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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

 
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

                                

                      U.S. GOVERNMENT PRINTING OFFICE
 67-584 CC                   WASHINGTON : 2001
------------------------------------------------------------------------------
                   For sale by the U.S. Government Printing Office
 Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida

                     A.L. Singleton, Chief of Staff
                  Janice Mays, Minority Chief Counsel

                                 ______

                       Subcommittee on Oversight

                    AMO HOUGHTON, New York, Chairman

ROB PORTMAN, Ohio                    WILLIAM J. COYNE, Pennsylvania
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
WES WATKINS, Oklahoma                JIM McDERMOTT, Washington
JERRY WELLER, Illinois               JOHN LEWIS, Georgia
KENNY HULSHOF, Missouri              RICHARD E. NEAL, Massachusetts
J.D. HAYWORTH, Arizona
SCOTT McINNIS, Colorado

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.

                            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

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:]

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,
      
    (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.

      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      

    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

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.)
      

                                

    Mr. Houghton. Good morning, everybody. The meeting will 
come to order.
    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.
    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.
    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:]

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 Republican-
sponsored 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.

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    Mr. Houghton. Thank you very much, Mr. Coyne.
    Mr. Hayworth, Mr. Watkins, do you have any comments?
    All right, fine, thank you. We're honored to have Hon. 
Charles O. Rossotti, Commissioner of the Internal Revenue 
Service, here today. Commissioner.

 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 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 enable 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, labor-
intensive 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 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: (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, 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, 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 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 well-
established 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 public 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 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 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.

[GRAPHIC] [TIFF OMITTED] T7584.007

[GRAPHIC] [TIFF OMITTED] T7584.008

[GRAPHIC] [TIFF OMITTED] T7584.009

                                

    Mr. Houghton. All right, thank you very much, Commissioner.
    I'd like to ask a question or two, and then I'll pass it 
off to Mr. 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?
    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 
short-term, 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?
    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 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.

[GRAPHIC] [TIFF OMITTED] T7584.010

[GRAPHIC] [TIFF OMITTED] T7584.011

 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 a few individual cases remain to be resolved, I 
am pleased to report that Service-wide 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.

------------------------------------------------------------------------
        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
                                       Dec 1997       The audit
This report evaluated managment's use                  concluded that
         of enforcement statistics in                  this District
 Arkansas-Oklahoma, including whether                  office had an
   the alleged impropriety led to the                  unbalanced focus
                  abuse of taxpayers.                  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
                                       January 1998   The report

     Use of Seizure Authority in the
            Collection Field Function
                                       July 1998      The IRS did not

      Examiniation Division's Use of
  Performance Measures and Statistics
                                       July 1998      This report found

Review of Special Project in the New   March 1999     This audit found
                      Jersey District                  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.
    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 district 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 DARP-recommended 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
----------------------------------------------------------------------------------------------------------------
                                    Closed without       Disciplinary
          Type of issue                 action         actions proposed          Open                Total
----------------------------------------------------------------------------------------------------------------
         Misuse of Enforcement                  72                   7                   2                  81
                     Statistics
                Inappropriate Levy and          69                  19                   6                  94
               Seizure Activity
  Total.........................               141                  26                   8                 175
----------------------------------------------------------------------------------------------------------------

                        Disciplinary Action Review Project Disciplinary Actions Proposed
----------------------------------------------------------------------------------------------------------------
          Employees                Reprimands         Admonishments         Suspensions             Total
----------------------------------------------------------------------------------------------------------------
                 Managers                    6                   12                    2                   20
         Revenue Officers                    0                    6                    0                    6
  Total.....................                 6                   18                    2                   26
----------------------------------------------------------------------------------------------------------------

                                

    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.
    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 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 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 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, 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.
    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.
    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 support 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.
    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 
recommendations, 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 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 customer 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.
    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
     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:

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.
     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/
                                             Ceridian 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 preparers, 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.
    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 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 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, 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.

     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.''
    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.
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    \1\ P.L. 105-206 (July 22, 1998).
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    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 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.
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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.
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    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 accounts 
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, performance-based 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 results-
oriented 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.
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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).
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  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, 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.
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    \4\ Taxpayer compliance is the extent to which taxpayers file 
required returns, correctly determine their tax liability, and pay the 
taxes they owe.
    \5\ Modernizing America's Tax Agency (IRS Publication 3349, Feb. 
1999, pp. 44-45).
    \6\ Tax Administration: Taxpayer Rights and Burdens During Audits 
of Their Tax Returns (GAO/T-GGD-97-186, Sept. 26, 1997).
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    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:
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    \7\ IRS Personnel Administration: Use of Enforcement Statistics in 
Employee Evaluations (GAO/GGD-99-11, Nov. 30, 1998).

          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 
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        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 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 lower-
level 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.
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    \8\ IRS Customer Service: Management Strategy Shows Promise But 
Could be Improved (GAO/GGD-99-88, May 5, 1999).
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    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 significant 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\
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    \9\ Tax 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).
    \11\ For 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).
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    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.
---------------------------------------------------------------------------
    \12\ Tax Systems Modernization: Results of IRS' Initial Expenditure 
Plan (GAO/AIMD/GGD-99-206, June 15, 1999).
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    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.
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    \13\ GAO/AIMD-95-156, July 26, 1995.
    \14\ GAO/AIMD/GGD-98-54, Feb. 24, 1998.
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    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.
    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.
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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.

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.
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    \16\ GAO/AIMD-95-156, July 26, 1995.
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    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.
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    \17\ GAO/AIMD/GGD-98-54, Feb. 24, 1998.
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    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 associated 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.
---------------------------------------------------------------------------
    \18\ This model was developed by the Software Engineering Institute 
at Carnegie Mellon University to evaluate an organization's software 
development or acquisition capability.
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    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.
---------------------------------------------------------------------------
    \19\ GAO/AIMD/GGD-99-206, June 15, 1999.

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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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    \20\ GAO/AIMD-96-106, June 7, 1996.
    \21\ P.L. 104-208, Sept. 30, 1996; P.L. 105-61, Oct. 10, 1997; and 
P.L. 105-277, Oct. 21, 1998.
    \22\ P.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.''
    \24\ GAO 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).
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    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.
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    \26\ GAO/AIMD/GGD-99-206, June 15, 1999.
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    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. Portman [presiding]. Thank you for your testimony.
    Mr. Coyne.
    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?
    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, 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 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 under-utilized. 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 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?
    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 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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