******REPORT OF THE JOINT COMMITTEE ON TAXATIONRELATING TO THE INTERNAL REVENUE SERVICEAS REQUIRED BY THE IRS REFORM AND RESTRUCTURING ACT OF 1998**

Prepared for the

HOUSE COMMITTEES ON WAYS AND MEANS,APPROPRIATIONS, AND GOVERNMENT REFORMAND THE SENATE COMMITTEES ON FINANCE, APPROPRIATIONS, AND GOVERNMENTAL AFFAIRS

For a Joint Review Scheduled on May 25, 1999

By the Staff

of the

JOINT COMMITTEE ON TAXATION

May 20, 1999

JCX-24-99

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**CONTENTS**

**INTRODUCTION**

**I.  DESCRIPTION AND ANALYSIS OF STRATEGIC PLANS 	AND BUDGET OF THE IRS**

A.  Overview of IRS's Strategic Goals

B.  Revision of IRS's Business Practices

C.  IRS Reorganization and Management

D.  Development of Organizational Performance Measures

E.  Technology Modernization

F.  IRS Budget Request for Fiscal Year 2000

**II.  THE 1999 TAX FILING SEASON**

A.  Electronic Tax Administration

B.  Providing Information and Service to Taxpayers

C.  1999 Revenue Protection Strategy

D.  GAO Review of the 1999 Filing Season

**III.  OTHER MATTERS ADDRESSED BY THE IRS REFORM ACT**

A.  Establishment of IRS Oversight Board

B.  Establishment of Independent National Taxpayer Advocate

C.  Treasury Inspector General For Tax Administration

D.  Personnel Flexibility

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**INTRODUCTION
	The Internal Revenue Service Restructuring and Reform Act of 1998 (1) (the "IRS ReformAct") made comprehensive changes relating to the operations of the Internal Revenue Service("IRS").  Goals of the IRS Reform Act included increasing public confidence in the IRS andmaking the IRS an efficient, responsive, and respected agency that acts appropriately in carryingout its functions.(2)  The IRS Reform Act included changes relating to IRS organization andmanagement, Congressional oversight, electronic filing, and taxpayer protections and rights.(3)

	As part of the provisions relating to Congressional oversight, the IRS Reform Actrequires that there is to be a joint review of IRS activities.(4)  The joint review is to include twomembers of the majority and one member from the minority of each of the House Committees onWays and Means, Appropriations, and Government Reform and the Senate Committees onFinance, Appropriations, and Governmental Affairs.  The joint review is to be held at the call ofthe Chair of the Joint Committee on Taxation, and is to take place before June 1 of each calendaryear after 1998 and before 2004.  The joint review is to address the strategic plans and budget ofthe IRS and such other matters as determined by the Chair of the Joint Committee on Taxation.

	The IRS Reform Act also requires the Joint Committee on Taxation to report annually tothe House Committees on Ways and Means, Appropriations, and Government Reform and theSenate Committees on Finance, Appropriations, and Governmental Affairs regarding certainmatters relating to the IRS.  The report is to be made in each calendar year after 1998 and before2004.(5)

	Pursuant to the IRS Reform Act, a joint review of the strategic plans and budget of theIRS for fiscal year 2000 has been scheduled for May 25, 1999.  This document,(6) prepared by thestaff of the Joint Committee on Taxation, contains the report of the Joint Committee on Taxationrelating to the IRS as required by the IRS Reform Act.  Part I of the document provides adescription and analysis of the strategic plans and fiscal year 2000 budget of the IRS, including adiscussion of the progress of the IRS in meeting its objectives and how the fiscal year 2000budget proposal supports those objectives.  Part II discusses the 1999 filing season.  Part IIIdiscusses progress relating to other matters addressed by the IRS Reform Act, specifically, theIRS Oversight Board, the office of the National Taxpayer Advocate, the Treasury InspectorGeneral for Tax Administration and personnel flexibilities.

**I.  DESCRIPTION AND ANALYSIS OF STRATEGIC PLANSAND BUDGET OF THE IRS
**A.  Overview of IRS's Strategic Goals
	In the IRS Reform Act, the Congress directed the IRS to review and restate its mission toincrease its emphasis on serving the public and meeting taxpayer needs.(7)  Prior to its revision, theIRS's mission statement focused on collecting the proper amount of tax.(8)

	The new mission statement, announced by the Commissioner in September 1998, has theIRS's interaction with taxpayers as its focus.  It states:
 Provide America's taxpayers with top quality service by helping them tounderstand and meet their tax responsibilities and by applying the tax law withintegrity and fairness to all.

	To assist in achieving its new mission, the IRS has developed three strategic goals.(9)  TheIRS's first goal is to provide top quality service to each taxpayer.  Second, the IRS hasdetermined that it must provide top quality service to all taxpayers.  The third strategic goalensures that productivity within the IRS will be increased by providing IRS employees with aquality work environment.

	The IRS's first strategic goal, providing top quality service to each taxpayer, is designedto ensure that every taxpayer receives first-quality service when dealing with the IRS.  Whetherthe IRS is providing forms, advising taxpayers about their accounts with the IRS, or engaged inthe examination function, the IRS has determined that it must have a clear understanding of thefacts and circumstances surrounding a particular taxpayer's case to ensure the proper applicationof the tax law to the taxpayer.  The Commissioner stated in his April 14, 1999, testimony beforethe Senate Finance Committee, that this goal also requires that "taxpayers should always betreated professionally and courteously and with full consideration of their rights."

	The second strategic goal requires the IRS to provide top quality service to all taxpayers. This goal aims for fundamental fairness to all taxpayers.  The IRS hopes to ensure that the taxlaw is applied with fairness and integrity such that taxpayers who fail to comply do not burdenthose who comply.  Success in this area is measured by the IRS in terms of uniformity ofcompliance among various segments of the population.  In measuring its success in achievingthis goal, the IRS will focus on increased compliance rather than revenue collected fromenforcement activities.

	As its third strategic goal, the IRS plans to increase productivity by providing a qualitywork environment for its employees.  Comparing its goals to organizations within the private-sector, the IRS noted that success with this goal requires providing employees with high-qualitytechnology tools, adequate training, effective management, and active engagement in the goals ofthe organization.  The IRS will adhere to creating a positive work place where there exist equalopportunity, recognition of employee performance, and no artificial barriers to advancement.

	To carry out the IRS strategic goals, the Commissioner has developed five guidingprinciples:  (1) understanding and solving problems from the taxpayer's point of view; (2)expecting managers to be accountable; (3) using balanced performance measures; (4) fosteringopen and honest communication; and (5) insisting on total integrity.  To complement the IRSstrategic goals and guiding principles, the Commissioner has established five specific "levers ofchange" for the IRS.  The IRS intends to implement the levers of change in an integrated fashionover the next three years.  The IRS views each lever as having equal importance.  The levers ofchange are:  (1) revising business practices for dealing with taxpayers; (2) modifying theorganizational structure around the needs of taxpayers; (3) having management roles with clearresponsibility; (4) establishing measures of performance that balance business results, customersatisfaction, and employee satisfaction; and (5) implementing and managing new technology toreplace outdated computer systems.

**B.  Revision of IRS Business Practices
**In general**

	The way the IRS interacts with taxpayers is defined by its business practices.(10)  Includedin the IRS's business practices are procedures for filing, procedures for determining when noticesare sent to taxpayers, how telephones are answered, how examinations of taxpayers' returns areconducted, and how taxes are collected.  The Commissioner has developed strategies to guide theIRS in carrying out its business practices.  These detailed strategies include: (1) preventingtaxpayer problems or addressing them as early as possible; (2) improving communications withtaxpayers; (3) expanding taxpayers' rights; (4) broadening the use of electronic taxadministration; (5) leveraging IRS resources through effective partnerships; (6) tailoringpractices and strategies based on specific taxpayer needs and problems; (7) applying risk-basedcompliance intervention techniques; and (8) integrating compliance strategies.

**Preventing taxpayer problems or addressing them as early as possible**

	The IRS identifies three stages of activities when it deals with taxpayers: (1) pre-filing;(2) filing; and (3) post-filing.(11)  According to the IRS, 73 percent of its budget is allocated topost-filing activities, i.e., dealing with problems after they happen.  Nine times as much is spentby the IRS on fixing problems after they occur than is spent on preventing them.(12)  The IRSanticipates that significant increases in both service and compliance will occur by shifting itsfocus to taxpayers' pre-filing activities.  The IRS also anticipates that, if compliance errors andproblems are addressed early, less burden will be imposed on the taxpayer.

**Improving communications with taxpayers**

          In general

	The IRS communicates with taxpayers through a variety of methods including the mail,the telephone, the Internet, and in-person meetings.  According to the IRS, in 1998, it mailedover 100 million tax packages and postcards to taxpayers and distributed an additional 650million forms and publications, including those documents that were downloaded from the IRS site on the World Wide Web.(13)  During that year, the IRS also mailed taxpayers 105 millionnotices, received between 20 and 30 million incoming pieces of correspondence, and 143 millionincoming phone calls on toll-free numbers, and served over ten million taxpayers at its walk-insites.(14)  Over 20,000 employees are dedicated solely to these tasks, and, in total, over 70,000employees regularly communicate with taxpayers.(15)  The IRS recognizes the volume of itscommunications with taxpayers and has focused on ways to improve its communicationmethods.

          The Internet and the World Wide Web

	The IRS has implemented programs that it maintains will provide the easiest and mostefficient way for taxpayers to get information from the IRS throughout the year.  For example,since January 1998, the IRS has determined that 84 million forms, publications, and productshave been downloaded from the IRS's Digital Dailey Web site.  The IRS Web site also providesthe latest information regarding tax law changes, tax tables and rate schedules, TeleTax topics,tax regulations, and the weekly Internal Revenue Bulletin.  The Web site also provides taxpayerswith "Special Taxpayer Alerts," which identify problems and what the IRS is doing to fix theproblems.  In January 1999, the IRS launched its Small Business Corner.  This Web-basedresource is intended to provide these taxpayers with accessible, understandable informationbased on their needs as a taxpayer group.(16)  Similarly, the Tax Professional's Corner of the IRS'sWeb site was designed to provide a quick listing of information and news items, which areneeded by tax professionals.(17)

          CD-ROM

	The Federal Tax Products CD-ROM contains over 600 Federal tax forms and instructionsand nearly 3,000 pages of topic-oriented tax information.(18)  Users can electronically search,view-on-screen, or print out any of the items contained on the CD-ROM.  The two-issuesubscription is available through the National Technical Information Service for $25.(19)  As ofMarch 22, 1999, nearly 65,000 subscriptions were sold.(20)  The IRS has also produced the "SmallBusiness Resource Guide: What You Need to Know About Taxes and Other Topics" on CD-ROM.  This interactive product provides small businesses with information, which is easy toaccess and understand.  17,000 copies will be available for distribution with over half going toSmall Business Administration Small Business Information Centers.  The information isorganized by stages in the business life cycle, and the product provides information on preparingand financing a business, record keeping, selecting a business structure, employment taxes, andother topics.(21)

          TAXI On-Line Learning Lab

	Developed based on the collaborative efforts of the IRS and the American BarAssociation's Section of Taxation, the Internet Application TAXI was launched in July 1998. This is an on-line learning lab for first-time taxpayers, students 13 to 18, who learn about taxes inschool.  This program covers the reasons why we pay taxes and how students can meet their taxobligations.  The program also addresses the availability and benefits of electronic filing.(22)

          IRS Local News Net

	IRS Local News Net is a list server that provides targeted, localized, and immediateinformation for tax professionals across the nation.  The system is designed to support thelocalized nature of information based upon the tax professional's specific, localized needs.  AnyIRS District Office, Service Center, or Computing Center that needs to communicate with thepublic or with tax professionals on a regular basis can request a list server.(23)  Local News NetServers are being developed primarily to reduce the print and postage costs incurred withDirector newsletters.

**Expanding taxpayer rights**

	Many of the IRS's modernization efforts will focus on implementing and reinforcing theexpansion of taxpayer rights in accordance with the provisions included in the IRS Reform Act.

**Broadening the use of electronic tax administration**

	The conference report to the IRS Reform Act states that "the policy of Congress is topromote paperless filing, with a long-range goal of providing for the filing of at least 80 percentof all tax returns in electronic form by the year 2007."(24)  The IRS has recognized the need forimprovement in its technological equipment to allow for the filing of a full range of returns,resolution of security issues to eliminate requirements for separate signature documents, tailoringof marketing and education programs to attract taxpayers and practitioners with varying needs,and broadening of the number of effective payment options with filing returns.(25)  Experiencewith electronic tax administration during the 1999 tax filing season is discussed in Part II, below.

**Leveraging IRS resources through effective partnerships**

	The IRS intends to place greater emphasis on working in partnership with thoseorganizations and groups that are actively involved in tax administration.  Those groupsidentified by the IRS include State revenue agencies, tax practitioners, industry associations,small business associations (e.g., the Small Business Administration), community and volunteergroups, low-income and disadvantaged taxpayer services, and large businesses and institutionsoffering tax filing assistance to their employees.  Many of these groups work with the IRS bysharing information about IRS programs and taxpayer concerns.  States work with the IRS byproviding compliance information and, in some cases, by participating in a joint electronic filingprogram.  Because taxpayers often provide overlapping information to both the IRS and at leastone State, the IRS believes that there are significant opportunities to reduce the complianceburden on taxpayers.(26)

**Tailoring practices and strategies based on specific taxpayer needs and problems**

	The IRS's strategic plan calls for it to improve its business practices by tailoring them toaddress particular taxpayer issues, similar to what is done by companies that develop and markettheir products according to their customers' different needs.  The IRS recognizes that differentkinds of taxpayers have different concerns.  For example, individual taxpayers with incomereported by third parties experience less reporting and payment problems than those withbusiness income, yet prompt payment of refunds is very important to these taxpayers.  Collegestudents who file by telephone have different service needs than do senior citizens withretirement income.  Large businesses with extensive international activities have different issuesand concerns than do small, start-up businesses.  Identifying the particular needs of taxpayers andproviding them with appropriate service is critical at all stages.  The IRS regards this strategy asso fundamental to meeting its strategic goals that it is viewed as a key organizing principle forthe way the IRS is managed.(27)  The IRS structural reorganization based on taxpayer needs isdiscussed in detail in Part I. C., below.

**Applying risk-based compliance intervention techniques**

	Because of its limited resources, the IRS has determined that it must apply its resourceswhere they will provide the most benefit in reducing specific incidences and patterns ofnoncompliance.  The IRS finds that strategies that target resources effectively will benefitindividual taxpayers by reducing the compliance burden on those taxpayers who comply.  TheIRS cites as an example of targeting strategies its use of statistical techniques to select returns foraudit that are likely to contain understatements of tax.  The IRS has also observed that progresshas been made in developing more effective collection techniques and practices in both privateand public agencies.  The IRS identified two keys to effective collections: (1) early identificationof those taxpayers who may present a risk of nonpayment; and (2) effective intervention withtaxpayers in working out a payment program that addresses a particular taxpayer's paymentproblem.(28)  Moreover, the retention of accurate, current taxpayer data is essential to the IRS inmeeting this strategic plan.(29)

**Integrating compliance strategies**

	The IRS has determined that it will experience the greatest benefits from its strategicgoals when its improved business practices can be implemented through effective and integratedcompliance strategies.  "Integrated Strategies" are those in which the problems and needs of a setof taxpayers are understood, and all the resources and techniques from the appropriate disciplinesof the IRS are applied appropriately to solve those problems over a period of time.  For example,the IRS has reported that a California-based IRS team, in conjunction with an association of farmcontractors and State agencies, convinced a highly noncompliant group of agricultural farm laborcontractors to comply with employment tax and withholding obligations.  The IRS team was ableto develop agreements and educational programs that convinced most of the contractors tocomply, while working out acceptable arrangements for those taxpayers with past-dueobligations.(30)

**Management of customer service initiatives**

	As part of revising IRS business practices, in January 1998, the IRS established a centraloffice, the Taxpayer Treatment and Service Improvements ("TTSI") program, to manage theoverall implementation of customer service improvements.(31)  At the same time, an ExecutiveSteering Committee, chaired by the Commissioner, was established to provide authoritative andtimely decisions on all matters affecting implementation of initiatives and to ensure that allinitiatives are consistent with the IRS's business strategy.(32)

	The General Accounting Office ("GAO") reviewed the progress of 25 specific customerservice improvement initiatives as of January 1999.  Examples of these initiatives include:marketing TeleFile aggressively to individual taxpayers; establishing a uniform set of leadershipcompetencies for all levels of management; expanding telephone service hours to 24 hours, 7days a week; using multiple strategies to reduce demand on the telephone lines, such aseducating customers on when to expect refunds; assessing the skills of IRS employees andtraining those with the most critical needs; changing, over the long term, how the IRS selects,trains, evaluates, rewards, and supports its employees so they may better serve customers;eliminating, by the end of 1998, unnecessary notices; and standardizing the format and content ofwritten responses, using appropriate commercial software.(33)  The GAO concluded that the IRShas established a promising strategy for managing the agency's customer service initiatives.  TheGAO believes this strategy could be strengthened by the development of an approach and theprovision of guidance to managers for determining the appropriate cost and benefit informationfor the customer service initiatives and for measuring the results of the initiatives as they apply tothe IRS's customer service objectives.(34)

**C.  IRS Reorganization and Management
	At the time of Congressional consideration of the IRS Reform Act, the Commissionerhad announced the broad outline of a plan to reorganize the structure of the IRS in order to helpmake the IRS more oriented toward assisting taxpayers and providing better taxpayer service. Prior to announcement of this plan, the IRS had a three-tier structure of district and regionaloffices and a national office.  Thirty-three district offices and ten service centers administer theentire spectrum of taxpayers by defined geographical boundaries.  Four regional offices presideover the districts, with one national office in Washington, D.C. at the top of the command chain.

	As announced by the Commissioner, the new organizational structure would be based onunits that serve particular groups of taxpayers with similar needs.  Under this structure, each unitwould be charged with start-to-finish responsibility (e.g. education, audit, and collectionresponsibility) for serving a particular group of taxpayers.  The Commissioner believed that thisnew structure would solve many of the problems that taxpayers had been encountering with theIRS.  The Congress agreed that the current IRS organizational structure was one of the factorscontributing to the inability of the IRS to properly serve taxpayers and that the proposed structurewould help enable the IRS to better serve taxpayers and provide the necessary level of servicesand accountability to taxpayers.  In order to support the Commissioner in his efforts tomodernize and update the IRS, the IRS Reform Act included a statutory direction for theCommissioner to eliminate or substantially modify the existing organizational structure and toestablish organizational units to serve particular groups of taxpayers with similar needs.(35)

	The Commissioner's reorganization plan centers on taxpayer needs rather thangeographical location.  The plan eliminates regional and district offices as they now exist.(36)  Fouroperating divisions comprise the centerpiece of the plan:  Wage and Investment Income,(37) SmallBusiness and Self-Employed,(38) Large and Mid-Size Business,(39) and Tax Exempt andGovernmental Entities.(40)  Each division will have its own functions for education,communication, customer account services, and compliance.(41)

	The Taxpayer Advocate and Appeals will provide assistance to taxpayers independent ofthe operating divisions.(42)  The national office will be responsible for setting broad policy,reviewing the plans and goals of the business units and developing major improvementinitiatives.(43)  Other divisions of the IRS include Chief Counsel, the Chief Information Officer,Criminal Investigation and Shared Services (i.e., facilities management, personnel services andprocurement).(44)

	The reorganization is being staged in phases:(45)
Phase I:  Identifying and validating the major components of the neworganization's structure.
Phase II A:  Developing individual organizational unit blueprints and anintegrated Master Plan Blueprint for the Modernization Program as well asdetailed Infrastructure Implementation Plans.
Phase II B:  Developing detailed design team implementation plans forblueprints and implementing the Infrastructure Implementation Plans. These plans will be required for the start up of the operating divisions.
Phase III:  Implementing the new organization.

	Phase I was completed in July 1998.  In that phase, Booz-Allen & Hamilton confirmedthat the Commissioner's Concept to Modernize the IRS is the appropriate organizationalstructure to reorganize the IRS.(46)  Phase II A (blueprints) was completed on April 15, 1999. Phase II B (design team implementation plans) is ongoing.

	The IRS has begun implementing parts of the new organization.  In the first quarter of FY1999, the Information Systems activities of the regions, districts and service centers beganreporting to the Chief Information Officer.  The nationwide Taxpayer Advocate staff beganreporting directly to the National Taxpayer Advocate.

	The Commissioner has named the head of the new Tax Exempt and GovernmentalEntities Operating Division.  This division will be headquartered in Washington, D.C. withoperations scheduled to begin in late 1999 or early 2000.(47)  A search for the heads of the otheroperating divisions is underway.

**D.  Development of Organizational Performance Measures
	As part of efforts to implement the new IRS mission and the Commissioner'smodernization plans, the IRS is changing its organizational performance measures and the way ituses measures to focus attention on priorities, assess organizational performance, and identifyimprovement opportunities.  The new framework for measuring organizational performance willbalance business results (both quantity and quality), customer satisfaction, and employeesatisfaction.  The redesigned measures will ensure that customer satisfaction and employeesatisfaction share equal importance with business results.  The IRS views fiscal year 1999 as atransition period to introduce new measures, educate and train managers and employees aboutthe performance measures, gather and analyze data (i.e., "baseline" the new measurementsystem), and refine the measurement system.  The IRS views the new system as a first step inestablishing how to manage the new IRS.(48)  Establishing appropriate measures is also critical toassist in oversight of IRS operations.  The lists of measures included with the fiscal year 2000budget request are not final or complete because the IRS is still in the process of developing themeasures.

	The IRS has acknowledged that the new performance measurement system being put inplace is still in the first steps for several reasons: it does not include a measure of voluntarycompliance; it will need to be revisited to adapt to the new organizational structure of the IRS; itis constrained by systems and data availability; and it must allow for organization learning on theeffectiveness of the measures and how they are used.(49)  While difficult, developing a measure oftaxpayer compliance will enable the IRS to quantify how its increased focus on taxpayer serviceincreases voluntary compliance and revenues, as compared to the prior focus on enforcement. As the Commissioner has stated:

	In the future, it will also be essential for the IRS to develop regular and meaningfulmeasures of overall compliance.  This is important not only for effective management butalso for fundamental fairness, to assure taxpayers who pay their taxes that others are alsocomplying.  In the absence of such measures, informed decisions on strategies toencourage voluntary compliance...will be impossible and the historic tendency to fallback on enforcement revenue as a measure of performance may reoccur.(50)

	The GAO concurs that measures of voluntary compliance and taxpayer burdens arecritical to assessing IRS performance.(51)  The IRS Organizational Performance ManagementExecutive has told the GAO that measuring voluntary compliance without using somethingsimilar to the discontinued Taxpayer Compliance Measurement Program ("TCMP") would bedifficult.  TCMP used detailed audits to measure taxpayer compliance.  The last TCMP auditswere related to tax years 1987 and 1988; TCMP audits were discontinued due to concerns abouttaxpayer burdens.(52)  The IRS has also told the GAO that the TCMP data has certain limitations. The GAO has suggested that a modified version of the TCMP studies could be useful inassessing voluntary compliance, such as using smaller samples that project nationwide results,sampling groups of taxpayers and projecting results to specific groups of taxpayers, orcontinuously sampling a small number of returns over a period of several years.(53)

	The IRS has discontinued a previously-used performance measure to gauge taxpayerburdens, because it was based on outdated methodology and was considered to be a poorindicator of burden.  The IRS is working with a consultant to develop new methods of measuringtaxpayer burden.

**E.  Technology Modernization
**Year 2000 compliance**

	Like other entities, public and private, dependent on technology, the IRS is engaged inthe task of making its computer systems Year 2000 compliant.  Failure to successfully completethis task could have a significant impact on taxpayers.  The IRS had set a goal of January 31,1999, for completion of most of its Year 2000 work, in order to avoid complications during the1999 filing season and to provide time for testing.(54)  As of the end of March 1999, the IRSreported that approximately 93 percent of its mission critical systems were Year 2000compliant.(55)

	According to the Commissioner, the Year 2000 prognosis is generally positive, but therestill is risk and significant work remains to be done.(56)

	To complete its Year 2000 efforts, the IRS will conduct end-to-end testing to ensure thatthe Year 2000 remediated systems function together.  The IRS has reported that it has beenconducting such testing since July 1998, and so far been successful.(57)  The IRS is also workingon an "end game" strategy for the weekend of December 31, 1999, through January 2, 2000.  TheIRS is also developing contingency plans that outline the procedures to follow in the event thatany of the mission critical tax processing systems suffer a major failure.  In order to assist inYear 2000 compliance, the IRS is continuing to receive independent assessment of its work fromoutside consultants.(58)

	Finally, the IRS is working with the Treasury Department to develop recommendations toensure that taxpayers who attempt to file in good faith or pay on a timely basis are not harmedbecause of a Year 2000 computer problem beyond their control.  For example, while the IRS canabate penalties for reasonable cause, there is limited authority to abate interest.(59)

**Systems modernization**

	IRS systems modernization is a necessary element to achievement of IRS strategic plans.The work required to modernize IRS systems is substantial.  As recently described byCommissioner Rossotti, updating IRS business practices for dealing with taxpayers "requiresalmost a complete replacement of IRS information technology systems, which are built on a 30-year old fundamentally deficient foundation that cannot provide accurate up-to-date informationabout taxpayer accounts."(60)

	The IRS has been working on systems modernization efforts for over a decade.  The pathto systems modernization has not been trouble free.  In 1995, the GAO reviewed IRS's taxsystems modernization ("TSM") projects, and identified significant problems.(61)  The GAO foundthat, while the IRS had progressed in many actions initiated to improve management ofinformation systems, pervasive management and technical weaknesses impeded modernizationefforts and put at risk the funds that had been allocated to systems modernization.  The GAOmade a number of recommendations to correct the identified problems, and also placed TSM onits list of high-risk areas as a critical information systems project vulnerable to schedule delays,cost over-runs, and failure to meet mission goals.

	The GAO again reviewed TSM efforts in 1996.(62)  At that time, the GAO found that theIRS had again made progress, but that none of the GAO recommendations had been fullyimplemented and that the IRS progress was not adequate to correct the management andtechnical weaknesses.  The GAO recommended that, until IRS weaknesses were corrected, theCongress should consider limiting TSM spending to only cost-effective modernization effortsthat:  (1) support ongoing operations and maintenance, (2) correct IRS management and technicalweaknesses, (3) are small, represent low technical risk, and can be delivered in a relatively shorttime frame, and (4) involve deploying already developed systems only if such systems have beenfully tested, are not premature given the lack of a completed architecture, and produce a proven,verifiable business value.

	In its 1996 report on TSM, the Treasury Department also found that, while the IRS hadmade some progress on systems modernization, modernization efforts had taken longer thanexpected, cost more than originally estimated, and delivered less functionally than originallyenvisioned.  The Treasury Department study concluded that significant changes in IRSmanagement approach were needed, and that it was beyond the scope of IRS ability to developand integrate TSM without expanded use of external expertise.(63)  In 1997, GAO again includedIRS systems modernization on its list of "high-risk" areas.

	The IRS has continued to make progress toward systems modernization.  On May 15,1997, the IRS issued its Modernization Blueprint detailing its information technology plan.  TheBlueprint had four principal parts: (1) a systems life cycle ("SLC"), (2) business requirements;(3) functional and technical architectures; and (4) a sequencing plan.  GAO reviewed theModernization Blueprint to determine whether it provided the foundation needed to develop oracquire modern systems and reported on the Blueprint in early 1998.(64)  The GAO found that theBlueprint was a good start, but that the Blueprint was not complete and did not provide sufficientdetail and precision for building or acquiring new systems.  The IRS CIO acknowledged thatessential elements were missing from the Blueprint, and stated that he had been taking steps toaddress the missing elements.(65)

	The IRS fiscal year 1998 appropriation included $325 million for information technologyand, in response to concerns regarding IRS system modernization efforts, restricted obligation ofthe funds until IRS submits to Congress for approval a plan for expenditure that: (1) implementsthe IRS Modernization Blueprint submitted to Congress on May 15, 1997; (2) meets theinformation systems investment guidelines established by the office of Management and Budgetin the fiscal year 1998 budget; (3) has been reviewed and approved by the IRS's InvestmentReview Board, the Office of Management and Budget, and the Department of the Treasury'sModernization Management Board, and has been reviewed by the General Accounting Office;(4) meets the requirements of the May 15, 1997 Internal Revenue Service's Systems Life Cycleprogram; and (5) is in compliance with acquisition rules, requirements, guidelines, and systemsacquisition management practices of the Federal Government.(66)  The fiscal year 1999information technology appropriation included similar restrictions.(67)

	In December 1998, the IRS awarded its prime systems integration services contract("PRIME").  The IRS is currently working with the PRIME contractor to update the strategicsystems plan, complete the Modernization Blueprint, account for changes in systemsrequirements and priorities caused by the IRS reorganization and the IRS Reform Act, and toimplement near-term projects (such as improved phone service and electronic filing options).(68) The IRS will be requesting $35 million of the previously appropriated funds to finalize planningactivities.  By September 30, 1999, the IRS plans to have its strategic business systems plan forthe entire reorganization.  This plan is expected to identify the systems to be modernized over thenext 5 years, their estimated costs, business case justification, the sequence in which the systemswill be developed and deployed, and the architecture standards governing their development.(69)

**F.  IRS Budget Request for Fiscal Year 2000
**In general**

	For fiscal year 2000, the IRS budget request (not including the funding for the earnedincome tax credit ("EITC") program) totals $8.105 billion and 97,767 full-time equivalent("FTE") positions.(70)  The amount of the fiscal year 2000 budget request is almost the same as thefunding level for fiscal year 1999.(71)  The approximately $2 million difference from fiscal year1999 is the net result of several increases and decreases.(72)  According to the GAO, the mostsignificant of these are an increase of $249****million to maintain current service levels, an increasein $197 million for organizational modernization, implementation of provisions of the IRSReform Act and training, and a decrease of $444 million in funding for IRS informationsystems.(73)

	The IRS budget request also includes $144 million and 2,095 FTEs for the EITCcompliance initiative.  The EITC program is funded outside the discretionary spending caps. Fiscal Year 2000 is the third year of funding for this five-year program.  The program providesfor expanded customer service and public outreach programs, strengthened enforcementactivities, and enhanced research efforts to reduce overclaims and erroneous filings associatedwith the EITC.(74)

**Funding to maintain current service levels**

	The IRS believes that the funding to maintain current service levels is essential to enablethe IRS to implement the IRS Reform Act and continue modernization efforts while maintainingday-to-day operations.  The IRS objective is to handle increased workload due to the growingeconomy and tax law changes while holding the overall workforce constant.(75)

**Organizational modernization; implementation of IRS Reform Act; training**

	The fiscal year 2000 budget request includes $140 million for implementing the structuralreorganization plan for the IRS, as described in Part I.C., above.  According to the IRS, thisfunding will be used to realign, revise, and retool certain occupations through buyouts,relocations, and retraining of IRS staff.  The IRS anticipates that base funding will be spent todeliver other aspects of modernization, including contract support, facilities modifications,computer support and other expenses of implementing the new organizational structure.(76)

	The IRS has requested $40 million and 500 FTEs for implementing the provisions of theIRS Reform Act, which the IRS has stated requires changing business priorities and practices. During the current fiscal year, IRS operational divisions have estimated that they will spend over$200 million on implementing the IRS Reform Act.  Most of this money will be redirected fromcompliance activities.  The IRS believes additional resources are required in fiscal year 2000 tocomplete the transition and fully and effectively carry out the legal mandates of the IRS ReformAct.(77)

	The IRS is requesting the $40 million to fund two program areas: $13 million forelectronic filing aimed at meeting the Congressional goal of 80 percent electronic filing reflectedin the IRS Reform Act, and $27 million and 500 FTEs for implementation of various taxpayerprotections and rights provisions of the IRS Reform Act.(78)

	Included in the budget request is $17 million for enhancing customer service throughimproved training.  According to the IRS, $13 million of this amount is needed to permanentlyincrease training funds that had been reduced during the past few years.  The IRS believes thattraining shortfalls and their resulting skills gaps contributed to some of the taxpayer treatmentissues leading up to the IRS Reform Act.(79)

	The GAO has commented that, while the IRS initiatives related to reorganization,implementation of the IRS Reform Act, and training are critical if the IRS is to provide first-classcustomer service, the IRS has not provided sufficient information regarding how these elementsof the budget request were determined to enable the GAO to determine whether the requestedfunding levels are reasonable.(80)  With respect to the reorganization, the GAO also said it couldnot comment on the reasonableness of the request because planning for the reorganization is stillin progress and, until plans are finalized, it will be difficult to estimate items such as buyouts,relocation expenditures, and training needs.(81)

**Year 2000 compliance**

	The IRS has requested $250 million and 239 FTEs for its Year 2000 compliance efforts.(82)These efforts include funding for two major system projects: (1) $100.6 million for the ServiceCenter Mainframe Consolidation project which involves consolidation of the IRS's mainframecomputer processing operations from 10 service centers to two computing centers; and (2) $26.4million for the Integrated Submission and Remittance Processing System which is to replace theIRS's two primary tax return and remittance input processing systems with one system that is tobe Year 2000 compliant.  $123.4 million of the Year 2000 budget is for the activities of theCentury Date Change ("CDC") Project office which oversees the conversion and testing ofchanges made to existing systems.  (Of the $123.4 million, approximately $29 million has beenallocated primarily for CDC Project labor and discretionary costs, $60 million the GAO notes arestill subject to approval, and $34 million is for a contingency fund for needs that may beidentified later.)

**Information technology**

	The IRS's budget request also includes $1.46 billion for information systems.  Of thisamount, $1.14 billion is to (1) operate and maintain information systems that support taxadministration, (2) consolidate mainframe computing from 10 centers to 2, and (3) restructure theinformation systems organization.  Another $250 million is for Year 2000 conversion activities,discussed above.  The balance of $66 million is for initiatives to correct IT managementweaknesses or to develop systems to sustain IRS operations until it implements modernizedsystems.(83)  The IRS has also requested an advance appropriation of $325 million for the IRS'smultiyear capital account systems modernization, referred to as the Information TechnologyInvestments Account ("ITIA").(84)

	The GAO has testified that the fiscal year 2000 budget request of $1.46 billion forinformation systems is consistent with the spending categories GAO has previously set forth forthe IRS, i.e., cost-effective modernization efforts that (1) support ongoing operations andmaintenance, (2) correct IRS management and technical weaknesses, (3) are small, represent lowtechnical risk, and can be delivered in a relatively short time frame, and (4) involve deployingalready developed systems only if such systems have been fully tested, are not premature giventhe lack of a completed architecture, and produce a proven, verifiable business value.(85)  However,the GAO has testified that the IRS has not justified its request for advance funding the ITIA of$325 million.(86)

	In particular, the GAO found that the IRS did not comply with Federal requirements that,before requesting multiyear funding for capital assets acquisitions, agencies develop accurate,complete cost data and perform thorough analyses to justify the business needs for theinvestment.  GAO determined that the IRS will not be able to prepare such analyses until after itcompletes its strategic business plan in September 1999.  Thus, the IRS did not base its budgetrequest on a complete definition of fiscal year 2001 investments and did not justify theseinvestments with a cost-benefit analysis.  IRS officials have reported to GAO that they developedan estimate for the fiscal year 2000 budget process in order to ensure that funds would beavailable for modernization in fiscal year 2001.  The GAO found that these estimated wereflawed and, in some cases, lacked verifiable data and supporting data.(87)

	The GAO recommends that the IRS fiscal year 2001 advance request of $325 million bedenied, or that the Congress consider restricting the obligation of such funds until the IRSdevelops the requisite analysis and supporting information.  The GAO believes that neither of thesuggested options would impair fiscal year 1999 and 2000 modernization efforts, because theITIA has sufficient funds to cover IRS proposed spending in both years.(88)

**General discussion of IRS budget request**

	The GAO has made several observations in addition to those described above regardingthe IRS fiscal year 2000 budget request.  First, the GAO has noted that oversight of IRS fiscalyear 2000 operations could be more complex while the IRS is in the process of structuralreorganization because the budget format is based on the current operational structure, whichmay not be the same in fiscal year 2000, and because many performance measures in the year2000 budget request are new.  The GAO recognizes that it is premature to change the IRS budgetformat until reorganization is complete.

	The GAO also recommends a separate budget activity for the office of the TaxpayerAdvocate in order to make Congressional oversight easier and to enhance the independence ofthe Taxpayer Advocate.  The GAO agrees with IRS comments that it is preferable to make allneeded changes to IRS financial and budget structures at one time (i.e., to make changes to theTaxpayer Advocate's budget when the budget is revised to reflect the new organizationalstructure).  In the meantime, the GAO recommends a descriptive narrative of the amount of thebudget for the office of Taxpayer Advocate.(89)

	The GAO had several comments related to IRS efforts relating to enforcement andcustomer service and voluntary compliance.  As noted above, there currently is no reliablemeasure of voluntary compliance.  The GAO has pointed out that this makes it difficult to assessthe effects of the diversion of enforcement resources to implement the provisions of the IRSReform Act and enhance customer service.(90)  The GAO also believes that Congressionaloversight would be enhanced if the IRS budget distinguished between resources allocated totaxpayer assistance and enforcement activities.  For example, the GAO notes that the $3.3 billionrequested for Tax Law Enforcement is not exclusively for enforcement, but includes(91) anunspecified amount of money and FTE's for various form of assistance, including walk-inservice and taxpayer education efforts.

	In some cases, it may be difficult to distinguish between taxpayer assistance andenforcement activities.  The latter, often referred to as "compliance", has traditionally includedthings such as audits and collection of taxes.  It is possible that a diversion of resources fromsuch enforcement activities will result in a decrease in tax revenues.  It is also possible, however,that increased taxpayer assistance efforts will increase voluntary compliance, as well as have apositive impact on the perceived fairness of the tax system.  Developing measures of the effectsof such activities is likely to be difficult, but, if realistic, such measures would be useful inassessing IRS activities and IRS oversight.

**II.  THE 1999 TAX FILING SEASON
	The 1999 Federal tax filing season experienced progress in several areas, many of whichrelated to the IRS's strategic plan.  The IRS also is implementing what it deems as criticalmandates of the IRS Restructuring and Reform Act of 1998.(92)

	Regarding this filing season, the IRS projected net collections for Fiscal Year 1999 of$1.7 trillion.(93)  The IRS expects to have received 228 million returns during 1999, including over126 million individual returns, and it expects to have issued over 93 million individual refunds.(94) The IRS reported that, as of March 1999, 93 percent of the its mission-critical systems weremade Year 2000 compliant and were successfully placed back into production for the 1999 filingseason.(95)  As of April 2, 1999, refunds were up over four percent from last year, with the averagerefund at $1,575, and on-line filing was up, running 156 percent ahead of last year's pace.(96)

**A.  Electronic Tax Administration
	The IRS experienced growth in its electronic tax administration for the 1999 tax filingseason.  The IRS has reported to the JCT staff that, through April 23, 1999, nearly 29 millionindividual taxpayers filed using one of the three e-file options -- a 19 percent increase over thesame period in 1998.  Almost 21 million taxpayers e-filed their tax returns through an IRS-authorized Electronic Return Originator ("ERO"), which reflects a 19.8 percent increase over thesame period in 1998.  Nearly 2.4 million taxpayers filed their returns via their home computerthrough a third-party transmitter.  Volume for on-line filing was 161 percent ahead of last year'space, and approximately 5.6 million taxpayers filed their returns over the telephone via TeleFile. Relating to the IRS's partnerships with State tax agencies, individuals were able to file both theirFederal and State income tax returns in a single telephone call during the pilot of the firstFederal/State TeleFile option.  Over 7 million taxpayers chose to file both their Federal and Stateincome tax returns in a single electronic transmission--with 35 States and the District ofColumbia participating in the program this year.(97)

	This filing season, the IRS conducted two pilot programs designed to eliminate the needto file paper signature forms.  Over 1 million taxpayers participated in the Signature Pilot. Approximately 650,000 taxpayers engaged in the On-Line Signature Pilot whereby e-fileCustomer Numbers were distributed to taxpayers who prepare their own returns using taxpreparation software and file from their home computers.  Another 490,000 taxpayersparticipated in the Practitioner Signature Pilot whereby taxpayers chose a personal identificationnumber ("PIN") to file through more than 8,000 participating practitioners.

	Finally, 74,000 taxpayers paid their balance due using an Automated Clearing Housedebit as part of their electronic return.  Under this payment system, taxpayers were able to fileearly while having the debit occur as late as April 15.(98)  Another 53,000 taxpayers were able toremit their balance due with credit cards as part of two credit card pilots the IRS conducted thisyear.(99)

	Many business taxpayers also utilized the electronic filing options available to them. These taxpayers may now make their Federal tax deposits over the telephone or via personalcomputer, thus eliminating paper payments and coupons.  During Fiscal Year 1998, 582,000quarterly employment tax returns were filed over the telephone by small businesses in addition tothe nearly 750,000 Forms 941 that were filed electronically by payroll service providers.(100)  InFiscal Year 1998, $1.153 trillion was deposited and 47 million deposits were made via theElectronic Federal Tax Payment System, which accounted for approximately 86 percent of allpayroll deposit amounts during that period.  In Fiscal Year 1999, the IRS expects that over 2.3million Forms 941 will be filed either electronically or over the telephone.(101)  The IRS is alsoworking with other Federal agencies and States to reduce employer burdens by conductingsingle-point filing projects for Federal and State taxes in Iowa and Montana under the SimplifiedTax and Wage Reporting System ("STAWRS").(102)  The IRS has established a Harmonized WageCode database and is working to improve customer service.

	In 1998, the IRS established the Electronic Tax Administration Advisory Committee("ETAAC") to provide an organized public forum for the discussion of electronic-filing-relatedissues and the goal that paperless filing should be the preferred and most convenient method offiling tax and information returns.  Comprised of tax practitioners and preparers, transmitters ofelectronic returns, tax software developers, small and large businesses, employers and payrollservice providers, individual taxpayers, State governments, and financial industry members, theETAAC continues to provide input into the development and implementation of the strategicplan for electronic tax administration.(103)

**B.  Providing Information and Service to Taxpayers
**Walk-in assistance**

	During the 1999 tax filing season, the IRS provided Saturday walk-in service at nearly262 locations nationwide, serving over 122,000 taxpayers on the weekends.(104)  The SaturdayService sites were selected based on their weekend accessability and high-traffic volume, as wellas 32 non-traditional locations (e.g., shopping malls, community centers, and post offices). During these Saturdays, the IRS provided taxpayers with forms, publications, accountinformation, Taxpayer Identification Number verification, alien clearances, and paymentacceptance.(105)

	Begun in November 1997, IRS Problem Solving Days continue to assist the IRS inproblem resolution.  Since their beginning, over 32,000 taxpayers have taken advantage of thisprogram.  Monthly Problem Solving Days provide taxpayers with the opportunity to make anappointment with IRS personnel to assist them in resolving their tax problems.(106)  Moreover,many taxpayers who called to schedule an appointment had their problems resolved over thephone.(107)

	Taxpayers continue to receive assistance through the Volunteer Income Tax Assistanceand Tax Counseling for the Elderly programs.  Many taxpayers have also benefitted from theIRS's outreach program, which focuses on providing assistance with the Earned Income TaxCredit ("EITC").(108)

**Telephone communication**

	The IRS implemented its 24 hours-a-day, 7 days-a week telephone customer serviceduring the end of the 1998 filing season, becoming permanent as of January 4, 1999.(109)  As ofMarch 27, 1999, over 28 million taxpayers have been served via "24/7" phone service, comparedto nearly 30 million over the same filing period last year.(110)  The IRS is now measuring thepercentage of calls in which the taxpayer receives actual service, compared to the percentage oftime the taxpayer merely gains access to the system.  Quality is also rated based on those whoreceive complete and accurate service, as well as technical tax law and accurate accountinformation.  Taxpayers may also receive forms, instructions, TeleTax topics, and small businessnewsletters via facsimile.  TeleTax also has information on 148 tax topics available 24 hours viaTouch-tone telephone.  In addition, as of March 27, 1999, 22.5 million used the AutomatedRefund Information system on TeleTax to check the status of their refunds.(111)

	The IRS found that the average length of a phone call with a taxpayer is eight to tenminutes, versus an average 3.5 minutes call with a typical commercial credit corporation. Moreover, in 1997, a taxpayer had a 51-percent chance of getting through to the IRS whenplacing a telephone call, as opposed to a 90 to 95 percent chance of getting through when callingother leading commercial companies.(112)

**Other taxpayer services**

	The IRS's Corporate Partnership program continues to provide more than 13 millionemployees with access to IRS forms through their corporation's World Wide Web site orLAN.(113)

**Forms**

	For the 1999 tax filing season, 11 new forms were developed and 177 forms andinstructions and 39 publications were revised.(114)   Moreover, its 1998 form packages were revisedto improve readability, highlight tax law changes,(115) and protect taxpayer privacy.  Finally, inthose areas that have insufficient outlets for distributing tax forms, the IRS has engaged itsNewspaper Supplement Program, which provides pre-selected, common tax forms in one of theSunday local newspaper editions.(116)

	The IRS is developing a forms simplification research plan that will provide strategies formoving taxpayers to the simpler tax forms and for targeting where changes are needed.  During1999, forms and publications personnel have been working with an outside contractor to redesignthe EITC and child tax credit forms and instructions.(117)

**C.  1999 Revenue Protection Strategy
	The IRS reports that, in 1998, there were 3.4 million occurrences on the electronic filingsystem of missing, invalid, or duplicate uses of social security numbers ("SSNs"), which causedthe tax returns to be rejected back to the electronic transmitter.  During the 1999 filing season,validation of SSNs continued to be a very visible portion of the IRS's fraud and abuse preventionefforts.  The IRS is expanding the validation of SSNs and taxpayer identification numbers toessentially all forms and schedules requiring identification numbers.(118)

	The EITC Communications Strategy is also being continued by the IRS.  This includeseducating taxpayers and practitioners about the EITC rules and consequences of and penaltiesassociated with non-compliance.  The IRS will also publicize free return preparation assistanceand electronic filing through the Volunteer Income Tax Assistance and Tax Counseling for theElderly programs.(119)

**D.  GAO Review of the 1999 Filing Season
**In general**

	The GAO was asked to review the IRS's performance during the 1999 tax filing season. In its April 13, 1999, testimony before the Subcommittee on Oversight of the House Committeeon Ways and Means, the GAO made four specific observations.  First, the GAO noted thattaxpayers had experienced a significant decline in telephone service, although service hadincreased in recent weeks.  Second, the number of returns filed electronically increased, althoughthe number filed via telephone decreased.  Third, taxpayers have been experiencing a significantamount of confusion regarding the new child tax credit.  Finally, the GAO observed that theIRS's new computer systems for processing returns and remittances appeared to be performingwell.(120)

**Decline in telephone service**

	The GAO reported that, over the past few years, there has been a steady increase in theability of taxpayers to reach the IRS by telephone.  In 1999, however, there have been seriousproblems.  For example, the IRS decided to discontinue a procedure that it used in 1997 and1998 which handled questions involving complex tax topics.  Under the procedure, the IRSwould direct a caller to a voice messaging system.  The caller could leave their name, address,telephone number, and best time to receive a call.  Within two to three business days, an IRSemployee with knowledge in the specific area would return the call.  In 1999, however, the IRSexpected to have sufficient staff available to answer these calls directly.  There was also concernthat, by making taxpayers wait two or three days, the IRS was not providing the best possibleservice to taxpayers.  Therefore, the IRS decided to terminate the use of voice messaging.  Otherproblems included staffing issues associated with the expansion of telephone service to 24 hours,seven days; start-up issues with the IRS's new call routing system; and the lack of reliable dataon accessibility during the first weeks of the 1999 tax filing season.

	The IRS has taken steps to address these problems.  For example, during the week ofFebruary 15, 1999, the IRS reestablished its messaging system for questions involving certain taxtopics.

	The GAO also testified that taxpayers were more likely in 1999 to receive inaccuratetelephone responses to their tax questions than in 1998.  According to the IRS, this decline canbe attributed, for example, to the decision to stop using voice messaging.  This decision requiredcustomer service representatives to answer questions concerning topics that they were notresponsible for in 1998.(121)

**Electronic filing**

	Overall, electronic filing has increased--although at a reduced rate according to the GAO. Electronic filing, however, has not been entirely paperless, and the IRS has been conducting teststargeted at making electronic filing completely paperless and eliminating the need for taxpayersto send their Forms W-2 to the IRS.(122)

	There has been a decline, however, in returns filed via telephone.  The decline in thenumber of taxpayers using TeleFile may be partially attributed to the significant increase in on-line filing.  In addition, Commissioner Rossotti testified that the IRS believes the decline intelephone filing may be due to the fact that the student loan interest deduction and the Hopecredit cannot be claimed using TeleFile.(123)

**Errors in calculating the child tax credit**

	Eligible individual taxpayers could claim a child tax credit on their 1998 tax returns.  Ofthe 1.88 million total error notices sent to taxpayers for all reasons, 202,000 (nearly 11 percent)involved errors associated with the child tax credit.  The GAO reported that these errorsgenerally involved taxpayers either miscalculating the credit or erroneously not claiming thecredit.

	As of March 1999, the IRS changed its procedure for processing returns when taxpayersfail to claim the child tax credit even though they indicate on the front of the return that theyhave one or more qualifying dependents.  Initially, the IRS's procedure required it to adjust suchtaxpayers' returns to include the credit so long as information was included that indicated that thetaxpayer met the adjusted gross income test and certain other eligibility criteria.  The IRS laterchanged its procedure to require its service centers to determine whether the child meets the agecriteria before adjusting the return.  If research determines that the taxpayer qualifies, then theadjustment is to be made.  If research determines that the taxpayer does not qualify, then noadjustment is to be made and the service center is to process the return as filed.  However, if theresearch is inconclusive, the service center is to process the return as filed (i.e., without thecredit) and notify taxpayers that they may be eligible and should file an amended return if theydetermine that they are eligible to claim the credit.(124)

**IRS's computer systems**

	This year, the IRS has made major changes to its computer systems.  The first majorchange included replacement of the returns processing system at all 10 IRS service centers andreplacement of the remittance processing system at six service centers.  Another major changeentailed the consolidation of mainframe service center computer equipment at the IRS's twocomputing centers in Martinsburg, West Virginia, and Memphis, Tennessee.  Notwithstandingthese major changes, the GAO did not identify any significant disruption in the IRS's ability toprocess returns and issue refunds this tax filing season.(125)

**III.  OTHER MATTERS ADDRESSED BY THE IRS REFORM ACT
**A.  Establishment of IRS Oversight Board
	The National Commission on Restructuring the IRS ("the Restructuring Commission")conducted a year-long study of the IRS.  Among other things, it found that while Treasury wasresponsible for IRS oversight, it had provided little consistent strategic oversight or guidance tothe IRS.  For the most part, the IRS has operated independently in recent years.  One of thespecific causes for this lack of oversight noted by the Restructuring Commission is that Treasuryofficials responsible for IRS oversight hold their positions for less than three years on average. Similarly, the Commissioner of the IRS generally holds the position for less than three years. The Restructuring Commission concluded that focus, consistency, and direction from the top wasnecessary for the IRS to carry out its functions.

	The Congress agreed that a fundamental change in the management and oversightstructure of the IRS was necessary.  It believed that a new management structure would bringgreater expertise in needed areas.  Further, the Congress thought that more focus, continuity, andprivate sector expertise would help the IRS in appropriately carrying out its function.

	As a result, the IRS Reform Act created within the Department of Treasury the IRSOversight Board ("the Oversight Board").  Generally, the Oversight Board is to oversee the IRS'sadministration, management, conduct, direction and supervision of the execution and applicationof the internal revenue laws.(126)  Specific responsibilities of the Oversight Board includereviewing and approving the IRS's strategic plans and operational functions (such asmodernization, outsourcing, training and education).  The Oversight Board also is to recommendcandidates for appointment as IRS Commissioner, as well as recommend whether theCommissioner should be removed.  The Commissioner's selection, evaluation and compensationof senior executives are also to be reviewed by the Oversight Board.  The Oversight Board is toreview and approve any major reorganization of the IRS.  The Conference Report notes that tothe extent that the Commissioner has already taken measures to develop and implement such aplan, the Commissioner should not be precluded from going forward with such planning andimplementation prior to the appointment of the Board.(127)

	The Oversight Board is also to be involved in the IRS budget preparation process.(128) Budget requests prepared by the Commissioner are to be reviewed and approved by theOversight Board to ensure that the budget request supports annual and long range strategic plansof the IRS.  The Oversight Board is to submit the IRS budget request to the TreasuryDepartment.  The Treasury Department is required to submit that budget to the President, who inturn submits it to the Congress without revision.  This provision does not preclude the Presidentfrom including his own budget for the IRS.

	The Oversight Board is to be comprised of nine members.(129)  Six members are to bedrawn from the  private sector.  The other three members are to be the IRS Commissioner, theTreasury Secretary (or Deputy Secretary),  and one full-time federal employee or employeerepresentative.  The President appoints the private sector and federal employee representation members, with the advice and consent of the Senate, for staggered five-year terms.

	The oversight board nominees were to be sent to Congress on January 22, 1999.   ThePresident has not yet submitted any nominations to the Senate for confirmation.  Although noformal announcement has been made, it has been reported that the President has named four ofthe private-life nominees, and the employee representative.(130)

**B.  Establishment of Independent National Taxpayer Advocate
**Provisions of IRS Reform Act**

	The IRS created the Problem Resolution Program ("PRP") in 1976.  PRP's purpose wasto provide an independent means of ensuring that taxpayer problems were promptly and properlyhandled.  In 1979, the IRS created the position of the Taxpayer Ombudsman to head PRP.  In1996, the Taxpayer Bill of Rights 2 ("TBOR 2") established the position of Taxpayer Advocateand the Office of the Taxpayer Advocate in place of the Taxpayer Ombudsman and the nationaloffice headquarters PRP staff.(131)  The Taxpayer Advocate was expected to  represent taxpayerinterests independently in disputes with the IRS.  The IRS Reform Act renamed the TaxpayerAdvocate the National Taxpayer Advocate ("NTA").(132)  The NTA supervises the Office of theTaxpayer Advocate.

	The Office of the Taxpayer Advocate has four principal functions:
		(1)	to assist taxpayers in resolving problems with the IRS;		(2)	to identify areas in which taxpayers have problems in dealing with the IRS;		(3)	to propose changes in the administrative practices of the IRS to mitigate problems identified in (2); and 		(4)	to identify potential legislative changes which may be appropriate to mitigate such problems.

	The IRS Reform Act established a system of local Taxpayer Advocates that reportdirectly to the NTA.  The local Taxpayer Advocates are independent of the IRS' examination,collection, and appeals functions.  Local Taxpayer Advocates are employees of the Office of the Taxpayer Advocate.  The NTA appoints Local Taxpayer Advocates.  With the Commissioner,the NTA must develop career paths for local taxpayer advocates choosing to make a career in theOffice of the Taxpayer Advocate.

	The NTA monitors the coverage and geographic allocation of local taxpayer advocateoffices and ensures that at least one local advocate is available for each state.(133)  The IRS has ataxpayer advocate in each of the four regional offices.  Each of the 33 district offices, 30 formerdistrict offices, and 10 service centers has local advocates.  The NTA must also ensure that localtelephone numbers for each office are published and available to taxpayers served by theoffice.(134)  Additionally, the NTA must develop guidance to be distributed to all IRS officers andemployees that outlines the criteria for referral of taxpayer inquiries to local offices of taxpayeradvocates.(135)

	The IRS Reform Act also expanded the NTA's ability to issue Taxpayer AssistanceOrders.  A taxpayer can request a Taxpayer Assistance Order ("TAO") if the taxpayer is sufferingor about to suffer a "significant hardship" from tax law administration.(136)  A TAO may requirethe IRS to release property of the taxpayer that has been levied upon, or to cease any action, takeany action as permitted by law, or refrain from taking any action with respect to the taxpayer.

	The NTA is required to submit two reports annually to the House Committee on Waysand Means and to the Senate Finance Committee.(137)  One report, due June 30 of each year, coversthe Office of the Taxpayer Advocate's objectives for the fiscal year beginning in that calendaryear.  Besides statistical information, the report must contain a full and substantive analysis ofthe objectives.

	The other report, due December 31 of each year, concerns the activities of the Office ofthe Taxpayer Advocate.  The content of this report is set by statute.(138)  Generally, the report mustcover initiatives taken to improve taxpayer services and problems encountered, as well as theactions taken to resolve them and the results.  Specifically, the report must cover the twenty mostserious problems experienced by taxpayers.  The IRS Reform Act required that the reportidentify the ten most litigated issues for each category of taxpayer and the areas of the tax lawthat impose significant compliance burdens on taxpayers or the IRS.  Recommendations receivedfrom individuals with the authority to issue Taxpayer Assistance Orders, and any TaxpayerAssistance Order not promptly honored by the IRS, must also be included in the report.  Thereport must also set forth recommendations for administrative and legislative action to resolveproblems encountered by taxpayers.

	The NTA, is required by statute to  submit the reports directly to the Congressionalcommittees without prior review of the Commissioner, the Secretary, or any officer or employeeof the Treasury, the Oversight Board, or the Office of Management and Budget.(139)

**Implementation efforts**

          Taxpayer Advocate activity report

	The most recent NTA report identified the following areas as some of the most seriousproblems encountered by individual taxpayers and small business:(140)
- 	Complexity of the tax law;
- 	fairness of treatment to taxpayers;
- 	listening to taxpayer concerns;
- 	length of IRS processes;
- 	explanation of IRS processes;
- 	consideration by the IRS of the information presented by taxpayers;
- 	IRS explanation of taxpayer rights;
- 	amount of time spent on an issue;
- 	attitude of the IRS; and 
- 	lack of responsiveness by the IRS.

	The NTA cited penalty issues, taxability of income and dependency exemptions as themost litigated issues for individual taxpayers.(141)  Complexity, the ability to access the IRS, andunderstanding requirements and procedures were cited as areas of the tax law that impose themost significant compliance burden on taxpayers.(142)

	The NTA reported that during fiscal year 1998, PRP resolved 272,437 cases.  Requestsfor assistance on potential hardship cases totaled 32,049.(143)

          GAO testimony: challenges facing the NTA

	Recent GAO testimony identified three challenges facing the NTA.  They are: (1)resolving staffing and operational issues while maintaining independence from the IRS; (2)strengthening advocacy efforts within the Taxpayer Advocate's Office to prevent recurringproblems and (3) developing measures of effectiveness.(144)

          Staffing and operational issues

	Principal among the staffing and operational issues is adequate training for the PRP staff. Historically, PRP staff were IRS function employees (e.g.  Examination and Collection Divisionemployees).  As a result they routinely received training in functional matters.  Although PRPstaff are no longer part of an IRS function, the functional training needs continue.  The NTA isconsidering whether to implement a cross-functional training program for caseworkers.  Such aprogram would cover multiple IRS functions and improve a caseworkers' ability to providefaster and more accurate service.  GAO also suggested that a competitive selection process wouldhelp ensure that qualified staff are selected as case workers.

	Another consequence of the PRP staff's separation from IRS functions affects the abilityto obtain additional workers to cover workload fluctuations.  Previously, the Taxpayer AdvocateOffice relied on IRS functions to supply additional staff to cover workload increases.  Since PRPworkers are now within the Taxpayer Advocate's office, this traditional means of obtainingadditional staff may not be available.  Workload increases may also require the NTA to prioritizecases to address with PRP resources, possibly compromising the ability to help taxpayers.

          Use of advocacy

	Through its advocacy efforts, the Taxpayer Advocate Office can recommend changes tothe Commissioner, IRS functions, and Congress to improve IRS operations and to remedyproblems causing an undue burden on taxpayers.  GAO noted that advocates and their staff werespending only ten percent of their time on advocacy efforts and that PRP caseworkers werespending less than one percent.(145)  Case workloads limit the amount of time available to spend onadvocacy.(146)

	GAO noted that there is an absence of strategy for conducting advocacy efforts and datawith which to prioritize potential advocacy work.(147)  No system exists for sharing information onlocal advocacy efforts, which may result in duplication.  GAO also noted that no system existsfor transmitting feedback on field recommendations to the National Taxpayer Advocate Office.

          Effectiveness measures

	Currently the Taxpayer Advocate Office uses four program measures.  These measures,however, do not produce all of the information necessary to assess program effectiveness.(148) Average processing time and currency of inventory do not provide information on howeffectively PRP is operating.  The third measure, which determines whether taxpayers are beingproperly identified and referred to PRP, is used only at service centers, so there is no data for thedistricts.  The fourth measure, quality, involves assessing whether a taxpayer was contacted bythe promised date, the clarity of communications to the taxpayer and whether the problemappeared completely resolved.  GAO noted that this measure does not have a customersatisfaction element.  Without this information, the NTA cannot assess whether taxpayers aresatisfied with PRP services.  The Taxpayer Advocate Office is currently piloting a method forcollecting such data.

**C.  Treasury Inspector General For Tax Administration
**Background and provisions of the IRS Reform Act**

	Prior to the IRS Reform Act, the IRS Office of the Chief Inspector was primarilyresponsible for carrying out internal audits and investigations regarding the IRS.  Created in 1951in response to reports of widespread corruption and abuse, the Chief Inspector was an appointeeof the IRS Commissioner.(149)  The Office of the Inspector General for the Department of Treasury("Treasury IG") could also investigate allegations of IRS employee and officer misconduct. TheIRS and the Treasury IG had an agreement as to their respective roles in investigating andoverseeing the IRS.(150)

	The IRS Reform Act eliminated the IRS Office of the Chief Inspector.  In its place,Congress created the Office of  Treasury Inspector General for Tax Administration ("TIGTA").This office is in addition to the Office of Inspector General for the Department of Treasury,which, after the Act, no longer has responsibility for the IRS.

	The IRS Reform Act transferred to the TIGTA almost all of the responsibilitiespreviously assigned to the IRS Chief Inspector, in addition to the Treasury IG's duties to theIRS.(151)  The TIGTA conducts audits, investigations, and evaluations of IRS programs andoperations (including the Oversight Board).(152)  On an ongoing basis, the TIGTA is to evaluate theadequacy and security of IRS technology.  Part of the TIGTA's responsibility includes protectingthe IRS from external threats to corrupt or threaten employees.  The TIGTA also investigatescriminal misconduct as well as administrative misconduct, such as violations of Taxpayer Bill ofRights and ethical violations.  Taxpayers are to be provided with a toll-free number to reportallegations of IRS misconduct.

	In addition, the TIGTA is to conduct periodic audits of at least one percent of alldeterminations where the IRS has asserted the confidentiality provisions (either alone or inconjunction with the Freedom of Information Act or Privacy Act), or law enforcementconsiderations as the basis for denying requested information.(153)  The program is to beimplemented within 6 months of establishing TIGTA.  The TIGTA is to report any improperassertions to the Oversight Board.

**Implementation efforts**

	On April 29, 1999, the Senate confirmed the new Treasury Inspector General for TaxAdministration.  The Department of Treasury issued Treasury Order No. 115-01, which sets forththe authority and responsibilities of the TIGTA.

	Treasury Directive 27-14 describes the organization and functions of the TIGTA's office. Under the supervision of the TIGTA are a Deputy Inspector General ("IG") for TaxAdministration, a Counsel to the TIGTA, an Assistant IG for Audit, an Assistant IG forInvestigation, four Regional Inspector Generals for Tax Administration, a Director-Office ofResources Management, a Director-Office Systems Development and Integration, a Director-Central Case Development Center, a National Director for Communication, Education, andQuality and other support staff as the TIGTA deems necessary.

	Most of the staff of the former IRS Office of the Chief Inspector were transferred to theTIGTA.  The IRS retains some personnel from Inspection to establish an internal audit functionfor management.  The IRS also retains responsibility for IRS employee backgroundinvestigations and physical security.

**D.  Personnel Flexibility
**IRS Reform Act**

	Congress believed that as part of restructuring the IRS, the Commissioner should havethe ability to bring in experts and the flexibility to revitalize the current workforce.(154)  Indiscussing the need for personnel flexibilities, the legislative history noted that existing personnelrules and procedures on hiring, evaluating, promoting, and firing employees are subject toextensive regulation. Further, according to the committee, the risk-averse nature of the IRSprovided minimal incentive for managers or front-line employees to achieve the agency'smission, and stifled creativity, innovation, and quick problem resolution. The committee statedits intention that the personnel flexibilities lead to increased accountability by IRS managers andemployees and to increased focus on IRS mission, goals, and objectives.(155)

	Senator William V. Roth, Jr., Chairman of the Senate Finance Committee, spoke ofgiving the Commissioner "the tools necessary to bring the IRS into the next century."(156)  Amongthe tools provided to the Commissioner, said Senator Roth, are "the wherewithal to transform theagency's workforce by providing bonuses and other incentives, and to sufficiently disciplineemployees whose inappropriate actions are a plague on the agency." Another change in personnellaw emphasized by Senator Roth was the legislation's prohibition on "the use of enforcementstatistics to evaluate any IRS employee, not merely front line collection employees and theirsupervisors."  Senator Roth identified the use of enforcement statistics as "one of the mosttroubling issues raised in our September hearings."(157)

	Congressman Rob Portman, co-chairman of the National Commission, noted thelegislation enables the IRS to effect change throughout the agency by bringing in top experts,rewarding employees for taxpayer service and increasing the accountability of IRS employeesand management:

	. . . the legislation reforms the IRS management structure to increaseaccountability and performance.  It gives the IRS Commissioner new personnelflexibilities to drive change through the agency, such as the ability to bring inexperts from the private sector at a high level in the IRS, the ability to reward IRSemployees for taxpayer service, and fire employees who provide inferior service.It also increases the accountability of IRS employees and managers in thecollection area to stop the tactics of intimidation.(158)

	The IRS Reform Act gave the IRS considerable authority beyond the personnel rules andprocedures found in Title 5 relating to:
-  Pay authority for critical positions .--Upon request of the TreasurySecretary, the Office of Management and Budget is authorized to set abasic salary rate for "critical pay positions" at levels higher than thosegenerally authorized in the civil service laws for critical positions.  Theserates, including bonuses, awards and differentials, cannot exceed the rateof pay for the Vice President (currently $175,000).
-  Streamlined critical pay authority .--The Treasury Secretary can designatepositions, set pay and appoint up to 40 individuals to criticaladministrative, technical and professional positions.  These appointmentsassist in recruiting and retaining individuals exceptionally well-qualifiedfor a position.  Compensation cannot exceed that of the Vice President.
-  Recruitment, retention and relocation incentives .--The Treasury Secretarywas given the authority to offer incentives for recruitment, retention, andrelocation and to pay relocation expenses.
-  Performance awards for senior executives .--The Treasury Secretary wasalso given greater authority to pay performance bonuses to members of theSenior Executive Service ("SES"). 
-  New performance management system .--A new performance managementsystem, stressing individual accountability is to be implemented.  The Actprohibits the use of enforcement goal, quotas or statistics as the basis forawarding bonuses or merit pay.
-  Workforce classification and pay .--The Secretary can combine grades andsalary ranges to create broad banded systems for any or all of the IRSwork force.
-  Limited appointments to career reserved SES positions .--The IRS ReformAct permits the IRS to fill certain permanent positions with temporaryemployees.  The Act broadens the definition of a career reserved positionto include a limited emergency appointee.  It also covers a limited termappointee who immediately upon entering the career reserved position,served under a career or a career-conditional appointment outside of theSES, or where OPM approved the limited emergency or limited termappointment in advance.
-  Workforce staffing .--Candidates for positions can be selected from thehighest quality category regardless of individual numerical rating. Further, the IRS can establish a three year probationary period when ashorter period is insufficient to evaluate an employee.  The Secretary mayalso detail an employee without regard to the 120 day limitation.
-  Streamlined demonstration project authority .--The IRS Reform Actpermits the IRS to take a streamlined approach to conducting research andtesting alternative management constructs.  A demonstration project underthis section would not be subject to the ordinarily lengthy approvalprocess.

	 The Act defined specific acts of misconduct for which an IRS employee must beterminated.(159)  In his sole discretion, the Commissioner may determine that there are mitigating factors which weigh against terminating an employee.  This discretionary authoritycannot be delegated.

	Congress also gave the IRS the ability to offer incentives for voluntary separation (buyoutauthority).

	The Act requires the IRS to implement a training program for its employees within 180days of enactment.  The IRS is to submit an employee training plan to Congress.

**Implementation efforts**

	Commissioner Rossotti indicated that he has used the additional personnel flexibility tohire persons from outside the agency, particularly in the information systems area.  The IRS iscurrently recruiting for the heads of three operating divisions.

	With respect to employee evaluations, the Commissioner indicated that all of theprohibited measurements have been withdrawn.  In their place, the IRS has created "BalancedMeasures."  It uses a three-part system of customer satisfaction, business results that have aquality and quantity measure, (but not enforcement revenues), and an employee satisfactionmeasure.(160)  The IRS plans to implement the measures for at least part of the organization thisyear.  Managers are currently being trained in the new system.  For front-line employees thedesired activities and behavior consistent with the strategic goals(161) are incorporated into the"critical elements of each employee's position descriptions and should be evaluated by themanager based on informed observation of that employee's job performance."(162)  Thus,quantitative measurements are not used to evaluate performance, except in certain submissionsprocessing functions.(163)

	The IRS recently outlined how it plans to implement the IRS Reform Act mandatoryfiring provision.  Notice 99-27 outlines the basic principles for IRS will follow in administeringthe provision.  The IRS will apply existing personnel law and procedures, including the currentpersonnel definition of employee.  It will apply the law only to those employee acts or omissionsthat have a clear nexus to an employee's position at the IRS and that are undertaken with somedegree of intent.  The IRS determined that an administrative or judicial determination is finalonly if an employee is granted full rights to participate as a party to the action or proceeding.  Italso determined that the provision will apply only to those acts or omissions occurring after July22, 1998, the date of the IRS Reform Act's enactment.
**FOOTNOTES**
1.   Pub. L. 105-206 (July 22, 1998).
2.   H. Rept. 105-364, Pt. 1, at 34-35 (1997) (hereinafter the "House Committee Report")and S. Rept. 105-174, pp. 11-12 (1998) (hereinafter the "Senate Committee Report").
3.   For a summary of the IRS Reform Act's taxpayer rights and protections, *see Summaryof Revenue Provisions Contained in Legislation Enacted During the 105th Congress* (JCX-75-98), November 19, 1998, 61-77.  *See also*, Internal Revenue Service, Publication 553, *Highlightsof 1998 Tax Changes* (December 1998), 20-25.
4.   Internal Revenue Code ("Code") sec. 8021(f)(2).
5.   Code sec. 8022(3)(C).
6.   This document may be cited as follows: Joint Committee on Taxation, *Report of theJoint Committee on Taxation Relating to the Internal Revenue Service as Required by the IRSReform and Restructuring Act of 1998* (JCX-24-99), May 20, 1999.
7.   IRS Reform Act sec. 1002.
8.   The IRS's previous mission statement read:
	The purpose of the Internal Revenue Service is to collect theproper amount of tax revenue at the least cost; serve the public bycontinually improving the quality of our products and services; andperform in a manner warranting the highest degree of publicconfidence in our integrity, efficiency and fairness.

9.   The IRS is currently updating its strategic plan for fiscal years 1999-2004 to include,among other things, the revised IRS mission statement and the Commissioner's modernizationconcept.  Until the strategic plan is revised, the IRS has stated that pages SD-9 through SD-24 ofIRS Document 10968, *Fiscal Year 2000 Congressional Justification*(February 1, 1999)(hereinafter "IRS FY 2000 Justification") will serve as its strategic plan.  The IRS plans to issue arevised strategic plan in 1999.  The goals and objectives outlined in the Fiscal Year 2000Justification are also reflected in IRS Publication 3349 (2-1999), *Modernizing America's TaxAgency* (1999) (hereinafter *"Modernizing America's Tax Agency")*.
10.   Many IRS practices are in the Internal Revenue Manual and various rulings andregulations.  *See also**Modernizing America's Tax Agency*, 15-27.
11. *Id.*at 17.
12. *Id.*
13. *Id.*
14. *Id.* at 18.
15. *Id.*
16. **Statement of Charles O. Rossotti, Commissioner, Internal Revenue Service, before theSubcommittee on Oversight House Committee on Ways and Means (April 13, 1999), 8.
17. *Id.* at 9.
18. *Id.*
19. *Id.*, as updated with information supplied to the Joint Committee on Taxation staff bythe IRS.
20. **Statement of Charles O. Rossotti, Commissioner, Internal Revenue Service, before theSubcommittee on Oversight House Committee on Ways and Means (April 13, 1999), 9.
21. *Id.*
22. *Id.* at 10.
23. *Id.*
24.   H. Rept. 105-599, at 234 (1998) (hereinafter the "Conference Report").
25. *Modernizing America's Tax Agency* at 20.
26. *Id.* at 20-21.
27. *Id.* at 21-22.
28. *Id.* at 23.
29. *Id.*
30. *Id.* at 23-24.
31. *See* General Accounting Office, *IRS Customer Service, Management Strategy ShowsPromise But Could Be Improved*(GAO/GGD-99-88, May 9, 1998) (hereinafter "GAO Report99-88"), at 4-5.  The head of TTSI was authorized to build a staff and create a strategy forcoordinated review and implementation of more than 5,000 improvement initiatives by the IRS. In January 1999, this list was reduced to 157 initiatives as primary customer serviceimprovement actions to be managed by TTSI in the short term. 
32.   IRS FY 2000 Justification at SD-21 - SD-22.
33.   GAO Report 99-88 at 15-17.  As of January 1999, some of the initiatives were closed,some were in process, and some had been deferred.  Initiatives were classified as closed if theIRS believed the work had been completed or the work did not need to be done.  For example,the initiative to expand telephone service to 24 hours, 7 days a week had been closed by January1999 because the expansion had been completed.  *Id.*
34. *Id.* at  4, 8.
35.   IRS Reform Act sec. 1001. 
36.   IRS FY 2000 Justification at SD-1.  Each of the four operating divisions will havefield operations, with at least one "territory" in each state and with "areas" serving as a multistatepresence. This portion of the plan has been provisionally approved.  The IRS DeputyCommissioner for Modernization recently stated that the new territories will not simply replacethe existing districts.  In distinguishing the new structure, the Deputy Commissioner said that aterritory manager will have authority over joint collection and exam issues and that the fivelayers of management will be eliminated.  An issue will go from an agent to the group managerto the territory manager, who controls both exam and collection functions.  The geographicstructure is designed to meet the needs of each operating division's taxpayer base.  The DeputyCommissioner indicated that he envisioned moving only two percent of the current fieldworkforce.  "ABA Tax Section: New Article IRS Will Have 'Territories,' 'Areas,'" *Tax NotesToday*, 1999 TNT 84-2 (May 3, 1999).
37.   The Wage and Investment Income division will cover individual taxpayers with simplereturns, who are not self employed or do not have supplemental income.  These includeindividual taxpayers filing Form 1040A, 1040EZ, and simple 1040s. IRS FY 2000 Justificationat SD-15.  This division will have its headquarters in Atlanta, Georgia.
38.   The Small Business and Self-Employed division includes those individual filers whofile Schedules C, E, F, or Form 2106.  It also includes partnerships, S corporations andcorporations with assets under $5 million.  *Id.* at SD-15.  This division will have its headquartersin Washington, D.C.
39.   The Large and Mid-Size Business division covers mid size corporations, having assetsvalued between $5 million and $250 million, and large corporations, having assets in excess of$250 million.   *Id.* at SD-15.  This division will have its headquarters in Washington, D.C.
40.   The Tax Exempt and Governmental Entities division includes tax-exemptorganizations, employee plans, and governmental entities.  Employee Plans comprises over 1million private and public retirement plans.  Exempt Organizations includes over 1 million tax-exempt organizations and an estimated 350,000 religious organizations.  Governmental Entitiesincludes 220,000 outstanding tax-exempt bond issuances, 86,000 Federal, State, and localentities and 559 Federally recognized Indian tribes.  Internal Revenue Service, "Petschek to HeadIRS Tax Exempt Operating Division," Press Release IR-99-42 (April 20, 1999).  This divisionwill have its headquarters in Washington, D.C.
41.   IRS FY 2000 Justification at SD-15.
42. *Id.*
43. *Id.*
44. *Id.*
45. *Id.* at SD-16.
46. *Id.*
47.   Internal Revenue Service, "Petschek to Head IRS Tax Exempt Operating Division,"Press Release IR-99-42 (April 20, 1999).
48.   IRS FY 2000 Justification, at SD-19-SD-21.  *See also, Modernizing America's TaxAgency*, at 42-46.
49.   IRS FY 2000 Justification, at SD-20.
50. *Modernizing America's Tax Agency,* at 44-45.
51.   General Accounting Office, *Tax Administration: IRS' Fiscal Year 2000 BudgetRequest and 1999 Tax Filing Season* (GAO/T-GGD/AIMD-99-140, April 13, 1999) (hereinafter"GAO Report 99-140"), at 15.
52.   While the IRS administratively discontinued TCMP audits, subsequent statutorychanges relating to certain audit techniques could have an impact on the IRS's ability to reinstateTCMP audits in the same manner as they were previously conducted.  *See* Code sec. 7602(e).
53.   GAO Report 99-140, at 16-17.
54.   General Accounting Office, *IRS' Year 2000 Efforts: Status and Remaining Challenges*,(GAO/T-GGD-99-35, February 24, 1999) (hereinafter "GAO Report 99-35"), at 1.
55.   Statement of Charles O. Rossotti, Commissioner, Internal Revenue Service, before theSubcommittee on Oversight House Committee on Ways and Means (April 13, 1999), at 2.  InFebruary of this year, the GAO reported that, despite significant progress, the IRS had not metthe January 1999 completion goal for (1) upgrading systems software and hardware for its threetypes of computers and (2) fully implementing one of two major system improvement projects. GAO Report 99-35, at 2. 
56.   Statement of Charles O. Rossotti, Commissioner, Internal Revenue Service, before theSubcommittee on Oversight House Committee on Ways and Means (April 13, 1999), at 2.  
57. *Id.* at 3.
58. *Id.* at 3-4.  *See also*, GAO Report 99-35, at 1.
59.   Statement of Charles O. Rossotti, Commissioner, Internal Revenue Service, before theSubcommittee on Oversight House Committee on Ways and Means (April 13, 1999), at 4.  
60.   Statement of Charles O. Rossotti, Commissioner, Internal Revenue Service, before theSubcommittee on Oversight, House Ways and Means Committee (April 13, 1999), 18.
61.   General Accounting Office*, Tax Systems Modernization: Management and TechnicalWeaknesses Must be Corrected if Modernization is to Succeed* (GAO/AIMD-95-156, July 26,1995).
62.   General Accounting Office,*Tax Systems Modernization: Tax Systems ModernizationUnder Way But IRS Has Not Yet Corrected Management and Technical Weaknesses*(GAO/AIMD-96-106, June 7, 1996).
63.   Department of the Treasury, *Report to House and Senate Appropriations Committees,Progress Report on IRS's Management and Implementation of Tax Systems Modernization* (May6, 1996) at 1.
64.   General Accounting Office, *Tax Systems Modernization: Blueprint is a Good Start ButNot Yet Sufficiently Complete to Build or Acquire Systems* (GAO/AIMD/GGD-98-54, February24, 1998).
65. *Id.* at 2-3.
66.   Pub. L. 105-61 (October 10, 1997), 111 Stat. 1281.
67.   Pub. L. 105-277 (October 21, 1998), 112 Stat. 2681-488.
68.   IRS FY 2000 Justification, at SD-23.
69.   GAO Report 99-140, at 36-37.
70.   IRS FY 2000 Justification, at SD-26.
71.   The GAO recently presented the results of its audit of the principal financialstatements of the IRS for Fiscal Year 1998.  In summary, the GAO found extensive weaknessesin the design and operation of the IRS's financial management systems, accounting procedures,documentation, recordkeeping, and internal controls (including computer security controls),which prevented the IRS from reliably reporting the results of its administrative activities.  ForFiscal Year 1998, however, the GAO did conclude, after extensive, costly, and time-consumingad hoc procedures to overcome these weaknesses, that the IRS did report reliably on the resultsof its custodial activities.

	The GAO described the IRS's major accounting, reporting, and internal controldeficiencies to include: (1) an inadequate financial reporting process; (2) improperly managingunpaid assessments; (3) deficiencies in preventive controls over tax refunds that have permittedthe disbursement of millions of dollars of fraudulent refunds; (4) the failure to reconcile its fundbalance to Treasury records during Fiscal Year 1998; (5) the inability to properly safeguard (orreliably report) its property and equipment; (6) vulnerabilities in computer security that maypermit unauthorized access to IRS programs, data, and taxpayer information; (7) vulnerabilitiesin controls over tax receipts and taxpayer data; and (8) the inability to provide assurance that itsbudgetary resources are being properly accounted for, reported, and controlled.

	As a result of these weaknesses, the GAO was unable to render an opinion on the IRS'sstatement of net cost, statement of changes in net position, statement of budgetary resources, orstatement of financing.  The GAO did render a qualified opinion on the IRS's balance sheet andan unqualified opinion on the IRS's statement of custodial activities.
72.   IRS FY 2000 Justification, at SD-26.
73.   GAO Report 99-140, at 3-4.  The IRS reports the request to maintain current servicelevels as $299 million IRS FY 2000 Justification, at SD-27.  The difference between the twonumbers is a base reduction of $50 million that the Office of Management and Budget requestedthe IRS to absorb.  IRS FY 2000 Justification, at SD-29.
74.   IRS FY 2000 Justification, at SD-30.
75. *Id.* at SD-27.
76. *Id.* at SD-29.
77. *Id.*at SD-27 - SD-28.
78.   These include: (1) $18.6 million to meet increased notice activity and processing forinnocent spouse relief (IRS Reform Act sec. 3201) and due process in collection actions (IRSReform Act sec. 3401) and Spanish language assistance (IRS Reform Act sec. 3705); (2) $4million to fund additional grants for low-income taxpayer clinics (IRS Reform Act sec. 3601);and, (3) $4 million to fund toll-free circuitry and equipment costs and enhanced Internet access(IRS Reform Act sec. 2803).  *Id.* at SD-28.
79. *Id.*
80.  GAO Report 99-140, at 1-2, 4-6.
81. *Id.* at 5.
82.   IRS FY 2000 Justification, at SD-26.
83.   GAO Report 99-140, at 37.
84. *Id.* at 32-33.
85. *Id.*at 32, 37-38.
86. *Id.* at 33.
87. *Id.* at 38-40.
88. *Id.* at 40.
89. *Id.* at 10-11.
90. *Id.*at 6-7.
91. *Id.* at 9-10.
92.   These include: instituting new personnel flexibilities, including a broad-band paysystem; improving employee training and assistance; and achieving the goal that, by the year2007, 80 percent of all tax and information returns will be filed electronically.
93.   Statement of Charles O. Rossotti, Commissioner, Internal Revenue Service, before theSubcommittee on Oversight, House Ways and Means Committee (April 13, 1999), at 1.
94. *Id.*
95. *Id.*
96. *Id.*
97. *Id.* at 6.
98. *Id.*
99.   Taxpayers are responsible for any credit card fees incurred in the transaction.  Codesection 6311(d)(2) provides that the Secretary may not pay any fee for the use of credit, debit, orcharge cards for the payment of income taxes.
100. *Id.* at 7.
101. *Id.*
102.  Section 976 of the Taxpayer Relief Act of 1997, Pub. L. 105-34 (August 5, 1997),authorizes a demonstration project in the State of Montana and permits the disclosure of thetaxpayer's identity as defined in Code section 6103(d)(5) (i.e., the taxpayer's name, address, andtaxpayer identification number), and signature.  The IRS is also conducting a demonstrationproject with the State of Iowa, without the disclosures that are permitted under the Montanademonstration project.
103. *Id.*
104. *Id.* at 12.
105. *Id.*
106.   Taxpayer problems with the IRS are also addressed by the Office of the TaxpayerAdvocate, which is discussed in Part III. B., below.
107. *Id.*
108. *Id.* at 13.
109. *Id.* at 10.
110. *Id.*
111. *Id.* at 11.
112. *Modernizing America's Tax Agency* at 18.
113.   Statement of Charles O. Rossotti, Commissioner, Internal Revenue Service, before theSubcommittee on Oversight, House Committee on Ways and Means (April 13, 1999), at 13.
114. *Id.* at 14.
115.   For example, to improve readability, for example, the IRS printed the instructions tothe 1998 Form 1040 in larger, bolder type.  Moreover, the 1998 tax package also reflectedchanges to the tax law, including, for example: the child credits; education credits; ROTHconversion IRAs; credit for Federal tax paid on Kerosene; and a change in the standard mileagerates.  Finally, taxpayers' social security numbers were not printed on the peel-off label that wasmailed with the tax package, in order to protect taxpayer privacy.
116. *Id.* at 14-15.
117. *Id.*
118. *Id.* at 16.
119. *Id.* at 17.
120.   GAO Report 99-140 at 40-41.  The GAO observations reflect the filing statistics priorto the end of the filing season.  Final numbers of the filing season may affect the GAO'sfindings.
121. *Id.* at 41-45.
122. *Id.* at 45-47.
123.   Testimony of Charles O. Rossotti, Commissioner, Internal Revenue Service, beforethe Subcommittee on Oversight, House Committee on Ways and Means (April 13, 1999).
124.   GAO Report 99-140 at 47-50.
125.   GAO Report 99-140 at 50.
126.   Code sec. 7802(c) and (d).
127.   Conference Report at 203-204.
128.   Code sec. 7802(d)(4).
129.   Code sec. 7802(b).
130. *Tax Report*, Wall Street Journal, (May 12, 1999);*Administration Soon to Name FiveNominees for New IRS Oversight Board, Official Says,* BNA Daily Report for Executives, G-9(May 13, 1999).
131.   The Commissioner of the Internal Revenue Service appointed the Taxpayer Advocate.
132.   The IRS Reform Act now requires that the Secretary of the Treasury, afterconsultation with the Commissioner and the Oversight Board, appoint the NTA.  The NTA isrequired to have experience in customer service, tax law, and representing individual taxpayers. Compensation for the NTA is at the highest rate of basic pay established for the Senior ExecutiveService.  For the two year period preceding appointment, the NTA must not have been an IRSofficer or employee.  After leaving the Office of the NTA, the NTA can not accept employmentwith the IRS for five years.
133.   Code sec. 7803(c)(2)(C)(i).
134.   Code sec. 7803(c)(2)(C)(iii).
135.   Code sec. 7803(c)(2)(C)(ii).  Four criteria determine which cases are brought intoPRP:  (1) any contact on the same issue at least 30 days after an initial inquiry or complaint; (2)no response by date promised, including commitments made by the IRS; (3) any contact thatindicates that established systems have failed to resolve the taxpayer's problem; or (4) when it isin the best interest of the taxpayer or the IRS.  Internal Revenue Service, Publication 2104,*National Taxpayer Advocate's Annual Report to Congress* (December 1998) (hereinafter "NTAReport"), at 3.
136.   Code sec. 7811(a)(1)(A).  Significant hardship is deemed to occur if one of fourfactors exists: (1) there is an immediate threat of adverse action; (2) there has been a delay ofmore than 30 days in resolving the taxpayer's problems; (3) the taxpayer will have to paysignificant costs (including fees for professional services) if relief is not granted; or (4) thetaxpayer will suffer irreparable injury, or a long term adverse impact if relief is not granted. Code sec. 7811(a)(2).  The NTA may also issue a TAO if the taxpayer meets requirements to beset forth in regulations.  Code sec. 7811(a)(1)(B).
137.   Code sec. 7803(c)(2)(B).
138.   Code sec.7803(c)(2)(B)(ii)(I) through (XI).
139.   Code sec. 7803(c)(2)(B)(iii).
140.   NTA Report at 12. 
141. *Id.* at 74.
142. *Id.* at 85.
143. *Id.* at 3.
144.   General Accounting Office, *IRS Management: Challenges Facing the NationalTaxpayer Advocate*, (GAO/T-GGD-99-28, February 10, 1999), (hereinafter "GAO Testimony99-28"), at 1.
145. *Id.* at 6.
146. *Id.*
147. *Id.* at 7.
148. *Id.* at 7-8.
149.   Conference Report at 220.
150. *Id.*
151.   The TIGTA did not assume responsibility for background checks and physicalsecurity.  Treasury Order 115-01(1)(b) and (d)(6) (January 14, 1999).
152.   Treasury Order 115-01(1)(b) (January 14, 1999).
153.   Code sec. 7803(d)(3)(A).
154.   Joint Committee on Taxation, *General Explanation of Tax Legislation Enacted in1998*, (JCS-6-98)  November 24, 1998, at 45.
155.   Congressional Research Service, 98-4 GOV, *Implementation of P.L. 105-206: Personnel Management Flexibility for the Internal Revenue Service*, CRS-2 (March 11, 1999)(hereinafter "CRS Report") citing  H. Rept. 105-364 Pt. I, at 45-46 (1997).
156.   CRS Report, at CRS-2.
157. *Id.*, at CRS-3, citing 144 Cong. Rec. S4182-S4183 (daily ed. May 4, 1998).
158.   CRS Report, at CRS-4, citing 144 Cong. Rec. H5354 (daily ed. June 25, 1998).
159.   The acts or omissions that will subject an IRS employee to firing are:
	(1)  willful failure to obtain the required approval signatures on       documents authorizing the seizure of a taxpayer's home, personal belongings, or       business assets;  	(2)  providing a false statement under oath with respect to a material       matter involving a taxpayer or taxpayer representative; 	(3)  with respect to a taxpayer, taxpayer representative, or other employee      of the Internal Revenue Service, the violation of- 

 		(A)  any right under the Constitution of the United States; or 		    (B)  any civil right established under- 
			(i)  title VI or VII of the Civil Rights Act of 1964; 			(ii)  title IX of the Education Amendments of 1972; 			(iii)  the Age Discrimination in Employment Act of 1967; 			(iv)  the Age Discrimination Act of 1975; 			(v)   section 501 or 504 of the Rehabilitation Act of 1973; or 			(vi)  title I of the Americans with Disabilities Act of 1990; 

	(4)  falsifying or destroying documents to conceal mistakes made by any employee       with respect to a matter involving a taxpayer or taxpayer representative; 	(5)  assault or battery on a taxpayer, taxpayer representative, or other       employee of the Internal Revenue Service, but only if there is a criminal       conviction, or a final judgment by a court in a civil case, with respect to the       assault or battery;  	(6)  violations of the Internal Revenue Code of 1986, Department of       Treasury regulations, or policies of the Internal Revenue Service (including the      Internal Revenue Manual) for the purpose of retaliating against, or harassing, a      taxpayer, taxpayer representative, or other employee of the Internal Revenue       Service; 	(7)  willful misuse of the provisions of section 6103 of the Internal       Revenue Code of 1986 for the purpose of concealing information from a       congressional inquiry; 	(8)  willful failure to file any return of tax required under the Internal       Revenue Code of 1986 on or before the date prescribed therefor (including any       extensions), unless such failure is due to reasonable cause and not to willful       neglect; 	(9)  willful understatement of Federal tax liability, unless such       understatement is due to reasonable cause and not to willful neglect; and  	(10)  threatening to audit a taxpayer for the purpose of extracting         personal gain or benefit. 

160.   FY 2000 Justification at SD-19. 
161.   These goals are:  service to each taxpayer, service to all taxpayers, and "productivitythrough a quality work environment.
162. *Modernizing America's Tax Agency* at 44.
163. *Id.*************************************