports a year on IRS. So we’re in constant contact with them.

And I do want to say that under the new Commissioner, the cooperation I think that we’ve gotten from IRS is at a different level

than it’s been in the past.

Mr. HOUGHTON. If the Commissioner were to ask you for one significant suggestion out of all the things you’ve touched on, what

would it be?

Mr. WHITE. I think to continue with the integrated approach that

he has underway. It’s difficult to do, to do this kind of change in

the comprehensive way that he’s trying to do it. But I think it’s

crucial to do that. For example, systems modernization has to be

done in an integrated way with the business-side changes that they

want to make. You can’t do one independent of the other. It has

to be done in an integrated way. That makes it more difficult.

That’s a part of the challenge they face here. But that’s the right

way to do this.

Mr. HOUGHTON. One final question. Do you feel that the concept

of customer orientation, rather than internal mechanics, is getting

through? This is something he has stressed.

Mr. WHITE. I absolutely do. There is no doubt. The issue is

whether you drive that down through the organization. And that’s

where implementation again becomes important, it’s where training becomes important. It’s where performance measures are important, because they reinforce the training. All of this has to be

mutually reinforcing and consistent.

And driving it down through the organization also shows, again

demonstrates the importance of managers below the level of the

Commissioner being engaged in leading this effort.

Mr. HOUGHTON. Well, I have no further questions. Mr. Coyne, do

you?

Mr. COYNE. I just want to follow up on your concept about—it’s

fine for the top leadership to be involved and be on top of things,

but it’s really going to take lower level managers to implement

them. Could you put a number on those managers that you’re referring to, within the IRS?

Mr. WHITE. I can’t put a number on it right here. I can get back

to you on that.

What I’m talking about, though, are people from frontline supervisors all the way up through the senior executive service at IRS.

All of those people, their roles will be somewhat different, but they

all will have to take real responsibility for making this kind of

change in direction work.

Mr. COYNE. Thank you.

Mr. HULSHOF. Mr. Chairman, one follow-up question. Mr. White,

then what is it about the Service’s current modernization efforts

that leads GAO to believe that the chances of success are any better than in the past?

Mr. WHITE. There are several things. One is it’s comprehensive.

They aren’t doing information systems alone. They’re trying to do

information systems, their process for interacting with taxpayers at

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the same time, reorganization, all of this is being done simultaneously.

Something else, it’s consistent from a level of the mission statement down through employee evaluations. They’re trying to get to

a point where that is all aligned and staff and managers throughout the organization therefore are getting a consistent message

about what the goals of the organization are.

In addition to that, I would repeat again what I said about the

leadership of the IRS. That leadership that the Commissioner is

providing is clearly helpful.

Mr. HULSHOF. Thank you.

Mr. HOUGHTON. OK, thank you very much. Mr. White, we certainly appreciate your being with us. Thank you for your contribution.

Mr. WHITE. Thank you.

Mr. HOUGHTON. We are adjourned.

[Whereupon, at 10:53 a.m., the hearing was adjourned, to reconvene at the call of the Chair.]

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