Modernizing America’s Tax

Agency

2000

Publication 3349 (Rev. 1-2000)

Catalog Number 27171U

Modernizing America’s Tax Agency

Table of Contents

Foreword

I. Public Expectations and Mission......................................................1

II. Goals and Benefits ............................................................................5

III. Guiding Principles ..........................................................................13

IV. Business Practices and Strategies ..................................................17

V. Organization and Management ......................................................33

VI. Information Technology..................................................................41

VII. Performance Measures ..................................................................47

VIII. Planning, Priorities and Risks ........................................................53

IX. Milestones........................................................................................59

Appendices.......................................................................................61
Modernizing America’s Tax Agency

Quotes...

“As a guiding principle, the Commission believes that taxpayer satisfaction must become paramount

at the new IRS . . . .”

“Customer satisfaction must be a goal in every interaction the IRS has with taxpayers, including

enforcement actions. Taxpayers expect quality service in all interactions with the IRS, including taxpayer assistance, filing tax returns, paying taxes, and examination and collection actions.”

Report of the National Commission on 

Restructuring the Internal Revenue Service (June 25, 1997)

“For the vast majority of Americans who want to do the right thing, the IRS should do right by them,

and that means treating them with respect and trust. And, it means recognizing that taxpayers are its

customers.”

Vice President Gore, Reinventing Service at the IRS 

(NPR Report - 1998)

“Most of the IRS is organized around internally-defined functions, rather than the needs of customers.

. . . The IRS should begin to refine customer segments and key events for each of those segments as they

relate to those customers’ tax responsibilities.”

Reinventing Service at the IRS (NPR Report - 1998)

“For any particular kind of identified noncompliance, the choice between using the “service arm” and

the “enforcement arm” or something else [is] a matter of crucial professional judgement on which the public

image and credibility of the agency depend.”

Imposing Duties (Malcolm Sparrow)

“The Internal Revenue Service shall review and restate its mission to place a greater emphasis on

serving the public and meeting taxpayers’ needs.”

“The Commissioner of Internal Revenue shall develop and implement a plan to 

reorganize the Internal Revenue Service. The plan shall establish organization units serving 

particular groups of taxpayers with similar needs.”

IRS Restructuring and Reform Act of 1998

"When the topic of the Internal Revenue Service arose (during a congressional delegation meeting),

staff members were unanimous in their sincere expression of satisfaction with the quality of your agency's

services. We appreciate the significant efforts made by the IRS employees in dealing with our staffs. Our delegation is pleased to express our gratitude for your hard work."

July 30, 1999, letter from Senator Richard Durbin and Speaker of the

House J. Dennis Hastert signed by the entire Illinois Congressional

Delegation

"Thanks to the IRS Restructuring and Reform Act of 1998, which mandates the rights and needs of

taxpayers be made top priority, the IRS is on a new mission this tax season: to collect only those taxes that are

owed and to do so fairly, respectfully and efficiently." 

CNNfn, March 7, 1999
Modernizing America’s Tax Agency

Foreword to Modernizing America’s Tax Agency

In the last several years, the Internal Revenue

Service (IRS) has been the subject of much

study and criticism, including a Presidential

commission, several congressional committees

and the Vice President’s National Partnership

for Reinventing Government. Many problems

were identified and many solutions proposed,

dealing with virtually every dimension of the

IRS – from electronic filing to employee discipline. This process culminated with the overwhelming passage of the IRS Restructuring and

Reform Act in July 1998. Since then, many

audit reports, press stories and congressional

hearings have reviewed and commented on the

changes taking place at the IRS.

In the mass of detail and complexity that this

intense scrutiny of the IRS produced, it is easy

to get lost in the trees and fail to see the forest.

What the IRS was told in this process is that it

is expected to do a far better job serving the

public, based on a much better understanding of

the taxpayer’s point of view. 

Responding to this mandate, the IRS embraces

the opportunity to rise to a new and much

higher level of performance. If we are successful, millions of American taxpayers and thousands of IRS employees will benefit for years

to come: the taxpayers because they will have

a tax agency serving them the way they expect

to be served; the employees because they will

work in an agency that people internally and

externally trust. 

Rising to the challenge is not a simple task. It

requires fundamental change in almost all

aspects of the IRS and affects the way almost

all employees work with taxpayers and with

each other. The required changes range from

performance measures to technology, but they

are all necessary for success and are very much

interdependent.

The purpose of this paper is to provide an

overview of the entire process of change that the

IRS is undertaking to meet the public’s expectations. This process will take years and carries

with it considerable risk that progress will not

happen as planned or expected, and that

setbacks will occur. But there is no low risk

plan for the IRS. Therefore, it is essential to

identify and manage the risks by confronting

them, and honestly communicating what the

IRS is doing and why.

Since this process of change at the IRS will be

underway for a period of years, this overview

document will also change reflecting progress,

setbacks and learning that cause us to make

adjustments. This second edition is updated to

reflect the outlook as it appears early in the year

2000.

While recognizing the enormous challenge 

and the long road ahead, we are nevertheless

convinced of the necessity and value to

America’s taxpayers of reaching the higher

level of performance for the IRS. With the

continued support of the Treasury, the 

Congress and the public, we are confident 

we can succeed. 

Charles O. Rossotti

Commissioner

Internal Revenue Service
Modernizing America’s Tax Agency
Modernizing America’s Tax Agency 1

The Internal Revenue Service was established in

its current form in 1952, in the wake of corruption scandals and a Presidential Commission.

The objective was to create an agency that would

collect federal taxes according to the law without political or corrupt influence. The IRS mission statement,

written in the 1960s and in effect until 1998, reflected

the way the agency saw itself and was seen by the

public. Its operative words were “collect the proper

amount of tax.”

Over the last 47 years, the IRS succeeded remarkably

in achieving the purpose established in 1952. The IRS

today collects $1.7 trillion, more than the total GDP of

the United Kingdom and 26 times its collections in

1952. Corruption cases are few and are vigorously

investigated and prosecuted, and the agency is strongly

insulated from political influence. 

At the same time, the volume and complexity of IRS

operations expanded tremendously. Since 1952, the

number of returns filed has more than doubled, and the

number of pages in the Tax Code has expanded from

812 to approximately 3,500. The rate of change in the

tax system and the economy is also great. In 12 years,

there were approximately 9,500 changes to the Tax

Code. The IRS today deals directly with more

Americans than any other institution, private or public.

Even the tax-exempt sector with over $7 trillion in

assets – including pension funds, charities and

other non-governmental organizations – must

comply with rules administered by the IRS. 

For an agency that fulfilled its established purpose so

well, the IRS has been the subject of a great deal of

study and criticism in the last several years. The

studies identified a wide range of problems: inadequate technology and failure of technology modernization programs, poor service to taxpayers, violations of

taxpayer rights, failure to follow established procedures, lack of adequate training and resources for IRS

employees, and inappropriate use of enforcement

statistics, to name some of the most prominent. The

public itself expressed its dissatisfaction by its

response to surveys and ratings comparing the IRS to

other public and private institutions. In such surveys,

the IRS usually ranked last among public and private

institutions. 

What is noteworthy about the problems identified in all

the recent studies is that they are not the same ones

identified in 1952. Instead, they focus on a different but

equally fundamental issue: how the IRS affects the

people who pay the tax—America’s taxpayers. What the

public told the IRS, both directly and through various

groups that studied the agency, is that it expects more

from the IRS in the way it serves them. The public

today has a legitimate expectation that the IRS will do its

job in a manner that is no less effective than high-quality

private and public sector organizations. After all, every

taxpayer is also a customer of many other businesses and

institutions, many of which provide consistently highquality service to customers while also providing

excellent results for shareholders and other

stakeholders.

The IRS Restructuring and Reform Act of 1998 

(RRA ’98), which passed the House, 402-8, and the

Senate, 96-2, incorporated many of the recommendations found in the studies that preceded it. The direction given to the IRS was clear: it must do a better job

in meeting the needs of taxpayers. As required by the

RRA ’98, this direction is expressed in the new IRS

mission statement: 

Provide America’s taxpayers top quality

service by helping them understand and meet

their tax responsibilities and by applying the

tax law with integrity and fairness to all.

This mission statement accurately describes the

role of the IRS, as well as the public’s expectations

as to how the IRS should perform it. In the United

States, the Congress passes tax laws and requires

taxpayers to comply with them. It is the role of taxpayers to understand and meet their tax obligations, and

most do since roughly 98 percent of the taxes collected

are paid without active intervention by the IRS. It is

the role of the IRS to help the large majority of

taxpayers who are willing to comply with the tax law,

while seeing to it that the minority who are not willing

to comply are not allowed to burden their fellow

I. Public Expectations and Mission
2 Modernizing America’s Tax Agency

taxpayers. The IRS must perform this role to a top

quality standard, which means that all of its services

should be seen by the people who receive them as

comparable in quality to the best they get elsewhere. 

Some observers have questioned whether the new

mission statement underemphasizes the obvious need

to collect taxes. On the contrary, the mission statement

calls for the IRS to be more effective in all aspects of

its mission, including application of the law to those

who are unwilling to voluntarily comply.

Just as the best companies produce excellent shareholder returns by providing high-quality products and

services to customers, it will also be expected that

successful execution of this new IRS mission will

produce tax revenues for the Treasury in accordance

with the tax law without political or corrupt influence. 

This new mission statement does not, in any sense,

negate the intent of the previous one; rather it builds on

it and sets a broader and higher performance standard.

Only an institution that has been successful at one level

can aspire to a higher level of performance.

Establishing a new mission for the IRS and clarifying

the public’s expectations are essential and meaningful

steps in meeting those expectations. However, achieving this mission requires fundamental change in many

aspects of an institution that has been built over many

years. This change must produce success in the new

mission, while retaining the essential elements that

created success in the past. Further, this change must

take place while the IRS continues to administer a very

large, complex and ever-changing tax system. Since

the IRS will strive to perform at a level of quality

achieved elsewhere in the economy, a major part of this

change is guided by proven private and public sector

best practices. 

We refer to this whole process of change as “modernization,” because it involves building on the essential

components that made the IRS successful in the past

while bringing them up to date in a way designed to

achieve the new mission. This entire process is

summarized on the following page.
Modernizing America’s Tax Agency 3

Provide America’s taxpayers top quality service by helping them understand

and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.

Internal Revenue Service

Management

Roles with Clear

Responsibility

Modernizing America’s Tax Agency

GUIDING PRINCIPLES

• Understand and solve problems from 

taxpayer’s point of view

• Enable managers to be accountable - 

knowledge, responsibility, authority, action

• Align measures of performance at all 

organizational levels

• Foster open, honest communication

• Insist on total integrity

GOALS

Service to Each Taxpayer:

• Make filing easier

• Provide first quality service to each taxpayer needing 

help with his or her return or account

• Provide prompt, professional, helpful treatment to

taxpayers in cases where additional taxes may be due

Service to All Taxpayers:

• Increase fairness of compliance

• Increase overall compliance

Productivity Through a Quality Work Environment:

• Increase employee job satisfaction

• Hold agency employment stable while economy grows 

and service improves

Customer-Focused

Operating

Divisions

Revamped

Business 

Practices

Balanced

Measurement of

Performance

New Technology

MISSION STATEMENT
4 Modernizing America’s Tax Agency
Modernizing America’s Tax Agency

While the new mission statement and

clarification of the public’s expectations of

the agency are fundamentally important, it

is critical in any large institution to define specific goals

needed to achieve the mission. In a practical sense,

these goals represent what the agency is striving to

achieve and how it judges its success. It is important to

have both quantitative and qualitative indicators of how

well the agency is progressing toward achieving its

goals.

The IRS has formulated three strategic goals. If

progress is made on all three of these goals, we can be

confident that the IRS is moving forward to achieve its

mission and to meet the public’s expectations for the

agency. Many operational goals for components of the

agency can also be formulated in support of the

achievement of these strategic goals.

Top quality service 

to each taxpayer

The first strategic goal is to provide top quality service

to each taxpayer with whom the IRS deals, one at a

time.

The IRS has millions of interactions with taxpayers

each year, from the very simple to the very complex.

The IRS provides forms, information and filing

procedures to taxpayers who must file a return. This

process should be made ever easier and clearer,

reducing the chances of error and the time and effort

required by taxpayers. Millions of taxpayers require

information about their tax accounts with the IRS, or

need assistance to know how much or how to pay.

Taxpayers should be able to obtain information and

have appropriate adjustments made to their accounts

accurately, quickly and conveniently. In other

instances, the IRS may intervene, in the form of an

audit or a collection action, and may inform the

taxpayer that the agency believes more taxes are owed.

In these cases, taxpayers should be informed promptly

and treated professionally and with full consideration

of their rights.

Whenever the IRS deals with a taxpayer, the taxpayer

should receive first-quality service and treatment that is

helpful based on the particular situation and need.

Having a clear understanding of the facts and situation

is critical to providing top quality service, since the

proper application of the tax law is determined by the

particular facts and circumstances of each taxpayer’s

case. This requires understanding both the taxpayer’s

situation and the law.

We will measure success in achieving this goal by the

response of taxpayers to the service they receive from

the IRS. As part of the new IRS performance

management system, taxpayers who receive specific

kinds of service will be surveyed and asked to rate the

service. These transactional surveys can then be

summarized to measure the overall trend in taxpayer

satisfaction with IRS service. In addition, the overall

ratings given to the IRS by taxpayers, as compared to

other private and public sector institutions with which

they deal, will be a key long-term strategic measure of

success in achieving this goal. Finally, taxpayer

dissatisfaction, as measured by taxpayer complaint and

compliment trends, will be an important indicator.

The new balanced measures system began to be

implemented in the operational components of the

IRS in 1999. Work will begin on strategic

measures in 2000.

While we do not yet have adequate strategic measures

of performance in our service to each taxpayer goal,

the indicators we do have of taxpayer views on IRS

service show much room for improvement. A

University of Michigan survey of people who had dealt

recently with various public and private sector

organizations ranked the IRS last for a number of

years. In the most recent summary of this survey,

known as the American Customer Satisfaction Index

(ACSI), as the following chart shows, the IRS generally

ranks below the private sector. However, our electronic

filing program received higher marks.

5

II. Goals and Benefits
6 Modernizing America’s Tax Agency

Sector/Industry 1999 

Manufacturing/Durables 77.3

Automobiles, vans & light trucks 78

Consumer electronics (TV & VCR) 83

Major household appliances (washer,

dryer, stove, refrigerator, dishwasher) 82

Personal computers 72

Public Administration/Government 68.7

Solid waste disposal service (suburban) 76

Solid waste disposal service (city) 76

Police service (suburban) 68

Police service (city) 64

Social Security Administration 82

Internal Revenue Service 51

Internal Revenue Service-Electronic Filer 74

On the other hand, more limited surveys of taxpayer

satisfaction with particular IRS services, such as

Problem Solving Days, show consistently high

ratings despite many taxpayers not receiving the

outcome they sought. In fact, taxpayers attending

Problem Solving Days consistently rated the IRS

6.5 on a 7.0 scale, regardless of whether they

received the answer they wanted. This is a clear

indication that taxpayers, as a whole, distinguish

between the tax result and the quality of service

they receive.

Another survey, by the Roper opinion research

organization, compared the trend in favorability ratings

by the public of various government agencies. As can

be seen from the following chart, the public's rating of

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, hitting an all time low point

in 1998, before a slight improvement in 1999.

ACSI Rating

65

60

55

50

45

40

35

30

Public Confidence in the IRS (Source: 1999 Roper Survey) = IRS Favorability = Favorability of Most Agencies

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 
Modernizing America’s Tax Agency 7

Top quality service 

to all taxpayers

The second strategic goal is service to all taxpayers. We

must apply the law with integrity and fairness to all, so

taxpayers who do not comply are not allowed to place

a burden on those who comply. This aspect of IRS

service is important both to protect revenues flowing to

the Treasury and as a matter of fundamental fairness.

Our tax system depends on each person who is voluntarily meeting his or her tax obligations having confidence that his or her neighbor or competitor is also

complying. Therefore, when taxpayers do not voluntarily meet their tax obligations, the IRS must use

enforcement powers to collect the taxes that are due.

The overall measure of success in this goal is the total

collection percentage. The collection percentage 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. Another indicator of success for this

goal is the uniformity of compliance, representing the

relative degree of compliance among various economic

sectors, different geographic areas and different demographic segments. This is important for actual and

perceived fairness of the tax administration system.

While we do not have reliable, up-to-date measures of

overall compliance, the best extrapolations of previous

studies suggest that noncompliance of all kinds equated

to about $195 billion in FY 1997, which works out to

about $1,600 per individual tax return. This same data

indicates compliance is also quite uneven. For example, taxpayers who have primary income reported by

third parties are, on the whole, more compliant than

those who rely mostly on self reporting of income. In

1999, collections from personal income taxes increased

by almost 8 percent, while collections of corporate

income taxes decreased by 2 percent. One of the

reasons for the decrease in corporate income taxes was

the proliferation of corporate tax shelters, complex

transactions which have little or no business purpose

other than generation of tax benefits. There is ample

opportunity for improvement on this strategic goal.

Noncompliance is not necessarily deliberate, but can

stem from a wide range of causes, including lack of

knowledge, confusion, poor recordkeeping, differing

legal interpretations, unexpected personal emergencies

and temporary cash flow problems. On the other hand,

some noncompliance is willful, even to the point of

criminal tax evasion. In the interest of fairness, it is

vital that all parts of the noncompliance spectrum be

addressed by the IRS.

Enforcement activity must continue

The IRS takes enforcement actions, such as making

assessments of additional tax due after an audit or levying the bank account of a taxpayer who does not pay

tax debts, when the facts of the case show that such

action is necessary to bring that taxpayer into compliance with the tax law. Enforcement actions will

continue to be necessary in order to achieve the IRS’

compliance goals.

Since the passage of the Restructuring and Reform Act,

the number of enforcement actions has declined

substantially. For example, 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. Contrary to some

published reports, these significant declines in enforcement activity have not been caused by reallocation of

resources to customer service, which reallocations have

amounted to less than 3 percent of compliance

resources. Instead, the declines have resulted from

continued declines in staff due to budget constraints,

and from a substantial increase in the amount of time

required per case due to provisions of the Restructuring

and Reform Act.

It is important for the IRS to stabilize the level of

enforcement activity so that the proper action can be

taken in each case. This will require some additional

staff resources as well as additional training and

management attention to clear up confusion about how

to administer provisions of the RRA ’98.

Enforcement revenue is not a measure of

success

Although enforcement activity is essential, it is important to distinguish the goal of increasing overall

compliance from the notion of “enforcement revenue.”

Enforcement revenue is any tax, penalty or interest

gained from a specific taxpayer by an IRS enforcement

action, usually an examination or a collection. This

revenue represents about 2 percent of the revenue

collected by the IRS.
8 Modernizing America’s Tax Agency

Historically, the IRS placed great emphasis on direct

enforcement revenue, in part because it is precisely

measurable and in part because it showed an indirect

deterrent effect that increases compliance. However,

there are many techniques other than direct enforcement that increased compliance at the IRS and elsewhere, such as better and more targeted taxpayer

education, better reporting, voluntary agreements,

improved regulations and earlier intervention through

notices and phone calls. Since 98 percent of the

revenue comes in without enforcement action, an

increase of 1 percent in voluntary compliance would be

roughly equivalent to a 50 percent increase in enforcement revenue. Also, enforcement actions are expensive

because they are labor intensive and often lengthy,

sometimes extending for years after the tax is due.

Therefore, enforcement activity is a vital component of

a strategy for achieving overall compliance, but it is not

the only component and enforcement revenue is not a

good measure of success in achieving the strategic goal

of service to all taxpayers.

As part of the Service’s new balanced performance

measurement system, business results will be measured

as a function of both quality and quantity of work.

Measuring compliance is essential

The IRS does not have reliable, up-to-date measures of

overall compliance, nor of compliance by major

sectors. The last major study on the subject was

performed in 1988, and it relied in part on a previous

study done in the 1970s. In order to measure progress

on this critical goal and to avoid reliance on the more

easily measured but flawed concept of enforcement

revenue as a strategic measure, it will be essential for

the IRS to develop regular and up-to-date measures of

overall compliance.

Productivity through a 

quality work environment

The third strategic goal of the IRS is to increase

productivity by providing a quality work environment

for its employees. The IRS must not only provide top

quality service to taxpayers, but it must do so efficiently, using the fewest possible resources. 

Many private sector organizations demonstrated that

succeeding in this area requires providing employees

at all levels with high-quality technology tools,

adequate training, effective management and active

engagement in the goals of the organization. This is

especially true in service organizations in which most

front-line employees interact directly with customers.

It is essential that employees clearly accept ownership

of the goals of the organization, are given the support

they need to provide good service to their customers

and are able to communicate upward effectively about

the problems and obstacles they perceive stand in the

way of good service. A December 23, 1998, article in

The Wall Street Journal summarized prevailing views

on this subject, describing a leading company, Sun

Microsystems, as follows:

Sun polls its workers as often as monthly via an 

e-mail questionnaire about ‘performance inhibitors’

that have gotten in their way in the past month. The

result, which Sun calls an ‘employee quality index,’ is

part of a broader quality initiative that also gauges

customer loyalty. ‘This isn’t about an employee feelgood thing, but about the things Sun does that inhibit

performance,’ says Jim Lynch, Sun’s director, corporate quality. Sun has found a strong link between the

likelihood that employees will recommend Sun as a

place to work and the likelihood that customers will

recommend it as a place to do business.

The right work environment will help unlock employee

potential. Companies and organizations that excel in

customer service invariably have employees who feel

respected as individuals and valued by management for

the contribution they make to the overall service effort.

A positive work place is free of discrimination, does

not tolerate artificial ceilings and barriers to

advancement, affords equal opportunity and recognizes

employee performance and potential. It is also a work

place that is highly inclusive and seeks to make use of

the diverse experience and talents of all employees.

The IRS budget is a small part 

of tax administration

Looking solely at gross numbers, one might assume

that the IRS was succeeding in recent years in achieving higher productivity. From 1993 through 1999, the

number of IRS employees decreased from 115,000 to

98,000 while the economy grew in real terms by 23
Modernizing America’s Tax Agency 9

percent and the number of tax returns grew by

8.7 percent. However, this reduction in the size

of the IRS was achieved only in part by the

increased real productivity. A greater part of the

reduction was achieved by the failure to meet the

public’s service expectations as to how they

should be served, which in part accounts for the

concerted criticism leveled at the IRS in recent

years, and by layer reductions in compliance

activity. When considering the resources used in

tax administration, it is important to consider

all resources, recognizing that most of the

costs, both direct financial costs and indirect

costs of inconvenience, are incurred by taxpayers in complying with the tax laws. While

measures are not precise, most estimate that

the IRS internal budget represents perhaps

5 percent of total costs of tax administration in

the economy. Thus, a very small increase in the

costs borne by taxpayers can easily offset any

reduction in the on-budget costs of the IRS if

service declines or noncompliance increases.

The IRS is shrinking 

compared to the economy

One measure of productivity success will be

to increase the IRS workforce only slightly,

while handling the increased workload from

a growing economy and improving

performance on the other two service goals.

Should the IRS be able to accomplish this

ambitious goal, it will increase productivity

at a rate greater than the private financial

sector, and it will continue to shrink the size

of the agency significantly in relation to the

size of the economy, as shown above.

The agency will require investments over the

next several years in order to implement its

modernization program. The greatest part of this

investment will be for replacement of technology,

but some will also be required for redesign of the

organization and business practices, training and

facilities replacement.

As a part of the third strategic goal, measurement of

employee satisfaction with the quality of the work

environment should increase. Since 1993, the IRS

has used employee surveys to measure these attitudes, but they need to be refined and included

directly in our measures of performance. 

Taxpayers and employees will benefit if

the IRS achieves its three goals

One of the most important challenges the IRS faces

is that the agency cannot succeed unless it achieves

a high level of performance on all three goals. It

cannot be successful if it collects taxes but does not

provide top quality service to each taxpayer or

neglects to respect taxpayer rights. Equally, the

agency cannot be successful if it provides good

service but allows compliance to decline and

thereby fails to collect taxes. And, since resources

are severely limited, it can only achieve these

service goals by increasing productivity and utilizing effectively the skills of the workforce.

Year

140

130

120

110

100

90

80

1993 1994 1995 1996 1997 1998 1999 2000

IRS Resources and Workload (1993 = 100) 

FTE per $ of Real GDP

FTE

Real GDP

Real Revenue Collected

IRS Shrinks as a Fraction of the Economy

60

2001

70

150
10 Modernizing America’s Tax Agency

While this need to achieve multiple goals is a challenging one, it is not unique to the IRS. Almost every

business in the private sector must make a profit in

order to stay in business. In order to do this, it must

charge adequate prices to customers and collect its

receivables, and yet must do this while keeping its

customers satisfied so they will continue to do business with the firm. And the firm must retain and

motivate employees in order to achieve quality and

productivity.

If the IRS is able to achieve these three strategic

goals, the benefits to taxpayers and employees should

be concrete and noticeable, although they will take

time to become apparent. The following three pages

list some of the benefits that should be visible to individual taxpayers, small business and self-employed

taxpayers and employees as the IRS succeeds in

meeting its three strategic goals.

MODERNIZING AMERICA’S TAX AGENCY

Benefits for Individual Taxpayers

• More useful help in understanding and filing your taxes

- Special programs for retired people, students, homeowners, parents, low-income people and other groups with

special needs 

- Easier access to help through many more store-front locations; faster, easier access to telephone service, Internet

access and e-mail

- Expansion of easy filing programs like TeleFile

- Expansion of cooperative programs with State revenue agencies to make joint filing easier

• Fast, accurate service if you have a question about taxes you owe or your refund

- Service quality equivalent to the best private sector companies

- Reliable, prompt access over the phone or in person with assurance of prompt follow-through on actions

promised

- Trained representatives who understand your problem and are committed to solving it

- Clear acknowledgment of the resolution of your problem

• Professional, courteous help if you fall behind in paying your taxes

- Representatives trained to help you find the best way to meet your obligations and stay current in the future

- Prompt attention to your account so you do not fall too far behind

- Clear explanations of your obligations and rights

- Prompt access to independent channels if you disagree about the amount you owe or how it should be paid

- Well-defined, rigorous process for applying and relieving liens and levies when these actions are required to

protect the public interest

• Professional, courteous treatment if your return is selected for examination

- Representatives trained to help you understand any issues identified in your return and how to report accurately

- Earlier attention to your return so you do not fall too far behind

- Help in finding the best way of paying any additional obligations you may have

- Prompt access to independent channels if you disagree about the amount you owe or how it should be paid

• Greater confidence that your fellow citizens are paying their taxes as required by the tax law in the same way you

are, regardless of their occupation, location, type of business or income level

• Clear, effective means of identifying problems of law or regulation that cause unfairness or disproportionate administrative burdens on particular groups of taxpayers and communicating these to the right level of authority to fix the

problem

- To IRS headquarters if regulations need change

- To Treasury and Congress if tax law needs change
Modernizing America’s Tax Agency 11

MODERNIZING AMERICA’S TAX AGENCY

Benefits for Small Business and Self-Employed

• More useful help in understanding and filing your income, employment and excise taxes

- Special programs for occupations like farmers, taxi and truck drivers, doctors, artists and independent software

programmers

- Special programs for each industry, like garment manufacturers, franchise retailers, start-up technology companies and many others

- Easier access to help through many more store-front locations, faster and easier access to telephone service,

Internet access and e-mail

- Expansion of easy filing programs like TeleFile for 941s

- Expansion of cooperative programs with State revenue agencies to make joint filing easier 

- Expansion of cooperative programs with your industry association to help you understand your taxes and

simplify how you file and pay

• Fast, accurate service if you have a question about taxes you owe

- Service quality equivalent to the best private sector companies

- Reliable, prompt access over the phone or in person with assurance of prompt follow-through on actions

promised

- Trained representatives who understand your problem and are committed to solving it

- Clear acknowledgment of the resolution of your problem

• Professional, courteous help if you fall behind in paying your taxes

- Representatives trained to help you find the best way of meeting your obligations and staying current in the

future

- Prompt attention to your account so you do not fall too far behind

- Special service for start-up companies

- Clear explanations of your obligations and rights

- Prompt access to independent channels if you disagree about the amount you owe or how it should be paid

- Well-defined, rigorous process for applying and relieving liens and levies when these actions are required to

protect the public interest

• Professional, courteous treatment if your return is selected for examination

- Representatives trained to help you understand any issues identified in your return and how to report accurately

- Earlier attention to your return so you do not fall too far behind

- Help in finding the best way of paying any additional obligations you may have

- Prompt access to independent channels if you disagree about the amount you owe or how it should be paid

• Greater confidence that your competitors are paying their taxes as required by the tax law in the same way you are,

regardless of their occupation, location, type of business or income level

- Close working relationships with your preparers and industry associations to identify problems and confusion and

to clear them up in a cooperative way so as to ensure everyone is reporting and interpreting the law in the same

way

- Prompt identification and communication of compliance problems that affect an industry or group so that people

do not fall behind and end up owing taxes they did not expect

• Clear, effective means of identifying problems of law or regulation that cause unfairness or disproportionate

administrative burdens on small business and communicating these to the right level of authority to fix the

problem

- To IRS headquarters if regulations need change

- To Treasury and Congress if tax law needs change
12 Modernizing America’s Tax Agency

MODERNIZING AMERICA’S TAX AGENCY

Benefits for IRS Employees

• Greater respect from the public

- More cooperative, less adversarial relationship, similar to Problem Solving Day

- Respect for an agency committed to change and improvement

- Respect for quality of service provided

- Public who believes you are a competent professional

• Balanced measurements comprising three categories

- Customer satisfaction: customer view of service provided

- Employee satisfaction: your view of service and satisfaction with your job

- Business results: accomplishment of business goals

- Emphasis on compliance, not only enforcement

- Emphasis on quality as well as quantity

• Flatter organization structure will connect you better

- Better communication of what and why things are happening

- Better opportunity for you to be heard and influence the way things are done

- Less time for “micro-management”

- Managers are better able to provide you help and support

• Stabilization of work force

- Reduce anxiety over downsizing

- Provide some new opportunities

• Increased emphasis on training and quality

- Clearer definition of jobs for service reps

- More tailored training

- Better tools (e.g., voice mail, e-mail, tax law access)

- Exam and collection workforce with renewed and clarified mission: not only what you do but why you

do it

- Training and tools comparable to private sector
Modernizing America’s Tax Agency 13

III. Guiding Principles

I

n order to achieve the IRS’ strategic goals, many

changes and actions over many years will be

required. Actions will be taken at all levels, from

front-line employees to top managers. While each

change and each action that moves the IRS toward its

goals is valuable, it is useful in the midst of such great

change to articulate some principles that guide as well

as link our efforts. Articulating a list of principles does

not imply that there were no principles guiding the IRS

in the past or that this list is all inclusive. Instead, it

serves to ensure the importance of the principles that

are especially useful in the IRS today to guide our

actions toward our strategic goals. These principles are

a link between our strategic goals and the tangible

changes we make and actions we take to achieve the

goals.

Understand the customer’s

point of view and use this

understanding to prevent and

solve problems and provide

quality service

This principle is especially important at this point in

IRS history, as it represents a significant shift in

emphasis. This shift, from an internal focus to a

customer focus, is one that many organizations

undertook in the last 15 years and has powerful and

pervasive implications. As the IRS began to adopt this

focus in recent years, practical examples of this

principle have already had important effects.

For example, the IRS phone service improved a great

deal, with level of service rising substantially in one

year, without actually answering significantly more

calls. How? By recognizing that taxpayers typically

call at certain times of the day or week and by 

adjusting the schedules of customer service 

representatives to be available at those peak times.

Previously, call schedules were arranged mainly on

internal convenience.

IRS Problem Solving Days are another example of this

principle. They have been very highly rated by

taxpayers and have cleared up many long-standing

problem cases by understanding the customer’s point of

view. Some taxpayers needed to meet face to face with

an IRS representative and needed convenient times to

do this and oftentimes the taxpayers’ issues crossed

IRS functional boundaries. By providing all the

necessary expertise in one place at one convenient

time, these taxpayers’ needs were met.

Even the IRS quality measures for answering calls are

changing to better reflect the taxpayers’ points of view.

Instead of rating the quality of answers against a test

list of IRS-developed tax law questions, quality of

actual taxpayer calls is rated.

Nearly every IRS activity and every employee’s way of

doing his or her job will be affected by adopting this

principle. It should guide internal IRS activities as

well. For example, those within the IRS organization

who provide information systems services, facilities

services or accounting services have internal customers,

and it is vital to understand their needs to solve their

problems.

While this principle has much potential to improve

service to each particular taxpayer, it can also improve

overall compliance. Since the IRS intervenes directly

with only a very small percentage of taxpayers, gaining

a clear understanding of what causes compliance

problems in particular circumstances and situations is

essential to address those problems effectively.
14 Modernizing America’s Tax Agency

Enable managers to be

accountable, with the requisite

knowledge, responsibility and

authority to take action 

to solve problems and achieve

IRS goals

This principle, while almost universally accepted as

essential in any well-managed organization, is

important to stress at the IRS at this time. 

As the IRS has grown and become more complex over

the years, it has sometimes been difficult for managers

to fulfill this principle, to the frustration of taxpayers,

managers and employees alike. Lack of adequate

knowledge by managers of the substance of a problem,

or lack of authority to solve a problem, fuels this

frustration. Taxpayer cases that remain unresolved for

many years, over reliance on statistics as a management

tool and poor response from surveyed employees on

questions about “trust of management” all indicate that

commitment to this principle must be renewed at the

IRS.

The proper application of this principle in the future

means that managers at all levels will be expected to

understand the substance of the matters for which they

are responsible, see that quality work is performed, take

action on solving problems within their domain, and

participate actively with upper management to solve

problems which require higher level action. Higher

management must provide appropriate guidance,

structure, training, management support and tools so

that their subordinate managers can be accountable

and, then, expect them to rise to the challenge.

A much greater level of meaningful communication

between those responsible for policy and those

responsible for execution will also be essential. It is

not possible to be accountable for making policy

without having an accurate and up-to-date knowledge

as well as accountability for how policy is being

implemented with actual taxpayers. Likewise, the

valuable knowledge gained from work with taxpayers

must be used to make constant improvements in policy

and business practices. And, if they understand the

basis for the decisions that guide their operations,

front-line employees charged with executing policy

decisions through daily operations will be able to

perform their duties more effectively and make more

reasonable decisions.

Align measures of performance

at all levels

Everyone in the IRS shares responsibility for fulfilling

the mission and making progress toward the IRS’

strategic goals. Every employee is also evaluated

against some standard of performance, which in turn is

the basis for awards and promotions. It is vital that the

standards used to measure and evaluate performance at

all levels be aligned so as to encourage and reward

performance that advances the IRS’ strategic goals. It

is equally important to avoid measures or standards that

reward inappropriate actions or are subject to

manipulation.

The lack of alignment of performance measures

between managers and employees in recent years has

been one of the sources of IRS problems in service to

taxpayers and has undermined trust between employees

and managers.

Because of the complexity and diversity of IRS operations, it is essential to have performance measures that

are meaningful for each type and size of organizational

unit. The operational measures for a call site

answering tax law questions are different from those

for a large-case exam group. The performance

standards of an individual employee in these units must

also be tailored to what is appropriate and measurable

at each level. It is vital that whatever measures are

used, they should, in the behavior that they encourage

and discourage, be aligned at all levels, as well as with

the three strategic goals of the IRS.

Foster open, honest

communication

It is not possible to solve problems that one does not

know about or refuses to acknowledge. The more

difficult or important the problem, the more essential it

is for those at higher levels to come to grips with it as
Modernizing America’s Tax Agency 15

soon as possible. Open, honest communication at all

levels is one of the most powerful principles of

management for a large organization like the IRS.

Problems should be identified, acknowledged,

addressed and used as a learning tool for the future.

While this principle seems obvious and is well

proven, it is often hard to live by, especially in a large

organization. The well-known tendency to “shoot the

messenger bringing bad news” undermines this

principle. The often desirable managerial trait to

“present solutions, not just problems” can produce

situations where major problems are not raised until

too late. The natural tendency of preferring good news

to bad works against this principle. And, the fear of

negative public reaction can also suppress or delay

acknowledgement of problems.

Notwithstanding the difficulties of following the

principle of open, honest communication, this is an

essential principle for the IRS, especially at this time.

The massive degree of change being undertaken and

the commitment to address fundamental problems

mean that progress will be slowed and risk will be

elevated to unacceptable levels unless this principle is

embraced at all levels.

To foster open and honest communication, it is

essential for top managers at the IRS to demonstrate

their receptiveness to hearing real problems and to

avoid any hint of adverse consequences for those who

raise legitimate issues.

Insist on total integrity

The modern IRS was formed with the fundamental

objective of collecting taxes according to the law without corruption or political influence. As an agency that

succeeded admirably in this purpose, the principle of

integrity is not new to the IRS.

What is important at this time is to stress the breadth of

this concept of integrity, hence the term “total

integrity.” Total integrity means each employee should

perform all of his or her duties in accord with the

public interest and not with regard to any personal

interest. This concept includes, but is broader than,

avoiding traditional offenses of corruption or political

influence. It encompasses all matters of public interest,

such as taxpayer rights, use of government resources,

access to confidential information, internal and external

reporting, personnel practices, procurement and travel

activities, acceptance of gifts and conflicts of interest

while employed or afterwards.

While many matters relating to IRS integrity are codified in rules and regulations, adherence to the principle

of total integrity means that each employee should not

only observe the rules but also embrace the spirit of

acting in the public interest. When there is doubt as to

the right thing to do, there is a failsafe technique: ask

for help from a qualified source and do not act alone.
16 Modernizing America’s Tax Agency
Modernizing America’s Tax Agency 17

The way the IRS interacts with taxpayers is

defined by its business practices, such as how

filing is done, what notices are sent under what

circumstances, the way phones are answered, the way

collections of balances due are carried out and the way

examinations are conducted. These business practices

have historically been carried out by the IRS’ functional

disciplines, principally Examination, Appeals,

Collection, Criminal Investigation, Submissions

Processing and Customer Service (the latter being an

amalgam of functions, including examination and

collection, which have in common that they deal with

the taxpayer by phone or mail).

Closely related to business practices are IRS strategies

that guide such practices, such as how returns are

selected for examination, what kinds of compliance

issues to emphasize and how to encourage electronic

filing. Strategies are ways of deciding how best to use

limited resources to achieve defined goals.

Many IRS practices are codified in the Internal Revenue

Manual and in various rulings and regulations. Both

strategies and practices are also constrained by, and to a

considerable degree determined by, the established

organization structure and the installed technology base,

the two principal instruments through which the IRS

executes its business practices and strategies. These

interacting factors - business practices, strategies,

organization and technology - are so tightly joined and

interdependent that it is not possible to make fundamental improvements in any of them without addressing all

of them in an integrated fashion. This is a key reason

why past efforts to adopt very promising improvements

in compliance and customer service practices have not

been fully implemented, despite important successes on

a limited basis. Conversely, programs to improve

technology, while accomplishing important incremental

improvements, have not succeeded in replacing the old

and inadequate base of technology on which the IRS

depends.

By revamping its business practices and strategy in ways

that were successful in the private and public sectors

(and often on a limited basis at the IRS), the IRS can

make major strides toward all three strategic goals.

These changes are discussed below in summary, but full

implementation of these changes is a major undertaking

and will take place over a period of years, depending

heavily on requisite changes in organization and

technology.

Prevent taxpayer problems or

address them as early 

as possible

One of the overriding themes in improving IRS business

practices is to shift from addressing taxpayer problems

well after returns are filed to addressing them as early in

the process as possible, and in fact prevent problems

wherever possible.

Malcolm Sparrow of Harvard’s Kennedy School of

Government, and one of the world’s leading analysts of

government compliance programs, said it simply:

Speed of reaction after the fact is considered

second best; prevention is considered better, but

is harder to quantify.

This approach follows the well-established quality

principle that it is far better for the customer and far less

expensive to eliminate defects than to fix them. In

making cars, for instance, it is very expensive to issue a

recall because of a defect; it is less expensive to fix a

defect before the car leaves the factory; and it is best of

all to improve the design and manufacturing process so

no defect occurs. So it goes with tax returns. As a rule,

if a taxpayer files a correct return, no further costs are

incurred by the taxpayer or the IRS. If the taxpayer

makes an error, it is highly beneficial for both the IRS

and the taxpayer to find and fix the error as soon as

possible. If the taxpayer fails to pay the correct amount

due, the sooner the issue is addressed, the lighter the

burden on the taxpayer and the greater the likelihood that

the IRS will receive payment. Interacting with taxpayers

is a three-part process: 

IV. Business Practices and Strategies
Modernizing America’s Tax Agency

1. Pre-filing: services provided to a taxpayer before

the return is filed to assist in filing a correct return.

2. Filing: services provided to a taxpayer 

in the process of filing returns and paying taxes.

3. Post-filing: services provided to a taxpayer 

after a return is filed, to identify and correct 

possible errors or underpayment. 

Some of the services provided by the IRS in each of

these categories, and the approximate distribution of

IRS resources in each category, are shown below.

The IRS activities chart shows that the balance of IRS

resources is heavily weighted to intervention after problems occur while relatively little is devoted to preventing problems, with 73 percent of the budget allocated

to post-filing activities. In fact, nine times as much is

spent addressing problems after the fact than is spent

in preventing them.

Experience at the IRS and elsewhere shows that there

are many opportunities to improve service and

compliance and increase productivity by pursuing more

aggressive use of techniques to prevent errors and

address recurring and systematic compliance problems.

(See Appendix 1.)

18

11% 17% 72%

Percent of IRS Budget

NOTE: Budget figures exclude Counsel and support programs such as IS and facilities.

PRE-FILING

Customer Education and Assistance

• Forms

• Publications

• Toll-free tax law assistance

• Web site

• Taxpayer education programs

• Public service announcements

• Volunteer tax assistance sites

• Advanced pricing agreements

• Published tax law guidance

• Private letter rulings

• Determination letters

• Tip rate determination and education

• Letters advising taxpayers of potential

problems:

- Duplicate SSNs

- Self-employment tax

- Cash vs. accrual accounting methods

IRS ACTIVITIES

FILING

Customer Account Services

• Processing paper returns

• Processing electronic returns

• Crediting payments

• Advising taxpayers of errors and 

balances due

• Arranging installment agreements

• Answering taxpayer inquiries about

their accounts

• Making corrections and adjustments 

to taxpayer accounts

• Abating penalties on taxpayer 

accounts when appropriate

• Paying refunds

POST-FILING

Compliance

• Auditing returns

• Recommending assessments if additional tax is due

• Arranging methods of paying off

balances due

• Evaluating offers in compromise

• Taking collection actions, such as

liens, levies and seizures

• Handling taxpayer appeals on 

assessments and collection actions

• Litigating disputes

• Detecting and investigating possible

fraud

• Resolving complex taxpayer account

and collection situations

• Evaluating and addressing “hardship”

situations
Modernizing America’s Tax Agency

In addition, when taxpayer problems occur, it is important

to intervene as quickly as possible, particularly in the case

of underpayment or nonpayment. The key to effective

collection anywhere is to identify as quickly as possible

the potential risks of nonpayment and obtain an agreement to settle the debt.

The table shown above depicts commercial experience in

collecting debts. As is evident from the table, the chances

of successful collection decline rapidly with time,

dropping to 56 percent after six months. By contrast,

because of IRS practices, 90 percent of the working cases

of IRS telephone and field collection personnel are more

than six months old, and most are several years old.

Examination of returns also usually occurs well after

returns are filed. Examination of individual and small

business returns often occurs six months to one year after

filing, and completion of the examination requires an

additional five to 12 months. Audits of returns of large

corporate taxpayers often do not begin until 2 1/2 years

after returns are filed. Resolution of assessments, which

go into accounts receivable, often does not occur for an

additional two to four years.

In effect, the majority of IRS resources today are being

applied to address taxpayer errors or issues that arose

three to seven years ago. One of the implications is that

64 percent of the amounts shown as owed by taxpayers in

the GAO report on IRS financial statements are for interest

and penalties, and only 36 percent are the original tax due. 

While great gains in both service and compliance can be

anticipated by preventing taxpayer problems and errors

and addressing those that occur much faster, changing

established practices is dependent upon changes in

organization and technology that will require significant investments of time and money.

Improve communications with

taxpayers

The IRS communicates with millions of taxpayers

each year through multiple channels: mail, telephone,

Internet and in-person. The communications have a

wide subject range, from tax forms and publications

describing how to file, to phone calls setting up

installment agreements, to in-person meetings to

resolve longstanding issues and disputes. 

Communications can be initiated by either the taxpayer

or the IRS, and it is common for the same issue or subject

to be addressed through multiple channels, e.g., when the

taxpayer calls in response to a notice sent by mail.

IRS communications with taxpayers are not only

diverse, they are extremely voluminous and complex in

19

Collectability of Delinquent Commercial Debts

100

90

80

70

60

50

40

30

20

10

0

98.7 93.2

85.0

72.3

56.1 42.9

28.4

12.5

90% of IRS Collection Resources

0 1 2 3 6 9 12 24 Months Delinquent

IRS Telephone and Field Collection

% Collectable
20 Modernizing America’s Tax Agency

subject matter. The IRS currently provides 484 different tax forms, including 7 new forms, 177 modified

forms and 105 publications. In 1999, the IRS mailed

over 100 million tax packages to taxpayers and distributed an additional 650 million forms and publications,

including over 57 million downloaded from its web

site. In 1999, the IRS sent taxpayers 105 million

notices, received between 20 to 30 million incoming

pieces of correspondence and 168 million incoming

phone calls on toll-free numbers, and served over ten

million taxpayers at walk-in sites. Over 20,000

employees are dedicated solely to these tasks and, in

total, over 70,000 employees regularly communicate

with taxpayers.

The issues communicated through correspondence and

phone calls are often more complex than those handled

by typical commercial call centers. The average length

of a call with a customer service representative on the

IRS 800-number to respond to notices is eight to ten

minutes, while the average talk time at a typical

commercial credit corporation is 3.5 minutes.

From the taxpayer’s point of view, the quality of

service the IRS provides through these various forms

of communication has been well below expectations.

Since almost every taxpayer also deals with leading

commercial companies in credit, direct mail and

other similar operations, a comparison is readily

available. Typically, such operations have a level of

service whereby a customer has a 90 to 95 percent

chance of getting through on a given telephone call.

In 1999, the chances of getting through to an IRS

toll-free assistor was 53 percent. 

IRS written communications, such as notices, are

widely criticized as hard to understand. Furthermore,

the topics on which taxpayers are calling are often of

great importance to them, creating high anxiety if the

matter cannot be resolved quickly. For example, a

taxpayer who calls in response to a balance due notice

is subject to accumulating interest and penalties and

even levy of property if the matter is not resolved.

Improving convenience and quality of communications with taxpayers is one of the most important areas

of improvement in business practices in a modernized

IRS. 

Some significant progress was made in 1999. This

includes expansion of hours of phone service to 24

hours a day, seven days a week, Saturday hours at

250 walk-in sites throughout the country, and rewriting of some notices to make them easy to understand. Also, the IRS web site has been very successful, providing immediate access to all forms and

publications and answers to many tax questions. In

1999, the IRS web site had over 767 million “hits”

during which taxpayers downloaded more than 57

million forms and publications. In the longer term,

the concept of a modernized IRS is to organize

communications so that taxpayers can get accurate

and prompt information and correct resolution of

issues in a time and manner most convenient for them,

whether by letter, phone, Internet or in person. 

Given IRS operations’ scale and complexity, this is a

long-term task requiring fundamental change in all

aspects of IRS operations, including organization

and management, training of front-line personnel, internal and external distribution of information, information

technology and performance measurements. Following

are some examples of impediments to improving

communications with our taxpayers that require fundamental change:

• Improving the level of phone access and providing

24-hour service requires managing calls and

schedules on a nationwide basis, yet until

October 1, 1999, IRS’ 24 call sites reported to

local service centers or district directors who

were responsible for a geographic area and who

often had differing technology and management

practices.

• Improving the quality of call responses requires

having front-line people who are properly trained

and equipped to handle the subject matter. The

complexity and diversity of the subject matter of the

calls requires constant management of the way

agents are organized and trained and the way calls

are routed. This in turn depends on having management that is highly knowledgeable of the specific

needs of the taxpayers being served as well as the

ability to make constant improvements in the

communications process. Yet because of their

historically geographic focus, most call sites

attempted to manage communications for every

taxpayer type on a wide range of subject matters.
Modernizing America’s Tax Agency 21

• Improving the quality of all communications critically depends on providing the front-line employees

access to accurate, up-to-date information about

taxpayers’ accounts and the ability to adjust accounts

immediately when needed. IRS computer systems

generally do not have this capacity.

• Improving the quality of communications

requires an accurate system for measuring quality, from both a technical point of view and the

taxpayer’s point of view. In 1999, such a system

of measures was first introduced. 

• Improving the quality of written communications

(including forms, publications and notices) requires

incorporating user-friendly, educational, helpful,

easy-to-understand language and complete data that

helps taxpayers comply with their tax obligations.

This requires a complete rewrite of most notices and

often depends on displaying taxpayer account data

that IRS systems cannot provide.

The modernization program is designed to address all

of these impediments in order to improve dramatically

the convenience and quality of communications with

taxpayers.

Expansion of taxpayer rights

Taxpayer rights include a wide range of protections and

procedural safeguards designed to ensure that taxpayers

get a fair hearing on their cases before the IRS takes

any adverse action against them. In certain cases, the

law requires that the taxpayer’s personal circumstances

must also be considered so that the taxpayer will not

suffer undue hardship from an IRS action. 

Taxpayer rights were considerably expanded in the IRS

Restructuring and Reform Act of 1998, which included

over 70 provisions concerning taxpayer rights. For

example, some of the provisions in the bill are:

• “Due process in collections” provisions, which

provide taxpayers facing collection action the right

to have their case heard by the IRS Appeals office,

and potentially a court, prior to levies being made.

• Expanded “innocent spouse” provisions that under

certain circumstances provide increased authority

for the IRS to relieve spouses of liabilities

incurred on joint returns.

• Expanded authority for the IRS to “compromise” on

taxes owed under certain circumstances.

• Change in “burden of proof” in certain court cases.

• Extension of privileged communications between

taxpayers and attorneys to certain other advisors.

While the taxpayer rights provisions are now law and

being implemented by the IRS, they are also consistent

with and reinforce the direction of the overall modernization effort. Many of the modernization changes will

increase the quality and effectiveness of the IRS in

administering these rights. Of particular importance

are the organizational changes that establish the

National Taxpayer Advocate’s office as an independent

structure within the IRS, and the revamping of

performance measures to include taxpayer rights.

Although most of the changes required by RRA ‘98

have now been implemented, many more changes will

be required over the next five years to learn how to

administer these provisions effectively and efficiently.

Broaden use of electronic tax

administration

Electronically-filed returns improve service for

taxpayers and boost productivity by reducing errors,

speeding refunds and reducing labor costs. While

electronic filing has been increasing rapidly, 77 percent

of returns are still filed on paper. Reaching the

congressionally-mandated goal of 80 percent

electronically-filed returns will require many

improvements within the organization, such as

enhanced IRS technology to allow 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 the number of effective payment

options in conjunction with filing.

The opportunities to improve business practices

through electronic communications with customers and

practitioners go far beyond filing of returns. Customer
22 Modernizing America’s Tax Agency

education and assistance programs through the IRS

web site, such as distribution of forms and publications

and answers to tax law questions, are growing rapidly.

Eventually, secure communication over the Internet

with practitioners and taxpayers will be used more

effectively to resolve taxpayer account issues,

facilitating resolution of examinations, providing

taxpayers authorized transcripts of their accounts and

generally improving the timeliness and quality of the

full range of IRS interactions with taxpayers. 

In 1999, using highly secure technology, the IRS began

the first pilot project to communicate taxpayer account

data over the Internet with a small group of practitioners. Although this pilot program involved only 100

practioners, it is the first step in a major change in the

use of electronic channels by the IRS. 

To date, IRS electronic tax administration programs

were developed as specialized “add-on” programs. To

realize the potential, they must be integrated into the

basic ways of doing business throughout the organization, as well as into new technology programs. 

Leverage IRS resources

through effective partnerships

There are many organizations and groups that are

actively involved in tax administration and deal regularly

with taxpayers. Among the most notable are State revenue

agencies, tax practitioners of many kinds, industry associations, small business associations, federal agencies such as

the Small Business Administration, hundreds of community and volunteer groups, services for low income and

disadvantaged taxpayer services, and large businesses and

institutions offering tax filing assistance to their employees. 

Historically, the IRS worked with many of these

organizations to share information about IRS programs

and taxpayer concerns and, in the case of States, to

exchange information for compliance purposes. The

IRS also has some joint electronic filing programs with

States. 

In the future, the IRS must place far greater emphasis

on working in partnership with all of these groups to

reach solutions on taxpayer issues, and especially to

improve taxpayer education and assistance. Many of

these groups established communications channels to

millions of taxpayers and are enthusiastic about working

with the IRS to help their members avoid tax problems.

Many taxpayers are also more likely to listen to and

trust information that comes to them from organizations

with which they regularly deal and depend on rather

than from the IRS directly. 

Examples of partnership programs that provide

information to taxpayers include the following:

• The ABA and IRS produced an interactive education module for teens for use in high schools

called "TAXi" and made it available on the

Internet through the IRS Digital Daily website.

• The Banks, Post Office and Library (BPOL)

program facilitates distribution of publications

and forms through participating banks, post

offices and libraries.

• The FY 2000 Small Business Resource Guide

CD-ROM, designed as a reference guide for the

entrepreneur, was produced and distributed free to

the public in FY 99 as a pilot product.

• Through its Corporate Partnership Program, the

IRS made forms and publications available to

14.8 million employees through the Intranet sites

of over 2,200 companies.

• The Copy Center Program encourages copy

centers to distribute free tax forms. Over 2,900

copy centers participate nationwide with support

from large chains such as Office Depot, Office

Max and Sir Speedy. 

• Other partnership programs focus on outreach to

taxpayers in under-served communities such as

the Newspaper Supplement Program that distributes tax information through local newspapers and

a pilot program in the Austin area that provides

laminated tax forms for copying by grocery store

customers.

The IRS has much to learn about specific taxpayer

problems and concerns from the groups that are intimately knowledgeable about the taxpayer’s point of

view. Such an approach is very much in keeping with

our guiding principle of “understanding and solving

problems from the taxpayer’s point of view.” It is also
Modernizing America’s Tax Agency 23

a way of improving productivity, since a small investment of time and money in supporting a partnership

with an organization of thousands of members is much

more efficient than attempting to communicate directly

to individual taxpayers.

The states offer special opportunities for using

resources and improving service to taxpayers.

Since most taxpayers deal with at least one state as

well as the IRS, there is a great deal of overlapping

information providing significant opportunities for

reducing the burden on taxpayers.

The IRS and the Montana Department of Revenue

are testing a Simplified Tax and Wage Reporting

System (STAWRS). Upon successful completion of

the test, Montana employers will be able to take

advantage of combined federal and state filing.

STAWRS reduces taxpayer burden on small businesses by combining into one tax return the information now contained in the IRS employment tax

return (Form 941), the Montana withholding return

and the Montana unemployment insurance return.

State government partnership programs will enable

us to meet our joint mission as tax administrators to

reduce employer burden while improving the efficiency and effectiveness of government operations.

In order to implement improvements in business practices, the principle of effective partnership must be integrated into the basic structure of the organization and

be given sufficient management attention and support. 

Tailor practices and strategies

based on specific taxpayer

needs and problems

Just as companies develop particular products and

marketing programs to reach customers with differing

needs, most IRS business practices offer the opportunity

for dramatic improvement by tailoring them to address

particular taxpayer needs and problems. These needs

and problems vary enormously, as just a few examples

illustrate: 

• Individual taxpayers with income reported predominantly by third parties have a much more limited set 

of reporting and payment problems than those with 

business income, but prompt payment of refunds is

very critical to them.

• College students, whose returns can often be filed

by telephone, have different service needs and

preferences than senior citizens with retirement

income.

• Large businesses, with extensive international activities, have a different set of tax problems that require

much different service than small, start-up businesses.

An IRS working group recently studied taxpayers with

only wage and investment income and identified

groups of individual taxpayers with particular circumstances and needs (Exhibit A). To serve these taxpayers effectively, it is essential to understand their particular needs and circumstances and to meet them with

appropriate services and programs. 

Tailoring IRS services to particular groups of taxpayers

is a cornerstone of how we can dramatically improve

our service to taxpayers as well as increase productivity

within the organization. Virtually all IRS services can

be improved using this principle. Pre-filing assistance

programs, such as customer education, telephone and

Internet assistance and publications and forms design,

all represent obvious opportunities for more clear and

effective communications. Filing-related programs,

such as electronic filing, telephone account assistance

and notices also need to be tailored to suit the needs of

individual, small business and large business taxpayers.

In addition, post-filing compliance programs offer

major opportunities to allocate resources more effectively based on knowledge of specific issues affecting

taxpayers in particular industries or business situations.

In turn, the post-filing knowledge gained from working

with taxpayers in examination and collection can be

used to develop improved guidance and education

programs to prevent future problems, thus reinforcing

the problem prevention strategy.

Understanding taxpayer problems and needs and tailoring and improving programs to meet these needs is so

fundamental to meeting IRS strategic goals that it must

be a key organizing principle for the way the IRS is

managed. 
24 Modernizing America’s Tax Agency

Exhibit A: Modernizing America’s Tax Agency • Face-to-face contact required; tax education; needs hand-holding; language assistance • Need for accurate and fast access to IRS (through Internet); answers to specific questions • Reliable information on tax law changes, new forms and procedures; prompt and accurate response to queries • Customized assistance through preparers; need help with complex problems; easy access to tax information through preparers • Increased understanding of tax system; recognition of their circumstances--possible hardship assistance; acces- sibility to someone who will solve their problems; clear explanation of child support test • Understanding of the collection process, options and implications; understanding of withholding; accessibil- ity to tax help; reduction of penalties for honest mistakes

• Face-to-face assistance/education; information on Social

Security/pension changes; desire to volunteer; increasedawareness of investment tax law changes; assistance onreturn preparation

• Simple returns; low income (<$30K); low tax

understanding; language assistance; urban;possible dependents; possible compliance issues

• Simple returns; low to middle income; educated

and computer proficient; understands taxes;prepare own returns; compliant

• Middle income families; average return complexity; familiar with taxation; typically paper filers;

prepare own returns; compliant

• Complex returns, investment and schedules; high

income; professionals and wealthy retirees; paidpreparers; compliant

• Divorced/separated individuals; simple/average

complexity of returns; low/middle income; lowunderstanding of taxation; possible complianceproblems

• Balance due and non-filers; some understanding of

taxes; possible fear of the tax system; low understanding of collection options; financial problems;withholding (W-4) problems; frequently ignoringnotices, contact attempts; prepare own returns

• Elderly/retired; low to middle income; Social

Security/pension-based incomes; simple/middlecomplexity returns; prepare own returns; notcomputer literate; value face-to-face contact; easyto reach through retirement communities

W&I TAXPAYER CHARACTERISTICS

Examples of Special Needs of Individual Taxpayer Market Segments

SEGMENT PROFILE KEY NEEDS PROPOSED STRATEGY TO ADDRESS NEEDSSegment ISegment IISegment IIISegment IVSegment VSegment VISegment VII

• Focus on education about taxes; reach through walk-in centers;

bi-lingual assistance

• Aggressive marketing of e-commerce products; education on

forms to file and taxation issues pertaining to them; greateraccess to electronic sites (e.g., through schools and universities)

• Provide information on tax laws through direct mail; marketing

of e-commerce products--migrating them toward e-commerce;provide more accessibility through new channels

• No direct assistance required from IRS; focus on providing

high-quality assistance to practitioners; leverage partnershipswith practitioners to provide better service

• Basic tax education (e.g., seminars on return preparation);

hardship programs; outreach through divorce courts, singleparent associations

• Aggressive marketing/clinics on collection options (installment

agreements, offers in compromise and credit card settlement);information on reasonable cause incentives; providing specifichelp on the phone; quicker response to non-filing situations

• Increased coordination with AARP and other relevant stakeholders; seminars and assistance on filing through community

organizations; reach through VITA and TCE; joint ventureswith Social Security, investment firms, banks, etc.
Modernizing America’s Tax Agency 25

Apply risk-based compliance

intervention techniques

Regardless of how successful the IRS is in preventing

taxpayer errors, it will always be necessary to intervene

through examinations, collection actions and investigations when noncompliance or nonpayment is found or

suspected to be occurring. Since the IRS has limited

resources, it is essential to apply resources where they

will be of most value in reducing noncompliance, both

in specific cases and in patterns of noncompliance.

Strategies that target resources effectively benefit individual taxpayers by reducing the need to burden those

taxpayers who comply. For example, the IRS was a

pioneer in using statistical techniques in selecting tax

returns for audits that were likely to contain an understatement of tax.

With the advent of many new best private sector practices, the IRS has an important opportunity to use the

information it has to deploy compliance resources more

efficiently. This is especially the case with respect to

collections, where great progress in developing more

effective collection techniques and practices has been

made in both private and public agencies. The proven

keys to effective collections are: (1) to identify as

promptly as possible, using all available information,

customers who may present a risk of nonpayment; and

(2) to intervene in the most effective way, whether

through mail, phone calls or in-person visits, to work

out a payment program that addresses that particular

customer’s payment problem. This helps the customers

as well as the collecting agencies, and limits the need

for enforcement actions.

Although risk-based compliance techniques offer great

opportunities for progress on all three of IRS’ strategic

goals, they are dependent upon clear, centralized

management of compliance resources for relatively

homogeneous sets of taxpayers. In addition, accurate,

up-to-date data about taxpayers’ returns and accounts,

and modern technology such as constantly updated decision models, telephone dialing equipment that assists the

operator in making calls and collection support systems

are essential. Long-established business practices must

be modified and updated.

Address willful noncompliance

As the agency tasked with administering and enforcing

the tax laws, the Internal Revenue Service is required to

determine who is not in compliance with their taxpaying responsibilities, and bring them into compliance.

The IRS has the authority to impose civil fines and

penalties for delinquent payments and filings and generally pursues civil remedies through its Examination and

Collection functions. Civil actions are usually sufficient

for bringing most noncompliant taxpayers into compliance. However, there are a small number of taxpayers

who willfully violate the tax code with criminal intent.

A Roper survey commissioned by the IRS in June 1999

found that 87 percent of Americans feel that it is not at

all acceptable to cheat on your taxes. Only eight percent

say it is okay to cheat a little, but three percent thought it

acceptable to cheat on taxes “as much as you can get

away with.” 

IRS Criminal Investigation (CI) is responsible for 

investigating criminal tax violations and related financial

crimes in support of the administration of the Internal

Revenue Code. CI is the only federal law enforcement

agency with the authority to investigate income, excise

and employment tax criminal violations. CI conducts a

comprehensive financial investigation and determines

whether sufficient evidence exists to recommend prosecution to the Department of Justice for willful attempts

to violate the federal tax laws. Criminal penalties are

sought only in appropriate matters involving willful

violations of the tax code.

CI is an essential component of effective tax administration. Over the past decade, the number of cases referred

to CI from within the IRS decreased significantly. The

IRS is no longer the largest source of referrals and now

supplies less than 12 percent of all criminal cases requiring investigation. In April 1999, Judge William Webster

issued several recommendations following a year-long

study of the IRS’ Criminal Investigations. Judge

Webster identified in his report that “Examination,

collection and CI must reinvigorate the fraud referral

program...making clear CI’s commitment to tax enforcement.” In 2000, the IRS will begin to focus its investigative resources on those cases having the biggest impact

on noncompliance with the tax law. 
26 Modernizing America’s Tax Agency

Integrate compliance

strategies

The greatest payoff in progress on all three of IRS’

strategic goals will come when all of the improved

business practices can be implemented through effective and integrated compliance strategies. An integrated strategy is one in which the needs and problems

of a set of taxpayers are clearly understood and all the

techniques and resources from all the disciplines of the

IRS are applied appropriately to solve those problems

over a period of time. 

Again, to quote Malcolm Sparrow:

In both Australia and California, renewed

attention was paid to service functions, to

public education programs and provision of

timely and well-targeted information. But

attention never wavered from the central

mission of making sure taxpayers paid up, in

full and on time. For any particular kind of

identified noncompliance, the choice between

using the ‘service arm,’ and the ‘enforcement

arm,’ or something else became a matter of

crucial professional judgment on which the

public image and credibility of the agency

depended.

An example of such an approach is the IRS Earned

Income Tax Credit (EITC) Program. The EITC is

helping millions of lower-income workers, both

with and without children, make ends meet. In

1997, over 19 million workers received credits

worth almost $30 billion. The IRS’ goal is to

encourage every eligible taxpayer to claim the

credit. But, the IRS must also work to ensure that

claims for the credit are accurate while preventing

those who are ineligible from receiving it.

Professional tax practitioners prepare over 60

percent of the returns filed with a claim for EITC.

To increase the effectiveness of the preparer

community in servicing their clients, legislation was

enacted which provided that penalties be applied to

preparers who fail to diligently determine the

accuracy of the taxpayer information used to

claim EITC.

In order to assist the practitioner community in

meeting its obligations with respect to due diligence

in the area of EITC, the IRS developed the EITC

Preparer Outreach Program, a strategy of combined

outreach and compliance checks. Between November

1999 and January 2000, Service employees are visiting over 10,000 preparers. The employees are

discussing the eligibility requirements for a

taxpayer to claim an EITC benefit as well as the

recordkeeping requirements for preparers. During

these visits, preparers are also receiving an EITC

Professional Kit which contains an overview of the

EITC; information on valid identification numbers,

eligibility and due diligence requirements and other

helpful information.

In addition, the IRS has partnered with the two

largest national preparers, H&R Block and Jackson

Hewitt, which have agreed to provide the necessary

education to their own employees and franchisees.

They also agreed to change their software to eliminate all default answers on the due diligence forms.

While we have yet to determine the compliance benefits in tax dollars protected, we feel confident that the

improved customer service will lead to an improved

partnership between the IRS and the professional practitioner community.

Near-Term Improvement

Priorities

The development and implementation of integrated

strategies on a large scale depend on having a clear

understanding of taxpayer problems, an organization

structure that permits comprehensive addressing of

these problems, and appropriate performance measures

to encourage and quantify progress. 

As is evident from the above examples, there are major

opportunities for progress on all three of the IRS’

strategic goals by revamping business practices and

strategies, and there are hundreds of specific actions

that are required to implement these improvements.
Modernizing America’s Tax Agency 27

The National Performance Review study titled

Reinventing Service at the IRS made 295 specific

recommendations and many more have been identified

from other sources. While some of these actions can

and are being implemented quickly, the most important

changes are dependent upon other fundamental changes

in the organization, management and technology. 

Through a rigorous prioritization process, 

157 near-term initiatives to improve business practices were identified in 1999; of these, about half

are mandates. Many of the higher profile initiatives

were implemented or partially implemented in

1999, 12 initiatives were added and six expanded

for 2000, as shown on the following pages. 
28 Modernizing America’s Tax Agency Making Filing Easier (Pre-Filing) Providing First-Quality Service to Each Taxpayer Needing Help with a Return or Account (Filing)

Exhibit B-1: Near Term Improvement Priorities 

PRODUCTIVITY

SERVICE TO EACH

SERVICE TO ALL

LEGISLATIVE (RRA) . . . .52

NON LEGISLATIVE . . . . .37

Post-Filing

Filing

14

20

55

Pre-Filing

Improve taxpayer assistance by

meeting demand and increasing

accuracy.

1. Expand telephone

service to 24 hours a

day, 7 days a week.

2. Use call-routing technology to ensure better

management of phone

traffic.

3. Provide bi-lingual

service on the telephone.

4. Provide nationwide

access to the SERP,

Service-wide Electronic

Research Project.

Increase use of, and offer easyto-use alternatives to, paper

filing.

1. Implement actions to

mandate electronic filing of

Form 1065.

2. Accept alternative methods of

payment.

3. Increase marketing of all 

e-file products.

4. Increase electronic options

for businesses.

Meet customer demand for fast

responsive account assistance

by telephone.

1. Arrange for each local

District Office to publish

addresses and phone

numbers in local telephone

directories.

2. Complete Automated

Collection System (ACS)

redesign study.

3. Monitor and assess the

Atlanta Consolidated

Call Site Pilot (ACCSP) to

determine if concepts

merit Service-wide 

implementation.

Meet demand for walk-in assistance.

1. Expand and standardize

hours of operation.

2. Improve availability of forms

and publications.

3. Install Q-Matic at 15

additional sites.

Simplify notices and

correspondence.

1. Improve written communications by rewriting notices in

plain language.

2. Reduce volume of undelivered

mail.

3. Flatten the notice issuance

pattern throughout each year.

4. Include the name, telephone

number and unique identifying number of an IRS

employee on any manual

correspondence.

Provide specialized products and

services for small businesses.

1. Make technical correction to clarify the small

business exemptions

from the corporate alternative minimum tax.

2. Provide relevant information to new employers

when they apply for a

federal employer identification number (EIN).

3. Encourage the use of the

EFTPS and STAWRS.

4. Mentor and monitor New

Employers prototype.

Protect taxpayer rights.

1. Place burden of proof on

IRS in certain cases.

2. Expand innocent spouse relief,

separate liability election and

equitable relief.

3. Limit circumstances in

which a taxpayer’s residence or business assets

may be seized.

4. Hold employees responsible

for identifying any improper

conduct affecting taxpayers.

5. Notify the taxpayer when a

notice of federal tax lien has

been filed.

6. Maintain records of

taxpayer complaints of

misconduct by individual

employees.

Improve access to problem

solving help.

1. Expand the circumstances under

which the Taxpayer Advocate

may consider issuing a Taxpayer

Assistance Order.

2. Create Citizen’s Advocacy

Panels.

3. Inform public about the

Taxpayer Advocate and

publicize the Taxpayer

Advocate’s toll-free

number.

4. Hold local Problem Solving

Days (PSDs) at least through

April 1999. Institutionalize PSDs

into daily operations.

Identify systemic causes of

account problems and develop

solutions.

1. Address systemic causes of

Audit Reconsideration

issues by:

A) Revising statutory notice

processing.

B) Reducing processing

delays.

2. Obtain access to

Financial Management

Service’s Check

Information.

3. Implement Non-Master

File (NMF) action plan.

4. After December 31, 1999,

authority is given to extend

10-year collection period in

certain circumstances.

SERVICE TO EACH TAXPAYER

Providing Prompt, Professional, Helpful Treatment to

Taxpayers in Cases Where Additional Taxes May Be Due

(Post-Filing)

37

31 89

■ = Completed ■ = Partially Completed

Broaden taxpayer payment

options whenever appropriate.

1. Allow taxes paid by check or

money order to be made

payable to the United States

Treasury.

2. Offer credit card

payment for balances

due. Seek credit industry

partners to pilot test

credit cards for taxpayers who file electronically in 1999.

3. Test Direct Debit Installment

Agreement improvements

(option to exclude “user fee”

with direct debit of payments).

4. Change offer in compromise procedures to

reduce taxpayer burden.
89

37

31

Modernizing America’s Tax Agency 29

Exhibit B-2: Near Term Improvement Priorities Increase Fairness of Compliance

PRODUCTIVITY

SERVICE TO ALL

SERVICE TO EACH

LEGISLATIVE (RRA) . . .22

NON LEGISLATIVE . . . . . 9

Increase Compliance

25

7

Increase Fairness

SERVICE TO ALL TAXPAYERS

Increase Overall Compliance

Pursue penalty reform.

1. Reduce the FTP penalty by 50% for individuals who timely

file returns and pay by installment agreements. 

2. Redesign all penalty notices and train Exam, Collection and

Customer Service employees on who is authorized to

approve initial assessments.

3. Investigate the appropriate level for penalty abatement via

telephone.

4. Send a letter to business customers who have

made first-time deposit errors to tell them the

penalty has been waived and how to avoid

mistakes in making their next deposit.

Improve and increase use of “upstream” education and delinquency prevention techniques.

1. Award matching grants up to $100,000 per year to

develop, expand or continue qualifying lowincome taxpayer clinics.

2. Provide proactive education to taxpayers to inform them of

potential issues that could create delinquent tax situations.

3. Improve the EITC program by implementing the EITC action

plan, which includes: education, communication and assistance, prevention and identification, research and math error

programming for secondary TIN, age-related checks, etc.

Ensure appropriate, fair and consistent use of compliance

resources.

1. Develop and implement an approval process under

which any lien, levy or seizure is approved by a

supervisor.

2. Determine a minimum bid price below which the

seized property must not be sold.

3. Establish a sunset date of 180 days for notices of

intent to levy.

4. Revenue officers shall determine there will be

sufficient net proceeds from the sale to apply to

unpaid tax liabilities.

Use research to identify potential areas of noncompliance and

develop effective treatments.

1. Each year, conduct an analysis of the sources of complexity

in administration of the federal tax laws.

2. Design a national compliance survey as an effective

alternative to TCMP.

3. Continue to develop and refine alternative treatment revenue

(ATR) methodologies to measure the effectiveness of nonenforcement compliance initiatives.

■ = Completed ■ = Partially Completed
89

31

37

30 Modernizing America’s Tax Agency

Exhibit B-3: Near Term Improvement Priorities Increase Employee Job Satisfaction

SERVICE TO ALL

SERVICE TO EACH

LEGISLATIVE (RRA) . . .8

NON LEGISLATIVE . . . . .29

IRS Reorganization

31

6

Increase 

Employee Job

Satisfaction

Ensure Successful Reorganization of IRS Structure

and Management While Maintaining a Stable

Workforce

Provide tools and training to enhance customer

service.

1. Submit a comprehensive customer

service employee-training plan to

Congress.

2. Provide adequate number of telephone, fax

and e-mail capabilities at each post of duty.

3. Create a training module on customer service

for all functional areas.

4. Develop procedures to include user-friendly

job aids as part of IRM 2100 to assist front-line

Customer Service employees.

5. Provide electronic research tools to front-line

employees.

6. Use capabilities of Performance Development

System (PDS) to assess competencies and

determine training needs.

Improve service by reorganizing and refocusing along customer

segments.

1. Reorganize the IRS by establishing organizational units

servicing groups of taxpayers with like needs.

Create an IRS culture that values employees and rewards top quality service.

1. Prohibit the use of records of tax

enforcement in evaluating employees.

2. Revise IRS mission to focus on

taxpayer needs.

3. Establish, as a standard practice, that all executives overseeing taxpayer contact functions

will interact with taxpayers on a

regular basis.

4. Use internal and external feedback

systems to improve culture by:

A) Improving customer feedback.

B) Implementing tests in 4-8 field

offices to improve operations

based on customer satisfaction

surveys.

C) Implement customer satisfaction

measures.

Measure progress and performance against a balanced

measurement system.

1. Develop a balanced measurement system that

measures customer service, employee satisfaction and

business results by:

A) Aligning all IRS review systems (e.g., business

review, peer review, etc.);

B) Aligning critical elements of personnel standards into a balanced measures approach;

C) Aligning the balanced measurement system

into the modernized IRS.

2. Develop and implement a Centralized Quality Review

System to improve quality measures and provide

better feedback to CSRs and managers.

Provide a quality work environment.

1. Establish a new workforce performance management system.

2. Replace existing workstations as

required by the National Workspace

and Occupancy Standards.

3. Increase top grade level for

customer service representatives.

4. Change and continuously improve

supervisory practices to enhance

employee satisfaction at call centers.

5. Implement enhancements to e-mail

and VMS.

PRODUCTIVITY THROUGH A QUALITY WORK ENVIRONMENT

PRODUCTIVITY

■ = Completed ■ = Partially Completed
Modernizing America’s Tax Agency 31

Exhibit B-4: Potential Expanded or New Near Term

Improvement Priorities

NEW OR EXPANDED

New

New

New

Expanded

Expanded

New

Expanded

New

Expanded

New

New

New

Expanded

Expanded

New

New

New

INITIATIVE

SERVICE TO EACH

Develop a viable proposal to include a POA (or other appropriate representational designation) 

check box on Form 1040.

Rollout of oral Taxpayer Information Authorization (TIA).

Test placement of "stuffers" on local Problem Solving Days in fourth notices from Collection.

Expand Spanish walk-in service to multi-lingual walk-in service via contracted telephone translation support.

Implement ACS redesign recommendations.

Address outstanding issues from the latest NTA "20 Most Serious Problems." The first issue to address will be 

misapplied payments/unapplied payments. 

Perform a study to determine the scope of work required and current trends on this issue.

Institutionalize two components of Problem Solving Days within normal operations—taxpayer appointments and crossfunctional teams. Recommendations from the current task force will likely expand scope and resource requirements for 

institutionalizing effort.

Small Business Employment Tax Deposit proposal. Ease the burden on small business employers by increasing or 

easing the existing criteria for quarterly depositors.

Create a Small Business Transition Office (SBTO) to continue and expand specialized products and services for small 

businesses—e.g. Small Business Resource Guide (CD-ROM), partnerships with SBA and other agencies, EFTPS 

support, FEIN projects, STAWRS support, new employers prototype, Web site products, etc.

Coordinate with Small Business Development Centers (SBDCs). Use the over 1200 existing SBDCs as platforms for 

outreach programs to small businesses.

Oversee and migrate approved Small Business lab projects (Pacific/Northwest District) for implementation and/or 

integration to Small Business/Self Employed operating division. Lab projects will be approved and tracked using TSI 

process. 

Small Dollar Notices. Conduct a study to determine the viability of sending notice of balance due amount but waiving 

payment in cases of small dollar notices. Examine situations where the costs of collection are greater than the balances

due (defined by a to-be-determined tolerance level). 

Convene team of field personnel to review new IRM 2100 to identify issues and suggest improvements.

Make progress on notice redesign including measurement of quality and accuracy from taxpayer’s perspective. 

Conduct focus groups to obtain taxpayers’ points of view on quality of IRS notices.

SERVICE TO ALL

Implement approved recommendations from the "Reducing Burden National Task Force." Potential items include:

- Provide quality service during an audit by taking responsibility for a taxpayer’s existing IRS account problems

- Expand business hours of audits.

Conduct initiative to combat corporate tax shelters

Conduct initiative to combat abusive trusts

PRODUCTIVITY THROUGH A QUALITY WORK ENVIRONMENT

Reduce administrative burden on managers. Managers need to spend more time involved in case work and in 

mentoring and coaching employees.

Provide tax preparation assistance for lower graded employees at the service centers (GS3s, GS4s...).
32 Modernizing America’s Tax Agency

Exhibit C: IRS Current Organizations IRS Organization 1998 (Simplified)
Modernizing America’s Tax Agency 33

Previous IRS structure did not

adequately support taxpayer

demands

The organization structure is the vehicle through

which decisions are made and actions carried

out. The IRS structure as of September 1,

1998, is shown in Exhibit C. It was built around

districts and service centers, the basic organizational

units established many years ago and evolved over

decades. There were 33 districts and ten service

centers. Each of these 43 units was charged with

administering the entire tax law for every kind of

taxpayer, large and small, in a defined geographical

area. Consequently, every taxpayer was serviced by

both a service center and a district, sometimes more

than one. Within each of these units, work was actually

carried out by functional disciplines, principally

Examination, Appeals, Collection, Criminal

Investigation, Submissions Processing and Customer

Service, the latter being an amalgam of collections,

examination and general tax law and account information services provided by mail and telephone. 

Service centers and districts each performed these

functions for the same taxpayer, the responsibility

shifting depending on whether the work was done by

phone, mail or in person. For example, in the collection area, there are three separate kinds of organizations spread over all 43 operational units that use four

separate computer systems to collect taxes. Each of

these three units and four systems collects from every

kind of taxpayer, from individuals to businesses.

Overseeing these operational units were four regions

and a national office, which also operates three large

computing centers. There were eight intermediate

levels of staff and line management between a

front-line employee and the Deputy Commissioner,

who is the only manager besides the Commissioner

who had responsibility over all aspects of service to

any particular taxpayer.

This structure no longer enabled the IRS to achieve its

strategic goals. The cumbersome structure, matched by

an inadequate technology base, represented the

principal obstacles to modernizing IRS business

practices and strategies and to delivering dramatic

improvements in service and productivity.

A modernized structure built

around taxpayer needs

The IRS’ modernized structure is similar to one widely

used in the private sector: organized around customers’

needs, in this case taxpayers. Just as many financial

institutions have different divisions that serve retail

customers, small to medium businesses and large

multinational businesses, the taxpayer base falls

naturally into similar groups. This concept has been

closely studied since it was first proposed in early

1998. While some details remain to be worked out, the

top-level structure is shown in Exhibit D. Please note:

all numbers are approximate and subject to change.

The key operational units are four operating divisions,

each charged with full end-to-end responsibility for

serving a set of taxpayers with similar needs. These

operating divisions are supported by two service 

organizations: Information Systems and Agency Wide

Shared Services (providing common services such as

facilities and procurement). Appeals and the Taxpayer

Advocate are nationwide organizations that provide

separate specialized independent channels for taxpayers. Criminal Investigation will have sole responsibility

for investigation of criminal violations of the tax law

and, for the first time, will operate as a line unit within

the IRS. Chief Counsel provides tax advice, guidance

and legislative servies to all components of the IRS. A

smaller national office will assume an overall role of

setting broad policy, reviewing plans and goals of the

operating units and developing major improvement

initiatives. 

The needs and problems of the taxpayers served by

each of these operating divisions are very different, as

shown in the table on the next page, and consequently 

V. Organization and Management
34 Modernizing America’s Tax Agency

Exhibit D: IRS Future Organization

Internal Revenue Service

Future Organization

Chief Counsel

Stuart Brown

Commissioner/

Deputy Commissioner(s) 

Charles Rossotti, John LaFaver, Bob Wenzel

National Office Staff

HR, Finance, EEO, Communications,

Planning, Research

Tax Exempt and

Government Entities

Evelyn Petschek

Large and Mid-size

Business

Larry Langdon

Wage and Investment

Income

John Dalryrmple

Small Business and

Self-Employed

Joseph Kehoe

1,000 IRS Employees 2,600 IRS Employees

4,900 IRS Employees 7,000 IRS Employees 1,900 IRS Employees 1,600 IRS Employees

21,000 IRS Employees 39,000 IRS Employees 9,500 IRS Employees 2,800 IRS Employees

OPERATING

DIVISIONS

Appeals

Dan Black

Taxpayer Advocate

Service

Val Oveson

Agency Wide 

Shared Services

Facilities, Procurement, Etc.

William Boswell

Agency Wide

Information 

Systems Services

Paul Cosgrave

Criminal

Investigation

Mark Matthews

4,500 IRS Employees

FUNCTIONAL

UNITS

SHARED

SERVICES
Modernizing America’s Tax Agency 35

Wage & Small Business & Large & Tax Exempt &

Investment Self-Employed Mid-size Government 

Business Entities

Number of filers 88 million 45 million 210,000 2.4 million

Number of individual taxpayers 116 million —- —- —-

Total tax liability (billions) $380 $790 $466 $103

Average tax liability per filer $4,310 $20,231 $2,231,274 $42,698

Gross cash paid (billions) $46 $915 $712 $221

Average # of transactions with IRS per filer/year 1-4 4-60 60+ 60+

Percent preparing own returns 59% 20% —- —-

Assets regulated —- —- —- $7 trillion

Average number of returns filed per filer 1.1 2.7 3.5 1.7

* Please note numbers are estimated and subject to change.

Taxpayer Characteristics (Estimates)

serving them effectively and efficiently requires different services and different ways of delivering that

service.

The first of the four operating divisions will serve some

88 million filers. This group represents 116 million

individual taxpayers, including those who file jointly,

with wage and investment income only, almost all of

which is reported by third parties. Most of these

taxpayers deal with the IRS only once a year, when

filing their return, and most receive refunds. Collection

problems are limited since they pay only $46 billion in

cash directly to the IRS, the balance of their liability

being paid through withholding by their employers.

Compliance issues are focused on a relatively limited

range of issues, concentrated on dependent exemptions,

credits, filing status and deductions. Roughly 60

percent of these taxpayers file their own returns,

depending directly on the IRS or volunteer groups for

education and assistance.

The second group of taxpayers includes fully or

partially self-employed individuals and small businesses. This includes about 45 million filers. This

group has much more complex dealings with the IRS

than the wage and investment taxpayers. They have

four to 60 transactions with the IRS per year and pay

the IRS directly $915 billion in cash, representing

nearly 44 percent of the total cash collected by the IRS.

This amount includes personal and corporate income

taxes, employment taxes, excise taxes and withholdings

for employees, each of which has filing and technical

requirements. Since business income and a range of

taxes are involved, compliance issues are also complex.

The possibilities for errors, resulting in collection and

compliance problems, are greatest in this group

because of lack of withholding or information reporting

and the large amount of cash paid. The result is much

more frequent dealings with IRS compliance functions. 

Large and mid-size businesses, comprising only

about 210,000 filers, pay the IRS $712 billion in

cash. This group includes corporations with assets

over $5 million. While collection issues are rare,

many complex issues such as tax law interpretation,

accounting and regulation, many with international

dimensions, frequently arise. At least 20 percent of

these taxpayers interact with IRS compliance functions each year, and the largest taxpayers deal with

the IRS continuously.

The tax-exempt and government entities sector,

including pension plans, exempt organizations and

governmental entities, represents a large economic

sector with unique needs. Comprising 2.4 million

filers, this sector ranges from small local community organizations to major universities and huge

pension funds. Although generally paying no
36 Modernizing America’s Tax Agency

income tax, this sector pays over $220 billion in

cash in employment taxes and income tax withholdings and controls about $6.7 trillion in assets. The

IRS is charged with administering detailed and

complex provisions of law that are generally not

intended to raise money, but rather to ensure that

these entities stay within the policy guidelines that

enable them to maintain their tax-exempt status.

An example: The Wage and

Investment Division

By dedicating a separate unit with full responsibility for

serving each set of taxpayers, the best internal structure

and business practices to achieve our strategic goals can

be developed based on the specific taxpayer needs and

problems. For example, an overview of the proposed

structure for the Wage and Investment operating division is shown below.

Some key elements shown in this chart 

are as follows:

• A management team of about six top executives

will oversee all aspects of service to these

taxpayers. This team will be supported by dedicated senior executives from Information

Systems, Counsel and Taxpayer Advocate.

Thus, a team of manageable size will have the

authority, responsibility and expertise to both

oversee current operations and revamp and

improve business practices and strategies to

achieve our overall strategic goals.

• Internally, the division is structured around the

three main areas where taxpayers require

service: customer education and assistance,

helping the taxpayers understand the law as it

applies to them and to prepare correct returns;

assistance in filing and gathering information

about their accounts; and compliance interaction

in the event of a reporting or payment issue.

Wage And Investment Operating Division

W&I Commissioner 

and

Deputy Commissioner

Compliance

Staff Functions

Customer Account Services

(CAS) ETA*

Submission

Processing

Accounts

Management

Stakeholder

Partnerships

Education and

Communications

(SPEC)

Field

Assistance

Research &

Product

Development

Collection

Management

Examination

Management

Communications,

Assistance, Research and

Education (CARE)

Joint Operations Center

*ETA will be divided into Operating

Divisions once product is mature

• Managment and Finance

• Strategy, Program Planning & Quality

• Communications

• Business Systems Planning

• Human Resources

• EEO and Diversity

Internal Relations

• Taxpayer Advocate Service

• Counsel

• Criminal Investigation

• Information Systems

• Agency Wide Shared Services

• Appeals
Modernizing America’s Tax Agency 37

• This structure facilitates proper emphasis on

prevention of problems and service to those

customers who are attempting to comply. One

of the three major line executives would be

dedicated to customer education and assistance,

tailoring it with even more specific programs to

meet the needs of various subgroups of

taxpayers.

• The structure provides for serving taxpayers in

the manner most convenient and appropriate for

them. For this group of taxpayers, most transactions can be done by phone, mail and eventually

e-mail. All aspects of electronic tax administration hold great promise for improving service and

productivity, especially to this group of taxpayers.

However, a local field assistance organization is

also provided for those taxpayers who need

service in person. Over time, these local taxpayer

assistance centers will be situated in locations

convenient for taxpayers, such as shopping malls,

and may be co-located with other Federal or State

agencies. Several pilot projects of this kind,

including one with the State of Utah and one in a

shopping mall in Sacramento, have been started in

1999.

• In addition to serving taxpayers directly, this field

service organization would work to build partnerships with practitioners and other groups who

assist this group of taxpayers.

• In the compliance area, development and execution

of effective, risk-based strategies are made easier by

the management of all collection and examination

resources directly under a single compliance

executive.

• In general, there are only about four levels of

management, half the current number, between the

top official and the front-line employee, facilitating

effective two-way communication.

Each operating 

division will have a 

tailored structure

Each of the operating divisions will be structured in a

way to most effectively meet the needs of the taxpayers

they serve. The Small Business and Self-Employed operating division, dealing more frequently with taxpayers on

more complex issues, will have a compliance field

organization, including both examination and collection

groups, reporting to a multi-functional manager. The

Large and Mid-size Business operating division, which

deals regularly with taxpayers on complex issues, will be

predominantly a field organization that will be structured

into five industry groups. The Tax Exempt and

Government Entities operating division will have support

structures for each type of taxpayer it will serve: exempt

organizations, pension plans and governmental entities,

with common supporting elements. 

The centralization of management information systems

resources under the Chief Information Officer and of

other common services under a shared services organization will provide for efficient and standardized

common services where appropriate.

The Chief Counsel will establish a senior legal executive as the Division Counsel for each operating division

to participate fully in the plans and activities of the

operating division management and to provide highquality legal advice and representation.

The Appeals organization will remain an independent

channel for taxpayers who have a dispute over a recommended enforcement action.

The Taxpayer Advocate Service will be geographically

distributed to provide local contact with taxpayers, and

also have a taxpayer advocate in each operating division to identify systematic problems in the division.

Following the recommendations of the year-long study

by Judge William Webster, Criminal Investigation (CI)

will become a line unit reporting directly to the

Commissioner and Deputy Commissioner. Operating

as a nationwide line unit with 35 Special Agent in

Charge (SAIC) offices, CI will closely 
38 Modernizing America’s Tax Agency

coordinate its activities and strategies with the operating divisions and will be supported by dedicated attorneys from Chief Counsel.

The reduction in layers of management and the number of

separate major units will free up some personnel resources to

increase support for customer education and assistance

programs. Similarly, the reduction of separate operational

units and the centralization of management of key functions

such as processing, customer assistance and collection within

each division, will ease standardization of business practices

and introduction of new technology. 

Modernized organization

conforms to our guiding

principles

As seen through our guiding principles, the benefits of

this new organization structure as compared to the

current structure are apparent.

The modernized organization is built around specific

groups of taxpayers with relatively similar needs. It is

an inherently customer-focused organization, with each

operating division responsible for creating and executing business practices and strategies to meet those

needs.

The modernized organization sets forth clear, end-toend responsibility and authority for a top official,

supported by a small top-management team, to serve a

set of taxpayers. Equally important, since the taxpayers served are reasonably homogeneous in their needs,

it will be possible and expected for the managers at all

levels to be knowledgeable in the substantive problems

and issues that arise in administering the tax law in

their division. 

In the modernized organization structure, much of our

complex tax law will not be relevant or important for

the particular issues in each division, allowing the

managers to focus on that which is important for their

taxpayers. For example, the management of the Wage

and Investment Division, although responsible for

serving 75 percent of all taxpayers, will generally not

have to be concerned with the 83 percent of the tax

code that ordinarily does not apply to taxpayers for

which it is responsible. Therefore, we can expect

managerial accountability for understanding the problems in their area of responsibility and for taking

effective action to reach our strategic goals. The

Commissioner, Deputy Commissioners and the

national office staff, in turn, will be better able to

perform their proper role of helping the operating units

set appropriate strategic goals and overseeing their

performance in meeting them, rather than engaging in

detailed operational issues. 

This structure is specifically designed to facilitate

direct and meaningful two-way communication, both

vertically and horizontally, within the organization. 

The top management of the agency and of each major

division will consist of a set of teams, each of which

will be linked to the next level. For example, the

agency top management will consist of the

Commissioner, Deputy Commissioners, key staff

executives and the heads of each major operating division, while top management of each major operating

division will consist of its head, deputy head and its

top four to six staff and line executives. The total

number of management layers from the front-line

employee to the top official in the operating unit will

generally be about half the number found today. In

addition, many cross-unit councils and networks of

individuals with special expertise will be created (e.g.,

human resources, finance, collections, examination,

research, public affairs, etc.), further helping an interchange of best practices. 

Development of meaningful measures of performance

that relate directly to achieving our overall strategic

goals is difficult in the current structure because the

operational units are too small and too heterogeneous.

For example, it is not meaningful to measure overall

compliance at the district level. On the other hand,

the IRS as a whole is too large and diverse for such

overall measures to be useful except as broad indicators. The modernized organization structure will ease

the development of strategic measures for each major

operating division that are both meaningful and

aligned with each of the three overall strategic goals.

In addition, the clear separation in the compliance

functions of responsibility for compliance strategy,

including selection of returns for audit, from execution will advance the use of appropriate operational

measures.
Modernizing America’s Tax Agency 39

Integrity in any organization is achieved primarily

by clearly articulating shared values and expectations, reinforced by consistent leadership and decision-making, rather than by structure.

Nevertheless, the modernized structure will

contribute to achieving the principle of total

integrity in two ways: by clarifying the role of the

national office as one of oversight rather than operations and by establishing the Inspector General for

Tax Administration as a totally independent agency

within the Treasury Department.

Clear management roles

redefined to achieve goals

Closely related to the modernization of the organization

structure is defining the skills and experience required

for senior executives. The IRS has been a leader in the

federal government in developing executives. The

demanding process by which executives are selected

and developed is very successful in producing leaders

who thoroughly understand the IRS organization and

practices. The drawback is that almost all executives

have gained all their principal experience within the

IRS.

There are many similarities between IRS activities and

those of other private and public sector organizations,

and the IRS has much to gain by synchronizing our

best practices with the best of these organizations.

Doing this effectively requires some selective recruiting of executives from outside the IRS. The current

IRS organization makes it difficult to recruit and to

assimilate outside executives and also makes it hard

for IRS executives to fully learn and draw upon best

practices from the outside.

The modernized organization, modeled after well-established structures and practices in other organizations,

creates roles that are more comparable to those on the

outside. This increases the possibility of selectively

recruiting external executives with appropriate skills and

experience. This model also makes the IRS more attractive to potential executive recruits. Their skills and experience will complement the essential skills and experience of executives developed internally, to the benefit of

both. For example, there has historically been a

Commissioner and a Deputy Commissioner at the top of

the agency. We expect that there will be a similar senior

management team for each operating division, with the

possibility that one might be an executive recruited from

the outside and one drawn from the inside.

In September 1998, a new top-management team for

the IRS was constituted. This team included:

• Bob Wenzel, appointed Deputy Commissioner for

Operations with responsibility for overseeing all

IRS current operations. Mr. Wenzel is a veteran IRS

executive who co-chaired the IRS Customer Service

Task Force, a partnership effort between IRS, the

Department of Treasury, the National Treasury

Employees Union and the White House, which

produced the much-acclaimed book, Reinventing

Service at the IRS.

• John LaFaver, appointed Deputy Commissioner for

Modernization with responsibility for planning and

implementing the transition to the modernized IRS.

Mr. LaFaver is an experienced state tax administrator known for improving state tax agencies’

customer focus through effective use of technology.

• Paul Cosgrave, appointed Chief Information

Officer. Mr. Cosgrave had 25 years of experience

in the information technology industry prior to joining the IRS. 

• Val Oveson, appointed National Taxpayer Advocate.

Mr. Oveson has experience in tax administration and

public accounting, most recently serving as

Chairman of the Utah State Tax Commission.

• Stuart Brown, continuing in his role as 

Chief Counsel.

• David Williams, continuing in his role as Chief

Communications and Liaison. 
40 Modernizing America’s Tax Agency

During 1999, additional appointments to this top

management team were made, including:

• Evelyn Petschek, appointed Commissioner of the

Tax Exempt and Government Entities division.

Ms. Petschek previously served in the IRS as

Assistant Commissioner for EP/EO, and had prior

experience in the Treasury Department and as a 

partner in the law firm of Patterson, Belknap, Webb

and Tyler.

• Larry Langdon, appointed Commissioner of the

Large and Mid-Size Business division. 

Mr. Langdon recently retired as Senior VicePresident of the Hewlett-Packard Corporation,

where he had worldwide responsibilty for tax,

licensing and customs.

• William Boswell, appointed Chief, Agency Wide

Shared Services. Mr. Boswell had 30 years of experience in management, finance and adminstration

with major oil companies, including reorganization

of one company's services into a shared-services

function.

• Mark Matthews, appointed Chief, Criminal

Investigation. Mr. Matthews has experience as a

federal prosecutor of financial crimes, Deputy

Assistant Attorney General for Criminal Tax in the

Justice Department, Special Assistant in the FBI and

CIA, and a private criminal defense attorney.

• Dan Black, appointed Chief, Appeals. 

Mr. Black is an experienced IRS executive who

has served as Regional Director of Appeals, District

Director and site executive.

• Joseph Kehoe, appointed Commissioner of the

Small Business and Self-Employed Division. 

Mr. Kehoe has extensive experience in service

sector consulting with Pricewaterhouse Coopers.

• John Dalrymple, appointed Commissioner of the

Wage and Investment Division. Mr. Dalrymple is

an experienced IRS executive who has served as

Chief Operations Officer and Chief Compliance

Officer.

As the new operating divisions are established, an

important task will be forming top management

teams. These management teams must include 

individuals with the broad range of experience and

track record needed to lead each unit in the 

challenging dual task of managing current operations while modernizing business practices and

technology to achieve our new mission and strategic

goals. A modernized structure with redefined

management roles is one of the essential components needed to achieve our mission and strategic

goals. This new structure will make it possible to

modernize our business practices and our technology in order to deliver improved service and higher

productivity.
Modernizing America’s Tax Agency 41

For any information-intensive service-oriented

enterprise, such as the IRS, information technology has become, and will continue to be, 

a key resource on which all organizational performance depends. Hardly any large-scale business can

sustain itself without effective, efficient information

systems. The IRS is no different, yet is faced with

some truly unique, world-class challenges that it

must overcome in order to fulfill its mission.

Information technology

currently in use

The IRS’ installed inventory of information technology is the principal tool that IRS front-line workers

and managers use to deliver services to taxpayers

and to manage the organization. Nearly all IRS

employees depend on the IRS computer systems

every day to do their jobs, including over 70,000

individuals who use these systems to provide direct

service to taxpayers. In terms of resources, the

cost of IRS staff and information technology

makes up nearly the entire budget, with staff costs

comprising 70 percent and information technology

making up 18 percent. 

The IRS technology inventory is very large and

diverse, comprising at present approximately 147

mainframe computers from 19 vendors, approximately 1,620 mid-range computers from 55

vendors, and over 100,000 individual computers.

These computers run over 8,700 vendor-supplied

software products and 82 million lines of IRSmaintained computer code. There are four major

wide area data networks and 1,182 local area

networks. The IRS voice network processes 182

million phone calls per year. 

As in any information-intensive organization, the

current IRS computer systems are a reflection and codification of IRS’ established business practices and

organization structure, as well as specific tax code

provisions. For example, there are three different

systems to support collection activities because there

are three different kinds of organizational units that

perform collection activities, each using particular business practices. The IRS inventory of hardware and

software products is very heterogeneous, in part

because each service center and region would sometimes procure different products and, even when using

the same products, would use them in slightly different

ways. In addition, IRS technology inventory includes

many specific programs and systems that have evolved

in response to specific provisions of the tax code. This

process of change continues with over 800 tax code

changes and many procedural changes being implemented for the FY 1999 and FY 2000 filing seasons.

The large and extremely fragmented nature of the IRS

technology inventory creates many problems, including

high cost and poor service to end users, high costs and

long timelines to implement changes and improvements, and control and security difficulties.

IRS core data systems are

fundamentally deficient

While large in size, many of the IRS’ information technology problems are similar to those of other large

organizations that have installed technology piecemeal

over a long period of time without a strong focus on

professional management of information technology

resources from the top. However, the IRS also has a

very special problem that is a serious, on-going risk

and a fundamental barrier to achieving its strategic

goals. This problem is that the core data systems that

keep records on taxpayers’ tax accounts are fundamentally deficient.

The essential system on which all taxpayer accounts

are maintained is called the Master File system. This

system was developed in the 1960s in order to provide

the first consolidated records of taxpayer accounts. It

consists of a series of very large tape files, one set for

individual taxpayers and another for business taxpayers. Since it is a sequential tape file it cannot be

updated directly. It is updated once a week based on

input from other systems, a process that takes three

VI. Information Technology
42 Modernizing America’s Tax Agency

days. From the Master Files tape system, some records

are extracted weekly and are placed on a separate online system, the Integrated Data Retrieval System

(IDRS), in each of 10 service centers. The IDRS

system is used by most IRS customer service representatives and many other front-line employees. Dozens

of other specialized systems extract and feed data back

and forth through these two basic data systems. 

Some of the implications 

of this situation are: 

• Because of the delays in updating files and the

lack of synchronization of data among different

systems, IRS employees frequently have inconsistent and out-of-date data about a given taxpayer.

For example, if a taxpayer calls in response to a

notice with a correction to his or her account, the

adjustment might not take effect for up to 16 days.

In the meantime, additional notices might be

generated or the taxpayer might call again without

the IRS employee knowing what previous adjustments were already in process. 

• The Master File computer programs are written to

a design and in a language seldom employed

anywhere today, and which have the severe limitations of 30-year-old technology. In addition, thousands of changes to the files and the computer

code have been made over the years, many of

which are highly specific to particular sections of

the tax code or to IRS procedures. Consequently,

very few highly specialized programmers understand this system. Under these circumstances, the

ability to maintain and change the system, even in

response to mandatory tax law changes, is severely

limited. Implementing revamped business practices, including electronic tax administration

programs, is slow or even impossible.

• Because of the limitations of the core systems and

the difficulty of changing them, many separate

systems grew up to perform specialized functions.

In addition to the problems of data synchronization, this situation leads to complex operational

problems, great difficulty in making consistent

changes to the system as a whole, and increases

the chances of error.

• Some tax law requirements and IRS practices

simply cannot be accommodated within the limits

of the Master File system, leading to situations

where some essential taxpayer data is not even

reflected on it. For example, the RRA ‘98 provision for providing “innocent spouse” relief

requires separating a single tax liability on a joint

return for the spouses into multiple liabilities that

must be tracked separately over time. As the

Master Files were not designed for such situations and are limited by 30-year-old sequential

file technology, it is not practical to keep such

records on the Master Files. So, administration

of separate files, and other programs, imposes

additional costs and greatly increases the likelihood of error and delays in serving taxpayers.

Several of the most severe taxpayer problem

cases reported in the Senate Finance Committee

hearings stemmed in part from the Master File

system limitations.

• Although the Master File system holds the IRS’

authoritative financial record for every taxpayer, it

does not conform to accepted accounting standards.

For example, a record of every transaction that

affects a financial account should be maintained and

be traceable to an original source entry. Amounts

due for any taxpayer should be clearly identified as

to the source and cause that produced the liability.

The Master File system does not maintain this information because it was not designed to do so. 

• In 1998, the IRS was able to provide the General

Accounting Office (GAO) enough data to reliably

report on the custodial activities of the agency, but

GAO cited the extensive, costly and time-consuming

ad hoc procedures needed to provide the data, and

the long-term nature of the deficiencies that these

procedures represented. The lack of standard

accounting tools imposes ongoing costs, impedes

the ability of the IRS to serve taxpayers adequately

and prevents the IRS from effectively addressing

material weaknesses cited by GAO.

Since nearly all IRS systems and procedures require

data on taxpayer accounts, the entire IRS inventory of

systems is built on a fundamentally deficient foundation. The size of this inventory and databases is

comparable to the largest in the world. 
Modernizing America’s Tax Agency 43

Given this situation, the IRS must replace nearly its

entire inventory of computer applications and convert

its data on every taxpayer to new systems. This must

be done in conjunction with redesigned business practices, while continuing to provide service to taxpayers

and to respond to ongoing tax law and other changes.

This is a vast, complex and risky undertaking that will

require many years to accomplish. 

Modernizing IRS systems

It is important to understand the kind of process needed

to modernize IRS’ systems. This process has sometimes been compared to designing and building a new

airliner or a huge office building. While there are some

similarities, this comparison fails to adequately convey

the nature of the IRS technology modernization

program. A better metaphor would be a project to

redesign and rebuild a large, densely populated city,

such as New York City, complete with rebuilding all the

subways, utility lines, surface transportation and tall

buildings, all without delaying or injuring any residents

or businesses and while accommodating ongoing

growth and changes in the daily pattern of living and

working. Such a program is far too big, dynamic and

complex to be implemented or even designed in detail

all at once.

The approach that the IRS is taking to deal with this

monumental task is to establish an overall architecture

for a set of new systems that will accommodate all

essential tax administration functions according to

modern standards of technology and financial management. Achieving this new system architecture must then

be accomplished by defining a sequence of targeted

and manageable size projects that meet important and

specific needs while, at the same time, working to

complete the overall architecture. During this process,

the new and old systems must co-exist and must

exchange data accurately for an extended period of

time until data is gradually converted from old systems

to new ones. 

Given this situation, the existing inventory of installed

operational systems, commonly called the “legacy

systems,” must not only be maintained to reflect annual

tax law and other business changes, but it must also 

accommodate additional changes in order to bridge to

and from new technology systems and convert taxpayer

data from old to new formats. Therefore, the

demands on the resources and management of the

legacy systems staff will increase, not decrease, for

the coming years as a result of technology modernization. 

In 1997, the IRS published a “technology modernization blueprint,” which described a detailed target architecture, including technical, functional and data architecture. This blueprint was an important and valuable

step in the process of technology modernization. 

During 1999, a principal objective was to update the

blueprint to reflect the new plan for organization and

business practices and, given limited capacity, to decide

on the major priorities for implementation.

The speed of implementation of the technology

modernization blueprint is subject to three major limiting factors:

• Capacity to design and develop new business 

practices and systems;

• Capacity of the organization to manage the process;

and

• Capacity to make changes in the legacy systems

needed to support ongoing operations and temporary

integration with new systems.

Of the three factors, the capacity to manage the process

and to change the legacy environment are the most

constraining. Hence, planning of the technology

modernization with the ongoing management of the

existing environment is critical.

Organizing to manage

information technology

Because of the close inter-relationships, programs to

modernize IRS technology both depend on and enable

modernization of the organization and business practices. With respect to organization, there are two

important dimensions: how the IRS is organized to

manage information technology itself, and how the

operational units that manage IRS programs work with

information technology to improve business practices
44 Modernizing America’s Tax Agency

and achieve our strategic goals. Improvements in both

dimensions are essential in order for modernizing IRS

technology to succeed. 

Improvements in information technology organization

are essential to achieve professional, high-quality

results in resource use and in managing technology

programs, including modernization of core business

systems and management of the legacy systems. 

Improvements in IRS business organization are essential to create business owners who have the knowledge,

authority and commitment to develop improved and

consistent business practices. This will also enable

them to work in partnership with the information technology organization to develop and deploy appropriate

technology that supports modernized business practices.

As part of the IRS overall modernization program,

management of essentially all information systems

resources was centralized under the Chief Information

Officer in October 1998. This was a first step toward

creating a professionally managed information technology organization that will provide high-quality, efficient

service to all IRS operating units, treating the IRS operating units as customers. 

The establishment of IRS operating divisions, as

described in the previous section, will enable the appropriate business owner to revamp business practices and

work with the information technology organization to

modernize supporting technology. 

In December 1998, the IRS awarded a PRIME

contract to Computer Sciences Corporation and a

team of leading technology and consulting firms to be

a major partner in managing the modernization of

IRS’ core business and technology systems.

The modernization of IRS’ core systems requires

sustained leadership from the top leaders of the entire

organization. To provide a framework for the overall

management of this process, the IRS established in

1998 a Core Business Systems Executive Steering

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

In June, 1999, Paul Cosgrave was named IRS modernization executive with overall responsibilty for managing and integrating the Core Business Systems

programs. Reporting to him, the Enterprise Program

Management Office was created to perform overall

integration and management of all the projects in the

program. The EPMO leadership includes an IRS business executive, an IRS IS executive and a PRIME executive.

Some key operating guidelines about technology

modernization were also established, including the

following:

• All new systems, large and small, must conform to

the target architecture and system life cycle

methodology. The EPMO will manage this

process.

• All Core Business Systems must have committed,

engaged business owners, an executive steering

committee and an integrated project team. In

addition, they should be designed to last a maximum of about 24 months from approval to

proceed with development to initial operational

deployment.

• Each project will require an approved business case

before proceeding to the next phase.

• The process of developing solutions and approaches

for each major project will include finding the best

practices and products available from the private and

public sectors as a basis for the proposed solution.

Where appropriate, the PRIME will conduct a

competitive process to select the best solution.

During 1999, one of the principal objectives of the

Core Business Systems program was to develop a definition of and priorities for the major projects to be

carried out over the next five years. This process

included an analysis of projects previously proposed or

in process as well as those needed to implement the

revised blueprint in accord with the modernization

organization and business practices described in this

document. The result of this process was a decision on

the high level scope and priorities of the program. This

program is summarized at a high level on the next

page. A more detailed description of the projects is

provided in Appendix 3.
Modernizing America’s Tax Agency 45

• Improve taxpayer access to service via telephone and Internet

• Create an integrated, Web-based replacement for the existing value-adding third-party tools and data collection 

vehicles

• Build modernized database for managing customer information

• Build systems to store and display on-line images of correspondence and selected returns

• Modernize collection processes and policies to enable faster case resolution 

• Modernize examination processes, providing improved tools to agents and faster case resolution

• Foster the creation & marketing of easy-to-use electronic products & services, targeted at specific customer segments, 

to inform, educate & service the taxpaying public – including secure electronic interactions & customer account 

self-management

• Implement a single system for IRS employee data and human resource services

• Improve financial management and reporting, and provide service employees with greater access to taxpayer 

payment data

• Provide greater access to operational information to support timely, data-driven managerial decision-making

• Provide general ledger and budget execution

Customer

Communications

e-Services: Near Term

Customer Account

Data Engine

Correspondence and

Document on

Demand Imaging

CRM Collections

Customer

Relationship

Management (CRM)

Exam

e-Services: Strategic

Integrated HR

System: Integrated

Personnel System

Integrated Financial

System: Revenue

Accounting

Integrated Financial

System: Managerial

Accounting/Budgeting

PROJECT

WAGE & INVESTMENT

ELECTRONIC TAX

ADMINISTRATION

WAGE & INVESTMENT

TAX EXEMPT &

GOVERNMENT ENTITIES

SB/SE

LARGE & MID-SIZE

BUSINESS

ELECTRONIC TAX

ADMINISTRATION

MANAGEMENT &

FINANCE

MANAGEMENT &

FINANCE

BUSINESS SYSTEMS

MODERNIZATION

CORE BUSINESS SYSTEMS - INITIAL PROJECTS

INITIAL RELEASE

BUSINESS OWNERS

OBJECTIVE INITIAL RELEASE

BUSINESS OWNERS
46 Modernizing America’s Tax Agency
Modernizing America’s Tax Agency 47

The techniques that an organization uses to

measure its performance go to the heart of what

the organization really values. In the IRS, as

elsewhere, what the organization values is communicated through a variety of means, both explicit and

implicit, including what behavior is rewarded, ignored or

punished. Quantitative measures, being apparently

precise and objective, are an extremely powerful device

with great influence on behavior.

For many years, the IRS used statistics and measurements at all levels as part of its management process. A

real strength of the organization is that people are used to

dealing with hard data as an indicator of how things are

working or not working, and they respond to and

manage using this information. 

For many years, enforcement statistics, especially

enforcement revenue, were a key issue in measuring

performance at the IRS. Enforcement statistics are

counts of actions taken, such as number of levies or

seizures, and enforcement revenues are counts of

revenue gained from enforcement activities, such as

audits or collection actions. Although the revenue that is

actually collected (98 percent of which comes in voluntarily and 2 percent of which comes in through enforcement) is measurable on a fairly current basis, the total

amount owed that is not collected is less easily measured

and, in fact, has not been measured since 1988. In addition, enforcement action has been shown to have a deterrent effect that induces additional revenue from taxpayers other than those directly affected.

For these reasons, enforcement revenue has been a key

measure of success at the IRS. Enforcement revenues

have been used to justify the overall budget and have

been a very important internal measure of performance.

The chart below shows a one-page excerpt of the

President’s Budget for the IRS for fiscal year 1997. As

highlighted, there are four references to enforcement

revenues on this one page, three of them measuring a

particular category of enforcement revenue per FTE (or

per full-time employee). 

Excerpts from President’s Budget

Internal Revenue Service

SERVICE-WIDE PERFORMANCE MEASURES

1996 ACTUAL 1997 EST. 1998 EST.

Objective Measures:

Increase Compliance

Total Collection Percentage (TCP) . . . . . . . . . . . . . . . . . . . . . . . . . .86 86.7 87.3

Total Net Revenue Collected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1.38T $1.47T $1.57T

Service-wide Enforcement Revenue Collected . . . . . . . . . . . . . .$38B $34.7B $35.2B

PERFORMANCE MEASURES BY BUDGET ACTIVITY

Telephone and Correspondence:

Number of Calls Answered (in millions) . . . . . . . . . . . . . . . . . . . . . .99.1 111.4 111.4

Telephone Level of Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46% 60.2% 60.2%

Telephone Tax Law Accuracy Rate . . . . . . . . . . . . . . . . . . . . . . . . .91.6% 92% 92%

Automated Collection System (ACS) Dollars Collected per 

FTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N/A 1.4M 1.4M

TAX LAW ENFORCEMENT

PERFORMANCE MEASURES BY BUDGET ACTIVITY

Examination:

Field Examination Dollars Recommended (in billions) . . . . . . . . . . .26.0 22.83 22.83

Field Examination Dollars Recommended per FTE . . . . . . . . . .1,089,661 1,008,348 1,008,348

Appeals Non-Docketed Cycle Time (days) . . . . . . . . . . . . . . . . . . . .234 238 238

Appeals Staff Days per Disposal . . . . . . . . . . . . . . . . . . . . . . . . . . .2.14 2.14 2.14

Collection:

Field Collection Dollars Collected (in billions) . . . . . . . . . . . . . . . . . .5.63 4.87 4.92

Field Collection Dollars Collected per FTE . . . . . . . . . . . . . . . . .486,000 462,000 476,000

VII. Performance Measures

Recapped in the regulation on balanced measures on Sept 15, 1999
48 Modernizing America’s Tax Agency

The importance of enforcement revenue as a measure

of IRS performance created a dilemma and a controversy that persisted for years. The dilemma was created

by the fact that each specific enforcement action must

be guided by law as applied to the specific facts and

circumstances of the case and, therefore, it has long

been considered inappropriate to give “quotas” or

quantitative enforcement goals to an individual enforcement officer. For example, in 1959, in the wake of

hearings by the House Ways and Means Committee,

the IRS issued a policy statement that said:

If the duties of the position require the exercise

of judgment based on detailed knowledge of

laws and regulations or involve material

factors of technical or professional judgment,

performance must be evaluated in the light of

the actual cases or other assignments handled,

and no quantitative measurement may be

utilized which does not take such differences

into account. Dollar production shall not be

used as the measurement of any individual’s

performance.

For the ensuing 40 years, this dilemma persisted, a

history that is recapped in the regulation on balanced

measurement, issued in final form on September 7, 1999.

(A copy of the regulation is attached as Appendix 2.) 

In the 1990s, an attempt was made to increase the

emphasis on enforcement revenue by establishing a

quantitative performance index to rank the performance

of the IRS district offices, an index in which enforcement statistics comprised about 70 percent of the

weight of the index. This index was a very important

factor in evaluating the performance of the district

management. However, by law and regulation, these

same measurements were not supposed to be used to

evaluate front-line employees. As is now known, this

approach resulted in a misalignment of measures for

managers and employees, in turn causing a range of

serious problems including widespread violations of the

regulations on use of statistics. 

Establishing a balanced

measurement system

Despite this difficult history, it is essential to establish

appropriate quantitative performance measures for the

IRS and its major component operations. This is

required by the Government Performance and Results

Act and is essential to the proper operation of any large

organization. For this reason, an integral part of the

overall IRS modernization program is the establishment

of balanced performance measures that support and

reinforce achievement for the IRS’ restated mission and

overall strategic goals.

A critical aspect of establishing an appropriate

balanced measurement system is establishing the

measurements based on what we need and want to

measure in order to achieve our strategic goals and

mission, rather than simply what is most easily

measured. This balanced measurement system must

define quantities that are relevant to each of the strategic goals and that indicate, in total, progress on all

three goals. As in most good organizations, the process

of measurement can be constantly refined, but the

concept of what is being measured remains stable.

Also critical to the measurement system is following

the guiding principle that measures must be aligned at

all levels, from the top to the front-line employee. This

creates a commonality of interest and binds the organization around a common goal, rather than creating

conflict and mistrust at different levels. This principle

does not mean that all levels and all components of the

organization have precisely the same measurements,

which would obviously be impossible. Rather, it

means that the measures or evaluations are aimed at

encouraging the type of behavior that will advance the

organization’s overall strategic goals, and do not

encourage inappropriate behavior.

In developing measures for each organizational level, it

is important that each component of the balanced

measurement system reflect responsibility at that organizational level. At the top of the organization,

management has control over strategies and allocation

of resources. At the mid-levels, managers have less

control over these variables but do have control over

the effectiveness of training, coaching and guidance of
Modernizing America’s Tax Agency 49

employees. At the individual level, each employee

has control over his or her own individual work and

self-development.

An overview of the balanced measures system being

implemented at the IRS is shown above. As seen in

the matrix, there will be quantitative measurements

keyed to each of the three strategic goals at both the

strategic level and the operational level. In general,

quantitative measures will not be used at the individual employee level.

In September 1999, a Balanced Measures Regulation

was issued to formally establish the IRS' new performance management system. The issuance, which

followed a public comment period, set forth the

structure for measuring organizational and employee

performance within the IRS. A copy of the regulation

is available in Appendix 2.

Measuring at 

the strategic level

The strategic level is designed to measure overall

performance for delivering on the overall mission and

three strategic goals. This level is only meaningful for

the organization as a whole or for an organizational

component that is responsible for full service to a large

set of taxpayers. In today’s organization structure,

strategic measures would only be meaningful for the

agency as a whole. (A district, for example, is too

small and heterogeneous to have a meaningful measure

of overall compliance and does not have responsibility

for the activities in the service centers in its district.) In

the future organization structure, these strategic

measures will be applicable for each of the four major

operating divisions. 

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

Measuring Performance at the IRS

MEASURES THAT MEASURE WHAT WE REALLY WANT.

BALANCED MEASURES DERIVED FROM THREE CORPORATE GOALS.

MEASURES ALIGNED AT ALL ORGANIZATIONAL LEVELS.

GOALS

Service to Each Taxpayer

• Make filing easier

• Provide first-quality service to each

taxpayer needing help with his or

her return or account

• Provide prompt, professional,

helpful treatment to taxpayers in

cases where additional taxes may

be due

Service to All Taxpayers

• Increase fairness of compliance

• Increase overall compliance

Productivity Through a Quality

Work Environment

• Increase employee job satisfaction

• Hold agency employment stable

while economy grows and service

improves

STRATEGIC MANAGEMENT LEVEL

• Overall customer satisfaction

with service/treatment

• Customer dissatisfaction

(complaints)

• Customer satisfaction compared

to other organizations

• Overall compliance percentage

• Increase in compliance

• Uniformity of compliance

• Allocation of compliance

resources - dollars vs. resources

• Overall employee satisfaction

with working environment

• Overall workload vs. size of

workforce

OPERATIONAL MANAGEMENT

• Satisfaction with particular

service

• Dissatisfaction with particular service

• Quality of particular

cases/events (EQMS/CQMS)

• Quantity of particular

cases/events

• Employee satisfaction with

particular working environment

FRONT-LINE EMPLOYEES

• Service to taxpayers and treatment of

taxpayers incorporated in critical

elements

• Case quality and time management

incorporated in critical elements

• Now: None

• Future: Teamwork contributes to

improving work environment (TQO)
50 Modernizing America’s Tax Agency

also complying. In the absence of such measures,

informed decisions on strategies to encourage voluntary

compliance, such as those discussed in the earlier

section of this paper, Business Practices and Strategies,

will be impossible, and the historic tendency to fall

back on enforcement revenue as a measure of performance may reoccur.

In the balanced measurement system we are implementing, enforcement revenues are not a measure of

performance at either the strategic or operational level.

The sole use of enforcement revenue at the strategic

level is to measure the effectiveness of case selection

for compliance activities. However, overall revenue as

compared with expected revenue is a valid strategic

measure. 

Measuring at the operational

level

The operational management level focuses on the effective execution of particular aspects of the organization.

Today, these activities are mainly carried out by the

“functions,” such as Customer Service, field Collection

and field Examination. A large percentage of employees work in these important components of the organization, and it is critical to develop appropriate measures

of performance for them.

At this level, the balanced measures of organizational

performance are derived as follows:

Service to Each Taxpayer / Customer Satisfaction

The "service to each taxpayer”goal is measured from

the customer's point of view. The goal of the Customer

Satisfaction element is to provide accurate and professional services to internal and external customers in a

courteous, timely manner. The customer satisfaction

goals and accomplishments of operating units within

the IRS are determined on the basis of customer feedback collected via methods such as questionnaires,

surveys and other types of information gathering mechanisms. Information to measure customer satisfaction

for a particular work unit is gathered from a sample of

the customers served. Customers are permitted to

provide information requested for these purposes

anonymously. Customers may include individual

taxpayers, organizational units or employees within the

IRS and external groups affected by the services

performed by the IRS operating unit.

Service to All Taxpayers / Business Results

The "service to all taxpayers" goal is gauged through a

combination of quality, quantity and outreach

measures. The goal of the Business Results elements is

to generate a productive quantity of work in a quality

manner and to provide meaningful outreach to all

customers. The business results measures consist of

numerical scores determined under the elements of

quality and quantity.

• The quantity measures, which are to be used in

conjunction with the quality, customer satisfaction,

and employee satisfaction measures, provide information about the volume and mix of work products and

services produced by IRS operating units and consist

of outcome-neutral production and resource data.

Examples include the number of cases closed, work

items completed, customer education, assistance and

outreach efforts undertaken, hours expended and similar inventory, workload and staffing information.

• The quality measures provide information about how

well IRS operating units developed and delivered

their products and services. The quality measures are

determined based upon a comparison of a sample of

work items handled by certain functions or organizational units against a prescribed set of standards that

incorporate the customers' point of view. Additional

quality measures will gauge the accuracy and timeliness of the products and services provided.

Productivity Through a Quality Work

Environment / Employee Satisfaction

The "productivity through a quality work environment"

goal is assessed via measures of employee satisfaction.

The goal of the Employee Satisfaction element is to

create an enabling work environment for employees by

providing quality leadership, adequate training and

effective support services. The employee satisfaction

ratings to be given within the IRS are determined on

the basis of information gathered via survey. All

employees have an opportunity to provide information

regarding employee satisfaction under conditions that

guarantee them anonymity.
Modernizing America’s Tax Agency 51

Measuring at the individual

level

All quantitative measurements are assessments of

organizational performance, not of individual

employees. This is always true because it is

impossible to capture in any quantitative

measurement system all that is important in evaluating an individual. For managers responsible

for an organizational component, the quantitative

measurements of the balanced measurement

system are one of the factors that should 

influence a performance appraisal.

For front-line employees, quantitative measurements are not used to evaluate performance,

except in certain submissions processing functions. This is because, in most cases, it is not

practical to quantify the performance of an individual employee in a meaningful and appropriate

way. Instead, the desired activities and behavior

consistent with the strategic goals are incorporated into the “critical elements” of each

employee’s position description and should be

evaluated by the manager based on informed

observation of that employee’s job performance.

Thus, the front-line employee’s evaluation,

although not quantified, is directly aligned with

that of the management chain. 

Operational measures were first

implemented 

The IRS began to implement the balanced

measures system at the operational level in 1999,

starting with three functions, Customer Service,

Exam and Collection, which have most directly

affected large numbers of taxpayers and

employees. The operational measures for these

functions could be implemented within the

existing organizational structure and will remain

valid in the new organizational structure. By the

end of 1999, a large scale training effort had been

completed to support the initial implementation

of balanced measures. Approximately 913,000

hours of training were provided to 52,700

managers, employees and NTEU representatives.

Beginning in FY 2000, quantitative measures for

the balanced measures for these functions will be

regularly available to gauge progress. Also,

beginning in FY 2000, the system of setting and

measuring performance expectations for nearly

all managers and executives has been redefined

to be aligned with the balanced measurement

system.

Progress Update

Much work remains to be done on the

measurement process. The IRS completed

balanced measures development for the

Examination, Collection and three Customer

Service product lines in calendar year (CY)

1998. In CY 1999, additional balanced measures

were approved for: Tax Exempt and Government

Entities, Large and Mid-Size Business, Appeals,

Taxpayer Advocate Service, Research, Statistics

of Income and additional Customer Service

product lines. These measures are undergoing

final design and implementation. Other measures

teams underway in CY 1999 that are expected to

have approved balanced measures in early CY

2000 include: Information Systems, Criminal

Investigation, Counsel, Submission Processing

and Agency Wide Shared Services. 

Strategic measures for all of the operating units and

for the IRS as a whole must be defined and

implemented. In part, the strategic measures

depend on assembling data on overall compliance,

which will take longer to assemble. 

Most importantly, the IRS must learn how to use

balanced measures as a tool to achieve a high level

of performance on all three of our strategic goals.
52 Modernizing America’s Tax Agency

Implications for the way people work with

each other and with taxpayers

The new balanced measurement system at the

operational level is much more than a change in

measurements. The measurements should never be

used as an end in themselves, but as an indicator of

organizational performance and a guide to improve

performance. This requires an effort, every day, to

“get behind the numbers” to understand what is

really happening. It also implies profound changes in

the way people work with each other within the

organization and with taxpayers.

Concerning work with taxpayers, the changes implied

are directly related to the restated mission. All

actions must be looked at from the taxpayer’s point

of view and, in particular, must insist on observation

of taxpayer’s rights. This criterion is a strategic goal,

a guiding principle of our modernization effort and a

direct element in measuring and evaluating the

performance of every manager and employee. Good

quality work is the result of understanding the

taxpayer’s point of view and the law, not one or the

other.

The way managers and employees work with each

other also will change. Their goals are aligned, even

though the specific roles may be different, and

achievement of the goals should always be viewed as

a team effort. The managers’ role is to develop a

meaningful understanding of the work of their direct

reports and to assist them in achieving the highest

possible performance in contributing to the strategic

goals. At the front-line level, since performance of

quality case work is central to achieving the goals, it

is vital for managers to work with employees and

their customers to develop a true understanding of the

strengths and weaknesses of the work and to assist in

making the quality as high as possible. At higher

levels of management, it is also vital to understand

the taxpayers’ and employees’ points of view by

direct communication with them about issues of

importance in their work and to help them resolve

difficult issues and remove obstacles.

Development of the balanced measurement system

and, even more so, learning the new ways of

working will take years. By focusing our attention

on what is important for achieving our strategic

goals, we will be on the right path and will make

progress step by step. 
Modernizing America’s Tax Agency 53

This paper sets forth major changes that the

IRS is undertaking to achieve a restated

mission and strategic goals that closely follow

the expectations of Congress and the American

people. Recapped earlier in the chart on page 3,

these changes are comprehensive and are made up of

business practices and strategies, organization and

management, information technology and performance measures. This process, referred to as

“modernization,” represents a fundamental redesign

of the way the agency works, a challenging process

for any organization. These changes must take place

while current, large-scale operations continue uninterrupted, including ongoing changes to implement

new tax laws. 

Risks

The amount of change required for modernization,

coupled with current complex operations, means that

there is significant risk that unanticipated problems

will arise, particular plans or milestones may have to

be changed, and operational errors will occur. When

these events occur, time and money will be needed to

address them. 

Given the current situation at the IRS, there is no

low-risk plan. Any attempt to retain the status quo or

make modest incremental changes would increase the

gap between the IRS’ ability to deliver required

services and what the public and Congress expect,

while imposing increasing direct and indirect costs

on the public for administering the tax system. In

addition, the information technology on which the

IRS critically depends is fragile and deficient and

cannot be fixed short of a near total replacement.

Yet, success in modernization of technology can only

be achieved with the appropriate management and

organization structure and a program to modernize

business practices. 

Although there are inherent risks in the modernization process, knowing that they exist means that they

can be managed and mitigated so that no setback is

fatal, and we can be reasonably confident of ultimate

success. In this regard, two items are critical:

• Setting overall priorities in light of the limited

organizational capacity; and

• Establishing effective management over each

major change process. 

Organizational capacity and

priorities

The IRS, like any organization, has limited capacity

to manage and absorb change. These limitations

arise from such things as the capacity of the top

managers to understand, plan and make correct decisions about the many complex issues that arise; the

capacity of managers and employees throughout the

organization to learn many new ways of doing business, new practices and technology; limitations on

the number of subject-matter experts in highly

specialized areas, ranging from tax law to technology; time required to consult outside and inside

stakeholders; and time required to resolve disagreements. Because the IRS is a public agency that

provides an essential service, capacity to make

change rapidly is further limited by the need to

ensure that essential services, such as the filing

season, are never jeopardized and the financial

integrity of the revenue stream is maintained. The

inherent limitations of organizational capacity and

the need to manage risk make it essential to set overall priorities in light of the overall goals. 

Even before the redefined mission and modernization

program were undertaken, the IRS organizational

capacity was stressed to the maximum in an attempt

to respond to thousands of individual recommendations from studies and proposals, as well as legislative mandates and tax law changes. This reactive

process used up all available capacity without

addressing the fundamental problems. 

VIII. Planning, Priorities and Risks
54 Modernizing America’s Tax Agency

In order to deal with this issue, a set of programs was

established to manage activities and priorities in an

orderly way in each major area of change with an overall sequence that attempts to maximize the use of available organizational capacity, while gradually expanding

it. This sequence aims at delivering on essential nearterm operational requirements and improvements in

service delivery while carefully planning and implementing longer-term changes. At a very high level, the

strategy for each major change program is as follows:

• Century date change and essential filing seasonsensitive changes have been top priorities and were

managed as one program. This program was

completed in early FY 2000. 

• Near-term taxpayer treatment and service improvements are rigorously prioritized based on those that

are either mandated or deliver maximum benefit to

the taxpayer in 12-18 months, and are subject to the

limitations of the existing operations and information services organization capacity. As the new operating divisions become operational, they will assume

responsibility for ongoing improvements in service.

This process will be managed through a new strategic planning and budgeting process.

• By the end of 1999, the design of the new organizational structure at the detailed level was nearly

complete and the new organizational units were

beginning to assume responsibility for operations. 

- On October 1, 1999, an interim step was implemented in which management of all 25

customer service sites was unified under a

Customer Service Field Organization. This organization will eventually become part of the

Wage and Investment and Small Business and

Self-Employed Divisions. 

- As of early FY 2000, the Tax Exempt and

Government Entities Division, Agency Wide

Shared Services, Information Systems and the

reorganized Taxpayer Advocate Service were

operational and the Large and Mid-size

Business Division, Appeals and Criminal

Investigation were planned to be operational in

the first half of 2000. 

- The remaining units, the Wage and Investment

Division, the Small Business and 

Self-Employed Division and Counsel are scheduled to become operational by the end of calendar 2000. If all goes as planned, by the end of

2000, the existing districts, regions and operational components of the national office will

cease to exist and the major elements of the new

organizational structure will be in place,

although further internal reorganizations and

workload reassignments will continue through

the 2002 filing season.

• As the new organization is implemented, organizational capacity to manage business process and technology change will increase. There will be four

management teams, each with full responsibility for

a major part of the operation, as well as a new information systems organization.

• As the new organizational structure is implemented,

new balanced strategic measures will be developed

while the newly-introduced operational measures

continue.

• The Information Systems Modernization program,

which was mainly engaged in planning in 1999, will

ramp up substantially in 2000 with the goal of delivering the first major projects by 2001. Thereafter,

major releases supporting improved business

processes and strategies, as outlined in Chapter VI of

this document, will be delivered regularly, usually at

least once-a-year.

Risks and schedules

An essential aspect of managing risk in this change

program is properly managing and communicating the

schedules and dates for accomplishing particular

change events.

In this huge change process, there will be hundreds of

specific changes implemented on particular dates. For

example, an organizational change occurred when

customer service sites began reporting to a single

customer service field organization headquarters

instead of a district or service center; a new business

system and process implementation occurred when

the centralized call-routing software began to route

incoming telephone calls to call sites around the

country; and a technology change occurred when the
Modernizing America’s Tax Agency 55

mainframe computer programs for the Andover

Service Center began executing on a consolidated

computer in Martinsburg rather than on local

computers in Andover.

Every change of this kind carries with it risk, and the

decision as to when and how to proceed must be carefully evaluated and reevaluated in light of all information available at each point in time. Every specific

project that composes the overall change program

should be recognized as a learning experience in which

more detailed and complete information becomes available over time. Proper risk management depends on

constantly using this information to set and reset schedules. Failure to manage risks and schedules in this flexible way enormously increases the likelihood of failures

and frequently ends up delaying, rather than accelerating, actual progress.

The role of high-level planning and the presentation of

overall milestones, such as those presented in this

paper, are to allow for the setting of priorities and the

initiation of more detailed planning and implementation projects.

Given the nature of this change process, it is extremely

important for management to keep all key stakeholders

informed on a regular basis and to explain the intent of

presenting various milestones and schedules. It is

important for stakeholders to understand the nature of

this process, and to evaluate the program based on

overall progress towards the strategic goals, rather than

placing undue significance on the date on which

particular events occur.

Management process

Since the IRS is undergoing extensive change in each

of the dimensions described above while current operations continue uninterrupted, an appropriate management process must be established. Each of the dimensions of change affects various parts of the existing

operations and requires both high-level leadership and

decision making to address major issues and intensive

daily management of massive levels of detail and

analysis. Finally, each dimension of change requires

special expertise and knowledge of best practices used

in other private and public sector organizations around

the country.

To manage these changes, the IRS established a

tailored management process for each area of change.

In each change area, an executive steering committee

acts as the top-level governing body. The executive

steering committee consists of the Commissioner and

the senior executives responsible for all the major

areas affected by the change. In addition, the

Assistant Secretary of the Treasury for Management

and the President of the NTEU are members of each

committee.

The purpose of these executive steering committees is to

provide consistent direction and prompt decision making

on all major issues that affect progress in the change

areas. Under the general direction of the executive steering committee, there is a program office headed by a

senior executive that manages the on-going program and

also provides staff support to the committee. The

program office maintains plans, performs analyses and

provides detailed management and guidance to whatever

organizational components within the IRS are necessary

for implementation of changes. In most of the change

areas, organizational capacity is augmented and knowledge of best practices is provided by an experienced lead

contractor.

Since the Commissioner, the two Deputy Commissioners,

Chief Information Officer and other top executives are

common members of these executive steering committees and also supervise all ongoing operations, highlevel communications and coordination are facilitated.

An essential aspect of this change program is very

active, ongoing, two-way communications within the

organization at all levels and with outside stakeholders,

including Congress, Treasury and numerous outside

groups with an interest in IRS matters. In each change

program, an important function of the program office

and of the top executives is developing communications

materials and personally meeting with many individuals

and groups. This activity is coordinated through an

overall modernization communications program

managed by the Chief, Communications and Liaison. 
56 Modernizing America’s Tax Agency

Executive Top Program Lead 

Steering Committee Executive Office Contractor

Taxpayer Treatment Deputy Commissioner TTSI-Tomaso None

& Service Improvements Operations-Wenzel

Organization Deputy Commissioner Modernization Program Booz-Allen

Modernization Modernization-LaFaver Management-Stocker

Deputy Commissioner Measures Organizational Booz-Allen

Measures Operations-Wenzel Performance Management 

Executive-Cables

Core Business System Modernization Executive EPMO CSC &

Chief Information Officer Mazei PRIME Alliance

Cosgrave

Financial Management Deputy Commissioner FMC None

and Control Operations-Wenzel Tomaso

Top-level change processes in effect in 2000
Modernizing America’s Tax Agency 57

Strategic planning and

budgeting

The IRS is developing a new strategic planning and

budgeting process to support the modernized organization. The purpose of strategic planning is to provide

a structured dialogue, occurring over time, among the

senior leadership of the IRS to determine how

resources should be allocated and priorities established. The new strategic planning and budgeting

process provides a formal process for defining future

IRS strategies and resource allocations. The process

incorporates senior management guidance while

ensuring operating unit ownership of operational plans

and business practices and provides for greater

process integration between strategic planning,

budgeting, research and accountability mechanisms.

The major role of the Commissioner is to provide

broad guidance to the operating units and to review

the proposed plans. The heads of the operating units

will have major responsibility for proposing and

executing programs to support the Commissioner’s

guidance. The Commissioner is supported by a staff

facilitating the planning process, providing guidance

to the operating units and formulating and executing

the budget. 

The Strategic Planning And Budgeting Process

Identity Key Strategy &

Program Issues

• Identify Key Issues

• Senior Management Review

• Identify Research Needs

Develop Multi-Year

Budget and Plan

• Formulation

• Budget & Plan Review

Review Environment

• Research & Gather Data

• Analysis

• Review

Develop Operations Strategy

& Programs (OS&Ps)

• Develop OS&Ps, Investment

Programs

• Review Finalize OS&Ps,

Investment Plans 

Update Budget & Plan 

• Review Requirements

• Modify/Re-Prioritize

Programs

• Update Budget & Plan

Issue Commissioner's

Planning Guidance

• Develop/Validate Vision

• Prepare Guidance

• Issue Guidance

Execute &

Measure/Monitor Results

• Execute

• Measure & Monitor

Review Strategy, Program &

Budget

• Strategic Performance Review

• Analyze Results

1

2 8

3 7

4 6 5
58 Modernizing America’s Tax Agency

The successful implementation of the strategic planning

process requires new planning and management practices throughout the organization and coordination

among the business units.

Changes required:

• Extend the planning horizon to five years.

• Integrate Treasury in review of proposed plans and

budgeting.

• Provide for substantive input and review by the

Oversight Board at key points in preparation of

plans and budget.

• Planning and priority setting are constrained by the

Commissioner’s budget guidance.

• Improvement initiatives proposed and approved as

part of the planning and budgeting cycle.

• Results of the planning cycle should translate very

readily into budget categories acceptable for

submission to Treasury and OMB.

• Closely tie research to strategy and plan development.

• Maintain a distinction between operating costs and

investment costs.

• Link information systems planning to operating

units plans.

• Maintain measures related to output and results of

strategic planning and budgeting, e.g. identifying

both operational measures such as volume and quality of service on calls returned and strategic

measures such as trends in customer satisfaction.

• Incorporate program analysis, measurement and

reviews into the annual cycle.

Jan Feb Mar Apr May Jun Jul Aug Sept Dec 

Issue Commissioner's Guidance

• Senior Management Conference

• Input from Treasury, Oversight Board

• Strategic Priorities & Resource Targets

Environmental Review

• Four Senior Management Meetings (one

per customer segment)

• External Environment

• Internal Strengths & Weaknesses

Develop Program Recommendations for

Commissioner

• OD/Support/Functional Units Present

• Senior Management Program Conference

• Oversight Board Briefing

Provide Budget Input for IRS Budget 

• OD/Functional & Support Organizations

Review Budget Proposals

• Senior Management Conference

• Oversight Board Review

Make Final Program Decision

• Operating Divisions: mid-June

• IS, AWSS: late June

Submit Final Budget to Treasury

Update Plan/Budget

• Respond to OMB review

Proposed Strategic Planning and Budgeting Process Timeline
Modernizing America’s Tax Agency 59

IX. Milestones

In 2000, the major milestones expected from the IRS

modernization change program are:

• Successfully complete the Century Date Change

program.

• Implement planned service and electronic tax

administration improvements in the 2000 filing

season and throughout the year.

• Refine and improve on initial implementation of

the taxpayer rights provisions of RRA ‘98, clarifying areas of uncertainty and improving quality and

productivity of operations.

• Complete implementation of balanced measures

program for all major operational functions and

use data for the first time in fiscal 2000 performance management process.

• Develop initial set of strategic measures for the

operating divisions.

• Complete recruiting of top management teams for

the new organization.

• Complete implementation of all top level units in

the new organization structure, while completing

detailed planning for remaining reorganization and

workload redistribution in the new structure.

• Establishment of a new management process and

plan to focus on improvements in financial

management and financial controls. This plan will

be rigorously managed in the same way as other

change programs, and will be supported by the

Core Business Systems program where major

systems changes are needed.

• Make progress as planned on core business

systems projects with objective of delivering first

major releases in 2001 and subsequent releases

regularly thereafter. Each major project will be a

vehicle to achieve modernized business processes

and progress on all three strategic goals.

• Establish new strategic planning and budgeting

process as a vehicle for managing resource allocations, setting priorities and establishing improvement initiatives as an integral part of operational

management.

A timeline depicting the high level milestones for the

overall modernization effort is shown on the following page.
60 Modernizing America’s Tax Agency BUSINESS PROCESSES

ORGANIZATION AND MANAGEMENT

PERFORMANCE MEASURES

TECHNOLOGY

2000 2001 1999

Top-Level, Major Modernization Timeline (Illustrative)

Begin to address major data issues.

Continue implementation and training for RRA '98

Implement Taxpayer Advocate process for resolving cases

Expand face to face services

Implement Offers in Compromise and Installment Agreement programs

Implement 24 x 7 phone service Establish Spanish help line

Implement changes in collection process

Implement Credit Card Payments

Improve call routing and VRU

Implement electronic tax administration changes

Simplify notices and correspondence

Reengineer business practices in all operating divisions

Recruite leaders of operating divisions

Establish operating division headquarters

Establish Tax Exempt and Large Business Operating Divisions

Realign Taxpayer Advocate

Realign Customer Service Field Sites Establish Joint Operations Center

Establish Shared Services

Establish Wage & Investment and Small Business Operating Divisions

Realign national, regional and field offices Complete Webster Study of CI

Complete organizational transition

Establish comprehensive strategic planning and budgeting process

Revise field measures and training Refine operational measures and management processes

Implement strategic measures for operating divisions Develop management goals and strategic measures

Establish new balanced measures in field

Complete Y2K testing and preparation

Establish Core Business Systems modernization process

Revise business systems strategic plan Deploy first three subreleases

Implement futher relaeses of majoy core business systems programs

Top-Level, Major Modernization Timeline (Illustrative)

2000 2001 2002

PERFORMANCE MEASURES

TECHNOLOGY

Develop first two projects: Customer Communications, e-services

Complete development of operational measures

Complete development of strategic measures, begin to implement

Complete implementation of operational measures

Develop interim strategic measures

Implement Taxpayer Advocate process for resolving cases

Establish Spanish help line

Reengineer collection process

Additional credit card companies offered tax payment option for customers

Expand Direct Debit option to TeleFile taxpayers

Implement Appeals Fast Track Mediation

Simplify notices and correspondence

Continue implementation and training for RRA ‘98

Establish operating division headquartersEstablish Tax Exempt and Large Business operating divisionsRealign Taxpayer AdvocateEstablish Shared ServicesEstablish Wage & Investment and Small Business Operating DivisionsRealign components of the national, regional and field offices

Implement streamlined Offers in Compromise

Improve call routing and VRU

Review and refine operational measures

Implement strategic measures for entire organization

Begin to address major data issues

Complete deployment of first two projects: Customer Communications, e-services

Continue addressing major data issues Deploy first major data sub-releases

Address infrastructure issues Deploy first infrastructure sub-releases Continue deployment of infrastructure sub-releases

Complete organizational transition

Establish comprehensive strategic planning and budgeting process

Realign Large and Midsize Business inventoriesEngage all operating divisions in strategic planning and budgeting processEstablish Customer Account Services in Operating Divisions

Realign Wage & Investment and Small Business inventories

BUSINESS PROCESSES

Realign Appeals, Counsel, and Criminal Investigations

• Customer Communications • e-services

Link technology planning to strategic planning

Nationwide

deployment

Expand e-file and credit card payment options

Improve audit processes to include electronic filing

Centralize TE/GE Case Classification, Closing and Review

Expand L&MSB pre-filing services

Test Secured Messaging with Practitioners

ORGANIZATION AND MANAGEMENT
Modernizing America’s Tax Agency 61

Appendix 1: Examples 

of Strategy to Improve Service

and Increase Compliance 

Simplifying Filing:

The Simplifying Individual Filing Research Strategy

focuses on ensuring that the IRS tax forms and instructions are as easy as possible to use, guiding taxpayers

toward the simplest form and reducing demand for

service through simplifying individual filing. For example, in the 1997 tax year, approximately 16 million

taxpayers filed more complicated individual tax returns

than they needed to file to meet their filing obligation.

In addition, approximately 18 million taxpayers threw

away Telefile packages and filed other paper tax forms.

Taxpayers spent over 63 million more hours filing, and

the Service spent nearly seven million extra dollars

processing 1997 Forms 1040 Series because of this

single issue (filing more complicated form than necessary). 

Subsequent research quantified the extent of difficulties,

costs and resulting problems. Working in collaborative

fashion with the Multimedia Division has enabled the

Service to improve the percentage of mailed tax packages that can be used by the receiving taxpayers.

Research worked with the Submission Processing and

Forms and Publications Divisions to use data related to

taxpayer errors on forms to identify the order in which

forms and publications were redesigned. This resulted

in the changing of two forms and related publications,

one of which, because of the redesign, will no longer

cause over 20 million taxpayers to call or find other

guidance and instruction to complete a form they would

not use anyway.

The Strategy also addressed the issue of taxpayers filing

when they were not required to file. Taxpayers having

no taxable income, no withholding and/or no tax liability were going through the filing process and incurring

the costs to file. These taxpayers expended over 51

million hours in 1998 in filing and the Service spent

over 25 million dollars processing these unnecessary

returns. Research again worked with Submission

Processing Division to complete focus group and other

research techniques to enact change. This resulted in

redesigned flyers, instructions, web page and marketing

techniques to ensure the right taxpayers were reached

and that they received clear and understandable communications. In the second year of this research, over three

million taxpayers in two age groups, elderly and young

filers, will receive flyers and follow-up items to assist

them in understanding they do not have to file.

Electronic Tax Law Assistance 

(Previously known as "Ask the IRS")

The Electronic Tax Law Assistance (ETLA) Program

provides a convenient, alternative means for taxpayers

to get answers to their tax law and procedural questions.

Taxpayers can submit their questions through the IRS

Web site at any time, day or night, and will receive

prompt written responses. They do not have to wait in

queue on the telephone, and can have a response they

can refer to as needed. They do not need to be

concerned about forgetting the details of a response

verbally communicated to them via a telephone conversation. The service has been well received by taxpayers. Our survey results show that 97 percent of our

customers chose the new service in lieu of the telephone, and 94 percent said they will use the service

again. 

The Electronic Tax Law Assistance (ETLA) program

began as a pilot at the Nashville Customer Service site

during the 1994 and 1995 filing seasons and has operated year-round since March 1996. The pilot program

had receipts of 270,000 in FY 99, and receipts of

700,000 are projected in FY 2000.

ETLA also allows Customer Service to manage its

workload more efficiently. The workload can be

balanced by switching assistors from the telephones to

e-mail during periods of slack telephone demand.

Electronic W-4

Research is developing a computerized Form W-4 that

will be both simpler for employees to use and more

Appendices
62 Modernizing America’s Tax Agency

accurate than the paper Form W-4 can be. Employees

use the Form W-4 to tell their employers how much tax

to withhold from their paychecks. The paper form helps

employees to convert the most important aspects of the

tax law into either a number of withholding allowances

(to avoid having too much withheld) or an additional

amount of tax to withhold per-pay-period (to avoid

having too little withheld). Since the paper form has to

accommodate most people’s situations, and since it

requires the employee to perform several calculations, it

is often burdensome and non-intuitive to use. Moreover,

since the complex tax calculations need to be approximated on the paper form, the amount actually withheld

can deviate substantially from one’s actual tax liability. 

The electronic W-4 will be both easier to use and more

accurate than the paper form by having the computer do

the work and by customizing the calculations based on

user input. Users will be prompted to enter only the

information that is relevant to their situation (e.g., based

on their marital status, number of jobs, etc.), and the

program will provide them with all the information they

need to be withheld as accurately as possible. The

program is being developed as a Web-based application,

but can be distributed to employers in other forms as

well. Future versions may even be able to print out a

completed Form W-4 at the conclusion of the program.

In addition to reducing taxpayer burden, the electronic

W-4 may help to reduce unexpected under-withholding,

and therefore may prevent many balance due and nonfiling cases.

TIP Rate Determination and Education Program

In 1993, IRS estimated that tipped employees in the food

and beverage industry were receiving approximately $18

billion in tip income, but reported less than $9 billion.

Proper reporting would result in increases to corresponding items such as FICA tax, federal income tax, state

unemployment tax, workers’ compensation insurance,

state income tax and any other tax or benefit that is

based on wages. 

It is important to stress that this program emphasizes

outreach and education as the means to increase voluntary compliance without having to use traditional

enforcement actions, such as tip examinations. This

reduces the tax burden for all those affected. Employers

and employees are not burdened with unplanned tax

liabilities that result from tip examinations. The IRS also

profits, in that fewer resources are used in promoting this

program than if labor intensive examinations were to be

performed.

The Tip Reporting Alternative Commitment, begun in

October 1993, directed Examination field personnel to

make contact with individual restaurants and secure Tip

Rate Determination Agreements (TRDA). Under the

program, the IRS works with restaurants to determine a

fair tip rate to be reported by all tipped employees.

These tips are reported to the IRS. The restaurant industry raised concerns about the accuracy of the established

average tip rates. As an answer to the industry’s stated

concerns, the IRS worked with a coalition of representatives from food and beverage industry to develop the Tip

Reporting Alternative Commitment (TRAC), which

became available in June 1995.

Under TRD/EP, in addition to one-on-one contacts with

restaurants, the IRS has sent trained IRS personnel to

speak to interested groups, such as local restaurant associations and practitioner groups. These personnel also

teach workshops on tip reporting to tipped employees

and write articles for local publications. 

The number of employers filing from 8027, Employer’s

Annual Information Return of Tip Income and Allocated

Tips, increased from 48,178 in 1993, to 56,468 in 1998.

However, the most significant factor is that the tips being

reported on these forms, by tipped employees, increased

from $3.9 billion in 1993 to $7.03 billion in 1998. (Food

and beverage employers must file this return to make

annual reports to the IRS on receipts from food and

beverage operations and tips reported by their employees.) During this same period, tip rates increased from

7.8 percent in 1993 to 10 percent in 1998.

This program has had an impact on all other industries

that report tip wages as evidenced by the increase in tip

wages being reported on Forms 941, Employer’s

Quarterly Federal Tax Returns. Tip wages reported,

from all industries, increased from $8.52 billion in 1994

to nearly $12 billion in 1998.

Due to the tremendous success experienced with the

TRAC and TRDA, the program was extended to the

gaming (casino) and hairstyling industries in 1996.

Plans are underway to develop generic agreements for all

other industries where tipping is customary.
Modernizing America’s Tax Agency 63

EITC & Year of Birth Project

In October 1998, legislation gave the IRS the authority

to use year-of-birth data from Social Security

Administration (SSA) records to determine the accuracy

of the age of children used to claim EITC benefits on tax

returns. If the age reported by the taxpayer for the child

is found to be in error, the EITC may be disallowed

during returns processing as a math error.

The law does not allow EITC to be claimed for a qualifying child over the age of 23 unless the qualifying child

is permanently and totally disabled. In July 1998,

38,999 Tax Year 1997 returns were identified as claiming

EITC for children who, according to SSA records, were

over the age of 23. Research assisted the EITC Project

Office to issue a notice to those taxpayers (not already

being contacted for other errors) telling them of the

discrepancy between the age reported on the return and

SSA data relevant to the child. 

The notice asked taxpayers to carefully review their

1997 tax return and, if the age reported on the return was

erroneous, to not claim EITC on behalf of that person on

their 1998 income tax return. If the information on the

1997 tax return was correct, the taxpayer was asked to

contact SSA to have the record corrected. Of the 26,783

taxpayers who were mailed a notice, 52.3 percent did not

repeat the erroneous condition on their 1998 tax return.

Farm Labor Contractor Strategy

This central California strategy addressed a business

segment that historically was highly noncompliant,

and the taxpayers were often in an adversarial relationship with the IRS. This business segment is

made up of agricultural farm labor contractors who

supply temporary farm workers to farm operators.

Before the new program began, relatively few

contractors were compliant with employment tax

and withholding obligations, as well as various State

tax obligations. Working with an association of

farm contractors and the State agencies, the IRS

team was able to develop agreements as well as

educational programs that persuaded most members

to comply early, while working out acceptable

arrangements for meeting past obligations. In

particular, the IRS team forged an agreement with

the State of California that made the issuance of

State business licenses for farm contractors contingent on compliance with all federal and State tax

laws. Only a very few taxpayers who blatantly

refused to comply were investigated and prosecuted.

The leader of this particular association was very

vocal in his praise of this program because it eliminated in a practical way a major ongoing problem

for most of his members, many of whom wished to

be compliant but had difficulty doing so when the

majority of their competitors were not complying.

In 1993, businesses in the team’s jurisdiction owed

the government $11.1 million. As of 1997, that

figure was down to $240,000.
64 Modernizing America’s Tax Agency
Modernizing America’s Tax Agency Modernizing America’s Tax Agency 65

Appendix 2:

Department of the Treasury

Internal Revenue Service

PART 801--BALANCED SYSTEM FOR MEASURING

ORGANIZATIONAL AND EMPLOYEE PERFORMANCE WITHIN THE INTERNAL REVENUE

SERVICE

Sec.

801.1 Balanced performance measurement system; in

general.

801.2 Measuring organizational performance.

801.3 Measuring employee performance.

801.4 Customer satisfaction measures.

801.5 Employee satisfaction measures.

801.6 Business results measures.

Authority: 5 U.S.C 9501 et seq. ; secs. 1201, 1204, Pub. L.

105-206, 112 Stat. 685, 715-716, 722 (26 U.S. C. 7804 note).

801.1 Balanced performance measurement system; In

general

(a) In general-- (1) The regulations in this part 801 implement the provisions of sections 1201 and 1204 of the

Internal Revenue Service Restructuring and Reform Act of

1998 (Public Law 105 -106, 112 Stat. 685, 715-716, 722)

and provide rules relating to the establishment by the

Internal Revenue Service of a balanced performance

measurement system. 

(2) Modern management practice and various statutory

and regulatory provisions require the IRS to set performance goals for organizational units and to measure the

results achieved by those organizations with respect to

those goals. To fulfill these requirements, the IRS has

established a balanced performance measurement system,

composed of three elements: Customer Satisfaction

Measures; Employee Satisfaction Measures; and Business

Results Measures. The IRS is likewise required to establish a performance evaluation system for individual

employees.

(b) Effective date. This part 801 is effective September 7,

1999.

801.2 Measuring organizational performance

(a) In general. The performance measures that comprise

the balanced measurement system will, to the maximum

extent possible, be stated in objective, quantifiable and

measurable terms and, subject to the limitation set forth in

paragraph (b) of this section, will be used to measure the

overall performance of various operational units within the

IRS. In addition to implementing the requirements of the

Internal Revenue Service Restructuring and Reform Act of

1998 (Public Law 105 -206, 112 Stat. 685), the measures

described here will, where appropriate, be used in performance goals and performance evaluations established, inter

alia, under Division E, National Defense Authorization Act

for Fiscal Year 1996 (the Clinger-Cohen Act of 1996)

(Public Law 104 -106, 110 Stat. 186, 679); the

Government Performance and Results Act of 1993 (Public

Law 103 -62, 107 Stat. 285); and the Chief Financial

Officers Act of 1990 (Public Law 101-576, 108 Stat.

2838). 

(b) Limitation--quantity measures (as described in '801.6)

will not be used to evaluate the performance of or to

impose or suggest production goals for any organizational

unit with employees who are responsible for exercising

judgment with respect to tax enforcement results (as

defined in '801.6) except in conjunction with an evaluation

or goals based also upon Customer Satisfaction Measures,

Employee Satisfaction Measures, and Quality Measures. 

801.3 Measuring employee performance

(a) In general. All employees of the IRS will be evaluated according to the critical elements and standards or

such other performance criteria as may be established for

their positions. In accordance with the requirements of 5

U.S.C. 4312, 4313 and 9508 and section 1201 of the

Internal Revenue Service Restructuring and Reform Act of

1998 (Public Law 105 -206, 112 Stat. 685 ) (as is appropriate to the employee's position), the performance criteria

for each position will be composed of elements that

support the organizational measures of Customer

Satisfaction, Employee Satisfaction and Business Results;

however, such organizational measures will not directly

determine the evaluation of individual employees. 

(b) Fair and equitable treatment of taxpayers. In addition

to all other criteria required to be used in the evaluation of

employee performance, all employees of the IRS will be

evaluated on whether they provided fair and equitable

treatment to taxpayers.

(c) Senior Executive Service and special positions.

Employees in the Senior Executive Service will be rated in

accordance with the requirements of 5 U.S.C. 

4312 and 4313 and employees selected to fill positions

under 5 U.S.C. 9503 will be evaluated pursuant to workplans, employment agreements, performance agreements
66 Modernizing America’s Tax Agency 66

or similar documents entered into between the

Internal Revenue Service and the employee. 

(d) General workforce. The performance evaluation

system for all other employees will: 

(1) Establish one or more retention standards for

each employee related to the work of the employee

and expressed in terms of individual performance --

(i) Require periodic determinations of whether each

employee meets or does not meet the employee’s

established retention standards; and 

(ii) Require that action be taken, in accordance with

applicable laws and regulations, with respect to

employees whose performance does not meet the

established retention standards. 

(2) Establish goals or objectives for individual

performance consistent with the IRS’ performance

planning procedures --

(i) Use such goals and objectives to make performance distinctions among employees or groups of

employees; and

(ii) Use performance assessments as a basis for

granting employee awards, adjusting an employee’s

rate of basic pay, and other appropriate personnel

actions, in accordance with applicable laws and

regulations. 

(e) Limitations--(1) No employee of the Internal

Revenue Service may use records of tax enforcement results (as defined in '801.6) to evaluate any

other employee or to impose or suggest production

quotas or goals for any employee. 

(i) For purposes of the limitation contained in this

paragraph (e), employee has the meaning as defined

in 5 U.S.C. 2105(a).

(ii) For purposes of the limitation contained in this

paragraph (e), evaluate includes any process used to

appraise or measure an employee's performance for

purposes of providing the following:

(A) Any required or requested performance rating. 

(B) A recommendation for an award covered by

Chapter 45 of Title 5; 5 U.S.C. 5384; or section

1201(a) of the Internal Revenue Service

Restructuring and Reform Act of 1998, (Public Law

105 -206, 112 Stat. 685, 713-716 ).

(C) An assessment of an employee's qualifications

for promotion, reassignment or other change in

duties.

(D) An assessment of an employee's eligibility for

incentives, allowances or bonuses. 

(E) Ranking of employees for release/recall and

reductions in force.

(2) Employees who are responsible for exercising

judgment with respect to tax enforcement results (as

defined in '801.6) in cases concerning one or more

taxpayers may be evaluated with respect to work

done on such cases only on the basis of information

derived from a review of the work done on the

taxpayer cases handled by such employee. 

(3) Performance measures based in whole or in part

on Quantity Measures (as described in '801.6) will

not be used to evaluate the performance of or to

impose or suggest goals for any non-supervisory

employee who is responsible for exercising judgment with respect to tax enforcement results (as

defined in '801.6). 

801.4 Customer satisfaction measures

The customer satisfaction goals and accomplishments of operating units within the Internal Revenue

Service will be determined on the basis of information gathered via various methods. For example,

questionnaires, surveys and other types of information gathering mechanisms may be employed to

gather data regarding customer satisfaction.

Information to measure customer satisfaction for the

particular work unit will be gathered from a statistically valid sample of the customers served by that

operating unit and will be used to measure, among

other things, whether those customers believe that

they received courteous, timely and professional

treatment by the Internal Revenue Service personnel

with whom they dealt. Customers will be permitted

to provide information requested for these purposes

under conditions that guarantee them anonymity.

For purposes of this section, customers may include

individual taxpayers, organizational units or

employees within the Internal Revenue Service and

external groups affected by the services performed

by the Internal Revenue Service operating unit. 

801.5 Employee satisfaction measures

The employee satisfaction numerical ratings to be

given operating units within the Internal Revenue

Service will be determined on the basis of information gathered via various methods. For example,

questionnaires, surveys and other information gathering mechanisms may be employed to gather data

regarding employee satisfaction. The information

gathered will be used to measure, among other

factors bearing upon employee satisfaction, the

quality of supervision and the adequacy of training
Modernizing America’s Tax Agency Modernizing America’s Tax Agency 67

and support services. All employees of an operating

unit will have an opportunity to provide information

regarding employee satisfaction within the operating

unit under conditions that guarantee them

anonymity.

801.6 Business results measures

(a) In general. The business results measures will

consist of numerical scores determined under the

Quality Measures and the Quantity Measures

described elsewhere in this section.

(b) Quality measures. The quality measure will be

determined on the basis of a review by a specially

dedicated staff within the Internal Revenue Service

of a statistically valid sample of work items handled

by certain functions or organizational units determined by the Commissioner or his delegate such as

the following:

(1) Examination and Collection units and

Automated Collection System units (ACS). The

quality review of the handling of cases involving

particular taxpayers will focus on such factors as

whether Internal Revenue Service personnel devoted

an appropriate amount of time to a matter, properly

analyzed the issues presented, developed the facts

regarding those issues, correctly applied the law to

the facts, and complied with statutory, regulatory

and Internal Revenue Service procedures, including

timeliness, adequacy of notifications and required

contacts with taxpayers. 

(2) Toll-free telephone sites. The quality review of

telephone services will focus on such factors as

whether Internal Revenue Service personnel

provided accurate tax law and account information.

(3) Other workunits. The quality review of other

workunits will be determined according to criteria

prescribed by the Commissioner or his delegate.

(c) Quantity measures. The quantity measures will

consist of outcome-neutral production and resource

data, such as the number of cases closed, work

items completed, customer education, assistance and

outreach efforts undertaken, hours expended and

similar inventory, workload and staffing information, that does not contain information regarding the

tax enforcement result reached in any case involving

particular taxpayers. 

(d) Definitions--(1) Tax enforcement result. A tax

enforcement result is the outcome produced by an

Internal Revenue Service employee's exercise of

judgment recommending or determining whether or

how the Internal Revenue Service should pursue

enforcement of the tax laws.

(i) Examples of tax enforcement results. The

following are examples of a tax enforcement result:

a lien filed; a levy served; a seizure executed; the

amount assessed; the amount collected; and a fraud

referral.

(ii) Examples of data that are not tax enforcement

results. The following are examples of data that are

not tax enforcement results: case closures; time per

case; direct examination time/out of office time;

cycle time; number or percentage of overage cases;

inventory information; toll-free level of access; talk

time; number and type of customer education, assistance and outreach efforts completed; and data

derived from a quality review or from a review of an

employee's or a work unit's work on a case, such as

the number or percentage of cases in which correct

examination adjustments were proposed or appropriate lien determinations were made.

(2) Records of tax enforcement results. Records of

tax enforcement results are data, statistics, compilations of information or other numerical or quantitative recordations of the tax enforcement results

reached in one or more cases, but do not include tax

enforcement results of individual cases when used

to determine whether an employee exercised appropriate judgment in pursuing enforcement of the tax

laws based upon a review of the employee's work on

that individual case.

(e) Permitted uses of records of tax enforcement

results. Records of tax enforcement results may be

used for purposes such as forecasting, financial

planning, resource management and the formulation

of case selection criteria.

(f) Examples. The following examples illustrate the

rules of this section: 

Example 1. In conducting a performance evaluation, a supervisor may take into consideration information showing that the employee had failed to

propose an appropriate adjustment to tax liability in

one of the cases the employee examined, provided

that information is derived from a review of the

work done on the case. All information derived

from such a review of individual cases handled by

an employee, including time expended, issues raised

and enforcement outcomes reached may be considered in evaluating the employee.

Example 2. When assigning a case, a supervisor

may discuss with the employee the merits, issues
68 Modernizing America’s Tax Agency

and development of techniques of the case based upon a

review of the case file.

Example 3. A supervisor may not establish a goal for

proposed adjustments in a future examination, based

upon the tax enforcement results achieved in other cases.

Example 4. A headquarters unit may use records of tax

enforcement results to develop methodologies and algorithms for use in selecting tax returns to audit.

Commissioner of Internal Revenue

Approved:

Assistant Secretary of the Treasury (Tax Policy) 
Modernizing America’s Tax Agency 69

Appendix 3:

Business Systems Modernization Projects Descriptions

The Business Systems Modernization projects that

directly support business goals are briefly described

below. Some of these already exist and have teams

identified. 

Customer Communication

The focus of this project is to provide centralized

national call management capability so that taxpayer

calls can be routed to any IRS assistor in the country. In

addition, this project will concentrate on improved selfservice telephone and Internet services for taxpayers.

e-Services

The goal of this project is to foster easy to use electronic products and services which provide the taxpayer

the ability to conduct all of their interactions electronically and allows account management among payers,

employers and tax authorities. By 2007, IRS 

e-Services will enable the agency to exceed the

Congressional mandate by electronically transacting

with more than 80 percent of U.S. taxpayers while

achieving a 90 percent customer and employee satisfaction rate.

Customer Account Data Engine (CADE)

This project will replace the master files and Integrated

Data Retrieval System (IDRS) with new technology,

new applications and new databases. CADE will allow

employees to post transactions and update taxpayer

accounts and return data from their desks. Updates will

be immediately available to anyone who has authorized

access to data and will provide a complete, timely and

accurate account of the taxpayer’s information.

Taxpayers will be removed from the master files as

they are added to modernized systems. Over several

years, the master files and IDRS will shrink as CADE

grows.

Correspondence and Document on Demand

Imaging (CADDI)

This project will image taxpayer correspondence and

selected paper tax returns to support more efficient

customer service and case management. Today, correspondence is often not available to customer service

representatives (CSRs) and examiners as they are interacting with the taxpayer. Without access to this key

information, IRS employees are not able to consider

information provided by the taxpayer, so they do not

get the service that they deserve. CADDI will allow

employees to see an electronic image of correspondence in the electronic case folder.

Customer Relationship Management Core 

(CRM Core)

The CRM Core project will provide the central, shared

electronic case folders needed for case management.

Creating the case management information in a central

and accessible repository will significantly benefit

taxpayers and employees who are involved in any case

management activity. CRM Core will enable an end-toend view of the interactions between the IRS and its

customers. Taxpayers expect the IRS to have this essential capability in place when they receive a call to

discuss their account.

Customer Relationship Management Exam 

(CRM Exam)

The CRM Exam project focuses on reducing the time

and increasing the quality in the exam process. The

project will investigate using commercial-off-the-shelf

(COTS) software and integration with common CRM

Core capabilities and a risk-based approach to identifying workload. The goal is to reduce the current two-tofour-year cycle to a process that will be completed in

12 to18 months while providing more support to exam

to identify and resolve important issues.

Customer Relationship Management Collection

(CRM Collection)

This project is focused on reengineering the entire

collection process in two major ways. The first is using

technology to intervene more quickly and in the most

effective way, in every collection situation based on the

history and risk in the taxpayer's account. The second is

ensuring every employee has the information and the

tools needed to resolve the taxpayer's issues quickly

and efficiently while observing the taxpayer's rights.

This may involve sending a notice, making a telephone

call or having a revenue officer visit the taxpayer.
70 Modernizing America’s Tax Agency

Customer Relationship Management Registration

(CRM Registration)

This project will incrementally improve those processes

that support taxpayer identification number assignments,

S corporation elections, exempt organization status

determinations, power of attorney and reporting agent

assignments, bond approvals and transfer pricing

approvals. It will reduce the elapsed time from

application until assignment and incrementally develop

systems supporting processes to provide integrated online support.

Integrated Research

This project will build systems to improve research to

facilitate the early identification of new compliance

issues, workload decisions and educational outreach. It

will provide data-driven analysis of taxpayer behavior

and enforcement activity, and enable continuous feedback from case resolution activities for use in pre-filing

activities.

Customer Relationship Management Outreach

(CRM Outreach)

CRM Outreach will build new processes and maximize

the use of modernized and legacy electronic technology

support for conducting proactive taxpayer outreach

activities to inform, assist and educate.

Integrated Human Resource System (IHRS)

This project will acquire and implement a single system

for IRS employee data and Human Resources (HR)

services. The project is part of a Treasury-wide HR

system integration utilizing commercial-off-the-shelf

(COTS) technology. The project’s strategic goals are to

reduce the administrative burden associated with managing the IRS work force, improve development opportunities for IRS people and help improve job satisfaction. 

IFS-ERP (Integrated Financial Systems-Enterprise

Resource Planning)

The Integrated Financial Systems project will incrementally build an agency-wide system that collects and

provides standards-compliant administrative and custodial financial management information. Step one is to

build two corporate data warehouses. The first will

manage taxpayer revenue data and to produce the associated required custodial sub-ledgers. The second will

form the basis for corporate financial and performance

measures information at the business unit level. This

will provide a revised budgeting and performance

measurement capability. In addition, a payment information database will be created to properly track and clarify payment at the time of receipt.
Modernizing America’s Tax Agency 71

• Provide timely, accurate account updates and settlement with complete and integrated data

• Shorten time between receipt of info and sending out notice to taxpayer

• Clarify notices

• Increase electronic means of notification

• Provide daily processing and real-time posting

• Accelerate refunds and notices and improve customer service

• Increase level of early fraud detection

• Provide timely, accurate account updates with complete and integrated data

• Provide universal access to case history

• Provide capability to assign cases based on skill

• Provide broad view of customer contact

• Provide risk-based case prioritization

• Provide daily processing and real-time posting

• Receive and respond to inquiries via multiple media

• Provide complete history of contact

• Provide focused outreach to taxpayer segments

• Provide automated informing capability 

• Clarify forms and publications

• Leverage external organizations with proactive outreach activities

• Increase electronic means of corresponding with the IRS

• Accelerate transmission of correspondence to the appropriate case-worker and improve

document tracking

• Reduce overall manual effort and physical storage

• Support improved customer service

• Significant cycle time reduction and resolution of cases

• Improved probability for collection as a result of resolving collection cases earlier

• Empowerment of employees to vary case treatments

• Reduce exam cycle time to 12-18 months

• Risk-based case selection allows for more efficient allocation of resources

• Increase level of electronic filing

• Provide more convenient methods of filing

• Increase accuracy of data capture

• Provide automated method for status tracking

• Need for improved receivables collection 

• Need for accurate receivables management and documentation

• Need sub-ledger of revenue, refunds, receivables and payables integrated with general

ledger

Customer Account Data

Engine (CADE)

Customer Relationship

Management (CRM) Core

CRM Outreach

Correspondence and

Document on Demand

Imaging (CADDI)

CRM Collection

CRM Examination

e-Services

CRM Registration

Integrated Financial Systems

Projects

Business Systems Modernization

Gaps Addressed
72 Modernizing America’s Tax Agency

Enterprise Journey Map: Process View Summary

• Taxpayer access to information is largely a result of their research rather than proactive communication from IRS

• Limited information on taxpayers or taxpayer groups constrains employees' service capabilities

• Communication strategies are designed to maximize coverage versus customizing or targeting to segment needs

• Taxpayer educational programs do not leverage info captured in post-filing activities

• Uneven participation in e-filing by third parties limits customer satisfaction and employee productivity

• Employees lack access to certain taxpayer information that could assist in offering proactive assistance

• Automated telephone systems are difficult and confusing to use

• Taxpayers have difficulty in reaching the IRS by telephone or e-mail

• Employee training is often not focused on specific skills that will enable an employee to better serve taxpayers

• Limited access to tax law information makes it difficult for employees to answer taxpayer questions on the subject

• Taxpayer options to submit, communicate or pay are limited, often complicated and potentially cost time and money

• Paper-based system causes heavy peaks in manual workload and delays in returns processing

• Taxpayers are dissuaded from trying or using e-file due to third party biases against the added workload, complexity and cost

• Taxpayer receive refunds in 4-6 weeks

• Taxpayer filing and discrepancy resolution is lengthy

• Taxpayers often cannot obtain refund status through current customer service options

• Taxpayer options for obtaining account information are limited

• Employees have difficulty properly serving taxpayers because of a lack of accurate account data, contact history or

real-time update capabilities

• Employee training often not focused on just those skills that will enable an employee to better serve taxpayers

• Limited assistance options because no secure mechanisms are in place for taxpayers and third parties to get account

assistance electronically

• Significant time delays in resolving cases results in increased interest and penalties

• Case resolution tools and authority insufficient to allow employees to serve taxpayers

• Delays in initiating cases increases tax record-keeping burden

• Limited risk-based approach to case selection inhibits productivity

• Centralized electronic case history throughout life of case is lacking

• Limited use of risk-based case selection impacts productivity

• Significant time delays in initiating and resolving cases, which impacts collectability of receivables

• Workforce management hampered by lack of centralized employee skill information

• Workforce planning is not tied to recruitment, learning and development

• Insufficient control of monies received by IRS

• Cost accounting system lacks detail

• Disjointed or overlapping infrastructure programs result in increased costs and decreased effectiveness

• Lack of standards and efficient platforms on which to host e-Services slows their development and implementation

1. Customer Communications

2. e-Services

3. Customer Account Data Engine (CADE)

Current Issues Column

Educate and

Communicate

Provide Pre-Filing

Assistance

Accept Filings and

Payments

Provide Account

Assistance

Correct Non-filing

and Under-reporting

Collect Unpaid or

Overdue Balances

Internal

Management

Infrastructure

Integrated Research and Analysis

Indirect Support of

Business Goals Direct Support of Business Goals

4. Correspondence and Document on Demand Imaging (CADDI)

5. Customer Relationship Management (CRM) Core

6. CRM Exam

7. CRM Collection

8. CRM Registration

9. Compliance Research

10. CRM Outreach

11. Integrated Human Resources Systems (IHRS)

12. Integrated Financial System (IFS)

Legend:

Planned Tier A projects that support business goals

Process
Modernizing America’s Tax Agency 73

Increased value to proposition to

transact electronically (2)

Selected value adding parties receive

long awaited enhancements (2)

Improved taxpayer access to service,

by telephone and Internet (1)

Improved workload management via

intelligent call routing (1)

Some refunds within days for

e-filers (2,3)

Increased electronic filing through

third parties (2)

Improved taxpayer access to service,

by telephone and Internet (1)

Improved Power of Attorney

management for e-filers (2)

Enhanced assistance messages for

third parties via secure messaging (2)

Increased effectiveness via more

targeted case selection (6)

Faster case resolution (4,6)

Enhanced training programs for employees (11)

Improved access to management information. (11)

Consolidation of multiple IS Help Desks to a single Virtual Help Desk

Remote network support capabilities allowing flexible resource locations

Centralized reporting on all IRS computing devices

Targeted and customized education via

improved research and segmentation

(2,8,9,10)

Improved taxpayer issues identification

increases quality of communication

(5,6,7,9)

Reduced cycle-time for registering new

taxpayer entities (8)

Proactive, targeted assistance delivered

through multiple channels

(5,6,7,8,9,10,11)

Improved payment options for taxpayers

(2)

Exceed RRA goal of 80% electronic

submissions (2)

More effort spent serving taxpayers due

to less effort spent processing paper (2)

Proactive, targeted assistance delivered

through multiple channels

(5,6,7,8,9,10,11)

Targeted exam efforts resulting from

risk-based case selection (6)

Exam cycle reduced to 12 - 18 months

(3,6)

Highly effective resource allocation

(3,5,6)

Targeted collection efforts due to riskbased case selection (7)

Improved probability of successful

collection resulting from earlier

initiation (7)

Integrated planning, budgeting and

capital expenditure (12)

Improved overall resource/asset

management (12)

Reliable financial statements (12)

Reduction in unit cost of telecommunications services while substantially

increasing usage

Improved methods for providing 

continuous protection of IRS information

resources

More value adding third parties converting to eServices and more being retained (2)

Targeted marketing focuses resources more efficiently and lowers administrative costs (2)

Targeted marketing helps to increase volume of 

e- Service usage by focusing on under-performing

third parties and underserved taxpayers (2)

Enhanced assistance options for taxpayers via

secure e-mail correspondence (2,5)

Correct and consistent responses to taxpayer

inquiries (5)

Proactive assistance via taxpayer case histories (10)

Targeted, timely employee training in enhanced

assistance capabilities (11)

Refunds within days for most taxpayers (2,3)

Reduced taxpayer burden, making it simpler and

easier to file taxes (time, cost, etc.), via direct

filing (2)

Increased taxpayer satisfaction leading to greater

participation in e-Services and higher retention (2)

Improved "first-call" resolution rate via electronic

case folders (5)

Enhanced assistance options via secure e-mail and

Internet correspondence (2)

Real-time access to customer account data (5)

Targeted, timely employee training in enhanced

assistance capabilities (1,11)

Greater employee insight into customer history

and future needs (4,5,9)

Improved case management (5,6)

Centralized case history (7)

Increased use of risk-based criteria for caseselection help to empower employees (7)

Targeted and timely employee training (11)

More effective workforce management (11)

Improved management reporting & decisionmaking (12)

Improved systems to provide global service

On-line Tax Law Assistance

Standards-based integrated systems development

and maintenance environment

Near-Term 

(Filing Season 2001-2002)

Medium-Term 

(Filing Season 2003-2005)*

Long-Term 

(Filing Season 2006-2008)**

Tier B projects to be defined by new business units

* in addition to near-term benefits

** in addition to near-term and medium-term benefits

Italic - Process Re-engineering Enabled Benefits

Blue - Technology-enabled Benefits

Plain - Both Process & Technology Enabled

Benefits Summary

Organizational

Modernization Benefits

(Not Process-Specific)

• Customized Services

• Greater focus on education

and communication

• Early recognition and

resolution of problems

• End-to-end accountability

• Management roles revised

to move decisions closer to

taxpayers

• Facilitate reengineering and

deployment of technology

• More effective/efficient tax

administration

• Increased practitioner

involvement

• Empower employees to

improve service (workforce

realignment)

• Customer-focused organization (operating division

realignment)

• Improved service to large

and mid-sized businesses

(industry realignment)

• Better alignment between

field and service centers

(service center realignment)