REPORT OF THE 

JOINT COMMITTEE ON TAXATION

RELATING TO THE INTERNAL REVENUE SERVICE

AS REQUIRED BY THE 

IRS REFORM AND RESTRUCTURING ACT OF 1998

Prepared for the

HOUSE COMMITTEES ON WAYS AND MEANS,

APPROPRIATIONS, AND GOVERNMENT REFORM

AND THE SENATE COMMITTEES ON 

FINANCE, APPROPRIATIONS, AND GOVERNMENTAL AFFAIRS

For a Joint Review 

Scheduled on May 3, 2000

By the Staff

of the

JOINT COMMITTEE ON TAXATION

April 28, 2000

JCX-46-00
(i)

CONTENTS

Page

INTRODUCTION .................................................... 1

I. IRS MISSION STATEMENT AND OVERVIEW OF IRS

STRATEGIC PLANS ........................................... 3

A. Mission Statement and Statement of Strategic Goals . . . . . . . . . . . . . . . . . 3

B. Providing Top Quality Service to Each Taxpayer .................... 4

C. Providing Top Quality Service to All Taxpayers ..................... 5

D. Productivity Through a Quality Work Environment .................. 6

II. IMPLEMENTATION OF IRS STRATEGIC GOALS ................ 7

A. Revision of IRS Business Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

B. IRS Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

C. Development of Organizational Performance Measures . . . . . . . . . . . . . . . 16

D. Technology Modernization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

III. DESCRIPTION AND ANALYSIS OF THE IRS BUDGET REQUEST

FOR FISCAL YEAR 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

A. In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

B. Funding to Maintain Current Operations and Service Levels . . . . . . . . . . . 24

C. Funding to Support Organizational Modernization and Implementation

of the IRS Reform Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

D. Information Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

E. Financial Audit of IRS Fiscal Year 1999 Financial Statements . . . . . . . . . 29

IV. OTHER MATTERS ADDRESSED BY THE IRS REFORM ACT . . . . . . 31
(ii)

A. Establishment of the IRS Oversight Board . . . . . . . . . . . . . . . . . . . . . . . . . 31

B. Establishment of Independent National Taxpayer Advocate . . . . . . . . . . . 32

C. Treasury Inspector General For Tax Administration . . . . . . . . . . . . . . . . . . 38

D. Taxpayer Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

E. Personnel Flexibility and IRS Management . . . . . . . . . . . . . . . . . . . . . . . . 47

V. THE 2000 TAX FILING SEASON . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

APPENDIX I: IRS' FISCAL YEAR 2001 BUDGET REQUEST COMPARED 

WITH PROPOSED FISCAL YEAR 2000 OPERATING LEVEL ....... 58

APPENDIX II: COMPARISON OF IRS' FISCAL YEAR 2000 PROPOSED

OPERATING LEVEL AND FISCAL YEAR 2001 TOTAL BUDGET

REQUEST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
1

 Pub. L. No. 105-206 (July 22, 1998).

2

 H.R. Rep. No. 105-364, Pt. 1, at 34-35 (1997) and S. Rep. No. 105-174, at 11-12

(1998).

3

 For a summary of the IRS Reform Act’s taxpayer rights and protections, see Summary

of Revenue Provisions Contained in Legislation Enacted During the 105th Congress (JCX-75-

98), November 19, 1998, 61-77. See also, Internal Revenue Service, Highlights of 1998 Tax

Changes, Publication 553 (December 1998), 20-25.

4

 Internal Revenue Code (“Code”) sec. 8021(f)(2).

5

 The first joint review was held on May 25, 1999. A transcript of the joint review is

published in Joint Committee on Taxation, Strategic Plans and Budget of the Internal Revenue

Service, 1999, May 25, 1999 (JCS-4-99).

6

 Sec. 8022(3)(C). The report relating to fiscal year 2000 is found at Report of the Joint

(continued...)

- 1 -

INTRODUCTION

The Internal Revenue Service Restructuring and Reform Act of 1998 1

 (the “IRS Reform

Act”) made comprehensive changes relating to the operations of the Internal Revenue Service

(“IRS”). Goals of the IRS Reform Act included increasing public confidence in the IRS and

making the IRS an efficient, responsive, and respected agency that acts appropriately in carrying

out its functions.2 The IRS Reform Act included changes relating to IRS organization and

management, Congressional oversight, electronic filing, and taxpayer protections and rights.3

As part of the provisions relating to Congressional oversight, the IRS Reform Act

requires a joint review of IRS activities.4

 The joint review is to include two members of the

majority and one member from the minority of each of the House Committees on Ways and

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

Appropriations, and Governmental Affairs. The joint review is to be held at the call of the

Chairman of the Joint Committee on Taxation ("Joint Committee"), and is to take place before

June 1 of each calendar year 1999 through 2003.5

 The joint review is to address the strategic

plans and budget of the IRS and such other matters as determined by the Chairman of the Joint

Committee.

The IRS Reform Act also requires the Joint Committee to report annually to the House

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

Committees on Finance, Appropriations, and Governmental Affairs regarding certain matters

relating to the IRS. The report is to be made in each calendar year 1999 through 2003.6
6

(...continued)

Committee on Taxation Relating to the Internal Revenue Service as Required by the IRS Reform

and Restructuring Act of 1998 (JCX-24-99), May 20, 1999.

7

 This document may be cited as follows: Joint Committee on Taxation, Report of the

Joint Committee on Taxation Relating to the Internal Revenue Service as Required by the IRS

Reform and Restructuring Act of 1998 (JCX-46-00), April 28, 2000.

- 2 -

Pursuant to the IRS Reform Act, a joint review of the strategic plans and budget of the

IRS for fiscal year 2001 has been scheduled for May 3, 2000. This document,7

 prepared by the

staff of the Joint Committee, contains the report of the Joint Committee relating to the IRS as

required by the IRS Reform Act.
8

 IRS Reform Act sec. 1002.

9

 The IRS previous mission statement read: 

The purpose of the Internal Revenue Service is to collect the proper

amount of tax revenue at the least cost; serve the public by

continually improving the quality of our products and services; and

perform in a manner warranting the highest degree of public

confidence in our integrity, efficiency and fairness.

10 The strategic direction and plans of the IRS are described in brief in IRS Document

10968 (Rev. 01-2000), Fiscal Year 2001 Congressional Justification (February 7, 2000)

(hereinafter “FY 2001 Justification”) at SD-11 through SD-17, and in detail in IRS Publication

3349 (Rev. 1-2000), Modernizing America’s Tax Agency (2000) (hereinafter “Modernizing

America’s Tax Agency"). During the current fiscal year, the IRS intends to update its strategic

plan, as originally sent to Congress in 1997 (and revised through an interim update included in

the FY 2000 Annual Performance Plan) to reflect the reorganized IRS. FY 2001 Justification at 

SD-11. The FY 2001 Justification contains the FY 1999 Program Report, the FY 2000 Final

Performance Plan Explanation, and the FY 2001 Proposed Performance Plan Explanation as

required by the Government Performance and Results Act of 1993. 

- 3 -

I. IRS MISSION STATEMENT AND OVERVIEW OF IRS STRATEGIC PLANS

A. Mission Statement and Statement of Strategic Goals

In the IRS Reform Act, the Congress directed the IRS to review and restate its mission to

increase its emphasis on serving the public and meeting taxpayer needs.8

 Prior to its revision, the

IRS mission statement focused on collecting the proper amount of tax.9

The new mission statement, announced by the Commissioner in September 1998, has

interaction with taxpayers as its focus. It states:

Provide America’s taxpayers with top quality service by helping them to

understand and meet their tax responsibilities and by applying the tax law with

integrity and fairness to all.

To assist in achieving its new mission, the IRS has developed three strategic goals.10 The

first goal is to provide top quality service to each taxpayer. The second goal is to provide top

quality service to all taxpayers. The third strategic goal is to increase productivity within the IRS 

by providing IRS employees with a quality work environment. The IRS describes the process of

change necessary to meet its strategic goals and fulfill its new mission statement as

"modernization."
11 Statement of Charles O. Rossotti, Commissioner of Internal Revenue Service, before

the Senate Finance Committee (April 14, 1999).

12 The survey results are reported in Modernizing America's Tax Agency at 5-6.

13 Id. at 6.

14 Id. See also General Accounting Office, Tax Administration: IRS' Problem Solving

Days (GAO/GGD-99-1, October 16, 1998) and Internal Revenue Service, National Taxpayer

Advocate Annual Report to Congress for Fiscal Year 1999, Publication 2710 at V-12-13

(December 1999).

- 4 -

B. Providing Top Quality Service to Each Taxpayer

The first strategic goal, providing top quality service to each taxpayer, is designed to

ensure that every taxpayer receives first-quality service when dealing with the IRS. Regardless

of the type of interaction with taxpayers (e.g., providing forms, advising taxpayers about their

accounts with the IRS, or engaging in the examination function), the IRS recognizes that it must

have a clear understanding of both the law as well as the facts and circumstances surrounding a

particular taxpayer’s case to ensure the proper application of the tax law to the taxpayer. The

Commissioner has stated that this goal also requires that “taxpayers should always be treated

professionally and courteously and with full consideration of their rights.”11

Success in achieving the first strategic goal will be measured by the IRS by the response

of taxpayers to the service they receive from the IRS, including taxpayer responses to surveys,

comparison of ratings given the IRS by taxpayers with other private and public sector

institutions, and taxpayer complaints. The IRS does not yet have performance measures in place

with respect to this strategic goal, but expects to begin work on such measures in 2000.

In the interim, the IRS reports that in recent survey results from the University of

Michigan, known as the American Customer Satisfaction Index, the IRS generally ranks below

the private sector, as well as below certain public administrative or government functions. The

electronic filing program received a higher ranking than the IRS generally.12 Another survey,

performed by the Roper opinion research organization, shows that the IRS was once comparable

to that of other government agencies. During the 1980s, the ratings of the IRS and other agencies

declined substantially. In the 1990s, the ratings of other agencies improved, while that of the IRS

continued to decline, reaching an all-time low in 1998, before a slight improvement in 1999.13

The IRS has produced better customer satisfaction in particular areas. For example,

according to the IRS, taxpayers attending Problem Solving Days rated the IRS 6.5 on a scale of

7.0, regardless of whether the taxpayer achieved the desired result.14
15 Modernizing America’s Tax Agency at 7.

16 Id.

17 Id.

18 Id. For a discussion of measuring corporate tax shelter activity, see Testimony of the

Staff of the Joint Committee on Taxation Concerning Interest and Penalties and Corporate Tax

Shelters Before the Senate Committee on Finance (JCX-23-00) March 8, 2000, at 15-18.

- 5 -

C. Providing Top Quality Service to All Taxpayers

Objective

The second strategic goal requires the IRS to provide top quality service to all taxpayers. 

This goal aims for fundamental fairness to all taxpayers. The IRS goal is to ensure that the tax

law is applied with fairness and integrity so that taxpayers who fail to comply with the tax laws

do not burden those who comply. 

Measuring success; compliance and enforcement

The IRS will measure success in this goal by the total collection percentage, that is, the

fraction of taxes that are actually paid as compared to those that would be paid if everyone paid

what was due under the law. Success in this area is also measured by the IRS in terms of

uniformity of compliance among various segments of the population.15

One issue that arises with respect to this goal is how to measure compliance. There is

currently no reliable measure of compliance. As discussed more fully below, a key issue in

measuring the success of the IRS is developing such a measure. In the meantime, the IRS has

extrapolated from previous studies of noncompliance. The IRS estimates that noncompliance of

all kinds equated to about $195 billion in fiscal year 1997, which is approximately $1,600 per

individual tax return.16

The IRS also reports that previous studies indicate that compliance is uneven among

sectors. For example, taxpayers who have most of their income reported to the IRS by third

parties are generally more compliant than those who report most of their income to the IRS

themselves. The IRS also reports that collections of corporate income taxes decreased by two

percent in fiscal year 1999 over the previous fiscal year,17 even though corporate profits rose by

approximately 3.6 percent at the same time. One of the reasons attributed by the IRS to this

decline is the proliferation of corporate tax shelters.18

Another issue that arises with respect to measuring IRS success with respect to this goal

is the difference between compliance and enforcement and the emphasis that should be placed on
19 Modernizing America’s Tax Agency at 7.

20 Some have attributed the decline to reallocation of staff to customer service. The IRS

reports that such reallocations amount to less than 3 percent of compliance resources.

21 Id. at 8.

22 Id. at 9.

- 6 -

each. Enforcement generally refers to actions taken by the IRS to bring taxpayers into

compliance with the law, such as audits or levies. Since the passage of the IRS Reform Act, the

number of enforcement actions has declined substantially. The IRS reports that the fraction of

individual returns audited in face-to-face audits has declined about 40 percent and the number of

collection cases closed has declined a similar amount.19 The IRS attributes this decline to

continued decline in staff due to budget constraints and a substantial increase in the amount of

time required per case due to provisions in the IRS Reform Act.20

The IRS acknowledges that enforcement is essential, but believes that the goal should be

increasing overall compliance rather than simply increasing enforcement revenue. The IRS

reports that 98 percent of the tax revenues received are paid through voluntary compliance rather

than through enforcement actions. Historically, the IRS placed great emphasis on enforcement

activities, partly because enforcement revenue is easy to measure. Such emphasis, and problems

taxpayers reported with IRS enforcement activities, was one of the issues sought to be addressed

by the IRS Reform Act. The IRS hopes to increase voluntary compliance through such actions as

better and more targeted taxpayer education, better reporting, voluntary agreements, improved

regulations, and earlier interventions through notices and phone calls. 21

D. Productivity Through a Quality Work Environment

As its third strategic goal, the IRS plans to increase productivity by providing a quality

work environment for its employees. Comparing its goals to organizations within the private

sector, the IRS notes that success with this goal requires providing employees with high-quality

technology tools, adequate training, effective management, and active engagement in the goals of

the organization. The IRS is working to create a positive work place where there exist equal

opportunity, recognition of employee performance, and no artificial barriers to advancement. 

The IRS measures success in this goal by employee satisfaction, as reflected in employee

surveys.22
23 Many IRS practices are in the Internal Revenue Manual and various rulings and

regulations. See also Modernizing America’s Tax Agency at 17-32.

- 7 -

II. IMPLEMENTATION OF IRS STRATEGIC GOALS

To carry out the IRS strategic goals, the Commissioner has developed five guiding

principles: (1) understanding and solving problems from the taxpayer’s point of view; (2)

expecting managers to be accountable; (3) using balanced performance measures; (4) fostering

open and honest communication; and (5) insisting on total integrity. To complement the IRS

strategic goals and guiding principles, the Commissioner has established five specific “levers of

change” for the IRS. The IRS intends to implement the levers of change in an integrated fashion. 

The IRS views each lever as having equal importance. The levers of change are: (1) revising

business practices for dealing with taxpayers; (2) modifying the organizational structure around

the needs of taxpayers; (3) having management roles with clear responsibility; (4) establishing

measures of performance that balance business results, customer satisfaction, and employee

satisfaction; and (5) implementing and managing new technology to replace outdated computer

systems.

The IRS recognizes that achieving its modernization plan will take a number of years and

requires an integrated approach because of the interdependency of the various components of the

process. For example, full implementation of the planned changes in business practices is

dependent on changes in organizational structure and technology modernization.

A. Revision of IRS Business Practices

In general

The way the IRS interacts with taxpayers is defined by its business practices.23 Included

in the IRS business practices are procedures for filing, procedures for determining when notices

are sent to taxpayers, how telephones are answered, how examinations of taxpayers’ returns are

conducted, and how taxes are collected. The Commissioner has developed strategies to guide the

IRS in carrying out its business practices. These detailed strategies include: (1) preventing

taxpayer problems or addressing them as early as possible; (2) improving communications with

taxpayers; (3) expanding taxpayers’ rights; (4) broadening the use of electronic tax

administration; (5) leveraging IRS resources through effective partnerships; (6) tailoring

practices and strategies based on specific taxpayer needs and problems; (7) applying risk-based

compliance intervention techniques; and (8) integrating compliance strategies.

Preventing taxpayer problems or addressing them as early as possible

The IRS identifies three stages of activities when it deals with taxpayers: (1) prefiling; (2)
24 Id. at 17.

25 Id.

26 Id. at 19.

27 Id. at 20.

- 8 -

filing; and (3) postfiling.24 According to the IRS, 73 percent of its budget is allocated to postfiling activities, i.e., dealing with problems after they happen. Nine times as much is spent by the

IRS on fixing problems after they occur than is spent on preventing them.25

The IRS estimates that the majority of IRS resources are being used to address issues that

arose three to seven years ago. For example, there can be a significant delay between the time a

taxpayer is determined to owe taxes and the commencement of IRS collection actions. In

general, the private sector attempts to avoid such delays. The IRS reports that data from the

commercial sector indicates that the chances of successful collection decline rapidly with time,

dropping to 56 percent after six months of delinquency.26

The IRS anticipates that significant increases in both service and compliance will occur

by shifting its focus to taxpayers’ prefiling activities and addressing issues more rapidly. The

IRS also anticipates that, if compliance errors and problems are addressed early, less burden will

be imposed on the taxpayer.

Improving communications with taxpayers

The IRS communicates with taxpayers through a variety of methods including the mail,

the telephone, the Internet, and in-person meetings. The IRS currently provides 484 different tax

forms and 105 publications. According to the IRS, in 1999, it mailed over 100 million tax

packages and postcards to taxpayers and distributed an additional 650 million forms and

publications, including over 57 million downloaded from the IRS site on the World Wide Web. 

During that year, the IRS also mailed taxpayers 105 million notices, received between 20 and 30

million incoming pieces of correspondence, received 143 million incoming phone calls on tollfree numbers, and served over ten million taxpayers at its walk-in sites. Over 20,000 employees

are dedicated solely to these tasks, and, in total, over 70,000 employees regularly communicate

with taxpayers.27 The IRS recognizes the volume of its communications with taxpayers and has

focused on ways to improve its communication methods.

The IRS has recently instituted or expanded programs aimed at improving taxpayer

communications, such as expanding telephone service to 24 hours a day, 7 days a week,

expanding walk-in hours, increasing use of technology, and revising notices, forms, and

publications. Among other technology-based innovations, the IRS has a variety of Internet-
28 For a detailed discussion of IRS information services, see Statement of Charles O.

Rossotti, Commissioner, Internal Revenue Service, before the House Ways and Means

Subcommittee on Oversight (March 28, 2000)(hereinafter “Rossotti House Oversight

Testimony”) at 7-19. Communication issues arising in relation to the 2000 filing season are

discussed in Part , below.

29 Modernizing America Tax Agency, at 20.

30 See, e.g., Internal Revenue Service, Electronic Tax Administration-A Strategy for

Growth, Publication 3187 (Rev. 11-99) at 3.

31 See Internal Revenue Service, IRS e-file Using a Personal Computer,

<http://www.irs.gov/elec-sus/il-txpyr.html>.

32 Id. at 11.

33 General Accounting Office, IRS Modernization: Business Practice, Performance

Management, and Information Technology Challenges (GAO/T-GGD/AIMD-00-144, April 10,

(continued...)

- 9 -

based programs.28

Although the IRS has made progress in the area, it acknowledges that problems still exist

and significant improvements can still be made.29

Expanding taxpayer rights

Many of the IRS’s modernization efforts will focus on implementing and reinforcing the

expansion of taxpayer rights in accordance with the provisions enacted in the IRS Reform Act. 

These issues are discussed in detail in Part IV. D below.

Broadening the use of electronic tax administration

Electronic filing is generally thought to have advantages over paper returns for both the

IRS and taxpayers. According to the IRS, taxpayers who file electronically are able to obtain

their tax refunds faster than taxpayers who file paper returns.30 In addition, electronic filing is

more accurate than paper filing. The error rate associated with processing paper returns is

approximately 20 percent, half of which is attributable to the IRS and half to errors in taxpayer

data.31 Because electronically filed returns usually are prepared using computer software

programs with built-in accuracy check, undergo pre-screening by the IRS, and experience no key

punch errors, electronic returns have an error rate of less than one percent.32 The GAO has

commented that maximizing electronic filing is important to the IRS because the agency is

“drowning in paper.”33 Because of the advantages of electronic tax administration, the IRS
33(...continued)

2000) (hereinafter “GAO Report 00-144") at 5.

34 IRS Reform Act sec. 2001.

35 Modernizing America’s Tax Agency at 20.

36 GAO Report 00-144 at 5-6.

37 Internal Revenue Service, Electronic Tax Administration - A Strategy for Growth,

Publication 3187 (Rev. 11-99) at 17.

38 Modernizing America’s Tax Agency at 21.

39 Id. at 22.

- 10 -

Reform Act provides that “the policy of Congress is to promote paperless filing, with a longrange goal of providing for the filing of at least 80 percent of all tax returns in electronic form by

the year 2007.”34

Despite the benefits of electronic filing, 77 percent of individual returns are still filed on

paper.35 The IRS has taken steps to try to increase the attractiveness of electronic filing. For

example, one of the problems identified with electronic filing is that it is not truly paperless

because of the need to file paper W-2s and a signature document. To address these concerns,

since 1996 the IRS has been conducting various pilot programs to determine how best to

eliminate the paper associated with electronic returns.36 The IRS is also taking steps to try to

dispel taxpayer perceptions that electronically filed returns are more likely to be audited.37

The IRS has developed a strategic plan to implement the goal set forth in the IRS Reform

Act. The IRS strategic plan recognizes that reaching the congressionally-mandated goal will

require improvement in its technological equipment to allow for the filing of a full range of

returns, resolution of security issues to eliminate requirements for separate signature documents,

tailoring of marketing and education programs to attract taxpayers and practitioners with varying

needs, and broadening of the number of effective payment options with filing returns.38 

The IRS also hopes to improve electronic business practices in addition to filing through

the use of electronic communications. Eventually, the IRS anticipates that Internet

communications will be used for a variety of purposes, such as resolving taxpayer account issues

and facilitating the resolutions of examinations.39 To this end, in 1999, the IRS begun a pilot

project to communicate taxpayer account data over the Internet.

Leveraging IRS resources through effective partnerships

The IRS intends to place greater emphasis on working in partnership with those
40 Id. at 22-23; See also Rossotti House Oversight Testimony at 11, 16.

41 Modernizing America’s Tax Agency at 23-24.

- 11 -

organizations and groups that are actively involved in tax administration. Those groups

identified by the IRS include State revenue agencies, tax practitioners, industry associations,

small business associations, community and volunteer groups, low-income and disadvantaged

taxpayer services, and large businesses and institutions offering tax filing assistance to their

employees. Many of these groups work with the IRS by sharing information about IRS programs

and taxpayer concerns. States work with the IRS by providing compliance information and, in

some cases, by participating in a joint electronic filing program. Because taxpayers often provide

overlapping information to both the IRS and at least one State, the IRS believes that there are

significant opportunities to reduce the compliance burden on taxpayers.40 In the future, the IRS

expects to place greater emphasis on working in partnership with all the groups to solve taxpayer

issues and improve taxpayer education and assistance.

Tailoring practices and strategies based on specific taxpayer needs and problems

The IRS’s strategic plan calls for it to improve its business practices by tailoring them to

address particular taxpayer issues, similar to what is done by companies that develop and market

their products according to their customers’ different needs. The IRS recognizes that different

kinds of taxpayers have different concerns. For example, individual taxpayers with income

reported by third parties experience less reporting and payment problems than those with

business income; prompt payment of refunds is very important to these taxpayers. College

students who file by telephone have different service needs than do senior citizens with

retirement income. Large businesses with extensive international activities have different issues

and concerns than do small, start-up businesses. Identifying the particular needs of taxpayers and

providing them with appropriate service is critical at all stages. The IRS regards this strategy as

so fundamental to meeting its strategic goals that it is viewed as a key organizing principle for

the way the IRS is managed.41 The IRS structural reorganization based on taxpayer needs is

discussed in detail in Part II. B., below.

Applying risk-based compliance intervention techniques

Because of its limited resources, the IRS has determined that it must apply its resources

where they will provide the most benefit in reducing specific incidences and patterns of

noncompliance. The IRS finds that strategies that target resources effectively will benefit

individual taxpayers by reducing the compliance burden on those taxpayers who comply.

The IRS has identified two keys to effective collections: (1) early identification of those

taxpayers who may present a risk of nonpayment; and (2) effective intervention with taxpayers in
42 Id. at 23.

43 Id. at 25; GAO Report 00-144 at 7.

44 Modernizing America’s Tax Agency at 25.

45 GAO Report at 00-144 at 4.

46 See General Accounting Office, IRS Customer Service, Management Strategy Shows

Promise But Could Be Improved (GAO/GGD-99-88, May 9, 1998) (hereinafter “GAO Report

(continued...)

- 12 -

working out a payment program that addresses a particular taxpayer’s payment problem.42 The

IRS is developing a risk-based examination model to implement this strategy.

Both the IRS and the GAO have noted that effective risk-based compliance techniques

are dependent upon quality, centralized data systems that the IRS does not currently have, and

that lack of such systems will hinder IRS efforts in this area.43

Integrating compliance strategies

The IRS has determined that it will experience the greatest benefits from its strategic

goals when its improved business practices can be implemented through effective and integrated

compliance strategies. “Integrated strategies” are those in which the problems and needs of a set

of taxpayers are understood, and all the resources and techniques from the appropriate disciplines

of the IRS are applied appropriately to solve those problems over a period of time.

The IRS cites as an example of this approach its Earned Income Tax Credit Program,

which combines outreach to practitioners and compliance checks.44 In addition, based on the

success with Problem Solving Days, the IRS is establishing a new Tax Resolution Representative

(“TAR”) position. At Problem Solving Days, the IRS brought employees from various

functional groups to resolve taxpayers’ problems. Similarly, TARs are to provide prefiling

assistance and education and postfiling compliance support.

The GAO believes that the TAR position fits clearly with the strategic goal of improving

service to each taxpayer. The GAO finds that successfully implementing the TAR program will

require significant training and enhanced information systems.45

Near-term improvement priorities

As part of revising IRS business practices, in January 1998, the IRS established a central

office, the Taxpayer Treatment and Service Improvements (“TTSI”) program, to manage the

overall implementation of customer service improvements.46 At the same time, an Executive
46(...continued)

99-88") at 4-5. 

47 IRS Document 10968 Fiscal Year 2000 Congressional Justification, (February 1,

1999) at SD-21 - SD-22.

48 GAO Report 99-88 at 4, 8.

49 Modernizing America's Tax Agency at 27. A list of the initiatives and a progress report

may be found in Modernizing America's Tax Agency at 28-31.

- 13 -

Steering Committee, chaired by the Commissioner, was established to provide authoritative and

timely decisions on all matters affecting implementation of initiatives and to ensure that all

initiatives are consistent with the IRS’s business strategy.47 At that time, the IRS had received

nearly 5,000 recommendations all aimed at improving customer service. By January 1999, this

list was reduced to 157 primary customer service initiatives to be managed by TTSI in the short

term.

The GAO reviewed the progress of 25 specific customer service improvement initiatives

identified as of January 1999. The GAO concluded that the IRS has established a promising

strategy for managing the agency’s customer service initiatives. The GAO believes this strategy

could be strengthened by the development of an approach and the provision of guidance to

managers for determining the appropriate cost and benefit information for the customer service

initiatives and for measuring the results of the initiatives as they apply to the IRS’s customer

service objectives.48

The IRS reports that many of the higher profile initiatives were implemented or partially

implemented in 1999, and that 12 initiatives were added and six expanded for 2000.49

B. IRS Reorganization

Background

At the time of Congressional consideration of the IRS Reform Act, the Commissioner had

announced the broad outline of a plan to reorganize the structure of the IRS in order to help make

the IRS more oriented toward assisting taxpayers and providing better taxpayer service. Prior to

announcement of this plan, the IRS had a three-tier structure of district and regional offices and a

national office. Thirty-three district offices and ten service centers administered the entire

spectrum of taxpayers by defined geographical boundaries. Four regional offices presided over

the districts, with one national office in Washington, D.C. at the top of the command chain.

As announced by the Commissioner, the new organizational structure would be based on

units that serve particular groups of taxpayers with similar needs. Under this structure, each unit
50 IRS Reform Act sec. 1001. 

51 The Wage and Investment Income division will cover individual taxpayers with simple

returns, who are not self employed or do not have supplemental income. These include

individual taxpayers filing Form 1040A, 1040EZ, and simple 1040s. This division will serve

approximately 116 million taxpayers, including those who file jointly, accounting for 90 million

returns with wage and investment income only. This division will have its headquarters in

Atlanta, Georgia. Internal Revenue Service, IRS Organization Blueprint, Document 11052 (5-

1999)(hereinafter "Organization Blueprint") at 20, 24.

- 14 -

would be charged with start-to-finish responsibility (e.g., education, audit, and collection

responsibility) for serving a particular group of taxpayers. The Commissioner believed that this

new structure would solve many of the problems that taxpayers had been encountering with the

IRS. The Congress agreed that the current IRS organizational structure was one of the factors

contributing to the inability of the IRS to properly serve taxpayers and that the proposed structure

would help enable the IRS to better serve taxpayers and provide the necessary level of services

and accountability to taxpayers. In order to support the Commissioner in his efforts to modernize

and update the IRS, the IRS Reform Act included a statutory direction for the Commissioner to

eliminate or substantially modify the existing organizational structure and to establish

organizational units to serve particular groups of taxpayers with similar needs.50

Description of reorganization plan and status report

The Commissioner’s reorganization plan centers on taxpayer needs rather than

geographical location. The plan eliminates regional and district offices. Four operating divisions

comprise the centerpiece of the plan: Wage and Investment Income,51 Small Business and Self-
52 The Small Business and Self-Employed division will service approximately 33 million

individual taxpayers who file Schedules C (Profit or Loss From Business), E (Supplemental

Income and Loss), or F (Profit or Loss from Farming), or Form 2106 (Employee Business

Expenses). It also includes approximately 7 million partnerships, S corporations and C

corporations with assets of $5 million or less. It will also have responsibility for estate and gift

taxpayers, fiduciary returns, and all individual taxpayers with international returns. Id. at 42-43.

This division will have its headquarters in Washington, D.C.

53 The Large and Mid-Size Business division covers mid size corporations, having assets

valued between $5 million and $250 million, and large corporations having assets in excess of

$250 million. This division is organized by industry rather than geography. Each industry will

have a separate headquarters. See Organization Blueprint at 68-71. This division will have its

headquarters in Washington, D.C.

54 The Tax Exempt and Governmental Entities division includes tax-exempt

organizations, employee plans, and governmental entities. Employee Plans comprises private

and public retirement plans that control approximately 4.1 trillion in assets. The majority of

those plans have less than 250 participants. Exempt Organizations includes over 1.5 million taxexempt organizations and an estimated 350,000 religious organizations. Governmental Entities

includes 270,000 outstanding tax-exempt bond issuances, 86,000 Federal, State, and local

entities and 559 Federally recognized Indian tribes. Id. at 74. This division has its headquarters

in Washington, D.C.

55 Id. at 10, 11.

56 Id. at 8

57 Id. at 10. 

58 Id. at 11.

- 15 -

Employed,52 Large and Mid-Size Business,53 and Tax Exempt and Governmental Entities.54 Each

division will have its own functions for education, communication, customer account services,

and compliance.

In addition to the four operating divisions, the new organization structure includes four

functional organizations responsible for specific issues and cases. The Taxpayer Advocate and

Appeals provide assistance to taxpayers independent of the operating divisions.55 The national

office will be smaller than previously and is responsible for setting broad policy, reviewing the

plans and goals of the business units and developing major improvement initiatives.56 Counsel

will provide legal interpretation of the revenue laws.57 The Criminal Investigation Division

investigates criminal tax matters.58 Following the recommendations of a year-long study, the

Criminal Investigation Division will be organized as a separate line unit reporting directly to the
59 Modernizing America’s Tax Agency at 37-38. See also Internal Revenue Service,

Review of the Internal Revenue Service: Criminal Investigation Division, Publication 3388 (April

1999).

60 Id.

61 Organization Blueprint at 7-8.

62 Id. at 7.

- 16 -

Commissioner and Deputy Commissioner.59 Two internal organizations, Information Systems

and Agency-Wide Shared Services, provide common services internally (e.g., facilities

management, personnel services and procurement).60

The reorganization is being staged in phases:61

Phase I: Identifying and validating the major components of the new

organization’s structure.

Phase II A: Developing individual organizational unit blueprints and an

integrated Master Plan Blueprint for the Modernization Program as well as

detailed Infrastructure Implementation Plans.

Phase II B: Developing detailed design team implementation plans for

blueprints and implementing the Infrastructure Implementation Plans. 

These plans will be required for the start up of the operating divisions.

Phase III: Implementing the new organization. 

Phase I was completed in July 1998. In that phase, Booz-Allen & Hamilton confirmed

that the Commissioner’s concept to modernize the IRS is the appropriate organizational structure

to reorganize the IRS.62 Phase II A (blueprints) was completed in Spring 1999 and culminated in

the publication of the Organization Blueprint. Phase III is currently underway.

The IRS has begun implementing parts of the new organization. In the first quarter of

fiscal year 1999, the Information Systems activities of the regions, districts and service centers

began reporting to the Chief Information Officer. The nationwide Taxpayer Advocate staff

began reporting directly to the National Taxpayer Advocate.

The Commissioners and Deputy Commissioners for all four Operating Divisions are now
63 Statement of Charles O. Rossotti, Commissioner of Internal Revenue, before the

Senate Finance Committee (February 2, 2000) (hereinafter “Rossotti Senate Finance Testimony”)

at 14. 

64 Id.

65 Id.

66 See Modernizing America's Tax Agency at 47-52.

67 Id. at 49. Employee performance measures are discussed further in Part IV. E., below.

68 The regulation is reproduced in Appendix 2 of Modernizing America's Tax Agency.

- 17 -

in place.63 The Tax Exempt and Government Entities division has been in operation since

December 1999.64 The Large and Mid-Size Business Division is scheduled to begin operations

in June 2000. The Wage and Investment and Small Business/Self-Employed Divisions are

expected to be operational in the fall of 2000.65

C. Development of Organizational Performance Measures

Historically, enforcement revenue has been a key measure of success at the IRS. The IRS

Reform Act sought to change this focus through provisions such as the mandate for a new IRS

mission statement. Accordingly, as part of efforts to implement the new IRS mission and the

Commissioner’s modernization plans, the IRS is changing its organizational performance

measures to balance business results (both quantity and quality), customer satisfaction, and

employee satisfaction. The redesigned measures will ensure that customer satisfaction and

employee satisfaction share equal importance with business results.66 As one way of avoiding

prior misuses of enforcement statistics as a performance measure, quantitative measures will

generally not be used at the individual employee level.67 Appropriate performance measures are

needed to determine how to manage the new IRS, gauge progress toward the IRS goals, as well

as to assist in IRS oversight. Performance measures can also help the IRS develop compliance

initiatives and develop customer assistance products.

In September 1999, a balanced measures regulation was issued to formally establish the

new performance management system.68 The IRS completed development of balanced measures

for the Examination, Collection and three Customer Service product lines in 1998. In 1999,

additional balanced measures were approved for Tax Exempt and Government Entities, Large

and Mid-Size Businesses, Appeals, the Office of the Taxpayer Advocate, Research, Statistics of

Income and additional Customer Service product lines. Other measures are expected to be

approved in 2000 for Information Systems, Criminal Investigation, Counsel, Submission
69 Id. at 51.

70 Id. at 7-8, 49-50.

71 Modernizing America’s Tax Agency at 44-45.

72 GAO Report 00-144 at 5, 9, 10-11. See also, General Accounting Office, Tax

Administration: IRS’ Fiscal Year 2000 Budget Request and 1999 Tax Filing Season (GAO/TGGD/AIMD-99-140, April 13, 1999) (hereinafter “GAO Report 99-140”) at 15.

73 While the IRS administratively discontinued TCMP audits, subsequent statutory

changes relating to certain audit techniques could have an impact on the IRS’s ability to reinstate

TCMP audits in the same manner as they were previously conducted. See sec. 7602(e).

- 18 -

Processing and Agency Wide Shared Services.69

The Commissioner has emphasized that, while enforcement measures are necessary,

enforcement revenues are not an appropriate performance measure. However, overall revenue

collections, compared with revenues due under the law, is a valid measurement.70 The

Commissioner has also acknowledged that developing a measure of overall compliance is

essential. While difficult, developing a measure of taxpayer compliance will enable the IRS to

quantify how its increased focus on taxpayer service increases voluntary compliance and

revenues, as compared to the prior focus on enforcement. As the Commissioner has stated:

In the future, it will also be essential for the IRS to develop regular and meaningful

measures of overall compliance. This is important not only for effective management but

also for fundamental fairness, to assure taxpayers who pay their taxes that others are also

complying. In the absence of such 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.71

The GAO agrees that a balanced set of performance measures are key to achieving the

IRS mission and also concurs that measuring voluntary compliance is critical to assessing IRS

performance.72 The IRS Organizational Performance Management Executive has told the GAO

that measuring voluntary compliance without using something similar to the discontinued

Taxpayer Compliance Measurement Program (“TCMP”) would be difficult. TCMP used

detailed audits to measure taxpayer compliance. The last TCMP audits were related to tax years

1987 and 1988; TCMP audits were discontinued due to concerns about taxpayer burdens.73 The

IRS has also told the GAO that the TCMP data has certain limitations. The GAO has suggested

that a modified version of the TCMP studies could be useful in assessing voluntary compliance,

such as using smaller samples that project nationwide results, sampling groups of taxpayers and

projecting results to specific groups of taxpayers, or continuously sampling a small number of
74 GAO Report 99-140, at 16-17.

75 GAO Report 00-144, at 9, 11.

76 Id. at 11.

77 Rossotti House Oversight Testimony at 2. Pages 2-3 of this testimony contain a

summary of the IRS Year 2000 readiness efforts.

78 Statement of Charles O. Rossotti, Commissioner, Internal Revenue Service, before the

(continued...)

- 19 -

returns over a period of several years.74

The GAO has also commented that it is not clear that IRS employees fully understand the

IRS mission statement, particularly the idea that customer service and compliance can be

mutually supportive. The GAO believes that balanced performance measures, including a

measure of compliance, can help employees better understand the relationship between customer

service and compliance.75

The IRS Office of Program Evaluation and Risk Analyses is working with a contractor to

determine how to measure compliance and develop a compliance strategy. This effort is reported

to be still in its early stages.76

D. Technology Modernization

Year 2000 compliance

The Commissioner has reported that the IRS experienced a smooth transition into the year

2000. Over the weekend between December 29, 1999, and January 3, 2000, the IRS experienced

fewer problems than in a normal year. There were also no problems associated with the leap year

on February 29, 2000. The IRS does not expect any future problems due to the year 2000

conversion. The Commissioner attributes this success to the IRS’s comprehensive planning and

preparations over the past three years.77

Systems modernization

IRS systems modernization is a necessary element to achievement of IRS strategic plans.

The work required to modernize IRS systems is substantial. As described by Commissioner

Rossotti, updating IRS business practices for dealing with taxpayers “requires almost a complete

replacement of IRS information technology systems, which are built on a 30-year old

fundamentally deficient foundation that cannot provide accurate up-to-date information about

taxpayer accounts.”78
78(...continued)

Subcommittee on Oversight, House Ways and Means Committee (April 13, 1999) at 18.

79 General Accounting Office, Tax Systems Modernization: Management and Technical

Weaknesses Must be Corrected if Modernization is to Succeed (GAO/AIMD-95-156, July 26,

1995).

80 General Accounting Office, Tax Systems Modernization: Tax Systems Modernization

Under Way But IRS Has Not Yet Corrected Management and Technical Weaknesses

(GAO/AIMD-96-106, June 7, 1996).

81 Department of the Treasury, Report to House and Senate Appropriations Committees,

Progress Report on IRS’s Management and Implementation of Tax Systems Modernization (May

6, 1996) at 1.

- 20 -

The IRS has been working on systems modernization efforts for over a decade. The path

to systems modernization has not been trouble free. In 1995, the GAO reviewed IRS’s tax

systems modernization (“TSM”) projects, and identified significant problems.79 The GAO found

that, while the IRS had progressed in many actions initiated to improve management of

information systems, pervasive management and technical weaknesses impeded modernization

efforts and put at risk the funds that had been allocated to systems modernization. The GAO

made a number of recommendations to correct the identified problems, and also placed TSM on

its list of high-risk areas as a critical information systems project vulnerable to schedule delays,

cost over-runs, and failure to meet mission goals.

The GAO again reviewed TSM efforts in 1996.80 At that time, the GAO found that the

IRS had again made progress, but that none of the GAO recommendations had been fully

implemented and that the IRS progress was not adequate to correct the management and

technical weaknesses. The GAO recommended that, until IRS weaknesses were corrected, the

Congress should consider limiting TSM spending to only cost-effective modernization efforts

that: (1) support ongoing operations and maintenance; (2) correct IRS management and technical

weaknesses; (3) are small, represent low technical risk, and can be delivered in a relatively short

time frame; and (4) involve deploying already developed systems only if such systems have been

fully tested, are not premature given the lack of a completed architecture, and produce a proven,

verifiable business value.

In its 1996 report on TSM, the Treasury Department also found that, while the IRS had

made some progress on systems modernization, modernization efforts had taken longer than

expected, cost more than originally estimated, and delivered less functionally than originally

envisioned. The Treasury Department study concluded that significant changes in IRS

management approach were needed, and that it was beyond the scope of IRS ability to develop

and integrate TSM without expanded use of external expertise.81 In 1997, GAO again included

IRS systems modernization on its list of “high-risk” areas.
82 General Accounting Office, Tax Systems Modernization: Blueprint is a Good Start But

Not Yet Sufficiently Complete to Build or Acquire Systems (GAO/AIMD/GGD-98-54, February

24, 1998).

83 Id. at 2-3.

84 The account from which systems modernization is to be funded is call the Information

Technology Investments Account (“ITIA”).

85 Pub. L. 105-61 (October 10, 1997), 111 Stat. 1281.

86 Pub. L. 105-277 (October 21, 1998), 112 Stat. 2681-488.

- 21 -

The IRS has continued to make progress toward systems modernization. On May 15,

1997, the IRS issued its Modernization Blueprint detailing its information technology plan. The

Blueprint had four principal parts: (1) a systems life cycle; (2) business requirements; (3)

functional and technical architectures; and (4) a sequencing plan. The GAO reviewed the

Modernization Blueprint to determine whether it provided the foundation needed to develop or

acquire modern systems and reported on the Blueprint in early 1998.82 The GAO found that the

Blueprint was a good start, but that the Blueprint was not complete and did not provide sufficient

detail and precision for building or acquiring new systems. The IRS Chief Information Officer 

acknowledged that essential elements were missing from the Blueprint, and stated that he had

been taking steps to address the missing elements.83

The IRS fiscal year 1998 appropriation included $325 million for information

technology84 and, in response to concerns regarding IRS system modernization efforts, restricted

obligation of the funds until IRS submits to Congress for approval a plan for expenditure that: (1)

implements the IRS Modernization Blueprint submitted to Congress on May 15, 1997; (2) meets

the information systems investment guidelines established by the office of Management and

Budget in the fiscal year 1998 budget; (3) has been reviewed and approved by the IRS’s

Investment Review Board, the Office of Management and Budget, and the Department of the

Treasury’s Modernization Management Board, and has been reviewed by the General

Accounting Office; (4) meets the requirements of the May 15, 1997 Internal Revenue Service’s

Systems Life Cycle program; and (5) is in compliance with acquisition rules, requirements,

guidelines, and systems acquisition management practices of the Federal Government.85 The

fiscal year 1999 information technology appropriation included similar restrictions.86 The fiscal

year 2000 appropriation did not include an amount for information technology.

In December 1998, the IRS awarded its prime systems integration services contract

(“PRIME”). In mid-1999, the IRS submitted is first expenditure plan requesting approximately

$35 million for modernization initiatives through October 1999. The GAO reported that the

initial expenditure plan was an appropriate first step toward successful systems modernization
87 General Accounting Office, Tax Systems Modernization: Results of Review of IRS'

Initial Expenditure Plan (GAO/AIMD/GGD-99-206)(June 1999) at 2-3.

88 GAO Report 00-144 at 12.

89 Id.

90 Id. at 13.

91 Id.

- 22 -

and satisfied the conditions set forth by the Congress for use of the funds.87

A second expenditure plan was not finalized before the original $35 million was

obligated. In December 1999, the IRS requested approval to obligate $33 million as a stopgap

funding measure until submission of the next expenditure plan.88 The GAO reviewed this

request and raised concerns regarding the lack of progress in completing and implementing

certain management controls and the risks associated with the plans to develop certain systems

without such controls in place.89 The IRS request was approved, and the IRS was directed to take

actions to address the concerns raised by the GAO.

The GAO reports that the IRS has scaled back its new system development efforts,

recognizing that it must first put in place the requisite modernization management capability.90

On March 9, 2000, the IRS submitted a new expenditure plan requesting obligation of

approximately $176 million in funds. The plan includes provisions to address management

weaknesses previously identified and emphasizes completing the enterprise architecture,

implementing the enterprise life cycle, and rescheduling projects to avoid problems. 

The GAO has noted that the March 9, 2000, plan addresses some longstanding

weaknesses. However, the GAO will continue to designate IRS systems modernization as a

high-risk program until management and technical weaknesses have been corrected.91
92 FY 2001 Justification at SD-18.

93 General Accounting Office, Tax Administration: IRS’ 2000 Tax Filing Season and

Fiscal Year 2001 Budget Request, (GAO/T-GGD)/AIMD-00-133, March 28, 2000) (hereinafter

“GAO Report 00-133") at 10.

94 FY 2001 Justification at SD-18.

95 Id. at EITC-7.

- 23 -

III. DESCRIPTION AND ANALYSIS OF THE IRS BUDGET REQUEST

FOR FISCAL YEAR 2001

A. In General

For fiscal year 2001, the IRS budget request, not including the funding and staffing for

the earned income tax credit (“EITC”) program, totals $8.841 billion and 98,051 full-time

equivalent (“FTE”) positions. The fiscal year 2001 budget request reflects a $769 million

increase and an increase of 2,284 in FTEs over the budget enacted for fiscal year 2000; this

difference includes a supplemental appropriation for fiscal year 2000 of $40 million as part of

efforts to stabilize the IRS workforce.92 The increase in the budget request is due to a number of

increases and decreases, including increases for (1) an initiative called Staffing Tax

Administration for Balance and Equity ("STABLE"), (2) information systems and technology

investments, and (3) organizational modernization.93 The IRS has indicated that it requires this

increase to deliver on the 98 mandates contained in the Reform Act of 1998, to manage

organizational modernization, and to invest in critically needed information technology.94

The IRS budget request includes $145 million and 2,082 FTEs for the EITC compliance

initiative, which reflects a $1 million increase from fiscal year 2000 due to adjustments necessary

to maintain current levels.95 The EITC program is funded outside the discretionary spending

caps. Fiscal year 2001 is the fourth year of funding for this five-year program. The program

provides for expanded customer service and public outreach programs, strengthened enforcement

activities, and enhanced research efforts to reduce overclaims and erroneous filings associated

with the EITC.

The IRS’s overall budget request for fiscal year 2001, including funding and staffing for

the EITC, totals $8.986 billion and 100,133 FTEs.

 A table showing the IRS fiscal year 2001 budget request, broken down by category,

compared to the proposed fiscal year 2000 operating level is contain in the Appendix. 

The GAO has reviewed the IRS fiscal year 2001 budget request. While generally

supportive of the IRS request, the GAO recommends that the Congress not approve the requested
96 GAO Report 00-133 at 1-2.

97 Id. at 2, 10.

98 FY 2001 Justification at SD-19.

99 Id.

100 Id. at 20.

101 Rossotti House Oversight Testimony at 24.

- 24 -

increase for telephone service and the funding for the multiyear technology capital account. The

GAO also notes that some of the items requested in the budget may lead to increases in funding

in future years.96 These matters are discussed in more detail below.

The GAO has also made a general comment that several portions of the IRS’s budget

request do not contain a clear link between the requested funding and the expected results. The

GAO noted that an agency’s performance goals are of little value to the Congress without a

connection to the resources sought. The GAO believes that the IRS could make its budget

requests more useful to the Congress by doing a better job of making that connection.97

B. Funding to Maintain Current Operations and Service Levels

In general

The IRS believes that, in order to implement the mandates from the IRS Reform Act, it

must modernize its organizational structure and technological base and maintain its current level

of operations.98

Funding to maintain current service level

The IRS has requested an increase of $336 million to maintain current service levels,

which includes funding for pay raises, benefits, and non labor inflation increases.99 The IRS

notes that it is a labor-intensive organization, which must have a stable workforce to enable it to

carry out its operations. The IRS finds that in order to maintain its current service level and

operations, carry out a successful tax filing season, oversee tax administration programs, and

implement organizational modernization, it must have the resources to pay for the inflationary

cost of statutory pay and other mandatory increases.100 The IRS reports that funding of the

current services level request, together with funding for the STABLE project will also enable the

IRS to meet the need for critical skilled positions for which no hiring has been done since 1995

due to funding constraints.101 
102 FY Justification at SD-21.

103 Id.

104 GAO Report 00-133 at 12. The GAO has questioned whether the IRS will in fact be

able to implement STABLE as intended. The IRS has reported to the GAO that they expect to

fill all of the requested positions. Id.

105 The STABLE initiative includes 500 additional FTEs for the IRS’s toll-free telephone

service; 200 of these FTEs will be used to hire Customer Service staff to replace those 200 FTE

Examination staff that have been detailed to take telephone calls. Thus, the GAO views the

STABLE initiative as including 300 FTEs to increase the number of individuals devoted to

telephone service and the remaining 200 FTEs as an increase in Examination staff. Id. at 21-22.

- 25 -

STABLE

The STABLE initiative is designed to stabilize and strengthen tax compliance and

customer service. For this program, the IRS has requested $144 million and 1,633 FTEs for

fiscal year 2001 and $39.8 million and 301 FTEs for a fiscal year 2000 supplemental

appropriation which would allow the hiring of 301 FTEs in fiscal year 2000. The IRS notes that

this would ensure that most training of new hires would be undertaken in fiscal year 2000,

allowing the impact of these new hires to be fully maximized in fiscal year 2001.102 The

STABLE initiative includes staffing increases across the IRS in the following areas: submission

processing, telephone and correspondence, document matching, examination, collection, and taxexempt and government entities.103

The GAO has noted that the IRS budget request for STABLE does not reflect FTEs for an

entire fiscal year, because the budget request assumes that many new hires will not be brought on

board until April 1, 2001. Thus, if the initiative is funded and the IRS implements it as intended,

the IRS can be expected to seek a further increase in fiscal year 2002 to fund additional staffing

costs.104

The GAO found that many aspects of the STABLE initiative are appropriate, but raised

concerns about the part of the initiative that would increase staffing for the toll-free telephone

assistance program. Under this part of the program, the IRS has requested 300 FTEs105 to 

increase telephone service.

According to the GAO, the IRS has not provided justification for the proposed toll-free

telephone service staffing increase, nor sufficient detail as to how it determined the size of its

proposed staff increase or how such increase would affect service. Moreover, the GAO observed

that the IRS is unable to project the level of service it can expect from its current staff level; thus,

it is unclear how the IRS could project the level of service it would receive from an increase in
106 Id.

107 Id.

108 Rossotti House Oversight Testimony at 25; FY 2001 Justification at SD-22.

109 FY 2001 Justification at SD-22.

110 Id.

- 26 -

staff.106 The GAO has noted that the IRS has shown that it may be able to provide better service

with fewer staff than previously. For example, the level of service during the current filing

season improved significantly over the last year (63 percent as of March 4, 2000, as compared to

43 percent as the same time in 1999), even though fewer staff were allocated this year.107 

The GAO recommends that Congress consider withholding approval of the request

relating to the toll-free phone service until the IRS provides additional supporting information

regarding the request.

Electronic tax administration

As discussed above, the IRS Reform Act mandates that 80 percent of all tax and

information returns be filed electronically by 2007. The IRS is requesting an increase of $3

million for fiscal year 2001 for electronic tax administration so it may continue progress toward

achieving this goal.108 The IRS has indicated that funding will be used to expand marketing

efforts on the benefits of filing electronically (e.g., television, radio, and print media advertising),

as well as conducting research to ensure that electronic tax administration products and services

meet customers’ needs.109

Contract management

The IRS believes that its capability to use contractual support is vital to basic activities

that support the IRS organizations that are implementing the mandates of the IRS Reform Act

and overall modernization. Thus, the IRS has requested an increase of $44 million to fund

necessary contracts and general support operations, mandatory contractual arrangements, and

necessary outside expertise.110

C. Funding to Support Organizational Modernization and

Implementation of the IRS Reform Act

In general; organizational modernization

The IRS has requested $182 million to cover expenses related to the reorganization of the
111 Id. at SD-24.

112 Id.

113 Id.

114 Id.

115 FY 2001 Justification at SD-24; GAO Report 00-133 at 32.

116 GAO Report 00-133 at 19. See Part II. D., above, for a discussion of the limits on IRS

technology spending.

- 27 -

IRS. Of the $182 million, $140 million is base funding from fiscal year 2000, which will

continue to cover the general expenses of the reorganization, such as buyouts, recruitment,

relocations, employee training, equipment, services and supplies, telecommunications moves and

installations, and modifications of information systems to the new organizational structure.111

The remaining $42 million is requested for fiscal year 2001.112

The IRS has indicated that costs for this purpose will peak in fiscal year 2001, decline in

fiscal year 2002, and end in fiscal year 2003.113 The types of expenditures related to this funding

request include design work, space alterations, and contract movers (to physically align

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

Headquarters, Information Systems, and the National Office). These funds also are intended to

cover costs associated with assisting employees in transition. The IRS has noted that this

funding will cover all aspects of organizational change that will complement the IRS’s systems

modernization efforts and implementation of the IRS Reform Act mandates.114

D. Information Technology

Information systems

The IRS fiscal year 2001 budget request includes $1.58 billion and 7,531 FTEs for

information systems. Of the $1.58 billion, $1.54 billion is for funding the operations and

maintenance of existing systems. The remaining $40 million is for what the IRS refers to as

“Business Line Investments,” which are intended to add new capabilities to five operational

systems and develop three new systems to address certain business needs unique to some of

IRS’s newly formed divisions.115

The GAO reports that this request appears consistent with the spending categories

established in previous budget legislation.116
117 The ITIA currently contains $438 million in appropriated, but unobligated, funds. Id.

The establishment of the ITIA is discussed in Part II. D., above.

118 In fiscal year 2000, the IRS requested no funds for ITIA. However, the IRS notes that

remaining balances from prior year appropriations plus the $119 million requested for fiscal year

2001 will support its estimated fiscal year 2001 need of $325 million.

119 FY 2001 Justification at SD-25.

120 GAO Report 00-133 at 2, 20-21.

121 Id. at 20.

- 28 -

ITIA core business systems

In addition to the $1.58 billion information systems funding request, the IRS is requesting

a total of $494 million for its multiyear capital account, referred to as the Information

Technology Investments Account (“ITIA”), which is intended to fund contractor costs associated

with IRS’s core business systems modernization program.117 Of this request, $119 million is for 

fiscal year 2001.118 The additional $375 million is a request for an advanced appropriation for

fiscal year 2002.119 The IRS believes that this funding is essential to properly support

modernization and to fully comply with the IRS Reform Act. The IRS believes that full funding

will allow the realization of the following benefits:

• Short-term–Improved access to IRS customer service representatives; improved service to

internal and other Federal customers; enhanced electronic communication with taxpayers;

and timely, accurate information for personnel systems;

• Mid-Term–Improved financial management, expanded electronic filing and payment

options, and expanded electronic interaction with taxpayers; and

• Long-Term–More accurate and timely information for increased customer service, more

customer friendly collection capabilities, faster refund processing, and secure and

auditable access to all taxpayer account information through a single terminal.

The GAO has questioned the IRS ITIA funding request.120 The GAO reports that the IRS 

has not performed required analyses to justify the business need for these investments, including

analyses demonstrating that the investments: (1) support a critical agency mission; (2) are

justified by life cycle cost-benefit analysis (i.e., business case); and (3) have cost, schedule, and

performance goals.121 According to the GAO, the IRS based its funding request on questionable
122 Id.

123 Id. at 2, 20-21.

124 General Accounting Office, Financial Audit: IRS’ Fiscal Year 1999 Financial

Statements (GGD/AIMD-00-76, February 2000)(hereinafter “GAO Report 00-76") at 8.

125 Id.

126 IRS Commissioner Rossotti recently testified that the fund balance was reconciled

with the Treasury Department at the end of fiscal year 1999, and monthly reconciliations have

occurred for October and November of fiscal year 2000. Commissioner Rossotti also indicated

that a new permanent team is now charged on a recurring basis with this duty. Statement of

Charles O. Rossotti, Commissioner, Internal Revenue Service, before the Subcommittee on

Government Management, Information and Technology of the House Committee on Government

Reform (April 10, 2000).

- 29 -

spending estimates.122 Consequently, the GAO has recommended that the Congress deny the

funds requested for the ITIA and direct the IRS to develop a credible and verifiable fiscal year

2001 budget request based on defined modernization requirements and formal estimating

methods, as well as seek a supplemental appropriation for this amount in time to meet fiscal year

2001 needs, if necessary.123

E. Financial Audit of IRS Fiscal Year 1999 Financial Statements

The GAO recently presented the results of its audit of the IRS principal financial

statements for fiscal year 1999. The GAO expressed an unqualified opinion on the IRS 

Statement of Custodial Activity, finding that it presents fairly, in all material respects, the IRS

custodial activity for fiscal year 1999.124 The GAO expressed a qualified opinion on the IRS

balance sheet, noting limitations on the scope of its work due to insufficient evidence regarding

the reliability of the components of the net position of the IRS. Except for these limitations, the

GAO found that the IRS balance sheet presents fairly, and in all material respects, the IRS assets,

liabilities, and net position as of September 30, 1999.125 Finally, the GAO was unable to express

an opinion on the IRS statements of net cost, changes in net position, budgetary resources, and

financing because of limitations on the scope of its work, which resulted from insufficient

evidence regarding (1) the opening balances of the IRS’s fund balance with the Treasury

Department, property and equipment, accounts payable, and net position, (2) the reliability of

program costs and budgetary balances, and (3) the components of net position.126

The GAO identified seven material weaknesses in the IRS’s internal controls as of

September 30, 1999. These weaknesses relate to the IRS’s control over: (1) the financial

reporting process; (2) management of unpaid assessments; (3) refunds; (4) fund balance with

Treasury; (5) property and equipment; (6) budgetary activities; and (7) computer security.
127 Id. at 10.

- 30 -

The GAO believes that these weaknesses may have adversely affected, in whole or in

part, any decision made by IRS management that is based on these weaknesses. Thus, the GAO

was unable to obtain reasonable assurance that the IRS’s program costs, budgetary balances, and

components of net position were reliable. Further, the GAO found that some of these material

weaknesses may have permitted inappropriate refunds to have been paid, reduced IRS’s

effectiveness in its enforcement of the tax laws, and resulted in errors in taxpayer accounts and

increased taxpayer burden.127
128 Sec. 7802(c) and (d).

129 The Conference Report for the IRS Reform Act notes that to the extent that the

Commissioner has already taken measures to develop and implement such a plan, the

Commissioner should not be precluded from going forward with such planning and

implementation prior to the appointment of the Board. H.R. Conf. Rep. No. 105-599, at 203-204

(1998) (hereinafter “Conference Report”).

130 Sec. 7802(d)(4).

131 Sec. 7802(b).

- 31 -

IV. OTHER MATTERS ADDRESSED BY THE IRS REFORM ACT

A. Establishment of the IRS Oversight Board

The IRS Reform Act created the IRS Oversight Board (“the Oversight Board”). 

Generally, the Oversight Board is to oversee the IRS’s administration, management, conduct,

direction and supervision of the execution and application of the internal revenue laws.128

Specific responsibilities of the Oversight Board include reviewing and approving the IRS’s

strategic plans and operational functions (such as modernization, outsourcing, training and

education). The Oversight Board also is to recommend candidates for appointment as IRS

Commissioner, as well as recommend whether the Commissioner should be removed. The

Commissioner’s selection, evaluation, and compensation of senior executives also are to be

reviewed by the Oversight Board. In addition, any major reorganization of the IRS is to be

reviewed and approved by the Oversight Board.129

Budget requests prepared by the Commissioner will be reviewed and approved by the

Oversight Board.130 This review is to ensure that the request supports the annual and long range

strategic plans of the IRS. The Oversight Board is to submit the IRS budget request through the

Treasury Department and the President, who in turn is to submit it to the Congress without

revision. This provision does not preclude the President from submitting his own budget for the

IRS.

The Oversight Board is to consist of nine members.131 Six members are to be drawn from

the private sector. The other three members are to be the IRS Commissioner, the Treasury

Secretary (or Deputy Secretary), and one full-time federal employee or employee representative. 

The President appoints the private sector and federal employee representative members, with the

advice and consent of the Senate, for staggered five-year terms.

The IRS Reform Act required the Oversight Board nominees to be sent to the Senate by

January 22, 1999. The last nominee was submitted on January 27, 2000. The President 

nominated the following seven persons:
132 The Commissioner of the Internal Revenue Service appointed the Taxpayer Advocate.

- 32 -

• George L. Farr, former Vice-Chairman of American Express (nominated for a

four-year term),

• Nancy Killefer, Director, McKinsey & Company, former Treasury Department

Assistant Secretary for Management and Chief Financial Officer (nominated

for a five-year term),

• Charles Kolbe, Chairman of the Board, Red Oak Hereford Farms (nominated

for a three-year term),

• Larry R. Levitan, former partner Arthur Anderson & Co./Andersen Consulting

(nominated for a five-year term),

• Steve H. Nickles, professor, Wake Forest University School of Law and the

Babcock Graduate School of Management (nominated for a four-year term),

• Robert M. Tobias, former president of the National Treasury Employees

Union (nominated for a five-year term), and

• Karen Hastie Williams, partner, Crowell & Moring (nominated for a threeyear term).

The nominees have a wide range of expertise, including government budget and

procurement matters, the needs of small business and large corporations, customer service,

debtor and creditor law, technology management, and the representation of IRS employees. On

February 3, 2000, the Senate Committee on Finance held a confirmation hearing for the

nominees. All seven nominations were reported favorably out of the Committee on March 2,

2000. The nominations are waiting for consideration by the full Senate.

B. Establishment of Independent National Taxpayer Advocate

Background and related provisions of the IRS Reform Act

The IRS created the Problem Resolution Program (“PRP”) in 1976. PRP’s purpose was

to provide an independent means by which taxpayer problems were promptly and properly

handled. In 1979, the IRS created the position of the Taxpayer Ombudsman to head PRP. In

1996, the Taxpayer Bill of Rights 2 (“TBOR 2") replaced the Taxpayer Ombudsman with the

Taxpayer Advocate.132 The Taxpayer Advocate was expected to represent taxpayer interests

independently in disputes with the IRS. The IRS Reform Act renamed the Taxpayer Advocate
133 The IRS Reform Act now requires that the Secretary of the Treasury, after

consultation with the Commissioner and the Oversight Board, appoint the NTA. The NTA is

required to have experience in customer service, tax law, and representing individual taxpayers. 

Compensation for the NTA is at the highest rate of basic pay established for the Senior Executive

Service. For the two year period preceding appointment, the NTA must not have been an IRS

officer or employee. After leaving the Office of the NTA, the NTA can not accept employment

with the IRS for five years.

134 Sec. 7803(c)(2)(C)(i).

135 Sec. 7803(c)(2)(C)(iii).

136 Sec. 7803(c)(2)(C)(ii).

- 33 -

the National Taxpayer Advocate (“NTA”).133 The NTA supervises the Office of the Taxpayer

Advocate.

The Office of the Taxpayer Advocate has four principal functions:

• to assist taxpayers in resolving problems with the IRS;

• to identify areas in which taxpayers have problems in dealing with the IRS;

• to propose changes in the administrative practices of the IRS to mitigate such

problems; and 

• to identify potential legislative changes which may be appropriate to mitigate

such problems.

The IRS Reform Act established a system of local Taxpayer Advocates that report to the

NTA or his delegate. Local Taxpayer Advocates are to be independent of the IRS’ examination,

collection, and appeals functions. Local Taxpayer Advocates are also to be employees of the

Office of the Taxpayer Advocate. The NTA appoints Local Taxpayer Advocates. With the

Commissioner, the NTA must develop career paths for local taxpayer advocates choosing to

make a career in the Office of the Taxpayer Advocate.

The NTA monitors the coverage and geographic allocation of local taxpayer advocate

offices and ensures that at least one local advocate is available for each State.134 Prior to the

reorganization of the Office of the Taxpayer Advocate, the IRS had a taxpayer advocate in each

of the four regional offices. Each of the 33 district offices, 30 former district offices, and 10

service centers has local advocates. The NTA must also ensure that local telephone numbers for

each office are published and available to taxpayers served by the office.135 Additionally, the

NTA must develop guidance to be distributed to all IRS officers and employees that outlines the

criteria for referring taxpayer inquiries to local taxpayer advocate offices.136

The IRS Reform Act also expanded the NTA’s ability to issue Taxpayer Assistance
137 Sec. 7811(a)(1)(A). Significant hardship is deemed to occur if one of four factors

exists: (1) there is an immediate threat of adverse action; (2) there has been a delay of more than

30 days in resolving the taxpayer’s problems; (3) the taxpayer will have to pay significant costs

(including fees for professional services) if relief is not granted; or (4) the taxpayer will suffer

irreparable injury, or a long term adverse impact if relief is not granted. Sec. 7811(a)(2). The

NTA may also issue a TAO if the taxpayer meets requirements to be set forth in regulations. 

Sec. 7811(a)(1)(B).

138 Sec. 7803(c)(2)(B).

139 Sec. 7803(c)(2)(B)(iii).

140 Sec.7803(c)(2)(B)(ii)(I) through (XI).

- 34 -

Orders. A taxpayer can request a Taxpayer Assistance Order (“TAO”) if the taxpayer is suffering

or about to suffer a “significant hardship” from tax law administration.137 A TAO may require

the IRS to release property of the taxpayer that has been levied upon, to cease any action or take

any action as permitted by law, or refrain from taking any action with respect to the taxpayer.

As required by law, the NTA submits two reports annually to the House Committee on

Ways and Means and to the Senate Finance Committee.138 The NTA submits the reports directly

to the Congressional committees without prior review of the Commissioner, the Secretary, or any

officer or employee of the Treasury, the Oversight Board, or the Office of Management and

Budget.139 

The first report, due June 30th of each year, covers the Office of the Taxpayer Advocate’s

objectives for the fiscal year beginning in that calendar year. Besides statistical information, the

report must contain a full and substantive analysis of the objectives.

The second report, due December 31st of each year, concerns the activities of the Office

of the Taxpayer Advocate.140 Generally, the report must cover initiatives taken to improve

taxpayer services and problems encountered, as well as the actions taken to resolve them and the

results. Specifically, the report must cover the 20 most serious problems experienced by

taxpayers. The IRS Reform Act also requires the report to identify the ten most litigated issues

for each category of taxpayer and the areas of the tax law that impose significant compliance

burdens on taxpayers or the IRS. Recommendations received from individuals with the authority

to issue Taxpayer Assistance Orders, and any Taxpayer Assistance Order not promptly honored

by the IRS, must also be included in the report. The report must also set forth recommendations

for administrative and legislative action to resolve problems encountered by taxpayers.
141 See Internal Revenue Service, National Taxpayer Advocate Annual Report to

Congress for Fiscal Year 1999, Publication 2104 at VI-1 (December 1999) (hereinafter NTA

Report FY 1999).

142 Id.

143 Id.

144 Id.

145 Id. at VI-3.

146 Statement of W. Val Oveson, National Taxpayer Advocate, Hearing before the Senate

Committee on Finance at 2 (February 2, 2000).

147 NTA Report FY 1999 at VI-3.

148 Id. at VI-1.

- 35 -

Implementation efforts

Establishing independence

According to the NTA’s most recent report, the NTA has taken several steps to strengthen

the independence and accountability for Taxpayer Advocate goals. The reorganized Office of the

Taxpayer Advocate (“Taxpayer Advocate Service”) became official on March 12, 2000. The

field organization consists of nine Area Taxpayer Advocate directors, seven of whom oversee

casework by Local Taxpayer Advocates in assigned territories and two of whom oversee

casework from Service Center Advocates. Seventy-four Local Taxpayer Advocates report to the

Area Taxpayer Advocate Directors and are responsible for handling taxpayer cases at the local

level. The Area Taxpayer Advocate Directors report to the NTA.141 Previously, local Taxpayer

Advocates reported to and received evaluations from IRS district and service center directors.142

Caseworkers were also moved into the local Taxpayer Advocate organization.143 A career path

was established for these workers to allow for professional development and advancement.144

The NTA determined that a workforce of approximately 2,300 employees would be

necessary based on historical data adjusted for the NTA’s independence and additional

responsibilities.145 Over 8,000 applications were received.146 Hiring began in fiscal year 1999

and is projected to be completed during the first half of fiscal year 2000.147 

In addition to caseworker positions, the NTA created Operating Division Taxpayer

Advocate positions to work within the new IRS organizational structure.148 As part of the filed

organization, two Operating Division Taxpayer Advocates report to the NTA. The primary

responsibility of the Operating Division Taxpayer Advocate will be systemic analysis and
149 Id.

150 Id. at VI-3.

151 Id.

152 Id.

153 Id. at I-2.

154 Id. at III-2.

155 Id.

- 36 -

advocacy, as opposed to casework.149 

To provide legal assistance, the NTA has an executive-level Chief Counsel attorney

assigned as the Counsel to the National Taxpayer Advocate.150 The Counsel to the National

Taxpayer Advocate has authority to hire four highly graded attorneys to provide the NTA and the

immediate office with legal support.151 Since its inception in November 1998, the Counsel’s

office has assisted the NTA with over 120 cases or projects.152

Taxpayer Advocate activity report

The most recent NTA report identified the following areas as some of the most serious

problems identified by individual and business taxpayers, tax practitioners, and IRS employees:

` complexity of the tax law;

` clarity and tone of IRS communications;

` administration of the earned income tax credit;

` lack of one-stop service;

` penalty administration;

` inability to access the toll-free number;

` lack of acknowledgment of correspondence and payments;

` divorced and separated taxpayers;

` offer-in-compromise issues; and 

` misapplied payments.153

The general category of penalties (accuracy-related and failure to file or pay) ranks first in

litigation both in the “individual” and “self-employed” categories.154 In addition to penalties, the

top five most litigated issues for individuals include the definition of gross income, trade or

business expenses, earned income tax credit and head of household.155 For the self-employed, the

list includes trade or business expenses, entertainment expenses, self-employment tax, and
156 Id.

157 Id. at II-1.

158 Id.

159 Id. 

160 Id. at VII-1.

161 Id. at VII-3.

162 Id. at VII-1.

163 The Office of the Taxpayer Advocate received more than 442,000 calls through its

toll-free number during fiscal year 1999. NTA Report FY 1999 at VII-1 and VII-12.

164 Two on refund offsets, one for interest abatement, one to issue a refund to avoid

foreclosure and one to stop an audit in which the taxpayer felt harassed. Statement of W. Val

Oveson, National Taxpayer Advocate, Hearing before the Senate Committee on Finance at 4

(February 2, 2000).

165 NTA Report FY 1999 at VII-1.

- 37 -

activity not engaged in for profit.156 The NTA noted that the earned income tax credit and

business expenses, both on the most litigated lists, impose significant compliance burdens on

taxpayers due to complexity.157 According to the NTA, the earned income tax credit is one of the

primary causes of Taxpayer Advocate casework.158 Other categories that the NTA identified as

imposing a significant compliance burden include interest, penalties, refunds, alternative

minimum tax, and the phase-out of itemized deductions and personal exemptions.159

The NTA reported that during fiscal year 1999, the Office of the Taxpayer Advocate

handled approximately 200,000 cases.160 More than 56 percent of these cases involved refunds,

amended returns, audit reconsideration, or revenue protection.161 In addition, there were 93,000

applications for taxpayer assistance orders, a 290 percent increase over the previous year.162 The

NTA attributes this increase to (1) the new “30-day delay” hardship criterion for resolving a

taxpayer account problem, (2) more publicity about the availability of NTA services, (3) a new

toll-free number, and (4) greater emphasis on the Taxpayer Assistance Order program.163 Five

cases required an enforced Taxpayer Assistance Order.164 An enforced Taxpayer Assistance

Order is required when the local Taxpayer Advocate and the responsible IRS functional area

cannot reach an agreement on case resolution. In 73.5 percent of the cases, the NTA was able to

provide relief or appropriate assistance to the taxpayer.165

According to the NTA’s report, representatives of the NTA are involved in several task
166 NTA Report FY 1999 at VII-5-7.

167 Id. at VII-7 - VII-9.

168 Id. at VII-12. Responsibility for Problem Solving Days was transferred to IRS

Operations in January 2000.

169 Id.

170 Id. at VII-13.

171 Id.

172 Conference Report at 220.

173 Id.

- 38 -

forces and working groups to address various taxpayer concerns, implementation of the IRS

Reform Act, and innocent spouse issues.166 In addition, the NTA initiated projects to study the

procedures regarding rejected offers in compromises, ways to improve the availability of correct

power of attorney information on the Central Authorization File, and the negative impact on low

income taxpayers caused by the addition of the kerosene tax for kerosene used for heating

purposes.167

The NTA previously coordinated Problem Solving Days with the IRS district offices, as

well as the National Problem Solving Day.168 In general, problem solving days permit taxpayers

to have face-to-face contact with an IRS employee who can assist them in resolving their

problems with the IRS.169 The IRS held Problem Solving Days monthly in every district office

through December, 1999.170 Since the Problem Solving Day Program began two years ago, the

IRS has resolved 57,450 cases.171

C. Treasury Inspector General For Tax Administration

Background and provisions of the IRS Reform Act

Prior to the IRS Reform Act, the IRS Office of the Chief Inspector was primarily

responsible for carrying out internal audits and investigations regarding the IRS. Created in 1951

in response to reports of widespread corruption and abuse, the Chief Inspector was an appointee

of the IRS Commissioner.172 The Office of the Inspector General for the Department of Treasury

(“Treasury IG”) could also investigate allegations of IRS employee and officer misconduct. The

IRS and the Treasury IG had an agreement as to their respective roles in investigating and

overseeing the IRS.173

The IRS Reform Act eliminated the IRS Office of the Chief Inspector. In its place,
174 The TIGTA did not assume responsibility for background checks and physical

security. Treasury Order 115-01(1)(b) and (d)(6) (January 14, 1999).

175 Treasury Order 115-01(1)(b) (January 14, 1999).

176 Sec. 7803(d)(3)(A).

177 Statement of David C. Williams, Inspector General, Treasury Inspector General for

Tax Administration, before the Senate Committee on Finance at 7 (February 2, 2000) (hereinafter

Williams Finance Testimony).

178 Id.

179 Id.

- 39 -

Congress created the Office of Treasury Inspector General for Tax Administration (“TIGTA”).

This office is in addition to the Office of Inspector General for the Department of Treasury,

which, after the enactment of the IRS Reform Act, no longer has responsibility for the IRS.

The IRS Reform Act transferred to the TIGTA almost all of the responsibilities

previously assigned to the IRS Chief Inspector, in addition to the Treasury IG’s duties with

respect to the IRS.174 The TIGTA conducts audits, investigations, and evaluations of IRS

programs and operations (including the Oversight Board).175 On an ongoing basis, the TIGTA is

to evaluate the adequacy and security of IRS technology. Part of the TIGTA’s responsibility

includes protecting the IRS from external threats to corrupt or threaten employees. The TIGTA

also investigates criminal misconduct as well as administrative misconduct, such as violations of

Taxpayer Bill of Rights and ethical violations. Taxpayers are provided with a toll-free number to

report allegations of IRS misconduct. In addition, the TIGTA also conducts periodic audits of at

least one percent of all determinations in which the IRS has asserted the confidentiality

provisions (either alone or in conjunction with the Freedom of Information Act or Privacy Act),

or law enforcement considerations as the basis for denying requested information.176

Semiannual report

In his semiannual report to the Congress, the TIGTA reported that his office had

successfully completed the transition period from IRS Office of Chief Inspector to TIGTA. It has

abolished its regional structure to eliminate a layer of management.177 In addition, its Office of

Audit was reorganized into specialized issue areas, which parallel the new IRS unit structure.178

Finally, TIGTA created the Office of Investigation’s Strategic Enforcement Division to

investigate any attempts to interfere with the operations and security of IRS computer systems.179

During the six month period covered by the report, the TIGTA issued 47 final audit

reports of the IRS and investigated over 1,600 allegations of criminal wrongdoing and
180 Treasury Inspector General for Tax Administration, Semiannual Report to the

Congress: April 1, 1999 - September 30, 1999, Publication 3372 at 3 (November 1999)

(hereinafter “TIGTA Semiannual Report”).

181 TIGTA Semiannual Report at 3.

182 Williams Finance Testimony at 6.

183 TIGTA Semiannual Report at 3.

184 Id. at 4.

185 Id.

186 Id.

- 40 -

administrative misconduct.180 The following discussion highlights some of the material

contained in the semiannual report covering the period April 1, 1999, through September 30,

1999.

IRS implementation the IRS Reform Act

According to TIGTA, the IRS is not in full compliance with all IRS Reform Act

provisions. The TIGTA reports that the IRS was not in compliance with the taxpayer rights

provisions as they relate to seizures, liens, levies, use of enforcement statistics, and Freedom of

Information Act requests.181 For example, TIGTA identified 96 violations in which IRS

management used tax enforcement results to evaluate employees or imposed or suggested

employee production quotas or goals, e.g., evaluations contained references to fraud referrals,

dollars assessed or collected or case closures.182 The TIGTA also concluded that because of

weaknesses in controls and inappropriate actions on cases, the IRS did not always provide fair

and equitable treatment to taxpayers.183

Information technology and computer security

The TIGTA noted that IRS computer security continues to need attention. TIGTA’s

reviews indicate that the IRS is still vulnerable in the area of system security.184 Despite

increased publicity about unauthorized access and more stringent sanctions, unauthorized access

comprised the largest segment of investigations of IRS employees initiated by TIGTA.185 In

addition to computer security, TIGTA found that computer applications need to be enhanced to

ensure functional needs are met effectively and efficiently.186 

Protecting revenue and minimizing tax filing fraud

The TIGTA noted that fraudulent refund schemes, especially related to the earned income
187 Id. at 6.

188 Id.

189 Id.

190 Id.

191 Id. at 24.

192 Id.

193 Id.

194 Id.

195 Id.

196 Id.

- 41 -

tax credit, continue to be a concern.187 According to TIGTA, it recently investigated a former

IRS employee who prepared fraudulent tax returns claiming the earned income tax credit.188

TIGTA also reviewed selected components of the electronic filing program as they relate to

preparers.189 It was concluded that IRS management needs to ensure that procedures are

consistently followed, controls are improved over the removal of preparers, computer

enhancements are made, and additional emphasis is placed on return preparer fraud activities.190

Criminal and misconduct investigations

TIGTA has developed a new complaint tracking system that provides a centralized

accounting of all complaints received by TIGTA and the dispositions of those complaints.191 The

system became operational on July 19, 1999.192 To receive complaints of wrongdoing by IRS

employees, TIGTA operates a toll-free telephone number, an e-mail account, and a central post

office box.193 

TIGTA received 5,092 complaints for the period April 1, 1999 through September 30,

1999.194 According to TIGTA, to the extent possible, complainants are interviewed by TIGTA

personnel.195 Of the complaints received, TIGTA found 2,071 warranted further investigation.196
197 Id. at 43. The employee cases were disposed of as follows:

Removed, terminated or other 108

Suspended/reduction in grade 67

Oral or written reprimand or admonishment 84

Closed - no action taken 196

Clearance letter issued 45

TOTAL DISPOSITIONS 500*

Employees resigned prior to adjudication 85

Source: Treasury Inspector General for Tax Administration. *451 cases were pending

administrative adjudication during the reporting period.

198 TIGTA Semiannual Report at 45-51.

- 42 -

Of these, 833 complaints were against IRS employees.197 

Audit reports with unimplemented corrective actions

According to TIGTA’s semiannual report, there are 29 audit reports for which corrective

action for significant recommendations remain outstanding.198 Many of the recommendations

involve automation of some processes, changes to the IRS computer systems, the creation of

databases, and other uses of computers. Other recommendations could be categorized generally

as requiring IRS management to undertake a further review of the particular issues and develop

procedures to improve operations.

D. Taxpayer Rights

The IRS Reform Act created or modified numerous taxpayer rights and procedural

protections. Most of its provisions were effective either on the date of enactment or within six

months of enactment. Thus, the IRS was required to provide guidance to the public and training

to its almost 100,000 employees in a very short time frame. In fiscal year 1999, the IRS had

briefings and training on 55 IRS Reform Act provisions and provided a total of two million hours
199 Rossotti Senate Finance Testimony at 5 (February 2, 2000).

200 Statement of Charles O. Rossotti, Commissioner, Internal Revenue Service before the

House Committee on Government Reform Subcommittee on Government Management,

Information and Technology at 16 (April 10, 2000).

201 Rossotti Senate Finance Testimony at 5.

202 Id.

203 Sec. 6015.

- 43 -

of training.199 The IRS estimates that nearly 4,560 full time equivalent personnel were required

for the specific administrative provisions of the IRS Reform Act.200 The Commissioner has

stated that it will be several years before the changes made by the IRS Reform Act operate at the

desired level of efficiency and quality.201 The IRS views its immediate challenges as training and

management.202 Discussed below are several areas that illustrate the difficulties encountered by

the IRS in implementing the IRS Reform Act: innocent spouse, due process in collection, and

third party notices.

Innocent spouse

Persons filing a joint return are jointly and severally liable for the joint return. Thus, one

spouse may be subject to joint liability for the omissions from income or erroneous deductions of

the other spouse. 

The Code offers conditional relief to an innocent spouse.203 The IRS Reform Act

generally made innocent spouse relief easier to obtain. It eliminated all of the understatement

thresholds and requires that the understatement be attributable to an erroneous (rather than

grossly erroneous) item of the other spouse. It also allows for apportionment of relief for the

taxpayer who simply did not know the extent of the understatement. A taxpayer who is no longer

married to, is legally separated from, or has been living apart for at least 12 months from the

person with whom the taxpayer originally filed the joint return can elect to limit liability to the

portion of the deficiency properly allocable to that individual if he or she did not know, or had no

reason to know, of an understatement on a joint return which he or she filed. The election for

relief from liability for all joint filers and the separate liability election must be made no later

than two years after the date the IRS has begun collection activities for the individual making the

election. In addition, the IRS Reform Act gave the IRS the ability to grant equitable relief if (1)

relief is otherwise unavailable and (2) taking into account all the facts and circumstances, it is

inequitable to hold the individual liable for any unpaid tax or any deficiency.

In the four months preceding the passage of the IRS Reform Act, the IRS received 3,000
204 Rossotti Senate Finance Testimony at 6.

205 Id.

206 Id. at 7.

207 Williams Finance Testimony at 3.

208 Rossotti Senate Finance Testimony at 7.

209 Id.

210 Id.

211 Id. at 8.

- 44 -

innocent spouse requests.204 After passage, as of February 2, 2000, the IRS had received a total

of 63,906 requests and is averaging over 2,800 requests per month.205

Immediately after passage, the IRS faced several difficulties in implementing the innocent

spouse provisions. It had no employees trained in applying the new provisions and no training

materials available for the new provisions, in particular the IRS had no familiarity with applying

the equitable relief provision.206 Thus, the IRS had to train its staff in how to handle these cases. 

In addition, the IRS did not anticipate the volume of requests that would be submitted. The IRS

also did not have a reliable management information system to reliably track innocent spouse

cases.207 The combination of these factors has resulted in a significant backlog of cases. As of

December 31, 1999, 46,665 cases were in inventory.208

To effectively manage the requests, the IRS has taken several steps. It has: (1)

centralized management of the program under a senior manager; (2) developed specific flow

charts and other training and job aids for the employees doing the screening; (3) revised the

procedures and training based on initial experience; and (4) instituted a 100-percent review of

completed claims to ensure quality and consistency. The IRS is also developing computer

support.209 

The IRS anticipates that it will be able to reduce its inventory of pending cases to under

30,000 by the end of the current year.210 It estimates that this effort will require 362 full time

equivalent personnel, including 153 revenue agents in fiscal year 2000.211

Due process in collection

Collection enforcement by the IRS generally takes three forms: (1) placing a lien on a

taxpayer’s property; (2) placing a levy on the taxpayer’s wages or bank account; and (3) seizing

the taxpayer’s business or personal assets. The IRS must provide the taxpayer with written
212 Secs. 6320 and 6330.

213 Rossotti Senate Finance Testimony at 9.

214 TIGTA Semiannual Report at 9-10.

215 Williams Finance Testimony at 6.

- 45 -

notification of the right to an impartial hearing before an appeals officer after a notice of lien has

been filed or before a notice of levy is sent.212 The taxpayer has 30 days to request an appeal, and

during this period, the levy or seizure may not take place. In addition, if the taxpayer requests an

appeal, the levy or seizure may not take place until the appeals officer makes a finding. Finally,

the taxpayer has 30 days to challenge an appeals finding in the U.S. Tax Court or U.S. District

Court during which time the IRS may not levy or seize. The IRS Reform Act also required other

procedural safeguards. For example, with respect to seizures of assets owned by an individual

and used in the course of a business, approval by the district director is required and an analysis

must be conducted to show that the taxpayer’s other assets are insufficient to satisfy the liability. 

Seizure of a principal residence requires court approval.

The IRS has noted that the initial effect of the IRS Reform Act provisions has been to

significantly cut the number of collection enforcement actions instituted.213 A comparison of

fiscal year 1998 with fiscal year 1999, when the changes became effective, illustrates this drop:

FY 1998 FY 1999

Liens 382,755 167,867

Levies 2,503,409 504,403

Seizures 2,307 161

Source: Internal Revenue Service.

While collection activity has dropped, the Treasury Inspector General for Tax

Administration found that of roughly a third of all liens, levies and seizures that it reviewed

involved potential violations of the IRS Reform Act and/or internal IRS guidelines.214 For

example, the IRS was not always informing taxpayers and their representatives of the taxpayers’

rights to a hearing once a Federal tax lien is filed. The IRS also seized business property without

obtaining the required approvals, and taxpayers were not personally warned before the seizure

action occurred.215

The IRS notes that it has devoted substantial amounts of training for both managers and

collection employees and new guidance has been issued on how to handle specific collection
216 Rossotti Senate Finance Testimony at 10.

217 Id.

218 Sec. 7602(c).

219 Rossotti Senate Finance Testimony at 10.

220 Id. at 11.

221 Id.

222 Id.

223 Id.

224 Sec. 7602(c)(3).

225 Rossotti Senate Finance Testimony at 12.

- 46 -

situations.216 It also expects to provide new check sheets and job aids to assist collection

employees in following the steps needed to take correct enforcement action.217

Third party notice

The IRS Reform Act required the IRS to give the taxpayer reasonable notice before

contacting any other person with respect to the determination or collection of the taxpayer’s taxes

and then to periodically tell the taxpayer who has been contacted.218 When the IRS first

implemented the provision, it sent a broadly worded notice to almost every taxpayer in the IRS 

administrative process.219 The letter was not tailored to any specific circumstances. The tone of

the letters was also criticized.220

As a result, the IRS had to refine the notices to encompass those instances in which third

party contact was likely, develop a notice appropriate for that situation, and train its employees

on how to identify and handle these situations.221 There are fifteen variations of the new notices,

which are tailored to the specific situation of the taxpayer.222 The IRS was to begin issuing these

new notices in February 2000.223

Under the statute, the IRS is not required to give notice to the taxpayer when it would

jeopardize collection, with respect to a criminal investigation, or if the third party expresses a

fear of reprisal.224 The IRS has found troubling the situation in which a third party does not claim

fear of reprisal but asks the IRS not to provide his or her name to the taxpayer.225 Based on
226 Id.

227 Id.

228 Id.

- 47 -

reports from its field employees, this happens frequently.226 The statute, however, obligates the

IRS to disclose the name of the third party to the taxpayer. The IRS is concerned that the

ultimate effect will be an unwillingness of third parties to provide information to the IRS under

any circumstances.227 Nonetheless, the IRS continues to work toward the implementation of this

provision. It estimates that 500-600 full time equivalent personnel are necessary to administer

this provision.228

E. Personnel Flexibility and IRS Management

IRS Reform Act

The IRS Reform Act gave the IRS considerable authority beyond the personnel rules and

procedures found in Title 5 relating to:

• Pay authority for critical positions.--Upon request of the Treasury Secretary,

the Office of Management and Budget is authorized to set a basic salary rate

for “critical pay positions” at levels higher than those generally authorized in

the civil service laws for critical positions. These rates, including bonuses,

awards and differentials, cannot exceed the rate of pay for the Vice President

(currently $175,000).

• Streamlined critical pay authority.--The Treasury Secretary can designate

positions, set pay, and appoint up to 40 individuals to critical administrative,

technical and professional positions. These appointments assist in recruiting

and retaining individuals exceptionally well-qualified for a position. 

Compensation cannot exceed that of the Vice President.

• Recruitment, retention and relocation incentives.--The Treasury Secretary was

given the authority to offer incentives for recruitment, retention, and

relocation and to pay relocation expenses.

• Performance awards for senior executives.--The Treasury Secretary was also

given greater authority to pay performance bonuses to members of the Senior

Executive Service (“SES”). 

• New performance management system.--A new performance management

system, stressing individual accountability is to be implemented. The IRS
- 48 -

Reform Act prohibits the use of enforcement goals, quotas or statistics as the

basis for awarding bonuses or merit pay.

• Workforce classification and pay.--The Secretary can combine grades and

salary ranges to create broad banded systems for any or all of the IRS work

force.

• Limited appointments to career reserved SES positions.--The IRS Reform Act

permits the IRS to fill certain permanent positions with temporary employees. 

The IRS Reform Act broadens the definition of a career reserved position to

include a limited emergency appointee. It also covers a limited term appointee

who immediately upon entering the career reserved position, served under a

career or a career-conditional appointment outside of the SES, or where OPM

approved the limited emergency or limited term appointment in advance.

• Workforce staffing.--Candidates for positions can be selected from the highest

quality category regardless of individual numerical rating. Further, the IRS

can establish a three year probationary period when a shorter period is

insufficient to evaluate an employee. The Secretary may also detail an

employee to a different assignment without regard to the 120 day limitation

otherwise applicable.

• Streamlined demonstration project authority.--The IRS Reform Act permits

the IRS to take a streamlined approach to conducting research and testing

alternative management constructs. A demonstration project under this

section would not be subject to the ordinarily lengthy approval process.

Implementation efforts

Personnel

The Commissioner has assembled his senior leadership team, including the heads of all of

the new operating divisions. These persons have been drawn from the private sector, State and

Federal Government, and from within the IRS:

• Bob Wenzel, Deputy Commissioner of Operations (37 years of experience

with the IRS);

• John LaFaver, Deputy Commissioner of Modernization (former Kansas State

Tax Commissioner);

• Dan Black, National Chief, Appeals (former IRS National Director of

Appeals, 30 years of experience with the IRS);
229 Rossotti Senate Finance Testimony at 12.

- 49 -

• William Boswell, Chief of Agency Wide Shared Services (former Senior Vice

President of Shared Services for BP America);

• Stuart Brown, Chief Counsel (has held this position since 1994 and was

previously a partner at the law firm of Caplin and Drysdale and Deputy Chief

of Staff for the Joint Committee on Taxation);

• Paul Cosgrave, Chief Information Officer (former Chairman and CEO of the

Claremont Technology Group and partner in Andersen Consulting);

• John Dalrymple, Commissioner of the Wage and Income Division (former

IRS Chief Operations Officer with 25 years of IRS experience);

• Joseph Kehoe, Commissioner of the Small Business/Self Employed Division

(former Global Leader, Service Sector Consulting for

PricewaterhouseCoopers);

• Larry Langdon, Commissioner of the Large and Mid-Size Business Division

(former Vice President, Tax, Licensing and Customs for Hewlett-Packard);

• Mark Matthews, Chief of Criminal Investigation (former Deputy Assistant

Attorney General for Criminal Tax at the Justice Department and was

previously in private law practice at Crowell and Moring);

• W. Val Oveson, National Taxpayer Advocate (former Chairman of the Utah

State Tax Commission);

• Evelyn Petschek, Commissioner of the Tax Exempt and Government Entities

Division (former IRS Assistant Commissioner for Employee Plans and

Exempt Organizations and partner in the law firm of Patterson, Belknap,

Webb and Tyler); and

• David R. Williams, Chief Communications and Liaison (previously worked in

the Treasury Department and the United States Senate).229

In addition, the IRS is set to implement a new paybanding system for senior managers,

and a new pilot bonus system for key senior leadership positions, that will link executive and

managerial compensation more directly to performance. According to the IRS, it is also in the

process of aligning its bargaining unit employee performance standards with the balanced

measures system. Further, the IRS notes that it must undertake more comprehensive pay and
230 General Accounting Office, IRS Employee Evaluations: Opportunities to Better

Balance Customer Service and Compliance Objectives (GAO/GGD-00-1, October 1999) at 14.

231 GAO Report 00-144 at 7.

232 Id. at 8.

233 General Accounting Office, IRS Employee Evaluations: Opportunities to Better

Balance Customer Service and Compliance Objectives (GAO-GGD-00-1, October 1999) at 14.

234 Id. at 14-15.

235 Id. at 15.

236 Id.

237 Id.

- 50 -

performance management reforms in partnership with the National Treasury Employees Union.

Performance management and enforcement statistics

The employee evaluation process is a significant method for influencing employee

behavior. With respect to enforcement employees in particular, the IRS recognizes that the

evaluation process is an important part of any performance management system and may be key

to improving customer service.230 Historically, the IRS performance management system has

emphasized revenue at the expense of customer service.231 As discussed above, GAO also has

noted that at a fundamental level, it is not clear that IRS employees fully understand that

customer service and compliance can be mutually supportive.232

As part of its effort to improve customer service, the IRS has incorporated into the

employee evaluation process a new performance standard relating to the fair and equitable

treatment of taxpayers that employees must meet at a passing level to retain their jobs.233 The

retention standard provides the employees must “[a]dminister the tax laws fairly and equitably,

protect all taxpayers’ rights, and treat each taxpayer ethically with honesty, integrity and

respect.”234 When evaluating employees, supervisors are to first determine whether the employee

met the retention standard and, if the employee did, then proceed to evaluate the employee on the

critical job elements.235 The new retention standard was put in place in July 1999.236

In addition, the Collection Division has taken steps to restructure its evaluation system to

reflect the emphasis on customer service. The division has revised its standard position

description for revenue officers and revised the critical job elements.237 The critical job elements 

were reduced from three to five. The three revised elements are customer relations and
238 Id.

239 Id.

240 Id.

241 TIGTA Semiannual Report at 8.

242 Id.

243 Williams Finance Testimony at 6.

244 TIGTA Semiannual Report at 8.

245 The acts or omissions that will subject an IRS employee to firing are:

(1) willful failure to obtain the required approval signatures on 

documents authorizing the seizure of a taxpayer's home, personal belongings, or 

business assets; 

 (2) providing a false statement under oath with respect to a material 

matter involving a taxpayer or taxpayer representative; 

(3) with respect to a taxpayer, taxpayer representative, or other employee

of the Internal Revenue Service, the violation of– 

 (A) any right under the Constitution of the United States; or 

(B) any civil right established under– 

(i) title VI or VII of the Civil Rights Act of 1964; 

(continued...)

- 51 -

assistance, case resolution, and case management.238 Previously, revenue officers were evaluated

based on time and workload management, case decisions, investigation and analysis, accounts

maintenance and customer relations.239 The revised elements became effective in July 1999.240

The IRS Reform Act prohibited any IRS employee from being evaluated based upon

enforcement statistics. In its semiannual report, TIGTA noted that the IRS is not in full

compliance with this provision and that some employees still believe IRS managers use records

of tax enforcement results inappropriately.241 In the 28 IRS offices reviewed, 96 violations were

identified by TIGTA.242 Separately, the IRS identified 525 additional violations.243 The IRS

intends to resolve this problem through the implementation of a balanced system of business

measures.244

Section 1203 violations

The IRS Reform Act defined 10 specific acts of misconduct for which an IRS employee

must be terminated.245 In his sole discretion, the Commissioner may determine that there are
245(...continued)

(ii) title IX of the Education Amendments of 1972; 

(iii) the Age Discrimination in Employment Act of 1967; 

(iv) the Age Discrimination Act of 1975; 

(v) section 501 or 504 of the Rehabilitation Act of 1973; or 

(vi) title I of the Americans with Disabilities Act of 1990; 

(4) falsifying or destroying documents to conceal mistakes made by any employee with

respect to a matter involving a taxpayer or taxpayer 

representative; 

(5) assault or battery on a taxpayer, taxpayer representative, or other 

employee of the Internal Revenue Service, but only if there is a criminal 

conviction, or a final judgment by a court in a civil case, with respect to the 

assault or battery; 

 (6) violations of the Internal Revenue Code of 1986, Department of 

Treasury regulations, or policies of the Internal Revenue Service (including the

Internal Revenue Manual) for the purpose of retaliating against, or harassing, a

taxpayer, taxpayer representative, or other employee of the Internal Revenue 

Service; 

(7) willful misuse of the provisions of section 6103 of the Internal 

Revenue Code of 1986 for the purpose of concealing information from a 

congressional inquiry; 

(8) willful failure to file any return of tax required under the Internal 

Revenue Code of 1986 on or before the date prescribed therefor (including any 

extensions), unless such failure is due to reasonable cause and not to willful 

neglect; 

(9) willful understatement of Federal tax liability, unless such 

understatement is due to reasonable cause and not to willful neglect; and 

 (10) threatening to audit a taxpayer for the purpose of extracting 

personal gain or benefit. 

246 Williams Testimony at 6.

247 Id.

- 52 -

mitigating factors which weigh against terminating an employee. This discretionary authority

cannot be delegated.

TIGTA received over 900 complaints; however, it determined that only 218 of these

complaints warranted investigation as possible section 1203 allegations.246 Of these 218, TIGTA

referred 87 to the IRS for adjudication.247 IRS management is emphasizing to its employees that
248 Id.

249 Statement of Colleen M. Kelley, National President, National Treasury Employees

Union, Before the Subcommittee on Government Management, Information and Technology,

House Committee on Government Reform at 9 (April 10, 2000).

250 Id. at 10.

- 53 -

disciplinary action will not be imposed on those employees who make honest mistakes.248 

Nonetheless, according to the National Treasury Employees Union (“NTEU”), the perceived

broad scope and vague nature of the provisions have created anxiety and confusion among IRS

employees.249 NTEU asserts that the requirement for mandatory dismissal is having a chilling

effect on collections and morale at the IRS.250
251 The IRS also completed what it describes as an “enormous, yet almost flawless” Year

2000 conversion. Rossotti House Oversight Testimony at 1.

252 Curt Anderson, Taxpayers’ Electronic Filing Rises, Associated Press, April 27, 2000,

available at <http://www.washingtonpost.com/wp-srv/aponline/20000427/aponline062256_

000.htm> (hereinafter "A.P. Article”).

253 GAO Report 00-133 at 1.

254 Id. at 7.

- 54 -

V. THE 2000 TAX FILING SEASON

Overview

The IRS has projected net collections for fiscal year 2000 of $1.767 trillion. During fiscal

year 2000, the IRS expects to receive 213.1 million returns, including over 127.3 million

individual returns, and expects to issue over 93 million individual refunds. As of March 10,

2000, the IRS reports that refunds are up over 10 percent from last year, with an average refund

of $1,731.251 The IRS recently announced that 35 million tax returns were filed electronically

this tax filing season.252

The GAO was asked to review the IRS’s performance during the 2000 tax filing season. 

In its March 28, 2000, testimony before the Subcommittee on Oversight of the House Committee

on Ways and Means, the GAO made three specific observations. First, the GAO noted that the

computer systems for processing returns and remittances are operating without significant

problems, and are in fact performing better than in 1999. Second, the number of individual

returns filed electronically has continued to increase. The GAO attributed at lease part of this

increase to IRS effort. Finally, GAO reports that it has been easier for taxpayers to reach the IRS

by telephone compared to last year, although service has not yet reached the level IRS attained in

1998.253

Certain issues relating to the filing season are discussed in greater detail below.

Electronic filing

The GAO noted a continuing increase in electronic filing. The IRS has taken a number of

steps to encourage electronic filing this tax filing season, including (1) expanding tests aimed at

making electronic filing paperless, (2) allocating $7 million to promote electronic filing through

marketing, and (3) increasing the types of forms that can be filed electronically.254 The IRS has

reported that the 35 million returns filed electronically this year was 1.4 million more than the
255 A.P. Article at 1.

256 Id.

257 Id. at 5.

258 Id. at 9.

259 A.P. Article at 1.

260 Id.

261 A.P. Article at 2.

- 55 -

IRS has anticipated, and an overall 20 percent increase from last year.255 Electronic returns, the

IRS notes, represents 27 percent of the total returns filed.256

The expansion of paperless filing tests is aimed at correcting a major criticism of

electronic filing, i.e., it is not truly paperless because a signature document and copies of Forms

W-2 must be filed. Also, if money is owed, a check and payment voucher must be submitted.257

In 1999, the IRS implemented two tests to provide alternatives to the paper signature

documents and two tests that provide electronic payment alternatives for taxpayers that owe

money. For the 2000 filing season, the IRS expanded each of those tests. The two alternative

signature tests waive the need for taxpayers to submit paper signature documents and copies of

their Forms W-2. The first test allows certain tax practitioners’ clients who file electronically to

use a self-selected identification number rather than a signature document. The IRS expanded

the number of practitioners eligible to participate in this test. The GAO reports that IRS data

shows that about 3.95 million taxpayers had already used this option as of March 9, 2000, which

is a significant increase over last year.258 Moreover, the IRS reported that, as of April 27, 2000,

approximately 7 million taxpayers used this signature option, including 1.4 million who selfprepared their returns.259 The GAO also reports that in 1999 approximately 660,000 taxpayers

utilized the second alternative signature test, in which the IRS sends them a postcard with a

unique customer number that they can use in lieu of mailing in a signature document. As of

March 9, 2000, approximately 778,000 taxpayers had used this option.260

The IRS also expanded the two tests involving alternative payment options for taxpayers. 

One test, involving the use of credit cards was expanded to taxpayers who file estimated tax

payments (Form 1040ES) or extensions of time to file (Form 4868). Approximately 186,000

taxpayers charged $536 million in Federal taxes on their credit cards as of April 27, 2000, which

is an increase from $184 million charged during the first year of the program.261 The second test,

which involves payments via direct debit was expanded to include TeleFile users. The GAO

reports that, according to the IRS, as of March 10, 2000, 28,200 taxpayers had used one of these

two payment alternatives, compared to 7,286 at the same time last year. Of the 28,200, 20,697
262 Id. at 9-10.

263 Id. at 12-13.

- 56 -

were electronic filers who paid by direct debit (including 6,367 TeleFilers) and 7,503 were an

unknown combination of electronic and paper filers who used a credit card.262

Telephone service

The IRS continued its 24 hours-a-day/7 days-a-week, toll-free telephone service. Offered

throughout the filing season, the “24/7" service became permanent on January 4, 1999. As of

March 11, 2000, over 26 million taxpayers have been served in fiscal year 2000, compared with

almost 29.9 million over the same period last year. The IRS explains this decline by noting the

expansion of the 24/7 service last year, plus the increased training demands to implement new

tax law requirements, particularly during the start of the filing season. Nonetheless, the IRS has

experienced, in total, a 65 percent level of service (compared with its target of 58 percent). For

the four weeks prior to March 28, 2000, the IRS experienced a 70 percent average level of

service.

Some of the IRS’s initiatives in the telephone service area included the Customer Service

Field Realignment, which was implemented October 1, 1999. This service helps route calls to

where trained people are most available, increasing the number of calls that will be answered. 

The IRS also increased the staff’s ability to answer tax law questions by assigning additional

compliance staff during regular and overtime hours and supplementing them with Appeals

officers. In addition, the IRS improved accessability to and service from the National Taxpayer

Advocate and expanded the Spanish Language Assistance.263

The GAO reported that, over the past years, there has been a steady improvement on the

ability of taxpayers to obtain telephone assistance. However, in 1999, this trend ended, when the

IRS experienced problems that significantly reduced taxpayers’ ability to reach the IRS by

telephone. Some of the problems were addressed in 1999, and others were improved this year. 

However, the service level as of March 7, 2000, remained below the level achieved in 1998, in

part because the productivity of telephone staff has declined, and fewer staff have been dedicated

to the service.

The GAO noted that there has been one major problem this year that had a significant

effect on the IRS’s telephone system. This occurred in late January 2000, when contract delays

resulted in over 1 million bulk notices being mailed out over a two-week period, rather than

having been staggered over seven weeks. Thus, as taxpayer received these notices, the IRS

received an abundance of telephone activity. The GAO reports that the service level was 67

percent for the week ended January 22, 2000, 44 to 48 percent the following two weeks, then 66

percent the week ended February 12, 2000.
264 Id. at 17.

265 Rossotti House Oversight Testimony at 21.

266 Id.

267 Id.

- 57 -

Forms

For the 2000 tax filing season, the IRS released a new version of Form 8857, “Request

for Innocent Spouse Relief,” which makes it easier for taxpayers to use the form by providing

guidance on completing the form as well as simple-to-answer checkboxes.264 The IRS also has

targeted improving certain other forms, including the EITC and Child Tax Credit forms,

worksheets, and instructions. Moreover, for the 2000 tax filing season, most taxpayers whose

only capital gains are from mutual fund distributions need not file Schedule D of Form 1040 to

report these gains. In addition, for the 2001 tax filing season, the IRS anticipates that a line will

be added to Form 1040A on which to report such capital gain distributions, thus allowing

approximately 2.5 million more taxpayers to file on Form 1040A rather than Form 1040.

Fiscal year 1999 revenue protection strategy

During the 2000 filing season, the IRS reports that validation of identifying numbers

continues to be a very visible portion of its efforts to prevent overclaims of the EITC.265 Starting

this filing season, the IRS plans to test the Dependent Database that includes records from the

Social Security Administration and the Office of Child Support Enforcement at Health and

Human Services. These records link the names and SSNs of dependent children with the names

of their parents and their parents’ SSNs, along with custody and child support obligation

information.266 The IRS is testing this data to identify the appropriate tax return for examination

and ruling out any unnecessary contacts with taxpayers who appear eligible for the EITC, the

Child Tax Credit, and dependency exemptions.267
268 This table is reproduced from GAO Report 00-133, Appendix I. Data for this table

may be found at FY 2001 Justification at SD 1, PAM-1, TLE-1. 

- 58 -

Appendix I

IRS’ Fiscal Year 2001 Budget Request

Compared With Proposed Fiscal Year 2000

Operating Level 268

Dollars in thousands

FY 2000 FY 2001 Percent change

Budget activity Dollars FTEs Dollars FTEs In dollars In FTEs

Submission Processing $930,325 15,682 $1,036,818 16,040 11.45 2.28

Telephone and Correspondence 932,190 20,480 1,026,742 21,291 10.14 3.96

Taxpayer Advocate Service 133,145 2,294 141,095 2,294 5.97 0.00

Document Matching 59,036 1,437 73,023 1,690 23.69 17.61

Management Services 609,771 6,694 686,155 6,694 12.53 0.00

Rent and Utilities 695,579 67 735,666 67 5.76 0.00

Subtotal: Processing, Assistance,

and Management Appropriation $3,360,046 46,654 3,699,499 48,076 10.10 3.05

Criminal Investigation 384,549 3,750 399,065 3,750 3.77 0.00

Examination 1,772,371 22,089 1,885,882 22,900 6.40 3.67

Collection 676,676 10,548 721,547 10,785 6.63 2.25

Tax Exempt/Government Entities 156,600 2,102 168,654 2,166 7.70 3.04

Statistics of Income 28,390 471 29,696 471 4.60 0.00

Chief Counsel 225,059 2,378 234,176 2,372 4.05 -0.25

Subtotal: Tax Law Enforcement

Appropriation $3,243,645 41,338 3,439,020 42,444 6.02 2.68

Operations and Maintenance 1,258,155 7,292 1,543,565 7,531 22.68 3.28

Year 2000 250,426 239 0 0 NA NA

Investments 0 0 40,000 0 NA NA

Subtotal: Information Systems

Appropriation $1,508,581 7,531 1,583,565 7,531 4.97 0.00

Information Technology

Investments 0 0 119,000 0 NA NA

Earned Income Credits

(outside caps) $144,000 2,082 $145,000 2,082 0.69 0.00

Total $8,256,272 97,605 $8,986,084 100,133 8.84 2.59

Source: IRS’ Fiscal Year 2001 Congressional Justification
269 This table is reproduced from GAO Report 00-133, Appendix II. Data for this table

may be found at FY 2001 Justification at SD 1, PAM-1, TLE-1. 

- 59 -

Appendix II

Comparison of IRS’ Fiscal Year 2000

Proposed Operating Level and Fiscal Year

2001 Total Budget Request 269

Dollars in thousands

Subtotal Total

Fiscal year 2000 proposed operating level (includes

Earned Income Tax Credit appropriation) $8,256,272

Decreases for fiscal year 2001

Information Systems (non-recur) ($50,897)

Transfer of resources to Treasury Inspector General

 for Tax Administration (732)

Subtotal-decreases ($51,629)

Increases for fiscal year 2000

Adjustments necessary to maintain current levels 347,596

Program annualization 40,736

Staffing Tax Administration for Balance and Equity 144,071

Electronic Tax Administration 3,000

Operational support contracts 43,631

Organizational modernization 42,407

Business line investments 40,000

Information Technology 119,000

Earned Income Tax Credit compliance initiative 1,000

Subtotal-increases 781,441

Fiscal year 2001 budget request $8,986,084

Difference between fiscal year 2000 operating level

and fiscal year 2001 budget request $729,812

Source: IRS’ Fiscal Year 2001 Congressional Justification.