REPORT OF THE 

JOINT COMMITTEE ON TAXATION 

RELATING TO THE INTERNAL REVENUE SERVICE 

AS REQUIRED BY THE 

IRS REFORM AND RESTRUCTURING ACT OF 1998 

Prepared for the 

HOUSE COMMITTEES ON WAYS AND MEANS, 

APPROPRIATIONS, AND GOVERNMENT REFORM 

AND THE SENATE COMMITTEES ON 

FINANCE, APPROPRIATIONS, AND GOVERNMENTAL AFFAIRS 

For a Joint Review 

Scheduled on May 8, 2001 

By the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

May 4, 2001 

JCX-33-01
i 

CONTENTS

Page

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

EXECUTIVE SUMMARY..................................................................................... 3 

I. IRS MISSION STATEMENT AND OVERVIEW OF IRS 

STRATEGIC PLANS ................................................................................ 12 

A. Mission Statement and Statement of Strategic Goals ............................. 12 

B. Providing Top Quality Service to Each Taxpayer .................................. 12 

C. Providing Top Quality Service to All Taxpayers.................................... 15 

D. Productivity Through a Quality Work Environment............................... 17 

II. IMPLEMENTATION OF IRS STRATEGIC GOALS........................... 19 

A. Guiding Principles and Major Strategies ................................................ 19 

B. Organizational Modernization................................................................. 25 

C. Development of Organizational Performance Measures ........................ 29 

D. Technology Modernization ..................................................................... 31 

III. DESCRIPTION AND ANALYSIS OF THE IRS BUDGET REQUEST 

FOR FISCAL YEAR 2002 ......................................................................... 36 

A. In General................................................................................................ 36 

B. Funding to Maintain Current Operating and Service Levels .................. 39 

C. Funding to Support IRS Systems Modernization ................................... 40 

D. Financial Audit of IRS Fiscal Year 2000 Financial Statements.............. 44 

 

IV. OTHER MATTERS ADDRESSED BY THE IRS REFORM ACT ...... 46 

A. IRS Oversight Board ............................................................................... 46 

B. National Taxpayer Advocate................................................................... 47 
Page

ii 

 

C. Taxpayer Rights ...................................................................................... 53 

D. Treasury Inspector General For Tax Administration .............................. 67 

E. Personnel Flexibility and IRS Management ........................................... 71 

 F. Violations for Which IRS Employees May be Terminated .................... 74 

V. THE 2001 FILING SEASON ..................................................................... 78 

 A. Overview ................................................................................................. 78 

 B. Electronic Tax Administration................................................................ 79 

 C. Telephone and Walk-In Service.............................................................. 83 

 D. 2001 Revenue Protection Strategy .......................................................... 84 

VI. APPENDIX ..................................................................................................... 87 
 1

INTRODUCTION 

The Internal Revenue Service Restructuring and Reform Act of 19981

 (the "IRS Reform 

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

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

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

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

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

Under provisions relating to the Congressional oversight, the IRS Reform Act requires a 

joint review of IRS activities.4 The joint review is to include two members of the majority and 

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

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

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

June 1 of each calendar year 1999 through 2003.5 The joint review is to address the strategic 

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

Committee. 

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

Committees on Finance, Appropriations, and Government Affairs, and the House Committees on 

Ways and Means, Appropriations, and Government Reform regarding certain matters relating to 

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

 

1

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

2

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

(1998). 

3

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

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

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

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

4

 Internal Revenue Code ("Code") sec. 8021(f)(2). 

5

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

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

Service, 1999, May 25, 1999 (JCS-4-99). The second joint review was held on May 3, 2000. A 

transcript of the second joint review is published in Joint Committee on Taxation, Strategic 

Plans and Budget of the Internal Revenue Service, 2000, May 3, 2000 (JCS-4-00). 

6

 Sec. 8022(3)(c). The previous two reports can be found at Report of the Joint 

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

and Restructuring Act of 1998 (JCX-24-99), May 20, 1999 and Report of the Joint Committee on 

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

Restructuring Act of 1998 (JCX-46-00), April 28, 2000. 
 2

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

fiscal year 2001 has been scheduled for May 8, 2001. This document,7

 prepared by the staff of 

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

by the IRS Reform Act.

 7

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

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

Reform and Restructuring Act of 1998 (JCX-33-01), May 4, 2001. 
 3

EXECUTIVE SUMMARY 

A. IRS Mission Statement and Overview of IRS Strategic Plans 

Mission statement and statement of strategic goals

As required by the IRS Reform Act, the IRS has restated its mission statement to focus 

on interaction with taxpayers. The new IRS mission statement is to: 

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

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

integrity and fairness to all. 

To assist in achieving its mission, the IRS has developed three strategic goals: 

(1) To provide top quality service to each taxpayer; 

(2) To provide top quality service to all taxpayers; and 

(3) To increase productivity within the IRS by providing IRS employees with a 

quality work environment. 

The IRS describes the process of change necessary to meet its goals and fulfill its mission 

statement as “modernization.” 

Providing top quality service to each taxpayer

The IRS has made some progress toward achieving the goal of providing top quality 

service to each taxpayer, but challenges in reaching this goal remain. This goal can be measured 

by taxpayers’ view of the performance of the IRS. Since the passage of the IRS Reform Act in 

1998, the IRS public opinion rating has improved. Nonetheless, the IRS rating remains well 

below that of other agencies. The IRS Oversight Board believes that the IRS is not meeting this 

goal. For example, the IRS Oversight Board has reported that 35 percent of calls made to the 

IRS for assistance are not answered, customer service representatives have inadequate training 

and access to information, walk-in hours are limited, and IRS notices continue to be unclear and 

difficult to understand. The Treasury Inspector General for Tax Administration (“TIGTA”) has 

similarly testified that in 368 random test calls, TIGTA personnel were unable to reach the IRS 

37 percent of the time and, when access was obtained, the IRS incorrectly responded to 47 

percent of the questions. Tax practitioner groups have indicated that IRS personnel have been 

more professional and responsive and that the new operating divisions have been reaching out to 

taxpayers and practitioners. However, such groups, the National Taxpayer Advocate, and others 

have raised concerns about the time it takes to resolve certain cases. 
 4

Providing top quality service to all taxpayers

The goal of providing top quality service to all taxpayers is intended to ensure that the tax 

laws are applied fairly and that taxpayers who fail to comply do not burden those who do 

comply. Enforcement and compliance are essential components of this goal. 

Since the passage of the IRS Reform Act, traditional enforcement activities have 

declined. In fiscal year 2000, the audit rate dropped to less than one-half of one percent. The 

IRS Oversight Board has noted that the decline in enforcement activities raises questions about 

tax compliance and fairness to the vast majority of citizens who pay all their taxes. The IRS has 

similarly noted that compliance by taxpayers with only wage and investment income is 

beginning to decline among the taxpayers with who have wage and investment income as a result 

of a lack of a balanced and effective compliance program. The IRS generally attributes the drop 

in enforcement to a decline in staffing and the shifting of personnel toward customer service. 

The Commissioner has stated that it is unnecessary to return to the level of enforcement 

that existed even five years ago, which was three times that in fiscal year 2000. The IRS has an 

aggressive document matching program to detect underreported income, and will take steps to 

stabilize the level of traditional compliance activities. The IRS also hopes to target enforcement 

and compliance efforts more effectively, and to reduce the need for some enforcement efforts by 

focusing on prefiling efforts, thereby increasing voluntary compliance. There is currently no 

reliable measure of compliance. However, from available information, the IRS has determined 

that compliance is uneven and that there are major problem areas of noncompliance, including 

the proliferation of corporate tax shelters and the earned income credit. 

Productivity through a quality work environment

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

work environment for employees. The IRS notes that success in this goal requires providing 

employees with high quality technology tools, adequate training, effective management, and 

active engagement in the goals of the organization. 

Although overall job satisfaction increased somewhat in 2000 (60 percent compared to 

54.5 percent in 1999), the IRS Oversight Board has found that IRS employee morale and job 

satisfaction are not adequate. Employee satisfaction differs significantly between different 

racial, national origin, and gender groups. Causes of employee dissatisfaction include 

inadequate training, lack of confidence in IRS reforms, and inadequate systems technology. 

B. Implementation of IRS Strategic Goals 

Guiding principles and major strategies

To carry out its strategic goals, the IRS has developed six guidance principles and 10 

major strategies. These strategies are to: 

• Meet the needs of taxpayers; 

• Reduce taxpayer burden; 
 5

• Broaden the use of electronic interactions; 

• Address key areas of noncompliance; 

• Stabilize traditional compliance activities; 

• Build a capability to deal effectively with the global economy; 

• Meet the special needs of the tax-exempt community; 

• Recruit, develop, and retain a qualified workforce; 

• Provide high quality, efficient, and responsive information services and shared 

support services; and 

• Promote effective asset and information stewardship by improving internal processes 

for information management, financial management, and asset management. 

Organization modernization

The IRS has reorganized its structure to establish four operating divisions designed to 

serve taxpayers with similar needs. This structure is intended to enable the IRS to meet all a 

taxpayer’s needs in one place. The new organizational structure formally replaced the prior 

geographically-based structure on October 1, 2000. Top management is in place for each of the 

operating units; final stages of implementation, including redistribution of workloads, is 

expected to take place through fiscal year 2002. 

The four operating divisions are: 

(1) Wage and Investment, which serves approximately 116 million taxpayers who 

have income from wages and investments only; 

(2) Small Business and Self-Employed, which serves 45 million taxpayers, including 

taxpayers with only self-employment income, self-employment income and other 

income (e.g., wage income), and small businesses. 

(3) Large and Mid-Size Business, which serves 210,000 taxpayers, including C 

corporations, S corporations, and partnerships with assets greater than $5 million. 

(4) Tax-Exempt and Government Entities, which serves three million entities, 

including pension funds, charitable organizations, State and local governments. 

This division also encompasses issues relating to tax-exempt bonds. 

In addition to these operating divisions, the IRS also has several functional units, 

including Appeals, the Taxpayer Advocate Service, Crimination Investigation, and 

Communication and Liaison. 

Although the new structure has generally been well received, issued remain as to staffing 

levels, consistent treatment of taxpayers both among and within the operation divisions, and 

adjusting to the use of services shared by the operating divisions. 
 6

Development of organizational performance measures

The IRS Reform Act sought to change the IRS’s historical focus of enforcement revenue 

as a key measure of success. Accordingly, the IRS has developed a balanced measures system 

that included business results (both quality and quantity), customer satisfaction, and employee 

satisfaction. 

The General Accounting Office has reported that the IRS has made progress in 

implementing its new performance measures, but also faces some challenges. For example, the 

General Accounting Office reported that the performance management system is most fully 

developed at the organization-wide level, and is weakest at the front-line level. 

Technology modernization

The deficiencies in IRS systems have been the subject of substantial publicity, and the 

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

has not been trouble free. In May 2000, the General Accounting Office reported that the IRS 

was just as challenged then as it was when the IRS Reform Act was enacted. 

Despite the challenges facing the IRS, the General Accounting Office has found that the 

IRS has begun to lay a foundation, which should facilitate changes to IRS business practices; 

however, substantial challenges remain in the areas of performance management and information 

systems modernization. The General Accounting Office has noted that the IRS has developed a 

massive modernization effort, which will likely take more than a decade to complete. 

The IRS’s taxpayer database is stored in its master file, which is updated weekly. The 

IRS plans to replace the master file with the customer account data engine. The customer 

account data engine is expected to provide a modern system for storing taxpayer data, which 

would allow the IRS and taxpayers to have up-to-date access to taxpayer information and 

records. 

C. IRS Budget Request for Fiscal Year 2002 

Administration’s fiscal year 2002 budget request

For fiscal year 2002, the Administration’s IRS budget request totals $9.276 billion and 

99,116 full-time equivalent positions, not including funding and staffing for the earned income 

credit program. The fiscal year 2002 budget request reflects a $580 million increase from the 

fiscal year 2001 appropriated level of $8.696 billion and an increase of 1,843 full-time equivalent 

employees from the fiscal year 2001 proposed operating level of 97,273 full-time equivalent 

employees. 

In addition, the Administration’s IRS budget request includes $146 million and 2,236 

full-time equivalent employees for the earned income credit compliance initiative, which reflects 

a $1.319 million increase from the proposed operating level for fiscal year 2001, due to 

adjustments necessary to maintain current levels. The fiscal year 2002 budgeted staffing levels 

would remain unchanged from the proposed operating level for fiscal year 2001. The earned 
 7

income credit program is funded outside the discretionary spending caps. Fiscal year 2002 is the 

fifth year of funding for this five-year compliance initiative. The compliance initiative provides 

for expanded customer service and public outreach programs, strengthened enforcement 

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

with the earned income credit. 

The IRS’s overall budget request for fiscal year 2002, including funding and staffing for 

the earned income credit, totals $9.422 million and 101,352 full-time equivalent employees. 

IRS Oversight Board’s fiscal year 2002 IRS budget recommendation

The IRS Oversight Board has stated that the Administration’s fiscal year IRS 2002 

budget request “does not adequately support the IRS Strategic Plan and provides inadequate 

support for technology modernization.” The IRS Oversight Board finds that the IRS operations 

budget should be increased by approximately six percent from fiscal year 2001 levels to account 

for inflation, mandatory cost increases, normal salary increases and promotions. 

For fiscal year 2002, the IRS Oversight Board has recommended a total budget of 

$10.260 billion, which includes $8.992 billion for operations and $1.268 billion for IRS 

modernization, which is a total of $838 million more than is requested by the Administration. 

The IRS Oversight Board made its fiscal year 2002 budget recommendation in terms of the 

IRS’s strategic goals and objectives, noting that the operations budget is directly linked to the 

strategic goals of the IRS. In its fiscal year 2002 budget recommendation, the IRS Oversight 

Board has allocated 40 percent to “Top Quality Service to All Taxpayers,” or $3.597 billion; 36 

percent to “Productivity Through a Quality Work Environment,” or $3.237 billion; and 24 

percent to “Top Quality Service to Each Taxpayer,” or $2.156 billion. The IRS Oversight 

Board’s recommendation would represent approximately a 13 percent increase over fiscal year 

2001 levels resources and funding for activities that provide service to each taxpayer. The IRS 

Oversight Board made this recommendation because it believes that resources should go where 

taxpayers need help. 

Financial Audit of IRS Fiscal Year 2000 Financial Statements

For the first time since the General Accounting Office began annual audits of IRS 

financial statements, it expressed an unqualified opinion on all IRS financial statements for fiscal 

year 2000. The ability to issue an unqualified opinion is attributed to the combined efforts of the 

IRS and the General Accounting Office. The General Accounting Office continues to identify 

weaknesses in IRS internal controls. 

D. Other Matters Addressed by the IRS Reform Act 

IRS Oversight Board

The IRS Oversight Board created by the IRS Reform Act began operations in September 

2000. Since then, the Board has been meeting for two days every two months. Much of the 

Board’s initial activities have been learning about IRS operations and identifying problem areas. 

In its interim report, the IRS Oversight Board identified the following significant problems: 
 8

inadequate taxpayer service; the level of enforcement activities; outdated computer systems; and 

poor employee morale and job satisfaction. 

The IRS Oversight Board has reviewed and approved the IRS strategic plan. The Board 

strongly supports the mission and goals defined in the plan and believes that the framework 

described tin the plan is logical and represents the best way forward. However, the Board 

recognizes that meeting the goals of the plan will be difficult, will take time, and will require the 

continuous support of the Administration and the Congress. 

As described above, the IRS budget approved by the IRS Oversight Board differs in 

significant respects from that submitted to Congress by the Administration. The Board believes 

that the Administration budget does not adequately support the IRS strategic plan or IRS 

technology needs. 

National Taxpayer Advocate

The National Taxpayer Advocate (through 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 such problems; and (4) to identify potential 

legislative changes which may be appropriate to mitigate such problems. According to the 

National Taxpayer Advocate’s most recent annual report, the reorganized Office of the Taxpayer 

Advocate has turned its attention away from modernizing its organizational structure and toward 

conducting its day-to-day business as the newly modernized and independent Taxpayer 

Advocate Service. The National Taxpayer Advocate successfully reassigned its casework from 

employees working in IRS Operations to its newly hired and trained staff. 

The National Taxpayer Advocate report identified the following areas as some of the 

most serious problems identified by individual and business taxpayers, tax practitioners, and IRS 

employees: (1) complexity of the tax law (individuals and businesses); (2) clarity and tone of 

IRS communications; (3) inability to access the IRS toll-free number; (4) burden on small 

business; (5) administration of the earned income credit; (6) lack of one-stop service; (7) lack of 

acknowledgement of correspondence and payments; (8) penalty administration; (9) offer-incompromise issues; and (10) misapplied payments. 

The National Taxpayer Advocate report stated that the most litigated tax issues are: (1) 

penalties and interest; (2) court procedures; (3) the deductibility of business expenditures; (4) 

filing status; (5) earned income credit; (6) dependency exemptions; (7) the definition of gross 

income (inclusions and exclusions); (8) accounting methods, record keeping, and documentation; 

(9) statute of limitations; (10) court authority for credits, refunds, and abatements; (11) selfemployment issues and independent contractor versus employee status; (12) and last known 

address and notice of deficiency issues. 

The National Taxpayer Advocate reported that during fiscal year 2000, the Taxpayer 

Advocate Service independently reviewed and took action to resolve over 256,000 cases. The 

National Taxpayer Advocate report listed the top ten sources of Taxpayer Advocate Service 

casework as: (1) refund issues; (2) processing of claims and amended returns; (3) processing of 
 9

original returns; (4) audit reconsiderations; (5) abatement of penalties; (6) revenue protection; (7) 

payment and credit problems; (8) examination of tax returns prior to assessment; (9) collection 

notices; (10) and lost or stolen refunds. 

Taxpayer rights

The provisions of the IRS Reform Act relating to taxpayer rights continue to have a 

significant impact on the operation of the IRS, and the IRS views its immediate challenges as 

training and management. Several areas illustrate the difficulties encountered by the IRS in 

implementing the IRS Reform Act, including collection due process, innocent spouse relief, 

offers in compromise, and other collection issues. 

The IRS stated that the provisions relating to collection due process have created 

additional staffing needs because the IRS can only initiate a lien or levy action after individually 

reviewing the facts and circumstances of each case. The also IRS stated that the due process 

provisions have slowed and lengthened the overall compliance cycle. According to the IRS, the 

principal difficulty in carrying out the collection due process provisions of the IRS Reform Act 

has been engineering an efficient collection due process system that does not disproportionately 

expend resources on cases in which taxpayers are abusing the process to delay collection. In an 

effort to more efficiently process collection due process cases, the IRS assembled a team to 

implement collection due process recommendations made by an executive level task force. 

Furthermore, the IRS stated that it now has additional personnel to handle collection due process 

cases and is increasing the number of trained employees in fiscal year 2001. In its most recent 

semiannual report, the Treasury Inspector General for Tax Administration stated that the IRS has 

improved its compliance with many of the provisions of the IRS Reform Act relating to 

collection due process. However, the Treasury Inspector General also noted that the IRS has not 

yet fully complied with IRS Reform Act provisions requiring the IRS to provide proper and 

timely notice that a Federal tax lien has been filed. 

Since passage of the IRS Reform Act, the IRS has faced several difficulties in 

implementing the innocent spouse provisions, resulting in a significant backlog of cases. In 

addition, some taxpayers and their representatives have apparently experienced difficulty in 

ensuring adequate consideration by the IRS of all of the facts relating to individual claims, 

particularly when the claim involves a low-income taxpayer who is not represented by counsel 

and the IRS solely relies upon correspondence to process the claim. The IRS stated that it has 

taken several measures to effectively manage the rapidly increasing volume of pending claims 

for innocent spouse relief. 

With regard to offers in compromise, several factors have contributed to delays in 

processing offers. The IRS stated that it is reviewing and reengineering its work processes to 

address the growing number of offer in compromise cases, including centralization of cases that 

may be most effectively processed in a service center environment. Although the IRS Reform 

Act expanded the offer in compromise program to cases in which settlement would promote 

effective tax administration, the IRS stated that fewer than 1 percent of total offers in 

compromise for fiscal year 2000 through February 2001 were initiated on the basis of the 

additional factors specified in the IRS Reform Act, including situations involving severe or 

unusual economic hardship. However, tax practitioner comments indicate that, while there has 
 10

been a noticeable increase in the use of offers in compromise by taxpayers, there has not been a 

corresponding increase in IRS acceptance of offers in compromise. In many cases, IRS 

personnel still may be reviewing offers in compromise without considering the additional factors 

mandated by the IRS Reform Act (e.g., equity, hardship, and public policy). 

In comparison with fiscal year 2000 results, the IRS stated that it is experiencing both 

positive and negative trends in collection activity during fiscal year 2001. The IRS noted that 

enforcement actions are increasing in fiscal year 2001, with positive trends in the number of liens 

filed and levies issued by the IRS. According to the IRS, both delinquent notice yield and 

Taxpayer Delinquent Account dollars collected have increased through February 2001. 

However, certain other collection measurements have slightly decreased in fiscal year 2001 due 

to the need to redirect resources to handle the increase in the numbers of offers in compromise 

and collection due process cases. The IRS stated that the amount of time between the filing of a 

return and the first compliance contact has remained constant over the years, and that the amount 

of time to assign cases for collection is expected to decline in fiscal year 2001. The IRS has 

attributed the overall decline in collection and compliance efforts in recent years to a decrease in 

staffing levels, the diversion of resources to customer service, an increase in employee training, 

and an increase in the amount of time needed to resolve cases. The IRS stated that it is taking 

several measures to increase the resources applied to collection and compliance activities. 

Treasury Inspector General for Tax Administration

The Treasury Inspector General for Tax Administration reports that although the IRS has 

made significant progress in complying with the IRS Reform Act and modernization, 

weaknesses continue to exist in certain critical areas, including restricting the use of enforcement 

statistics to evaluate IRS employees, providing timely notice that a federal tax lien has been 

filed, certifying the security of computer systems, providing computer virus protection, 

preventing filing fraud with respect to the earned income credit, ensuring taxpayer compliance, 

and protecting taxpayer rights in certain areas, including providing timely and accurate innocent 

spouse relief. The Treasury Inspector General for Tax Administration also reports on the 

number of investigations initiated and complaints about IRS personnel received, and lists past 

unimplemented corrective actions that it has recommended. 

Personnel flexibility and IRS Management

From the passage of the IRS Reform Act in July 1998 through March 20, 2001, the IRS 

has hired 26 Streamlined Critical Pay executives. Through March 20, 2001, eight have left. 

Some has stayed as few as five months and others as long as 29 months. On March 25, 2001 the 

IRS converted the first employees into the Senior Manager Payband established under the IRS 

Reform Act's workforce classification and pay authority. The IRS is developing a strategy to 

place most other non-bargaining unit positions in paybands. 

The IRS Reform Act defined 10 specific acts of misconduct for which an IRS employee 

must be terminated (section 1203 of the IRS Reform Act). As of March 31, 2001, there were 

243 substantiated violations of section 1203. Of the 243 substantiated violations, 213 were for 

failure to file a Federal tax return. Seven employees have been removed for willful failure to 
 11

timely file a Federal tax return when the employee was due a refund because he or she had 

overpaid the tax due. 

E. The 2001 Filing Season 

Commissioner Rossotti has referred to the 2001 filing season as having been “smooth and 

almost error free.” The IRS has projected that net collections for fiscal year 2001 will exceed the 

$1.9 trillion collected for fiscal year 2000. For fiscal year 2001, the IRS also projects that it will 

receive 215.4 million returns, including over 130.3 million individual returns, and it expects to 

issue over 96.8 million individual refunds. As of March 9, 2001, the IRS reported that the 

average dollar amount per refund was up over five percent from last year, and the average refund 

as of that date was $1,823. The IRS recently announced that 34.2 million tax returns were filed 

electronically as of April 6, 2001. 

The General Accounting Office has made four specific observations regarding the 2001 

filing season. First, the General Accounting Office noted that the IRS’s reorganization had little 

effect on the 2001 filing season, although some improvements to customer service are still 

needed. Second, the General Accounting Office reported that the IRS processed returns and 

refunds without any significant problems and has received a larger percentage or returns 

electronically, but the growth rate of electronic filing is slower than expected, and many 

taxpayers encountered trouble using their personal identification number (instead of signatures 

filed on paper). Third, according to the General Accounting Office, the IRS has done a better job 

answering telephone calls, although there remain concerns about the declines in the productivity 

of telephone assistors. Finally, the General Accounting Office finds continuing concerns 

regarding the quality of tax law assistance being provided by IRS walk-in sites, despite the 

increased staffing of the IRS field assistance program.
 12

I. IRS MISSION STATEMENT AND OVERVIEW 

OF IRS STRATEGIC PLANS 

A. Mission Statement and Statement of Strategic Goals 

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

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

 Prior to its revision, the 

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

The new mission statement has interaction with taxpayers as its focus. It states: 

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

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

integrity and fairness to all. 

To assist in achieving its new mission, the IRS has developed three strategic goals.9 The 

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

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

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

change necessary to meet its strategic goals and fulfill its mission statement as “modernization.” 

B. Providing Top Quality Service to Each Taxpayer 

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

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

this goal, the IRS has determined that it needs to: (1) provide clear tax law guidance, forms, and 

instructions; (2) provide taxpayers with the accurate, quick, and convenient information about 

their tax accounts and assistance in determining how much to pay, how to pay, and how to make 

adjustments to their accounts; and (3) treat taxpayers professionally, with full consideration of 

their rights, and promptly inform the taxpayer when the agency believes additional taxes are 

owed.10

The IRS has not developed specific measures for achieving this goal. Ultimately, success 

in achieving top quality service will be measured by whether taxpayers believe the IRS is 

meeting their expectations. Preliminary indications are that the IRS has made progress toward 

meeting those expectations, but that challenges remain. 

 8

 IRS Reform Act sec. 1002. 

9

 The most recent strategic plans and major strategies of the IRS are contained in IRS 

Strategic Plan (Fiscal Years 2000-2005). Internal Revenue Service, IRS Strategic Plan (Fiscal 

Years 2000-2005), Publication 3744 (February 2001) (hereinafter referred to as “IRS Strategic 

Plan”). These strategic plans and major strategies are discussed below in Part II.

10 IRS Strategic Plan at 4, 25. 
 13

Roper opinion research organization surveys show that, after reaching an all time low 

point in 1998, the agency’s public approval rating has improved in 1999 and 2000. Nonetheless, 

the IRS rating remains well below that of other agencies.11 

Since 1998, the IRS has been surveying taxpayers who have had direct contact with the 

IRS, either in person, over the phone, or through correspondence. According to the IRS, these 

surveys show that the IRS has made a modest improvement in customer satisfaction.12

The IRS Oversight Board reports that the IRS is not meeting the goal of top quality 

service to each taxpayer. It reports that 35 percent of calls made to the IRS for assistance are not 

answered and that customer service representatives have inadequate training and access to 

information necessary to handle complex questions.13 The Treasury Inspector General for Tax 

Administration (“TIGTA”) recently testified to similar effect. In a four-day test of the IRS’ tollfree number, TIGTA personnel made 368 random test calls and were unable to gain access 37 

percent of the time.14 When access was successful, the IRS incorrectly responded to 47 percent 

of the questions.15 TIGTA personnel also visited 47 Taxpayer Assistance Centers (formerly 

known as “walk-in sites”) in 11 states. In the resulting 90 contacts, IRS personnel generally 

responded with courteous treatment but provided incorrect answers 49 percent of the time.16 

 11 The Roper survey results are reported in the IRS Strategic Plan at 26. Also included in 

the IRS Strategic Plan are the results from a survey conducted by the University of Michigan, 

known as the American Customer Satisfaction Index. The survey polls people who have dealt 

recently with various public and private sector organizations. The IRS has ranked last for a 

number of years. The electronic filing program, which was added to the survey as a separate 

segment in 1999, received a higher ranking than the IRS generally. See IRS Strategic Plan at 26-

27. 

12 IRS Strategic Plan at 26-27. According to the IRS, the program areas with the highest 

ratings were in taxpayer assistance functions, such as telephone service on its toll-free lines and 

walk-in service. In an effort to measure its service, the IRS is also improving its systems to track 

complaints. Reliable numbers, however, are not yet available. 

13 Internal Revenue Service Oversight Board, the IRS Budget Fical Year 2002: Analysis 

and Recommendations (Interim Report, Spring 2001) (hereinafter “IRS Oversight Board 

Report") at 8. 

14 Statement of the Honorable David C. Williams, Inspector General, Treasury Inspector 

General for Tax Administration, before the House Ways and Means Subcommittee on Oversight 

(April 3, 2001). 

15 Id. 

16 Id. 
 14

The IRS Oversight Board further notes that walk-in hours are limited. Further, the IRS 

Oversight Board noted that IRS notices continue to be unclear and difficult to understand.17

In preparing this report, the staff of the Joint Committee on Taxation (“Joint Committee 

staff”) sought input from various groups having interaction with the IRS.18 The National 

Association of Enrolled Agents responded that, generally, their members have experienced a 

more professional and responsive IRS when interacting with the agency.19 The American 

Institute of Certified Public Accountants noted that certain IRS operating divisions have reached 

out extensively to taxpayers and practitioners.20 However, concerns also were raised about the 

length of time it takes to resolve innocent spouse cases, to complete an offer in compromise, and 

to convene a collection due process hearing.21 The National Taxpayer Advocate and others have 

noted that the diversion of operating division personnel to perform filing season duties delays the 

resolution of cases assigned to those employees who have been temporarily transferred.22 

 17 IRS Oversight Board Report at 8. 

18 The Joint Committee staff sent letters to the American Bar Association’s Section of 

Taxation, the National Association of Enrolled Agents, the American Institute of Certified Public 

Accountants, the Tax Executives Institute, the National Federation of Independent Business, the 

Tax Division of the United States Department of Justice, the United States Tax Court, and the 

IRS Oversight Board. The letters of those organizations that responded are included as 

appendices to this report. 

19 “For the most part, employees are going the extra mile to assist practitioners, even 

with the difficulty of reorganization. There is a more professional demeanor to interaction with 

the public and with the practitioner community.” Letter from Claudia Hill, Chair, Government 

Relations Committee, National Association of Enrolled Agents, to Lindy L. Paull, Chief of Staff, 

Joint Committee on Taxation (April 5, 2001) (hereinafter “NAEA Letter”). In addition, the Tax 

Section of the American Bar Association stated, “We [] have found the leadership of [the new 

operating divisions] to be very open and responsive, which makes it easier for the Tax Section to 

communicate with these new divisions at a leadership level.” Letter from Richard M. Lipton, 

Chair, Section of Taxation, American Bar Association to Lindy L. Paull, Chief of Staff, Joint 

Committee on Taxation (April 24, 2001) (hereinafter “ABA Letter”). 

20 “. . . [W]e call your attention to the fact that both the [Large and Mid-Size Business 

and Small Business and Self-Employed divisions] have conducted extensive outreach to outside 

stakeholders, practitioners and taxpayers alike.” Letter from Pamela J. Pecarich, Chair, Tax 

Executive Committee, American Institute of Certified Public Accountants, to Lindy L. Paull, 

Chief of Staff, Joint Committee on Taxation (April 10, 2001) (hereinafter “AICPA Letter”). 

21 ABA Letter and NAEA Letter. 

22 See e.g. Internal Revenue Service, Statement of Nina E. Olsen, National Taxpayer 

Advocate before the House of Representatives Committee on Ways and Means, Subcommittee 

on Oversight (April 3, 2001) and Statement of Claudia Hill, Enrolled Agent, National 
 15

C. Providing Top Quality Service to All Taxpayers 

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

This goal aims for fundamental fairness and uniform application of the law to all taxpayers. The 

IRS goal is to ensure that the tax law is applied with fairness and integrity so that taxpayers who 

fail to comply with the tax laws do not burden those who comply. 

Enforcement is an essential component to achieving fair and uniform application of the 

law. Since the passage of the IRS Reform Act, the IRS has undertaken substantially fewer 

enforcement activities.23 The number of audits and collection activity has declined. In fiscal 

year 2000, the audit rate has dropped to less than one-half of one percent and the number of 

individual returns audited was approximately 618,000. Declines in enforcement have resulted in 

the IRS collecting less enforcement revenue, $37 billion in 1997 versus $33 billion in 1999. 24 

The Department of Justice has noted a significant decline in IRS referrals of both civil and 

criminal cases as well, which the Department attributes in large measure to the “curtailment of 

IRS compliance actions.”25 The IRS Oversight Board noted that the decline in enforcement 

activities has “rais[ed] questions about tax compliance and fairness to the vast majority of 

citizens who pay all their taxes.”26 

The IRS notes that there are indications that compliance is beginning to decline among 

the taxpayers who have only wage and investment income as a result of “a lack of a balanced and 

effective compliance program.”27 It further noted that examination coverage is declining while 

the number of non-filer and delinquent accounts are increasing and the aging and quality of cases 

 

Association of Enrolled Agents, before the House of Representatives Committee on Ways and 

Means, Subcommittee on Oversight (April 3, 2001). 

23 Letter from Charles O. Rossotti, Commissioner, Internal Revenue Service, to Charles 

E. Grassley, Chairman, Senate Finance Committee (March 26, 2001). The IRS attributes this 

decline to a continued decline in staffing, the need to assign compliance staff to customer service 

duties during the filing season, and a substantial increase in the amount of time required per case 

due to provisions of the IRS Reform Act. 

24 IRS Strategic Plan at 31. 

25 Letter from Sheryl L. Walter, Acting Assistant Attorney General, Tax Division, 

Department of Justice, to Lindy L. Paull, Chief of Staff, Joint Committee on Taxation (April 13, 

2001) (“IRS compliance actions generate civil litigation handled by the Tax Division and 

develop leads to possible criminal violations. Thus, the decline in our civil and criminal case 

numbers is doubtless caused in large measure by the acknowledged curtailment of IRS 

compliance actions.”). 

26 IRS Oversight Board Report at 8. 

27 IRS Strategic Plan at 98. 
 16

remains unchanged.28 The Commissioner has stated, however, that there is “no need to return to 

the levels of individual audit coverage that existed even five years ago, which was three times 

the [fiscal year] 2000 level.”29 The Commissioner noted that the IRS has an “aggressive 

document matching program to detect underreported income. 30 Further, the Commissioner 

asserts that IRS will take the approach in the short run to “stabilize [the IRS’s] level of 

traditional compliance activities, such as individual audits, at or slightly above current levels and 

to focus them on areas where they are most required.”31 The IRS also hopes to target 

enforcement and compliance efforts more effectively, and to reduce the need for some 

enforcement efforts by focusing on prefiling efforts, thereby increasing voluntary compliance. 

The IRS has no reliable measure of general compliance. The last major study of 

compliance was done in 1988.32 This lack of a reliable measure of compliance affects the 

 28 IRS Strategic Plan at 97. 

29 Letter from Charles O. Rossotti, Commissioner of Internal Revenue, to Charles E. 

Grassley, Chairman, Senate Finance Committee (March 26, 2001). 

30 The IRS has “an aggressive document-matching program in place to cross-check 

wages, interest, and investment income to make sure people pay the right amount.” Internal 

Revenue Service, Statement by IRS Commissioner Charles O. Rossotti on Audit and Collection 

Activity for Fiscal 2000 (February 15, 2001). However, Transactional Records Access 

Clearinghouse found the following declines based on its review of IRS data: 

(1) One key computerized agency program identifies individual returns with potential 

underreporting discrepancies. In the early 1990’s, the IRS followed up on one out 

of two or three of these possible problems. In 1998, it followed up on only one 

out of six. 

(2) IRS’s computer based document matching program send out correction notices to 

individual taxpayers. In 1991, when this particular effort peaked, the number of 

correction notices sent by the IRS's computer-based document-matching program 

to individual taxpayers peaked, 4.8 million taxpayers were sent correction notices. 

In 2000, that number declined to 1.4 million. 

Transactional Records Access Clearinghouse, New Findings on Tax Collection and IRS 

Criminal Enforcement, <http://trac.syr.edu/tracirs/findings/aboutIRS/keyFindings.html> (visited 

April 28, 2001). The Transactional Records Access Clearing House is a data gathering, data 

research, and data distribution organization associated with Syracuse University. Its analysis of 

the IRS Computer Document Matching Program is based on IRS data submitted to the Senate 

Finance Committee on March 26, 2001. 

31 Letter from Charles O. Rossotti, Commissioner of Internal Revenue, to Charles E. 

Grassley, Chairman, Senate Finance Committee (March 26, 2001). 

32 IRS Strategic Plan at 29. 
 17

efficient distribution of resources. In addition, the IRS does not know if general compliance is 

remaining steady or declining.33

The IRS’s measure of success in achieving fair and uniform application of the law is 

based in part upon the IRS’s ability to measure the uniformity of compliance among various 

groups of taxpayers.34 The IRS has been able to determine from the available information that 

“compliance is quite uneven and that there are major problem areas in which significant 

noncompliance still exists.”35 Among the areas of noncompliance identified by the IRS are the 

proliferation of corporate tax shelters and noncompliance with the requirements of the earned 

income credit.36

D. Productivity Through a Quality Work Environment 

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

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

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

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

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

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

The IRS measures success in building productivity by increasing its workforce only slightly 

while concurrently handling an increased workload, and improving performance on the other two 

quality service goals discussed above. Employee satisfaction is also measured as part of this 

goal. 

According to the IRS, overall job satisfaction for IRS employees was 54.5 percent in 

1999.37 This figure increased to 60 percent in the year 2000.38

According to the IRS Oversight Board, IRS employee morale and job satisfaction are not 

adequate.39 The IRS strategic plan notes the employee satisfaction differs significantly between 

race, national origin, and gender groups.40 Further, according to the IRS Oversight Board, 

 33 Id. at 5. 

34 Id. at 5. 

35 Id. 

36 IRS strategies for addressing these areas of noncompliance are discussed below. 

37 IRS Strategic Plan at 33. 

38 Id. 

39 IRS Oversight Board Report at 9. 

40 IRS Strategic Plan at 98. 
 18

employees lack confidence that the reforms being made will continue or have any real impact.41 

According to the IRS Oversight Board, many employees believe that they are performing tasks 

that are inconsistent with their experience and skill level.42 The IRS strategic plan notes that 

employees and managers do not have the skills to deliver top quality service.43 The IRS 

Oversight Board reports that employees believe that the training they are receiving is inadequate 

and inappropriate.44 

According the IRS Oversight Board, the IRS is also not providing a quality work 

environment. The ability of IRS personnel to respond to taxpayer questions and efficiently 

perform critical duties is limited by the fact that the IRS computer systems are outdated and 

incompatible with each other.45 Not enough data is captured from tax returns, and the databases 

are not up-to-date.46 A discussion of the IRS’s efforts to improve its technological infrastructure 

is discussed at Section II. D. of this report, below. 

 41 The IRS Strategic Plan similarly notes that employees are becoming less confident in 

IRS management. IRS Strategic Plan at 98. 

42 IRS Oversight Board Report at 9. 

43 IRS Strategic Plan at 98. 

44 IRS Oversight Board Report at 9. 

45 Id. at 8-9. 

46 Id. at 8-9. 
 19

II. IMPLEMENTATION OF IRS STRATEGIC GOALS 

A. Guiding Principles and Major Strategies 

To carry out the IRS strategic goals, the IRS has developed six guiding principles: (1) 

understand and solve problems from the taxpayer=s point of view; (2) enable managers to be 

accountable with the requisite knowledge, responsibility, and authority to take action; (3) align 

measures of performance at all organizational levels; (4) foster open and honest communication; 

(5) insist on total integrity; and (6) demonstrate effective stewardship of assets and information 

entrusted to the IRS.47 All IRS executives, managers, and employees are expected to manage 

and operate using these guiding principles in their interactions with both taxpayers and other 

employees. 

In addition to guiding principles, the IRS has developed 10 “major strategies” to achieve 

its strategic goals. These strategies are: 

(1) Meet the needs of taxpayers; 

(2) Reduce taxpayer burden; 

(3) Broaden the use of electronic interactions; 

(4) Address key areas of noncompliance; 

(5) Stabilize traditional compliance activities; 

(6) Build a capability to deal effectively with the global economy; 

(7) Meet the special needs of the tax-exempt community; 

(8) Recruit, develop, and retain a qualified workforce; 

(9) Provide high-quality efficient, and responsive information services and shared 

support services; and 

(10) Promote effective asset and information stewardship by improving internal 

processes for information management, financial management, and asset 

management. 

Each major strategy has within it operational priorities and improvement projects. 

Responsibility is assigned to the operating units for carrying them out. A major strategy may 

 47 IRS Strategic Plan at 37. 
 20

cross several organizational units or be confined to a single unit.48 Highlights of several of the 

major strategies and their significant components are discussed below. 

Meet the needs of taxpayers 

“Meeting the needs of taxpayers” involves offering higher quality, more readily available 

assistance to taxpayers. The IRS defines this strategy to mean that a taxpayer should receive 

quality service that is helpful based on his or her particular situation or need. Components of this 

strategy include: 

(1) Improving local service by making it more convenient for taxpayers and by 

improving the training and technology for employees assisting the taxpayer; 

(2) Providing higher quality phone service, Internet information, and correspondence; 

(3) Expanding the network of volunteers to assist in meeting filing assistance needs; 

(4) Making notices and letters more understandable; 

(5) Expanding service in Spanish and other languages; 

(6) Working with States and other Federal agencies to provide streamlined filing and 

payment options for small business; and 

(7) Using new technology to provide faster refunds and account resolution.49

Reduce taxpayer burden

Reducing taxpayer burden highlights the IRS’s focus on its pre-filing efforts. The 

strategy is to address taxpayer problems as early as possible in the process and, through clear 

published guidance and education, prevent problems from occurring. According to the IRS, a 

key component of this strategy will be its partnerships with States, practitioners, and industry 

groups who are in regular contact with taxpayers.50 

 48 See Letter from the Honorable Charles O. Rossotti, Commissioner of Internal 

Revenue, to Lindy L. Paull, Chief of Staff, Joint Committee on Taxation, (April 27, 2001) 

(hereinafter “IRS Letter”) at 5-20 for a discussion of individual operating and functional unit 

initiatives. 

49 IRS Strategic Plan at 45-46. 

50 Id at 47. 
 21

Examples of this strategy include the Pre-Filing Agreement program,51 the Industry Issue 

Resolution Program,52 and the Comprehensive Case Resolution program,53 which are available 

to taxpayers under the jurisdiction of the Large and Mid-Size Business Division. 

Broaden the use of electronic interactions

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

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

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

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

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

data. However, 77 percent of returns are still filed on paper. Because of the advantages of 

electronic tax administration, the IRS Reform Act provides that “the policy of Congress is to 

promote paperless filing, with a long-range goal of providing for the filing of at least 80 percent 

of all tax returns in electronic form by the year 2007.”54

 51 Under the Pre-Filing Agreement program, a Large and Mid-Size Business taxpayer 

may request examination and resolution of a factual issue involving well-established legal 

principles likely to be disputed in post-filing audits before the income tax return reporting the 

transaction is filed. The IRS charges a user fee ranging from $1,000 to $10,000, based on the 

taxpayer’s asset size. A closing agreement completes the process, binding both the taxpayer and 

the IRS as to the tax treatment of the transaction in question. See Rev. Proc. 2001-22 for the prefiling agreement procedures. 

52 The Industry Issue Resolution program is still in the pilot stage with completion of the 

pilot planned for November 2001. The goal of the program is to provide guidance on frequently 

disputed industry issues to a number of affected Large and Mid-Size Business taxpayers, rather 

than through case-by-case rulings or post-filing audit determinations or rulings. Although the 

emphasis is on prospective guidance in the form of Revenue Procedures providing safe harbor 

rules, such guidance may also be applicable at the post-filing stage depending on the nature of 

issues. The guidance resulting from the Industry Issue Resolution process will apply to all 

taxpayers within an industry. See IRS Letter at 20-21. 

53 Under this pilot program Large and Mid-Size Business taxpayers could request 

resolution of all open issues for all open tax years under examination in Large and Mid-Size 

Business, in Appeals, or before the U.S. Tax Court. The goal of the Comprehensive Case 

Resolution program is to expedite resolution of all disputed issues by having all functions of the 

IRS making tax treatment determinations work together. Taxpayers would waive their Appeals 

ex parte communication rights and agree to meet the pilot Comprehensive Case Resolution 

processing timelines, including a requirement to complete the process in 12 months. A taxpayer 

may withdraw from the program within a set timeline. See IRS Letter at 21. 

54 IRS Reform Act sec. 2001. 
 22

The IRS intends to convert most interactions with taxpayers and practitioners to 

electronic means as rapidly as possible. 55 Examples of this strategy include the elimination of 

signatures on paper for electronically filed returns, and significantly increasing the number of 

forms that can be filed electronically.56

Address key areas of noncompliance

In its strategic plan, the IRS notes that there are compliance concerns with respect to 

pass-through entity returns and trusts.57 Further, the IRS states that the proliferation of corporate 

tax shelters presents an unacceptable and growing level of tax avoidance behavior.58 The IRS 

also identifies unpaid trust fund taxes and erroneous earned income credit claims as continuing 

issues of concern.59 

To address these concerns, the IRS plans to expand the data captured and transcribed 

from Schedule K-1 and match that information to the recipient taxpayer returns.60 It also plans 

to increase the number of abusive trust cases under examination, and continue its focus on 

corporate tax shelters. 

To address the unpaid trust fund taxes issue, the IRS will issue warning letters about the 

possible imposition of special trust fund tax filing and trust fund requirements. “In extreme 

cases, [the IRS will] place the taxpayer under special filing and deposit requirements and refer 

the taxpayer for civil and criminal action.” 61 

 55 IRS Strategic Plan at 47. 

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

House Ways and Means Subcommittee on Oversight (April 3, 2001). For individual taxpayers 

seeking to file their returns electronically, the IRS added 22 forms and schedules for 2001 and 

will add the remaining 38 forms in 2002. In addition, for business the IRS introduced electronic 

filing options for Form 941(“Employer’s Quarterly Federal Tax Return”) Form 940 

(“Employer’s Annual Federal Unemployment (FUTA) Tax Record”) and Form1065 (“U.S. 

Partnership Return of Income”). See also IRS Letter at 29-30, and 32. 

57 IRS Strategic Plan at 53. 

58 Id. at 53. 

59 IRS Strategic Plan at 54; IRS Letter at 85. 

60 IRS Letter at 13. Schedule K-1 is filed by partnerships, trusts, and S-corporations to 

provide information on the income and losses distributed by these entities to the individual 

partners, beneficiaries, and shareholders. 

61 IRS Strategic Plan at 54. See also IRS Letter at 85 (regarding criminal enforcement) 

and 93 (regarding civil enforcement). 
 23

With respect to the earned income credit, the IRS will continue its focus on earned 

income credit noncompliance, including preparer education and system changes to detect social 

security number errors.62

Stabilize traditional compliance activities

As noted above, IRS enforcement activities have significantly declined, in part because 

compliance personnel have been diverted to filing season assistance.63 Among other initiatives, 

the IRS intends to stabilize the total number of field examination and collection staff available 

through new hiring and to reduce the number of staff diverted to filing season assistance.64

A review of the Criminal Investigation Division by Judge William Webster (“the Webster 

Report”) noted that the percentage of cases that the Criminal Investigation Division investigated 

based on referrals from exam and collection had “dropped precipitously.”65 To reverse this 

trend, the Criminal Investigation is taking steps to revive the Fraud Referral Program through 

partnerships and increased communication with the operating divisions. Further, Lead 

Development Centers will assist IRS special agents in developing and assigning investigative 

leads. IRS Chief Counsel will also be involved in criminal investigation cases from the 

beginning to provide guidance to the case agent and management officials. Previously, an agent 

could work on developing a case for a significant amount of time with no input from Chief 

Counsel only to have it not go forward when Chief Counsel found problems after the preparatory 

work was completed.66

Build a capability to deal effectively with the global economy

To respond to the growing global economy, the IRS will develop an automated 

international classification system to assist in the early identification of issues and will work with 

the Department of Treasury and IRS Office of Chief Counsel to identify emerging issues, and 

 62 IRS Strategic Plan at 55. The IRS has also used its dependent database to identify 

questionable earned income credit claims and has implemented recertification requirements for 

taxpayers who have had their earned income credit claim previously denied by the IRS. IRS 

Letter at 74. For a discussion of the dependent database, see IRS Letter at 82-83. 

63 Internal Revenue Service, Statement by IRS Commissioner Charles O. Rossotti on 

Audit and Collection Activity for Fiscal 2000 (February 15, 2001). 

64 IRS Letter at 91-92. 

65 William H. Webster, Review of the Internal Revenue Service’s Criminal Investigation 

Division, IRS Publication 3388 (April 1999). 

66 See Fred Stokeld, Decline in Number of Audits Will Level Off, Rossotti Predicts, Tax 

Notes Today, 2001 TNT 42-7 (March 2, 2001). 
 24

update and publish guidance.67 It will also develop a shared global database to facilitate the 

treaty certification process.68

Meet the special needs of the tax-exempt community

The IRS maintains an Exempt Organizations Master File containing public information 

on more than 1.4 million tax-exempt organizations.69 According to the IRS, the database is 

neither accurate nor reliable. “Answering even simple questions, such as an organization’s 

location, exempt status, filing requirements, and contribution deductibility, is not possible in a 

reasonably short time.”70

To increase the accuracy of the Exempt Organizations Master File, the IRS will increase 

return imaging and introduce electronic filing for Form 990 (“Return of Organization Exempt 

from Income Tax”) filers.71 However, the IRS has projected that electronic filing of Form 990 

will not occur until fiscal year 2007.72 The IRS acknowledges that, historically, it has underserved government entities. To increase service to these entities, the IRS is establishing the new 

Government Entities organization.73 The IRS also plans to hire and train additional employees 

generally and in particular, strengthen the tax-exempt bond program by adding additional staff to 

increase regulatory efforts, including examination coverage.74

 67 IRS Strategic Plan at 61-62. 

68 Some treaty partner countries require a U.S. government certification that the 

applicant for reduced tax rates in a tax treaty country is a citizen, corporation, partnership, or 

resident of the United States for purposes of taxation. See Internal Revenue Service, Publication 

686, Certification for Reduced Tax Rates in Tax Treaty Countries (Rev. December 1998). 

69 IRS Strategic Plan at 63. 

70 Id. 

71 Id.; IRS Letter at 9-10. 

72 See, Joint Committee on Taxation, Study of Present-Law Taxpayer Confidentiality and 

disclosure Provisions as Required by Section 3802 of the Internal Revenue Service Restructuring 

and Reform Act of 1998, Volume II: Study of Disclosure of Provisions Relating to Tax-Exempt 

Organizations (JCS-1-00), January 28, 2000, at 91, fn. 196. 

73 IRS Letter at 10. 

74 Id.; IRS Strategic Plan at 64. 
 25

B. Organizational Modernization 

Background

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

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

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

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

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

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

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

The Congress found that organizational structure of the IRS was one of the factors 

contributing to the inability of the IRS to properly serve taxpayers. The Congress believed that a 

new structure focused taxpayers with similar needs would help enable the IRS to better serve 

taxpayers and provide the necessary level of services and accountability to taxpayers. In order to 

support the Commissioner in his efforts to modernize and update the IRS, the IRS Reform Act 

included a statutory direction for the Commissioner to eliminate or substantially modify the 

existing organizational structure and to establish organizational units to serve particular groups 

of taxpayers with similar needs.75

The IRS has made significant progress in implementing the new organizational structure. 

The IRS created four operating divisions to best serve taxpayers of similar needs: Wage and 

Investment; Small Business and Self-Employed, Large and Mid-Size Business, and Tax Exempt 

and Government Entities. There are also several functional units, including Appeals, the 

Taxpayer Advocate Service, Criminal Investigation and Communication and Liaison. 

This new organization formally replaced the prior geographically based organizational 

structure on October 1, 2000. Top management is in place for each of the operating divisions 

and business units. The final stages of implementation, including the redistribution of workload, 

will require another two years (through fiscal year 2002). Below is discussion of each of the 

operating divisions and certain functional units. 

Wage and Investment Division

The Wage and Investment Division serves approximately 116 million taxpayers, 

including married taxpayers who file jointly, accounting for 88 million returns with wage and 

investment income only. Most of these taxpayers deal with the IRS only once a year when filing 

their returns. Eight Service Centers provide processing, account management, and compliance 

services. 

 75 IRS Reform Act sec. 1001. 
 26

Small Business and Self-Employed Division

The Small Business and Self-Employed Division serves 45 million taxpayers, including 

small businesses, individuals with no wage income and individuals with both self-employment 

income and wage income. According to the IRS, this group has much more complex dealings 

with the IRS than wage and investment taxpayers. They have four to 60 transactions with the 

IRS each year. The Small Business and Self-Employed Division carries out its functions with a 

compliance field organization, including examination and collection groups, reporting to a 

manager handling multiple functions.76

Large and Mid-Size Business Division

The Large and Mid-Size Business Division serves C corporations, S corporations, and 

partnerships with assets greater than $5 million. At least two percent of these taxpayers interact 

with IRS compliance functions each year and the largest taxpayers deal with the IRS 

continuously. The Large and Mid-Size Business Division is predominantly a field organization 

that is structured into five industry groups. 

Tax-Exempt and Government Entities Division

The Tax-Exempt and Government Entities division serves three million entities including 

local community organizations, municipalities, universities, pension funds, state and local 

governments, and Indian tribal governments. This division also handles tax-exempt bond issues. 

Appeals

Appeals serves as a channel for taxpayers to contest an IRS compliance action. The 

mission of Appeals is “to resolve tax controversies, without litigation, on a basis that is fair and 

impartial to both the Government and the taxpayer, and in a manner that will enhance voluntary 

compliance and public confidence in the integrity and efficiency of the [IRS].”77

The new Appeals unit is organized into three operating units similar to the IRS operating 

divisions: Wage & Investment, Small Business/Self-Employed - Tax Exempt/Government 

Entities, and Large & Mid-Size Business. 

The activities of the Small Business/Self-Employed - Tax Exempt/Government Entities 

unit of Appeals involve cases covering corporations with less than $5 million in assets, collection 

issues, estate and gift tax cases, self-employed individuals, tax-exempt entities, and government 

entities. This unit also has responsibility for the current Records and Processing sections. Other 

program responsibilities include innocent spouse cases, Freedom of Information Act appeals, 

excise and employment taxes, and alternative dispute resolution of bankruptcy, dyed diesel fuel, 

and tax-exempt bond cases. Initially, all Wage and Investment Appeals unit cases will be 

processed by the Small Business/Self-Employed - Tax Exempt/Government Entities Appeals 

 76 IRS Strategic Plan at 83. 

77 IRS Letter at 15. 
 27

unit until the Wage and Investment unit of Appeals is operational. The Wage and Investment 

unit of Appeals is expected to become operational on October 1, 2001. The Large and Mid-Size 

Business unit of Appeals will cover corporate and partnership cases with assets greater than $5 

million with the most complex issues, particularly international issues. 

Criminal Investigation

Criminal Investigation investigates potential criminal violations of the Code and related 

financial crimes. The Webster report found that the then Criminal Investigation Division had 

“drifted from its primary mission of investigations of criminal violations of the Tax Code into 

the broader role of providing federal financial investigative expertise.”78 Following the Webster 

report, Criminal Investigation developed an interim compliance strategy to assist in identifying, 

developing, and investigating cases. The Criminal Investigation Compliance Program Strategy 

has three components, legal source tax crimes (generally cases governed by the Code), illegal 

source financial crimes (includes Code and Title 18 violations, as well as money laundering), and 

narcotics related financial crimes (which includes both tax and money laundering violations). 

Criminal Investigation is also focusing on refund fraud and e-commerce fraud. It is developing a 

Fraud Detection Center to assist in this effort, as well as an Electronic Crimes Section. 

Taxpayer Advocate Service

The Taxpayer Advocate Service assists taxpayers in resolving problems that have not 

been resolved through prior contacts with the IRS or cannot be resolved through normal systemic 

processes. On March 12, 2000, the Taxpayer Advocate Service was established as a new 

organization. The new organization has two components, one segment dedicated to casework 

and the other dedicated to advocacy. It is structured to ensure that at least one Local Taxpayer 

Advocate is in each state. 

Challenges facing the new IRS organizational structure

Staffing

The new organizational structure places a greater emphasis on pre-filing services, such as 

education and outreach to help taxpayers comply with the tax law and get their returns correct 

the first time. The IRS notes that staffing has lagged behind the level necessary to perform the 

intended pre-filing services for both the Wage and Investment and Small Business/SelfEmployed divisions.79 Currently, the IRS is engaged in a recruitment effort to fill staff positions 

in the pre-filing components of these two divisions.80

 78 William H. Webster, Review of the Internal Revenue Service’s Criminal Investigation 

Division, IRS Publication 3388 (April 1999). 

79 IRS Letter at 3. 

80 Id. 
 28

The IRS also has noted that resource limitations have affected the ability of the IRS to 

assist taxpayers promptly.81 To address this issue, the IRS has increased reliance on automated 

services.82

Consistent treatment of taxpayers

The IRS has experienced some difficulties in transitioning to the new organization. Each 

operating division is responsible for all of the interactions a taxpayer under its jurisdiction might 

have, regardless of geographic location. However, one division may be responsible for a 

program carried out by several divisions. For example, most collection procedures are the 

responsibility of the Small Business and Self-Employed division, but the Wage and Investment 

division shares responsibility for carrying out collection actions. Prior to the reorganization, the 

Collection Division would have been responsible for establishing procedures and the actual 

collection of tax. The IRS notes that it has had some difficulty having getting accustomed to 

having program responsibility assigned to one division and carried out by several others. “While 

the divisions are charged with addressing the unique needs of their taxpayer segments, we also 

need to ensure consistency of taxpayer treatment.”83

Outside groups also have noted a concern that taxpayers be treated uniformly among the 

operating divisions, as well as within the operating divisions. For example, the National 

Association of Enrolled Agents noted that its members are seeing inconsistent application of the 

equitable offer in compromise provisions.84 In addition, the Tax Section of the American Bar 

Association, as well as the American Institute of Certified Public Accountants noted that some 

IRS personnel appear reluctant to grant requests of equitable relief under the innocent spouse 

provisions.85 In addition, the Tax Section of the American Bar Association also expressed 

concern over the possibility for inconsistent treatment of similarly situated taxpayers. It used 

example the fact that the Large and Mid-Size Business Division consists of five industry groups. 

 81 IRS Letter at 67. 

82 Id. 

83 IRS Letter at 3. 

84 NAEA Letter. 

85 ABA Letter. “The experience of some practitioners [] is that some IRS personnel may 

be reluctant to grant requests for equitable relief under section 6015(f). Apparently some IRS 

personnel are placing a heavy burden on spouses to show that they did not have knowledge or 

reason to know of an underpayment of tax as a condition of their being granted equitable relief.” 

Id. “Also it is our impression that AICPA members are attempting to employ the IRC section 

6015(f) equitable relief provisions for spouses, but without measurable results. CPAs appear to 

find the IRS’s interpretation of the equitable relief provisions too stringent.” AICPA Letter. 

The administration of the innocent spouse and offer in compromise provisions is discussed 

below in section IV. 
 29

It noted the potential for a lack of uniformity when each industry separately resolves issues 

common to taxpayers across all industry groups.86 

Adjusting to shared services

Under the reorganized IRS, support functions such as information systems and facilities 

are centralized, rather than under the control of operational managers. The new structure has 

been viewed by some employees as more cumbersome and less effective than when these 

functions were under the control of the operation managers.87 Nonetheless, the IRS believes this 

centralized system will eventually standardize key support operations and provide a mechanism 

for controlling costs.88

Developing reliable measures of compliance 

The IRS needs information to assess whether its methods of encouraging voluntary 

compliance are achieving results, but it has not developed a plan for obtaining that information.89 

In part because the IRS lacks fundamental data on compliance levels, the General Accounting 

Office considers unpaid taxes to be a high-risk area for the IRS.90

C. Development of Organizational Performance Measures 

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

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

IRS mission statement and prohibiting the IRS from using tax enforcement results to evaluate 

any IRS employee or to impose or suggest production quotas or goals.91 Accordingly, the IRS is 

changing its organizational performance measures to balance business results (both quantity and 

quality), customer satisfaction, and employee satisfaction. The IRS notes that enforcement 

revenues are not a measure of performance at either the strategic or operational level.92 

 86 ABA Letter. 

87 IRS Letter at 3. 

88 Id. at 4. 

89 General Accounting Office, Testimony Before the Subcommittee on Government 

Efficiency, Financial Management, and Intergovernmental Relations, House Committee on 

Government Reform (April 3, 2001). 

90 Id.

91 In addition, the Government Performance and Results Act of 1993 requires Federal 

agencies to establish a hierarchy of goals, objectives, and performance measures applicable to 

various organizational units within their agencies. Pub. L. No. 103-62 (1993). 

92 IRS Strategic Plan at 91. According to the IRS, among other actions, it is providing 

guidance and training to its managers and employees on the use of statistics and establishing 
 30

According to the IRS, the sole use of enforcement revenue at the strategic level is to measure the 

effectiveness of case selection for compliance activities.93

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

new performance management system.94 The IRS implemented the balanced measures system 

for the Examination, Collection, and Customer Service in 1999.95 In addition, balanced 

measures have been approved for Tax Exempt and Government Entities, Large and Mid-Size 

Businesses, Appeals, Taxpayer Advocate Service, Information Systems, Criminal Investigation, 

Appeals, and for additional Submission Processing and Customer Service product lines within 

the Wage and Investment and Small Business and Self-Employed operating divisions.96 

Balanced Measures for the remaining organizational units are scheduled for approval during 

fiscal year 2001.97

The General Accounting Office notes that last year, IRS also made progress by aligning 

its performance evaluation system for managers with its balanced measurement system, to 

clearly link their work to the mission and goals of the agency.98 Further, IRS is beginning this 

year to hold managers accountable with a performance-based pay system.99 

The General Accounting Office also has identified several challenges in this area. It 

found that the performance management system is most fully developed at the organization-wide 

level, is less well developed at the division level, and is weakest at the front-line level, where 

interactions with taxpayer occur.100 According to the General Accounting Office, while most 

goals and action items to support operational objectives were clearly stated, they were not 

specific, measurable, or outcome-oriented.101 The General Accounting Office also found that 

 

business units to conduct quarterly certifications of compliance with the prohibition on the use of 

statistics. IRS Letter at 68. 

93 IRS Strategic Plan at 91. 

94 Id at 88. 

95 Id. at 93. 

96 Id. 

97 Id. 

98 General Accounting Office, Testimony Before the Subcommittee on Government 

Efficiency, Financial Management, and Intergovernmental Relations, House Committee on 

Government Reform (April 3, 2001). 

99 IRS Letter at 41. 

100 Id. 

101 General Accounting Office, Testimony Before the Subcommittee on Government 

Efficiency, Financial Management, and Intergovernmental Relations, House Committee on 
 31

while the IRS has revamped its evaluation system for managers, it still needs to similarly modify 

its evaluation system for front-line employees.102 According to the General Accounting Office, 

this will require setting forth the performance standards for employee groups that are appropriate 

and measurable for their units and to align those performance standards to encourage behavior 

that supports the three strategic goals.103

D. Technology Modernization 

In general

Commissioner Rossotti has observed that the “IRS is saddled with a collection of 

computer systems developed over a 35-year period. The most important systems that maintain 

all taxpayer records were developed in the 1960s and 1970s.”104 In fact, taxpayer data “is stored 

and updated once a week on magnetic tape.”105 IRS business systems modernization is a critical 

part of achievement of IRS strategic plans. Modernizing the IRS’s technological equipment 

requires a great deal of work; it is a massive project. 

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

to modernization continues to present the IRS with challenges. In 1995, the General Accounting 

Office reviewed the IRS’s tax systems modernization projects, and it identified significant 

problems.106 For example, the General Accounting Office found that, while the IRS had 

progressed in many actions designed to improved management of information systems, enhance 

its software development capability, and better define, perform, and manage its tax systems 

modernization, its efforts to modernize were at serious risk due to remaining pervasive 

management and technical weaknesses that were impeding modernization efforts.107

 

Government Reform (April 3, 2001); General Accounting Office, IRS Modernization: IRS 

Should Enhance Its Performance Management System, (GAO-01-234, February 2001) at 4. 

102 General Accounting Office, Testimony Before the Subcommittee on Government 

Efficiency, Financial Management, and Intergovernmental Relations, House Committee on 

Government Reform (April 3, 2001). 

103 Id.

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

the Subcommittee on Oversight, House Ways and Means Committee (April 3, 2001) at 17. 

105 Id. 

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

Weaknesses Must Be Corrected If Modernization Is To Succeed (GAO/AIMD-95-156, July 26, 

1995) (“GAO Report 95-156”). 

107 Id. at 3. 
 32

The General Accounting Office again reviewed the IRS’s tax systems modernization 

efforts in 1996.108 At that time, the General Accounting Office found that the IRS had made 

further progress, but that none of the General Accounting Office recommendations had been 

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

technical weaknesses. The General Accounting Office recommended that, until the IRS 

weaknesses were corrected, the Congress should consider limiting tax systems modernization 

spending to only cost-effective modernization efforts that: (1) support ongoing operations and 

maintenance; (2) correct IRS management and technical weaknesses; (3) are small, represent low 

technical risk, and can be delivered in a relatively short time frame; and (4) involve deploying 

already developed systems only if such systems have been fully tested, are not premature given 

the lack of completed architecture, and produce a proven, verifiable business value.109

In its 1996 report on tax systems modernization, the Treasury Department also found 

that, while the IRS had made some progress on systems modernization, modernization efforts 

had taken longer than expected, cost more than originally estimated, and delivered less 

functionally than originally envisioned. The Treasury Department study concluded that 

significant changes in the IRS management approach were needed, and that it was beyond the 

scope of IRS ability to develop and integrate tax systems modernization without expanded use of 

external expertise.110 In 1997, the General Accounting Office again included IRS systems 

modernization on its list of “high-risk” areas. 

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

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

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

functional and technical architectures; and (4) a sequencing plan. The General Accounting 

Office reviewed the Modernization Blueprint to determine whether it provided the foundation 

needed to develop or acquire modern systems and reported on the Blueprint in early 1998.111 

The General Accounting Office found that the Blueprint was a good start, but that it was not 

complete and failed to provide sufficient detail and precision for building and acquiring new 

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

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

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

109 GAO Report 96-106 at 3. 

110 Department of Treasury, Report to House and Senate Appropriations Committees, 

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

6, 1996) at 1. 

111 General Accounting Office, Tax Systems Modernization: Blueprint Is a Good Start 

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

February 24, 1998) (“GAO Report 98-54”). 
 33

systems. The IRS Chief Information Officer acknowledged that essential elements were missing 

from the Blueprint, and stated that he had been taking steps to address the missing elements.112

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

technology113 and, in response to concerns regarding IRS systems modernization efforts, 

restricted obligation of the funds until IRS submits to the Congress for approval a plan for 

expenditure that: (1) implements the IRS Modernization Blueprint submitted to Congress on 

May 15, 1997; (2) meets the information systems investment guidelines established by the Office 

of Management and Budget in the fiscal year 1998 budget; (3) has been reviewed and approved 

by the IRS’s Investment Review Board, the Office of Management and Budget, and the 

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

General Accounting Office; (4) meets the requirements of the May 15, 1997, IRS’s Systems Life 

Cycle program; and (5) is in compliance with the acquisition rules, requirements, guidelines, and 

systems acquisition management practices of the Federal Government.114 The fiscal year 1999 

information technology appropriation of $211 million included similar restrictions.115 The fiscal 

year 2000 and fiscal year 2001 appropriations did not include amounts for information 

technology.116

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

known as “PRIME”). In mid-1999, the IRS submitted its first expenditure plan requesting 

approximately $35 million for modernization initiatives through October 1999. The General 

Accounting Office reported that the initial expenditure plan was an appropriate first step toward 

successful systems modernization and satisfied the conditions set forth by the Congress for the 

use of the funds.117

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

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

funding measure until submission of the next expenditure plan.118 The General Accounting 

Office reviewed this request and raised concerns regarding the lack of progress in completing 

 112 Id. at 2-3. 

113 The account from which systems modernization is to be funded was known as the 

Information Technology Investments Account (also known as ITIA). 

114 Pub. L. No. 105-61 (1997). 

115 Pub. L. No. 105-277 (1998). 

116 Pub. L. No. 106-58 (1999) and Pub. L. No. 106-554 (2000). 

117 General Accounting Office, Tax Systems Modernization: Results of Review of IRS’ 

Initial Expenditure Plan (GAO/AIMD/GGD-99-206, June 15, 1999) (“GAO Report 99-206”) at 

3. 

118 GAO Report 00-144 at 12. 
 34

and implementing certain management controls and the risks associated with the plans to 

develop certain systems without such controls in place.119 The IRS request was approved, and 

the IRS was directed to take actions to address the concerns raised by the General Accounting 

Office. 

The General Accounting Office reports that the IRS has scaled back its new system 

development efforts, recognizing that it must first put in place the requisite modernization 

management capability.120 On March 9, 2000, the IRS submitted a new expenditure plan 

requesting obligation of approximately $176 million in funds. The plan includes provisions to 

address management weaknesses previously identified and emphasizes completing the enterprise 

architecture, implementing the enterprise lifecycle, and rescheduling projects to avoid problems. 

The General Accounting Office has noted that the March 9, 2000, plan addresses some 

longstanding weaknesses. However, the General Accounting Office will continue to designate 

IRS systems modernization as a high-risk program until management and technical weaknesses 

have been corrected. 

In May 2000, the General Accounting Office stated that the IRS was just as challenged an 

agency at that time as it was when the IRS Reform Act was passed by the Congress. The 

General Accounting Office noted that the IRS continued to face serious operational issues in its 

two key mission areas: enforcement and customer service. For example, deficiencies in controls 

to properly manage billions of dollars in unpaid tax assessments have resulted in taxpayer burden 

and potentially billions of dollars in lost revenue to the government. Taxpayers also continue to 

be frustrated with their inability to reach the IRS by telephone. Once taxpayers are able to get 

through, IRS employees often provide slow service and incorrect answers to questions.121

The General Accounting Office has noted that the IRS has developed a massive 

modernization effort, which will likely take more than a decade to complete. This effort 

encompasses major changes to the IRS’s organizational structure, performance management 

systems, information system, and business practices. The General Accounting Office has found 

that the IRS has begun to lay a foundation, which should facilitate changes to IRS business 

practices; however, substantial challenges remain in the areas of performance management and 

information systems modernization. 

IRS Master File modernization

The customer account data engine will provide a modern system for storing, managing, 

and accessing taxpayer records and accounts. This system will replace the existing master files 

and information processing system, and it will develop a central database for the management of 

 119 Id. 

120 Id. at 13. 

121 General Accounting Office, IRS Modernization: Long-term Effort Under Way, but 

Significant Challenges Remain (GAO/T-GGD/AIMD-00-154, May 3, 2000) (“GAO Report 00-

154”) at 1-2. 
 35

taxpayer information and software systems that support different transactions using taxpayer 

account information. The IRS anticipates that the customer account data engine will fully deploy 

the individual master file by 2006. The planning to incrementally stage the business master file 

and information returns processing on the customer account data engine-individual master file 

footprint will start in October 2001.122

Computer security

The IRS has noted that protecting taxpayer information is essential to the operation of a 

self-assessment tax system. In describing the steps the IRS has taken to prevent outsiders and 

insiders from breaching IRS security, the IRS has reported that, since 1997, the Office of 

Security (within the IRS), the General Accounting Office, and TIGTA have been actively 

involved in identifying and correcting security weaknesses throughout the IRS. The Office of 

Security conducts comprehensive security reviews of IRS facilities that identify both local and 

systemic weaknesses that require either local action or broader steps, such as policy guidance, 

revised operating procedures, training, or new technological approaches. Since 1997, the IRS 

has made major improvements in physical, data, and systems security assurance, although a 

major number of weaknesses remain. The General Accounting Office made note of IRS 

progress in this area in their most recent High Risk Update, in which its states that it has “made 

notable progress in improving computer security at its facilities, corrected a significant number 

of identified weaknesses, and established a Service-wide computer security management 

program that should, when fully implemented, help the agency effectively manage its security 

risks.”123

 122 IRS Letter at 25. 

123 Id. at 25-26. Some of the IRS’s significant achievements include: (1) improvement 

of the security status of existing systems; (2) development of security architecture for the IRS 

modernized systems environment; (3) improvements to the established systems certification and 

accreditation; (4) continuing emphasis on the unauthorized access program (also known as 

“UNAX”); (5) creation of an enterprise computer systems incident response center (also known 

as “CSIRC”); (6) facilities upgrades to improve security; and (7) development of assessment 

tools and techniques that allow IRS to identify and prioritize areas of vulnerability in an 

objective, measurable manner. Id. at 26-28. 
 36

III. DESCRIPTION AND ANALYSIS OF THE IRS BUDGET REQUEST 

FOR FISCAL YEAR 2002 

A. In General 

Administration’s fiscal year 2002 IRS budget request

For fiscal year 2002, the Administration’s IRS budget request totals $9.276 billion and 

99,116 full-time equivalent positions, not including funding and staffing for the earned income 

credit program. The fiscal year 2002 budget request reflects a $580 million increase from the 

fiscal year 2001 appropriated level of $8.696 billion and an increase of 1,843 full-time equivalent 

employees from the fiscal year 2001 proposed operating level of 97,273 full-time equivalent 

employees.124

In addition, the Administration’s IRS budget request includes $146 million and 2,236 

full-time equivalent employees for the earned income credit compliance initiative, which reflects 

a $1.319 million increase from the proposed operating level for fiscal year 2001, due to 

adjustments necessary to maintain current levels.125 The fiscal year 2002 budgeted staffing 

levels would remain unchanged from the proposed operating level for fiscal year 2001.126 The 

earned income credit program is funded outside the discretionary spending caps. Fiscal year 

2002 is the fifth year of funding for this five-year compliance initiative. The compliance 

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

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

associated with the earned income credit. 

The IRS’s overall budget request for fiscal year 2002, including funding and staffing for 

the earned income credit, totals $9.422 million and 101,352 full-time equivalent employees.127

IRS Oversight Board’s fiscal year 2002 IRS budget recommendation

The IRS Oversight Board has stated that the Administration’s fiscal year IRS 2002 

budget request “does not adequately support the IRS Strategic Plan and provides inadequate 

support for technology modernization.”128 The IRS Oversight Board finds that the IRS 

operations budget should be increased by approximately six percent from fiscal year 2001 levels 

to account for inflation, mandatory cost increases, normal salary increases and promotions. 

 124 IRS Document 10968, Fiscal Year 2001 Congressional Justification (April 9, 2001) 

(“FY 2002 Justification”) at SD-9, SD-12. 

125 FY 2002 Justification at EITC-1. 

126 Id. 

127 See Internal Revenue Service, Budget in Brief, Fiscal Year 2002 (April 2001) (“IRS 

FY 2002 Budget in Brief”) at 1. 

128 IRS Oversight Board Report at 5. 
 37

For fiscal year 2002, the IRS Oversight Board has recommended a total budget of 

$10.260 billion, which includes $8.992 billion for operations and $1.268 billion for IRS 

modernization, which is a total of $838 million more than is requested by the Administration. 

The IRS Oversight Board has presented its fiscal year 2002 budget recommendation in terms of 

the IRS’s strategic goals and objectives, noting that the operations budget is directly linked to the 

strategic goals of the IRS. In its fiscal year 2002 budget recommendation, the IRS Oversight 

Board has allocated 40 percent to “Top Quality Service to All Taxpayers,”129 or $3.597 billion; 

36 percent to “Productivity Through a Quality Work Environment,”130 or $3.237 billion; and 24 

percent to “Top Quality Service to Each Taxpayer,”131 or $2.156 billion. The IRS Oversight 

Board’s recommendation would represent approximately a 13 percent increase over fiscal year 

2001 levels resources and funding for activities that provide service to each taxpayer. The IRS 

Oversight Board makes this recommendation because it believes that resources should go where 

taxpayers need help. 

IRS objectives for the fiscal year 2002 budget request

The IRS has noted that its fiscal year 2002 budget request results from strategic and 

program delivery gaps in IRS resources. Examples of such gaps include taxpayers’ need for 

assistance in complying with tax laws, unpaid tax debts that remain uncollected, and 

noncompliance and underreporting. The IRS acknowledged its commitment to increased 

program delivery, including filing season assistance, expansion of key programs such as 

Electronic Tax Administration, declines in the backlogs in programs such as offers in 

compromise and collection due process, improvements in information services, progress in 

correcting security and financial control weaknesses, and fully implementing technical training 

for essential occupations such as exam and customer service.132

The IRS plans to address certain strategies as one of the significant steps to IRS 

modernization. These strategies include: 

• filling front-line pre-filing and taxpayers assistance positions in the organizational 

design; 

 129 “To Quality Service to All Taxpayers” includes: (1) increasing fairness of 

compliance and (2) increasing overall compliance. This strategic goal includes the earned 

income credit budget request of $146 million. Id. at 14. 

130 “Productivity Through a Quality Work Environment” includes: (1) increasing 

employee job satisfaction and (2) holding agency employment stable while economy grows and 

service improves. This strategic goal includes the mandated information systems special pay 

increases of $9 million and excludes modernization and improvements projects. Id.

131 “To Quality Service to Each Taxpayer” includes: (1) making filing easier, (2) 

providing first quality service to each taxpayer needing help with his or her return or account, 

and (3) providing prompt, professional, helpful treatment to taxpayers in cases where additional 

taxes may be due. Id.

132 FY 2002 Justification at SD-4 through SD-5. 
 38

• increasing the level of service access for telephone service; 

• replacing attrition in front-line compliance positions; 

• increasing front-line compliance services staffing for document matching and 

telephone collections; 

• reducing the number of compliance full-time equivalent employees diverted to filing 

season details, thereby increasing net full-time equivalent employees for compliance; 

• centralizing processing of most offers in compromise to reduce the drain on front-line 

collections staff; 

• moving most innocent spouse cases to the Wage and Investment unit to reduce the 

drain on front-line Small Business Self-Employed exam staff; 

• completing the Tax Exempt and Government Entities organizational design for 

government entities; 

• initiating document matching for Forms K-1; 

• improving operational efficiency through modernized business systems coming on 

line; and 

• planning for normal workload increases.133

The $580 million increase in the Administration’s IRS’s fiscal year 2002 budget request 

from its projected fiscal year 2001 operating level includes two broad categories: maintaining 

current service levels and modernization. For maintaining current service levels, the IRS has 

requested a total of $356 million, and for modernization, the IRS has requested a total of $224 

million.134

 133 FY 2002 Justification at SD-5 through SD-9. 

134 For its progress in modernization, the IRS has requested $325 million for business 

systems modernization and a reduction of $101 million for the non-recurrence in organizational 

modernization funds, which the IRS finds will decline by $101 million in fiscal year 2002 and 

end in fiscal year 2003. 
 39

B. Funding to Maintain Current Operating and Service Levels 

In general

For maintaining current service levels, the IRS has requested $356 million for fiscal year 

2002, which includes $325 million for pay cost, benefits, and non-labor increases, a combined 

$88 million for STABLE and counterterrorism staff annualization, and a $57 million reduction 

for the absorption of non-pay expenditures, as well as other non-discretionary cost increases. 

Pay, benefit, and non-labor increases

The IRS’s budget request includes $325 million for non-pay inflation and statutory pay 

and benefit increases.135 The IRS notes that it is a labor-intensive organization and that a stable 

workforce is critical to achieving its mission.136 The IRS further states that, in order to maintain 

its current operations, complete a successful filing season, and oversee tax administration and 

organizational modernization, it must have the resources to pay for the increased costs associated 

with statutory pay increases.137

STABLE and counterterrorism initiatives annualization

The Staffing Tax Administration for Balance and Equity (“STABLE”) initiative is 

designed to stabilize and strengthen tax compliance and customer service. For this program, the 

IRS has requested $86.4 million and 1,822 full-time equivalent employees for fiscal year 

2002.138 The IRS notes that the requested staffing increases will improve toll-free service and 

reverse the declines in audit coverage that the IRS has experienced over the past several years. 

In addition, the IRS has requested $1.4 million and 21 full-time equivalent employees to 

complete funding for the IRS Criminal Investigation portion of the National Initiative against 

Counterterrorism.139

The IRS Oversight Board also believes that full funding for the STABLE initiative is 

important. Thus, the IRS Oversight Board would ensure that the budget allow for the completion 

of the hiring of the 3,800 staff to enable to IRS to begin addressing the decline in taxpayer 

service, audits, and other compliance programs that have occurred during the past few years. 

 135 FY 2002 Justification at SD-10. 

136 Id.

137 FY 2002 Justification at SD-10. 

138 Id. at SD-13. 

139 Id. at SD-10. 
 40

Program offsets

The IRS has proposed to offset $57 million to account for projected inflation for non-pay 

expenditures, as well as other non-discretionary cost increases. The IRS notes that these costs 

can be offset through improved resource management. For example, IRS management is 

expected to be more selective in incurring costs such as travel and contracted services and to 

look for opportunities to improve the IRS’s purchasing power, for example, by combining 

procurements.140

C. Funding to Support IRS Systems Modernization 

In general

The IRS notes that most costs associated with administering the tax system are not part of 

its budget; rather, these costs are borne by taxpayers. Taxpayers must spend time and money in 

preparing their tax returns, as well as dealing with the IRS, which attempts to help taxpayers and 

administer Federal taxes with “extraordinarily old and poorly integrated systems.”141 The IRS 

has reiterated its desire to reengineer the way its conducts business with taxpayers, who should 

receive world-class service.142

The IRS has requested an increase of $224 million for modernization of the IRS, which 

encompasses both a $325 million increase for the IRS’s investments in new technology and to 

enable the IRS to continue the momentum of business systems modernization and a $101 million 

decrease in funds for organization modernization, a process that is ending.143

Business systems modernization

The IRS has found that its computer systems, which were developed in the 1960s and 

1970s, are so outdated that they do not allow the IRS to meet its modern business needs. 

Moreover, delays in modernizing IRS’s tax administration business systems result in the 

sustaining of these outdated systems that do not efficiently serve taxpayers.144

The IRS has requested a total of $397 million for business systems modernization (also 

known as BSM), which reflects a $325 million increase from the $72 million appropriated in 

fiscal year 2001.145 Formerly known as the Information Technology Investment Account (also 

known as ITIA) the business systems modernization appropriation provides for reengineering 

 140 Id. at SD-10 through SD-11. 

141 Id. at SD-11. 

142 Id. 

143 Id.

144 IRS FY 2002 Budget in Brief at 3. 

145 FY 2002 Justification at SD-11; FY 2002 Budget in Brief at 2. 
 41

business practices and acquiring new technology. The IRS is using a formal method to 

prioritize, approve, fund, and evaluate its portfolio of business systems modernization 

investments. The IRS finds that this methodology enforces a documented, repeatable, and 

measurable process for managing investments throughout their life cycle. Investment decisions 

are approved by the IRS Core Business System Executive Steering Committee, which is chaired 

by the Commissioner of Internal Revenue. 

The business systems modernization program is comprised of five categories. These 

include: (1) Program Management,146 (2) Core Infrastructure Support Projects,147 (3) Data 

Infrastructure Projects,148 (4) Existing Business Projects,149 and (5) New Business Projects.150

The IRS has indicated that its business systems modernization will provide improved 

access to information and tax data, more accurate information by the IRS to taxpayers, speedier 

responses by the IRS to taxpayers, and more timely IRS-initiated actions.151

The IRS thoroughly reviewed its tax system work streams as part of a business process 

reengineering effort. This process, which the IRS refers to as Tax Administration Vision and 

Strategy (also known as TAVS) developed a vision of future business practices for each stream, 

creating operating models that bundle sets of capabilities that meet the differing needs of 

customer segments at different stages in the taxpayer lifecycle. The Tax Administration Vision 

 146 Program Management includes: (1) Prime Program Management Office, (2) 

Enterprise Life Cycle, (3) Configuration Management, (4) Business System Modernization 

Office TIPSS support to QA, (5) Federally Funded Research & Development Center (MITRE), 

and (6) Architectural Engineering Office. FY 2002 Justification at BSM-11. 

147 Core Infrastructure Support Projects includes: (1) Security and Technology 

Infrastructure Releases (STIR), (2) Telecommunications Near-Term (formerly TESP), (3) STIR 

(Infrastructure Shared Services), (4) Enterprise Systems Management, (5) Solutions 

Demonstration Laboratory, (6) Virtual Development Environment, and (7) Enterprise Integration 

& Test Environment. FY 2002 Justification at BSM-11. 

148 Data Infrastructure Support Projects include: (1) Customer Account Data Engine 

(“CADE”) (IMF simple), (2) CADE (IMF complex), (3) CADE (BMF), (4) Information Returns 

Processing Modernization, (5) Enterprise Data Warehouse (Includes Custodial Accounting 

Project & Decision Analytics), and (6) Integrated Financial Services. FY 2002 Justification at 

BSM-11. 

149 Existing Business Projects include: (1) Customer Communications 2002 and (2) EServices. FY 2002 Justification at BSM-11. 

150 New Business Projects include: (1) Workload Planning and Control, (2) E-Services 

2003, (3) HRConnect, (4) Customer Account Management Individual and Self, (5) Filing and 

Payment Compliance, (6) Reporting Compliance - Individual, and (7) Taxpayer Education - 

Indirect. FY 2002 Justification at BSM-11. 

151 IRS FY 2002 Budget in Brief at 4. 
 42

and Strategy process has identified the business systems and processes that would most quickly 

provide benefits to taxpayers:152

The IRS seeks to change from the following 

business system or process... 

To... 

Information requests: 

• paper average: 23 days 

• e-mail average: 4 days 

• telephone level of service: 53 

percent (FY 1999) 

Information requests correctly routed and 

fulfilled at the time of request. 

Taxpayer cannot resolve problems without IRS 

staff 

• tax law quality 72 percent 

• account quality 59 percent 

Robust “self help” capabilities and third-party 

relationships help to prevent/correct problems. 

Refunds in 5 - 7 weeks. Refunds in 2 - 3 days. 

Audits not started until 14 - 20 months after 

return is filed. 

Tax returns selected for audit within same 

filing season. 

Up to 30 percent of audits result in “No 

Change” to the return. 

Reduce unnecessary audits so as to cut “No 

Change” closings by one half. 

Account inquiries at 40 percent first time 

resolution. 

Account inquiries at 80 percent resolution. 

Time to collect outstanding balances: average 

2.5 years. 

Collection of outstanding balances: average 6 

months. 

Multiple points of data entry. Single point of data entry. 

 152 Table adapted from IRS FY Budget in Brief at 5. 
 43

The IRS seeks to change from the following 

business system or process... 

To... 

Limited reporting and access to data. Manager and employee self service access to 

data and reporting capabilities. 

Limited measurement capabilities. Automated capabilities for enhanced and 

focused measurements. 

Multiple stand alone systems that are not 

integrated. 

One integrated data warehouse for HR data. 

Employee skills and competencies not linked 

to positions, vacancies, training, and employee 

records. 

Skills and competency database to link 

positions, training, job vacancies, employee 

records, etc. 

IRS Oversight Board’s budget recommendation for systems modernization

The IRS Oversight Board has recommended $871 million more funding for business 

systems modernization than the Administration has requested, in part because the IRS Oversight 

Board has recommended two-year funding for business systems modernization. The IRS 

Oversight Board is concerned that business systems modernization (former ITIA) will reach a 

zero balance by the end of fiscal year 2001, and that with two-year funding, modernization can 

continue without interruption. Thus, the IRS Oversight Board recommends that funding for 

fiscal year 2002 for Modernization and Improvement Programs be $1.268 billion, of which $1 

billion of the funding would relate to systems modernization, $131 million would be allocated to 

organization modernization, and $137 million would be allocated to other improvement 

projects.153

The IRS Oversight Board has recommended that $450 million of the $1 billion 

appropriation for systems modernization be released for fiscal year 2002 and $550 million be 

released for fiscal year 2003. The fiscal year 2002 amount is $53 million more than the 

Administration requested, because the IRS Oversight Board believes that such funding will 

foster completing modernization as quickly as possible. 

The IRS Oversight Board has also noted that the fiscal year 2002 budget for 

organizational modernization would decrease by $101 million.154 The remaining budget of $131 

 153 IRS Oversight Board Report at 21-22. 

154 Id. at 18. 
 44

million for this item reflects buyouts for retiring employees, moving expenses, and 

improvements to existing systems to support the new organization. In addition, the IRS 

Oversight Board recommends an increase of $97 million for other improvement programs, such 

as computer desktop and laptop replacements, improvements in existing systems, field site 

renovations, and shared services center furniture replacement.155

D. Financial Audit of IRS Fiscal Year 2000 Financial Statements 

The General Accounting Office recently presented the results of its audit of the IRS’s 

principal financial statements for fiscal year 2000. For the first time since the General 

Accounting Office started its annual audit of the IRS in 1992 in accordance with the Chief 

Financial Officers Act of 1990,156 as expanded by the Government Management Reform Act of 

1994,157 the General Accounting Office expressed an unqualified opinion on all IRS financial 

statements.158 The General Accounting Office’s audit of IRS financial statements for fiscal year 

1999, for example, resulted in an unqualified opinion on its custodial activity statement, a 

qualified opinion on its balance sheet, and a disclaimer that no opinion could be issued on the 

remaining IRS financial statements. In prior years, the General Accounting Office’s audit 

reports were less favorable. 

Commissioner Rossotti recently testified that the General Accounting Office rendered 

unqualified opinions due to the combined efforts of both the IRS and the General Accounting 

Office.159 Commissioner Rossotti also indicated that the IRS has made significant improvements 

in several areas, which contributed to the IRS’s success in obtaining unqualified opinions as to 

each financial statement. These improvements include: 

• implementing reconciliation procedures for IRS fund balances and ensuring that 

prompt review and reconciliation was performed; 

• revising its reporting and disclosure for the statement of net cost to properly classify 

IRS programs; 

• improving management of property and equipment inventories; 

 155 Id. 

156 Pub L. No. 101-576 (1990). 

157 Pub L. No. 103-356 (1994). 

158 The IRS financial statements include its balance sheet, net cost, changes in net 

position, budgetary resources, financing, and custodial activity. General Accounting Office, 

Financial Audit: IRS’ Fiscal Year 2000 Financial Statements (GAO-01-394, March 2001) 

(“GAO Report 01-394”) at 3. 

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

Subcommittee on Oversight of the House Committee on Ways and Means (April 3, 2001). 
 45

• improving its review and management of suspense accounts; 

• reducing the number of computer security weaknesses; 

• addressing issues related to safeguarding taxpayer data; and 

• improving its ability to substantiate unpaid assessments. 

Despite its unqualified opinions, the General Accounting Office continues to identify 

many material weaknesses in the IRS’s internal controls. These weaknesses in internal controls 

include: (1) safeguarding of assets, (2) lack of current and reliable ongoing information from 

which to make decisions, (3) inability to manage unpaid assessments, (4) weaknesses in controls 

over tax refunds, property, and equipment, (5) inadequate budgetary controls, and (6) 

weaknesses in computer security. 
 46

IV. OTHER MATTERS ADDRESSED BY THE IRS REFORM ACT 

A. IRS Oversight Board 

The IRS Reform Act created the IRS Oversight Board. The IRS Oversight Board began 

operations in September 2000. Generally, the IRS Oversight Board oversees the IRS’s 

administration, management, conduct, direction and supervision of the execution and application 

of the internal revenue laws.160 Specific responsibilities of the IRS Oversight Board include 

reviewing and approving the IRS’s strategic plans and operational functions (such as 

modernization, outsourcing, training, and education). The IRS Oversight Board also is to 

recommend candidates for appointment as IRS Commissioner, and may recommend whether the 

Commissioner should be removed. The Commissioner’s selection, evaluation, and 

compensation of senior executives also are to be reviewed by the IRS Oversight Board. In 

addition, any major reorganization of the IRS is to be reviewed and approved by the IRS 

Oversight Board. 

The IRS Oversight Board reviews and approves budget requests prepared by the 

Commissioner to ensure that the budget request supports IRS annual and long-range strategic 

plans.161 The IRS Oversight Board submits such budget requests to the Secretary of the 

Treasury, who submits the request to the President, who in turn submits it, without revision, to 

Congress together with the President’s annual budget request for the IRS for the fiscal year. The 

President is not precluded from submitting his own budget for the IRS. 

The IRS Oversight Board consists of nine members: seven private citizens who serve on 

a part-time basis, the Commissioner, and the Secretary of the Treasury. Since becoming 

operational, the IRS Oversight Board has been meeting for two days every two months. Much of 

the IRS Oversight Board’s initial activities have been learning about IRS operations and 

identifying problem areas. The IRS Oversight Board held its first public meeting in March 2001 

and heard statements about the IRS budget and IRS Strategic Plan from organizations that work 

with and advise the IRS. In its interim report, the IRS Oversight Board identified as significant 

problems that IRS customer service is still inadequate, the level of enforcement activities is too 

low, IRS computer systems are outdated, and IRS employee morale and job satisfaction are 

poor.162 So far, the IRS Oversight Board has organized three committees: Modernization, 

Personnel and Organization, and Performance Management. In addition, the IRS Oversight 

Board has started to develop a strategic plan, which will detail the manner of the IRS Oversight 

Board’s operations and the areas of IRS operations that the IRS Oversight Board will focus on. 

The IRS Oversight Board reviewed and approved the IRS’s Strategic Plan. In its Interim 

Report, the IRS Oversight Board strongly supports the mission and goals defined in the IRS 

Strategic Plan and believes that the framework described in the plan is logical and appropriate 

and represents the best way forward. However, the IRS Oversight Board recognizes that meeting 

 160 Sec. 7802(c) and (d). 

161 Sec. 7802(d)(4). 

162 IRS Oversight Board Report at 8-9. 
 47

the goals of the plan will be difficult, will take time, and will require the continuous support of 

the Administration and Congress.163 

The IRS Oversight Board reviewed the IRS’s proposed budget for fiscal year 2002 to be 

sure that the budget was consistent with and supported the IRS Strategic Plan. The IRS 

Oversight Board formally approved the IRS’s budget on February 26, 2001,164 which differs in 

significant respects from the budget submitted to Congress by the Administration.165 

The IRS Oversight Board also has been participating actively in the evaluation of the 

Taxpayer Advocate and advising the Secretary of the Treasury on this appointment, participating 

in the selection of a new Chief Information Officer, and building a professional staff for the IRS 

Oversight Board. The IRS Oversight Board recently named its first permanent staff director, 

whose primary initial task will be to build the IRS Oversight Board staff to six to twelve people. 

B. National Taxpayer Advocate 

Background and provisions of the IRS Reform Act

The IRS created the Problem Resolution Program in 1976. The purpose of the program 

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

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

program. In 1996, the Taxpayer Bill of Rights 2 replaced the Taxpayer Ombudsman with the 

Taxpayer Advocate.166 The Taxpayer Advocate was expected to represent taxpayer interests 

independently in disputes with the IRS. The IRS Reform Act renamed the Taxpayer Advocate 

the National Taxpayer Advocate.167 The National Taxpayer Advocate supervises the Office of 

the Taxpayer Advocate. 

 163 Id. at 12. 

164 Letter from Larry R. Levitan, Chairman IRS Oversight Board, to Lindy L. Paull, 

Chief of Staff, Joint Committee on Taxation (March 15, 2001). 

165 As discussed in more detail in Part III. above, the IRS Oversight Board supports 

increased funding for modernization (the Information Technology Investment Account) and $54 

million in funding for certain computer upgrades that the Administration’s budget does not 

provide. Further, the IRS Oversight Board believes that full funding of Staffing Tax 

Administration for Balance and Equity (STABLE) will counter the decrease in audit coverage 

and notes that the Administration’s proposed funding for STABLE would provide for only an 

increase of 2,500 professionals. IRS Oversight Board Report at 21-22. 

166 The Commissioner of Internal Revenue appointed the Taxpayer Advocate. 

167 The IRS Reform Act now requires that the Secretary of the Treasury, after 

consultation with the Commissioner and the IRS Oversight Board, appoint the National 

Taxpayer Advocate. The National Taxpayer Advocate is required to have experience in 

customer service, tax law, and representing individual taxpayers. Compensation for the National 

Taxpayer Advocate is at the highest rate of basic pay established for the Senior Executive 
 48

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 such 

problems; 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 report to the 

National Taxpayer Advocate or her delegate. Local Taxpayer Advocates are to be independent 

of the IRS’ examination, collection, and appeals functions. Local Taxpayer Advocates also are 

to be employees of the Office of the Taxpayer Advocate. The National Taxpayer Advocate 

appoints Local Taxpayer Advocates. With the Commissioner, the National Taxpayer Advocate 

must develop career paths for local Taxpayer Advocates choosing to pursue a career within the 

Office of the Taxpayer Advocate. 

The National Taxpayer Advocate monitors the coverage and geographic allocation of 

local taxpayer advocate offices and ensures that at least one local advocate is available for each 

State.168 Prior to the reorganization of the Office of the Taxpayer Advocate, the IRS had a 

taxpayer advocate in each of the four regional offices. Each of the 33 district offices, 30 former 

district offices, and 10 service centers has local advocates. The National Taxpayer Advocate 

also must ensure that local telephone numbers for each office are published and available to 

taxpayers served by the office.169 Additionally, the National Taxpayer Advocate must develop 

guidance to be distributed to all IRS officers and employees that outlines the criteria for referring 

taxpayer inquiries to local taxpayer advocate offices.170

The IRS Reform Act also expanded the National Taxpayer Advocate’s ability to issue 

Taxpayer Assistance Orders. A taxpayer can request a Taxpayer Assistance Order if the 

taxpayer is suffering or about to suffer a “significant hardship” from tax law administration.171 A 

 

Service. For the two-year period preceding appointment, the National Taxpayer Advocate must 

not have been an IRS officer or employee. After leaving the Office of the National Taxpayer 

Advocate, the National Taxpayer Advocate cannot accept employment with the IRS for five 

years. 

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

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

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

171 Sec. 7811(a)(1)(A). Significant hardship is deemed to occur if one of four factors 

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

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

(including fees for professional services) if relief is not granted; or (4) the taxpayer will suffer 
 49

Taxpayer Assistance Order may require the IRS to release property of the taxpayer that has been 

levied upon, to cease any action or take any action as permitted by law, or refrain from taking 

any action with respect to the taxpayer. The IRS has recently clarified the guidelines for issuing 

Taxpayer Assistance Orders.172

The Code requires the National Taxpayer Advocate to submit two reports annually to the 

Committee on Ways and Means of the House of Representatives and to the Senate Committee on 

Finance.173 The National Taxpayer Advocate submits the reports directly to the Congressional 

committees without prior review by the Commissioner, the Secretary, or any officer or employee 

of the Treasury, the IRS Oversight Board, or the Office of Management and Budget.174

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

Advocate’s objectives for the fiscal year beginning in that calendar year. Besides statistical 

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

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

of the Taxpayer Advocate.175 Generally, the report must cover initiatives taken to improve 

taxpayer services and problems encountered, as well as the actions taken to resolve them and the 

results. The report also must cover the 20 most serious problems experienced by taxpayers. In 

addition, the IRS Reform Act requires the report to identify the ten most litigated issues for each 

category of taxpayer and the areas of the tax law that impose significant compliance burdens on 

taxpayers or the IRS. The report must include any recommendations received from individuals 

with the authority to issue Taxpayer Assistance Orders, as well as any Taxpayer Assistance 

Orders that have not been promptly honored by the IRS. The report also must set forth 

recommendations for administrative and legislative action to resolve problems encountered by 

taxpayers. 

Organization of the Office of the Taxpayer Advocate

The reorganized Office of the Taxpayer Advocate (“Taxpayer Advocate Service”) 

became official on March 12, 2000. The field organization consists of nine Area Taxpayer 

Advocate directors, seven of whom oversee casework by Local Taxpayer Advocates in assigned 

territories and two of whom oversee casework from Service Center Advocates. Seventy-four 

Local Taxpayer Advocates report to the Area Taxpayer Advocate Directors and are responsible 

 

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

National Taxpayer Advocate may also issue a Taxpayer Assistance Order if the taxpayer meets 

requirements to be set forth in regulations. Sec. 7811(a)(1)(B). 

172 Internal Revenue Service, IRS Expands Authority for Taxpayer Advocate Service, IR2001-12 (Jan. 24, 2001). 

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

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

175 Sec.7803(c)(2)(B)(ii)(I) through (XI). 
 50

for handling taxpayer cases at the local level.176 The Area Taxpayer Advocate Directors report 

to the National Taxpayer Advocate.177 Caseworkers also have been moved into the local 

Taxpayer Advocate organization.178 A career path has been established for these workers to 

allow for professional development and advancement.179

In addition to caseworker positions, the National Taxpayer Advocate has created 

Operating Division Taxpayer Advocate positions to work within the new IRS organizational 

structure.180 The primary responsibility of the Operating Division Taxpayer Advocate is to 

provide systemic analysis and advocacy, as opposed to performing casework.181

The National Taxpayer Advocate receives legal assistance from an executive-level Chief 

Counsel attorney assigned as the Counsel to the National Taxpayer Advocate.182 The Counsel to 

the National Taxpayer Advocate has authority to hire four senior attorneys to provide the 

National Taxpayer Advocate and the immediate office with legal support.183 Since its inception 

in November 1998, the Counsel’s office has assisted the National Taxpayer Advocate with over 

120 cases or projects.184

National Taxpayer Advocate annual report

According to the National Taxpayer Advocate’s most recent annual report,185 the 

National Taxpayer Advocate has turned its attention away from modernizing its organizational 

structure and toward conducting its day-to-day business as the newly modernized and 

independent Taxpayer Advocate Service.186 The National Taxpayer Advocate successfully 

 176 Previously, local Taxpayer Advocates reported to and received evaluations from IRS 

district and service center directors. 

177 See Internal Revenue Service, National Taxpayer Advocate Annual Report to 

Congress for Fiscal Year 1999, Publication 2104 (December 1999), VI-1. 

178 Id.

179 Id.

180 Id.

181 Id.

182 Id. at VI-3. 

183 Id.

184 Id.

185 See Internal Revenue Service, National Taxpayer Advocate Annual Report to 

Congress for Fiscal Year 2000, Publication 2104 (December 2000) (hereinafter “National 

Taxpayer Advocate FY 2000 Report”). 

186 Id. at ii. 
 51

reassigned its casework from employees working in IRS Operations to its newly hired and 

trained staff.187

The National Taxpayer Advocate report identified the following areas as some of the 

most serious problems identified by individual and business taxpayers, tax practitioners, and IRS 

employees: 

(1) complexity of the tax law (individuals and businesses); 

(2) clarity and tone of IRS communications; 

(3) inability to access the IRS toll-free number; 

(4) burden on small business; 

(5) administration of the earned income credit; 

(6) lack of one-stop service; 

(7) lack of acknowledgement of correspondence and payments; 

(8) penalty administration; 

(9) offer-in-compromise issues; and 

(10) misapplied payments.188

The National Taxpayer Advocate report ranks the general category of penalties 

(accuracy-related and failure to file or pay) and interest as the most litigated tax issue.189 In 

addition to penalties and interest, the most litigated tax issues include: court procedures; the 

deductibility of business expenditures; filing status; earned income credit; dependency 

exemptions; the definition of gross income (inclusions and exclusions); accounting methods; 

record keeping and documentation (substantiation); statute of limitations; court authority for 

credits, refunds, and abatements; self-employment issues; independent contractor versus 

employee status; and last known address and notice of deficiency issues.190 Among the most 

litigated tax issues, the National Taxpayer Advocate noted that the deductibility of business 

expenditures, the definition of gross income, accounting methods, and record keeping and 

 187 Id.

188 Id. at 3. 

189 Id. at 66. 

190 Id. at 70. 
 52

documentation present the most significant compliance problems for taxpayers due to 

complexity.191

The National Taxpayer Advocate reported that during fiscal year 2000, the Taxpayer 

Advocate Service independently reviewed and took action to resolve over 256,000 cases.192 The 

National Taxpayer Advocate report listed the top ten sources of Taxpayer Advocate Service 

casework as refund issues, processing of claims and amended returns, processing of original 

returns, audit reconsiderations, abatement of penalties, revenue protection, payment and credit 

problems, examination of tax returns prior to assessment, collection notices, and lost or stolen 

refunds.193 In addition, there were 237,885 applications for Taxpayer Assistance Orders, a 250 

percent increase over the previous year.194 The National Taxpayer Advocate attributed this 

increase, in part, to the provisions of the IRS Reform Act requiring that certain criteria be 

automatically included in the program as hardship cases.195 Five cases required an enforced 

Taxpayer Assistance Order.196 An enforced Taxpayer Assistance Order is required when the 

local Taxpayer Advocate and the responsible IRS functional area cannot reach an agreement on 

case resolution. In 68.8 percent of the Taxpayer Assistance Order cases, the National Taxpayer 

Advocate was able to provide relief, partial relief, or appropriate assistance to the taxpayer.197

The National Taxpayer Advocate reported that taxpayers made more than half a million 

attempts to reach the Taxpayer Advocate Service during fiscal year 2000 using the dedicated 

toll-free telephone number, an increase of 90 percent from fiscal year 1999.198 The Taxpayer 

Advocate Service answered nearly 300,000 calls, 70 percent more than fiscal year 1999, and 

resolved more than 19,000 inquiries through the telephone calls.199

According to the National Taxpayer Advocate report, the National Taxpayer Advocate 

developed criteria for the referral of cases to the Taxpayer Advocate Service, implemented new 

case service quality measurement standards, and implemented a new balanced measurement 

system relating to customer satisfaction, employee satisfaction, and business results.200 In 

 191 Id.

192 Id. at 133. 

193 Id. at 135. 

194 Id. at 133. 

195 Id.

196 The enforced Taxpayer Assistance Orders involved innocent spouse relief, a request 

for a lien withdrawal, a penalty abatement, and two lien subordinations. Id. at 134. 

197 Id. at 133. 

198 Id. at 139. An attempt occurs each time the telephone number is dialed. 

199 Id.

200 Id. at 131. 
 53

response to a request for more delegated authority to the Taxpayer Advocate Service, the IRS 

now permits the Taxpayer Advocate Service to take the same actions as IRS Customer Service 

Representatives in cases that qualify for review by the Taxpayer Advocate Service, including 

adjustments and other account-related interactions between the IRS and taxpayers.201 This new 

authority supplements the statutory authority of the National Taxpayer Advocate and is expected 

to reduce the number of cases that require referral to other parts of the IRS.202

C. Taxpayer Rights 

In general

The IRS Reform Act created or modified numerous taxpayer rights and procedural 

protections. Most of its provisions were effective either on the date of enactment or within six 

months after enactment. Thus, the IRS was required to provide guidance to the public and 

training to its almost 100,000 employees in a very short time frame. The provisions of the IRS 

Reform Act continue to have a significant impact on the operation of the IRS, and the 

Commissioner has stated that it will be several years before the changes made by the IRS Reform 

Act operate at the desired level of efficiency and quality.203 The IRS views its immediate 

challenges as training and management.204

The Tax Division of the Department of Justice stated that it has experienced a significant 

decline in referrals of collection-related civil cases from the IRS since enactment of the IRS 

Reform Act, while the United States Tax Court stated that it has seen no significant change in its 

caseload as a result of the IRS Reform Act.205

Discussed below are several areas that illustrate the difficulties encountered by the IRS in 

implementing the IRS Reform Act, including: collection due process, innocent spouse relief, 

offers in compromise, and other collection issues. 

Collection due process

Collection enforcement by the IRS generally takes three forms: (1) placing a lien on a 

taxpayer’s property; (2) placing a levy on the taxpayer’s wages or bank account; and (3) seizing 

 201 Internal Revenue Service, IRS Expands Authority for Taxpayer Advocate Service, IR2001-12 (Jan. 24, 2001). 

202 Id.

203 See Treasury Inspector General for Tax Administration, Semiannual Report to the 

Congress: April 1, 2000 through September 30, 2000, Publication 3372 (November 2000), 4 

(hereinafter “TIGTA Semiannual Report”); Statement of Charles O. Rossotti, Commissioner of 

Internal Revenue, before the Senate Committee on Finance (February 2, 2000), 5. 

204 Id.

205 DOJ Letter; letter from the Honorable Thomas B. Wells, Chief Judge, United States 

Tax Court, to Lindy L. Paull, Chief of Staff, Joint Committee on Taxation (April 3, 2001). 
 54

the taxpayer’s business or personal assets. The IRS Reform Act added several due process 

provisions that increased taxpayer rights during the collection process, such as pre-lien and prelevy hearings and judicial review of such hearings. In particular, the IRS is required to provide 

the taxpayer with written notification of the right to an impartial hearing before an appeals 

officer after a notice of lien has been filed or before a notice of levy is sent.206 The taxpayer has 

30 days to request an appeal, and during this period, the levy or seizure may not take place. In 

addition, if the taxpayer requests an appeal, the levy or seizure may not take place until the 

appeals officer makes a finding. Finally, the taxpayer has 30 days to challenge an appeals 

finding in the U.S. Tax Court or U.S. District Court during which time the IRS may not levy or 

seize. 

The IRS Reform Act also instituted other procedural safeguards. For example, with 

respect to seizures of assets owned by an individual and used in the course of a business, 

approval by the district director is required and an analysis must be conducted to show that the 

taxpayer’s other assets are insufficient to satisfy the liability. Seizure of a principal residence 

requires court approval. 

The IRS stated that these provisions have created additional staffing needs at Automated 

Collection System sites.207 Prior to the IRS Reform Act, the Automated Collection System sites 

automatically processed levy actions with minimal staff intervention. As a result of the new due 

process provisions, the IRS can only initiate a lien or levy action after individually reviewing the 

facts and circumstances of each case. In addition, Automated Collection System staff is required 

to prepare cases for referral to Appeals upon receipt of due process hearing requests.208 

Automated Collection System staff that previously had been assigned to processing collection 

cases has been reassigned to handle the processing of collection due process requests.209

The IRS stated that the principal difficulty in carrying out the taxpayer due process 

provisions of the IRS Reform Act has been engineering an efficient collection due process 

system that does not disproportionately expend resources on cases in which taxpayers are 

abusing the process to delay collection.210 According to the IRS, the inventory of collection due 

process contains a significant percentage of cases advancing arguments that are frivolous or 

otherwise without merit.211 In addition to developing administrative steps to address such 

 206 Secs. 6320 and 6330. 

207 IRS Letter at 88. 

208 Id.

209 Id.

210 Id. at 90. 

211 Id. Practitioners themselves have acknowledged that some taxpayers have requested 

due process hearings for the sole purpose of delaying the collection process. ABA Letter. 
 55

tactics, the IRS stated that it anticipates recommending legislative solutions to the Joint 

Committee on Taxation and other appropriate Congressional committees in the near future.212

In an effort to more efficiently process collection due process cases, the IRS assembled a 

team to implement collection due process recommendations made by an executive level task 

force, including: 

• establishment of a due process program review in Appeals; 

• development of a best practices and case management guide for managers; 

• creation of a standardized Appeals referral form to clearly identify the issues being 

raised by the taxpayer and to assist Appeals in analyzing workload; 

• establishment of special purpose aids and an internal collection due process web site 

to provide quick reference materials; 

• development of abbreviated Appeals case memoranda to streamline the hearing 

process in situations where the taxpayer and the IRS have reached agreement; 

• establishment of a procedure that provides time for the collecting office to work with 

the taxpayer after a hearing request has been made; 

• establishment of an inventory tracking system to assist in assessing and predicting the 

collection due process workload; 

• review of lien filing and systematically proposed levy notice criteria; and 

• development of a test where employees familiar with Automated Collection System 

processing are assigned to Appeals to assist in due process hearing requests.213

When the due process provisions went into effect in January 1999, Appeals had 

approximately 60 settlement officers trained to handle collection issues.214 The IRS stated that 

Appeals now has 229 personnel (including 67 settlement officers) to handle collection due 

process cases and is increasing the number of trained employees to 482 in fiscal year 2001.215 

By the end of fiscal year 2001, Appeals will have applied 180 full-time equivalents to close 

8,175 collection due process cases.216 The IRS anticipates that it will apply 75 full-time 

equivalents to close approximately 4,600 collection due process cases by the first quarter of 

fiscal year 2002, as indicated by Table 1, below.217

 212 IRS Letter at 91. 

213 Id. at 88-89. 

214 Id. at 89. 

215 Id.

216 Id.

217 Id.
 56

Table 1.--Collection Due Process Staffing Levels 

1999 

Full-Time 

Equivalents 

2000 

Full-Time 

Equivalents 

2001 

Full-Time 

Equivalents 

(projected) 

1st Quarter 2002

Full-Time 

Equivalents 

(projected) 

 

Collection due process 

inventory 4,808 6,602 13,296 13,105 

 

Cases closed n/a n/a 8,175 4,600 

Full-time equivalents 

applied n/a n/a 180 75 

 

Employees Trained 60 67 482 482 

Source: Internal Revenue Service 

The IRS stated that the due process provisions added by the IRS Reform Act have slowed 

and lengthened the overall compliance cycle.218 The IRS attributes this effect to statutory 

waiting periods and the requirement that no collection action be taken prior to the exhaustion of 

the taxpayer’s judicial due process rights.219 For example, the IRS estimated that it takes almost 

one year from the issuance of a collection due process notice in an employment tax case for the 

IRS to resume collection after the taxpayer has fully exhausted all due process rights.220 The IRS 

estimated that other types of cases take at least two-thirds of a year to process.221 These 

estimates assume that the case is efficiently moving through the process, with the IRS and the 

taxpayer attempting to resolve the liability in good faith and without any delays attributable to a 

backlog.222

To protect taxpayer due process rights under the IRS Reform Act, the IRS stated that it 

has redesigned its collection systems to identify cases in which collection is prohibited.223 The 

 218 Id. Tax practitioner comments received by the Joint Committee staff indicate general 

taxpayer satisfaction with the collection due process system after enactment of the IRS Reform 

Act. These comments have noted that the receipt of a collection due process notice has had the 

positive effect of getting the attention of the taxpayer, thus leading to offers in compromise and 

installment agreements in many cases. ABA Letter. 

219 IRS Letter at 91. 

220 Id.

221 Id.

222 Id.

223 Id. at 91. 
 57

IRS also has provided tax law and procedural training to Appeals and Collections officers, and 

has taken steps to ensure that taxpayers are fully informed of their rights.224

According to the Treasury Inspector General for Tax Administration, the IRS has 

recently improved its compliance with many of the provisions of the IRS Reform Act relating to 

collection due process.225 During the period covered by the Treasury Inspector General’s 

semiannual report, the IRS complied with the specific statutory provisions and its own guidelines 

in all reviewed seizure cases.226 In addition, the IRS complied with the IRS Reform Act 

provisions for all district office levies issued, and for 99 percent of the reviewed Automated 

Collection System call site levies.227 However, the semiannual report also noted that the IRS has 

not yet fully complied with IRS Reform Act provisions requiring the IRS to provide proper and 

timely notice that a Federal tax lien has been filed.228

Innocent spouse relief

Persons filing a joint return are jointly and severally liable for the joint return. Thus, one 

spouse may be subject to joint liability for the omissions from income or erroneous deductions of 

the other spouse. 

The Code provides conditional relief to an innocent spouse.229 The IRS Reform Act 

generally made innocent spouse relief easier to obtain. It eliminated all of the understatement 

thresholds and requires that the understatement be attributable to an erroneous (rather than 

grossly erroneous) item of the other spouse. It also allows for apportionment of relief for the 

taxpayer spouse who simply did not know the extent of the understatement. A taxpayer who is 

no longer married to, is legally separated from, or has been living apart for at least 12 months 

from the person with whom the taxpayer originally filed the joint return can elect to limit liability 

to the portion of the deficiency properly allocable to that individual if he or she did not know, or 

had no reason to know, of an understatement on a joint return which he or she filed. The election 

for relief from liability for all joint filers and the separate liability election must be made no later 

than two years after the date the IRS has begun collection activities for the individual making the 

election. In addition, the IRS Reform Act gave the IRS the ability to grant equitable relief if (1) 

relief is otherwise unavailable and (2) taking into account all the facts and circumstances, it is 

inequitable to hold the individual liable for any unpaid tax or any deficiency.230

 224 Id. at 90-91. 

225 See TIGTA Semiannual Report at 5. 

226 Id.

227 Id.

228 Id.

229 Sec. 6015. 

230 Sec. 6015(f) 
 58

Since passage of the IRS Reform Act, the IRS has faced several difficulties in 

implementing the innocent spouse provisions. Initially, the IRS had no employees trained in 

applying the new provisions and no training materials available for the new provisions. In 

particular, the IRS had no familiarity with applying the equitable relief provision.231 Thus, the 

IRS had to train its staff in how to handle these cases. In addition, the IRS did not anticipate the 

high volume of requests that would be submitted.232 The IRS also did not have a reliable 

management information system to track innocent spouse cases.233 The combination of these 

factors has resulted in a significant backlog of cases. 

In addition, some taxpayers and their representatives have apparently experienced 

difficulty in ensuring adequate consideration by the IRS of all of the facts relating to individual 

claims, particularly when the claim involves a low-income taxpayer who is not represented by 

counsel and the IRS solely relies upon correspondence to process the claim.234

To effectively manage the rapidly increasing volume of pending claims for innocent 

spouse relief, the IRS has taken several steps, including: (1) centralizing management of the 

program under a senior manager; (2) developing specific flow charts and other training and job 

aids for the employees doing the screening; (3) revising procedures and training based on initial 

experience; and (4) instituting a 100-percent review of completed claims to ensure quality and 

consistency. The IRS also has developed additional computer support.235

In the four months preceding the passage of the IRS Reform Act, the IRS received 3,000 

claims for innocent spouse relief.236 As of March 6, 2001, the IRS had 40,278 pending claims 

(affecting 21,198 taxpayers) with regard to which the IRS had not yet notified the taxpayer of a 

determination.237 In fiscal year 2000, the number of claims received by the IRS increased 22 

percent, and the IRS processed a total of 42,546 innocent spouse claims.238 Of the 111,243 

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

Senate Finance Committee (February 2, 2000), at 7. 

232 Attorneys may have begun adopting a standard practice of submitting claims for 

innocent spouse relief in divorce proceedings as a matter of course, and regardless of the merits 

of the claim, in order to avoid potential to malpractice lawsuits. NAEA Letter. 

233 Statement of the Honorable David C. Williams, Inspector General, Treasury Inspector 

General for Tax Administration, before the Senate Committee on Finance (February 2, 2000), at 

3. 

234 ABA Letter. 

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

Senate Finance Committee (February 2, 2000), at 7. 

236 Id. at 6. 

237 IRS Letter at 102. 

238 Id.
 59

claims (affecting 58,549 taxpayers) received by the IRS since passage of the IRS Reform Act, 

the IRS had not yet notified 21,136 taxpayers of its determination by the end of fiscal year 

2000.239 The IRS anticipates that it will close 57,659 innocent spouse claims during fiscal year 

2001.240

Based upon innocent spouse claims where the IRS has notified the taxpayer of a 

determination, the average processing time for claims (from initial receipt of a claim to delivery 

of a determination letter to the taxpayer) is shown in Table 2, below.241

Table 2.--Average Number of Days to Process Innocent Spouse Claims 

 Average Number of Days 

(All Innocent Spouse Claims) 

Average Number of Days 

(Claims Filed in FY 2000) 

 

Non-Qualifying Claims 142 80 

 

Claims Not Meeting Basic 

Filing Requirements 128 81 

 

Meritorious Claims 318 238 

Source: Internal Revenue Service 

The IRS noted that the average processing time for innocent spouse claims varies among 

individual field areas and from field areas to the centralized processing site.242 The number of 

days that the IRS calculated for processing innocent spouse claims took into account required 

waiting periods to receive information and communicate with taxpayers, some of which are 

mandated by statute.243 For example, before the IRS can make a determination, there is a 

required 45-day waiting period to contact and wait for a response from the non-requesting 

spouse. In addition, following notification to the taxpayer of a determination, there is a 30-day 

opportunity for the taxpayer to request an administrative appeal and a 90-day period for the 

taxpayer to petition the Tax Court. Some of these time periods may decrease as a result of a 

technical correction made to section 6015(e) in 2000 that may eliminate part of the processing 

time by allowing the IRS to secure taxpayer waivers of the mandated time periods.244

 239 Id.

240 Id.

241 Id. at 102-103. 

242 Id. 102. 

243 Id.

244 Pub. L. No. 106-554 (2000). 
 60

In order to decrease the backlog of pending innocent spouse claims and to reduce the 

average processing time for claims, the IRS has stated that it is taking the following steps: 

• By May 2001, the IRS expects to have increased the staffing at the centralized 

processing site by 50 positions, an increase of over 46 percent from the 107 

employees in fiscal year 2000. Thirty of the new positions are temporary in nature, 

created to deal specifically with the current backlog of inventory. The IRS also 

upgraded the tax examiner position, thereby increasing the number of examiners who 

make determinations on more complex claims. 

• In January 2001, the IRS developed and implemented an Integrated Case Processing 

software application in the centralized processing site. This software application will 

lead the examiner through the complex decision-making process and create a paper 

trail to document the decision. Additional phases of software will include the account 

research and screening phases of the process. 

• In January 2001, the IRS implemented a new automated Master File account used for 

recording and maintaining information relating to separate spousal account 

transactions. It replaces the manual Automated Non-Master File system. 

• Early in fiscal year 2001, the IRS temporarily assigned appeals officers to 120-day 

assignments in local field quality review sites to assist with backlogs in the field.245

With the staffing increases that have already occurred and the implementation of the 

Integrated Case Processing software application, the IRS has indicated that it will have sufficient 

staff to process claims for innocent spouse relief within acceptable time periods.246

A taxpayer requesting innocent spouse relief under sec. 6015(b) (relating to relief for 

understatements of tax on certain joint returns) has the burden of showing that he or she “did not 

know, and had no reason to know,” of the understatement. By contrast, when a taxpayer who is 

no longer married or has legally separated elects the allocation of tax liability for a joint return 

under sec. 6015(c), the IRS has the burden of demonstrating that the taxpayer did not have 

“actual knowledge” of any item giving rise to the understatement. The National Taxpayer 

Advocate has identified these differing knowledge standards under sec. 6015 as a problem area. 

In particular, a review of innocent spouse claims determined that IRS examiners were having 

difficulty applying these standards, and that knowledge of understatements was the primary 

reason for denial of innocent spouse claims.247 The IRS also found that examiners were having 

difficulty applying the requirement under the sec. 6015(f) equitable relief provisions that the 

taxpayer must have a “reasonable belief that the tax would be paid.”248

 245 IRS Letter at 103. 

246 Id. at 104. 

247 Id.

248 Id. The Tax Section of the American Bar Association noted that the experience of 

some tax practitioners is that some IRS personnel may be reluctant to grant requests for equitable 

relief under sec. 6015(f) and appear to be placing a heavy burden on taxpayers to show that they 

did not have knowledge or reason to know of an underpayment of tax. ABA Letter. 
 61

In May 2000, the IRS identified a need for additional training in applying these 

knowledge standards and, in March 2001, the IRS developed and delivered training in this 

area.249 Because of the difficulties in applying the sec. 6015(c) actual knowledge standard, the 

IRS stated in its April 27, 2001 letter to the Joint Committee staff that it supports removal of the 

sec. 6015(c) knowledge standard, while acknowledging that removing this knowledge standard 

could increase the number of claims for innocent spouse relief.250

Recently, courts have issued several decisions interpreting the actual knowledge standard 

of sec. 6015(c). These decisions may lessen some of the uncertainty that the IRS has faced in 

interpreting this knowledge standard. 

Offers in compromise

Prior to the IRS Reform Act, the IRS could settle a tax liability for less than the amount 

assessed through an offer in compromise, but the IRS only would accept an offer in compromise 

if there was sufficient doubt as to the existence or amount of the tax liability or if there was 

doubt as to the ability of the taxpayer to pay the tax due. The IRS Reform Act codified the offer 

in compromise program with the intent that the program should be expanded to cover cases in 

which considerations of equity, economic hardship, and public policy favor accepting an offer in 

furtherance of effective tax administration.251

With regard to the length of time to process an offer in compromise, the IRS stated that it 

completed the processing of 38 percent of the offers in compromise received in fiscal year 2000 

within six months of submission of an offer, and completed the processing of 45 percent of the 

remaining offers by the end of the year.252 Through January 2001, the IRS resolved 32 percent 

of the offers submitted within the first six months.253

The IRS attributed the delay in processing offers in compromise to several factors, 

including: mandated administrative review of IRS decisions to reject offers or return offers for 

failure to provide financial information; expansion of the offer in compromise program to cases 

that would promote effective tax administration; not automatically rejecting incomplete offers; 

and no longer accepting installment agreements that would not satisfy the entire tax liability 

(thus increasing the number of offers involving cases that might otherwise be resolved through 

 249 IRS Letter at 104. 

250 Id. at 104-105. As of March 6, 2001, the IRS received and decided only 4,725 

innocent spouse claims under sec. 6015(c) (or 11 percent of the 42,324 meritorious innocent 

spouse claims that the IRS decided in total as of that date). Id. at 104. 

251 Sec. 7122(c) and (d). 

252 IRS Letter at 99. 

253 Id. Some practitioners have apparently complained about the inordinate amount of 

time required by the IRS to process offers in compromise, stating that the IRS usually takes at 

least a year to complete the initial review process. ABA Letter. 
 62

installment agreements).254 The IRS stated that it could more efficiently evaluate and process 

offers in compromise through future automation.255

The IRS stated that it has made efforts to reduce the amount of time for processing offers 

in compromise by increasing the number of assigned staff through a realignment of field 

resources.256 In fiscal year 2000, the IRS increased assigned revenue officers, paraprofessionals, 

and clerical staff from 762 to 1,230 full-time equivalents and will further increase the staffing to 

1,267 by the end of fiscal year 2001.257 The IRS stated that it also will provide additional 

recommendations to reform the process for offers in compromise.258

The IRS stated that it is reviewing and reengineering its work processes to address the 

growing number of offer in compromise cases.259 In an effort to improve efficiency and reduce 

the backlog in the inventory of offer in compromise cases, the IRS is centralizing cases that may 

be most effectively processed in a service center environment.260 The IRS stated that it 

conducted a pilot program in two service centers to test the feasibility of centralized processing 

of offers with respect to amounts of original tax liability of less than $50,000.261 Based upon the 

results of the pilot program, the IRS expects that centralized bulk processing of offers in 

compromise will produce efficiency gains in staffing and reduce the amount of time to process 

offers.262 Beginning in July 2001, all new offers in compromise will be sent to one of two 

service centers, depending upon where the taxpayers resides.263 Table 3, below, shows the 

 254 IRS Letter at 100. The determination that the IRS may not enter into an installment 

agreement with a taxpayer unless the full amount of tax due will be paid is based upon an IRS 

legal interpretation of the interplay between sec. 6159 (installment agreements) and sec. 7122 

(offers in compromise). According to IRS Chief Counsel, a taxpayer may resolve a tax liability 

for less than the full amount of the tax due only through the sec. 7122 offer in compromise 

procedure. Id. at 95. 

255 Id. at 100-101. 

256 Id. at 99. 

257 Id.

258 Id.

259 Id. at 92. 

260 Id.

261 Id. at 99. 

262 Id.

263 Id.
 63

expected staffing impact of centralized processing of offers in compromise, based upon the 

projected increase in offers.264

Table 3.--Expected Impact of Centralized Processing of Offers in Compromise 

 Expected 

Receipts 

Field 

Closures

Svc. 

Center 

Closures 

Field 

Full-Time 

Equivalents

Svc. Center 

Full-Time 

Equivalents 

Total 

Full-Time 

Equivalents

 

FY 2000 (actual) 109,296 84,391 - 1,230 - 1,230 

FY 2001 (projected) 129,230 87,000 - 1,267 - 1,267 

FY 2002 (estimated) 144,252 84,806 73,568 1,236 938 2,174 

FY 2003 (estimated) 161,020 84,806 91,920 1,236 1,126 2,362 

FY 2004 (estimated) 179,736 84,806 101,466 1,236 1,243 2,479 

Source: Internal Revenue Service 

As discussed above, the IRS Reform Act expanded the offer in compromise program to 

cases in which settlement would promote effective tax administration. However, the IRS stated 

that fewer than 1 percent of total offers in compromise for fiscal year 2000 through February 

2001 were initiated on the basis of the additional factors specified in the IRS Reform Act, 

including situations involving severe or unusual economic hardship.265 In fiscal year 2000, the 

IRS stated that it received only 580 such offers out of a total of 47,554 offers.266 The IRS 

accepted approximately 88 percent of these offers, while the remaining 12 percent were either 

rejected by the IRS or withdrawn by the taxpayer.267

However, tax practitioner comments indicate that, while there has been a noticeable 

increase in the use of offers in compromise by taxpayers, there has not been a corresponding 

increase in IRS acceptance of offers in compromise.268 These comments further indicate that 

IRS personnel reviewing offers in compromise often question the existence of economic 

hardship and “rarely, if ever,” determine that equitable factors are present that would merit 

 264 Id. at 92. 

265 Id. at 100. 

266 Id.

267 Id.

268 ABA Letter. 
 64

accepting an offer.269 In many cases, IRS personnel still may be reviewing offers in compromise 

solely on the basis of doubtful liability or collectibility without considering the additional factors 

mandated by the IRS Reform Act (e.g., equity, hardship, and public policy).270

Other collection issues

From fiscal year 1996 to fiscal year 1999, the Treasury Inspector General for Tax 

Administration stated that revenue collected as a result of compliance activity decreased by $5 

billion and gross accounts receivable increased by $41 billion, leading to concern about the 

amount of resources being allocated to collection activities and the related decrease in business 

results.271 Decreased enforcement also has been attributed to concerns of IRS employees over 

the mandatory termination provisions added by the IRS Reform Act.272

In comparison with fiscal year 2000 results, the IRS stated that it is experiencing both 

positive and negative trends in collection activity during fiscal year 2001.273 The IRS noted that 

enforcement actions are increasing in fiscal year 2001, with positive trends in the number of liens 

filed and levies issued by the IRS.274 According to the IRS, both delinquent notice yield and 

Taxpayer Delinquent Account dollars collected have increased through February 2001.275 

However, certain other collection measurements have slightly decreased in fiscal year 2001 due 

to the need to redirect resources to handle the increase in the numbers of offers in compromise 

and collection due process cases.276

The IRS stated that the amount of time between the filing of a return and the first 

compliance contact has remained constant at six to eight weeks over the years.277 If the taxpayer 

does not pay the deficiency after the first contact, the IRS issues four additional notices over the 

next 42 weeks prior to assignment for collection.278 However, high-risk accounts are assigned 

 269 Id. Some practitioners apparently believe that the temporary regulations under sec. 

7122 are being too narrowly construed because they contain examples that place undue emphasis 

on medical disability in determining whether collection of the full tax liability would result in 

economic hardship. Id.

270 Id.

271 See TIGTA Semiannual Report at 4. 

272 Id.

273 IRS Letter at 94. 

274 Id.

275 Id.

276 Id. at 94-95. 

277 Id. at 95. 

278 Id.
 65

for collection approximately six weeks after the first contact.279 High-risk cases represent about 

20 percent of the collection cases.280 In 2000, the IRS stated that the average assignment for 

collection required 33 weeks to resolve, while the fiscal year 2001 plan projects this amount of 

time to be reduced to 26 weeks.281

Since its last hiring initiative in fiscal year 1995, the IRS has experienced a steady decline 

in the number of field collection staff available to collect delinquent taxes and to secure 

delinquent tax returns.282 The IRS stated that it plans to hire 470 Revenue Officers in fiscal year 

2001, which will stabilize the workforce and allow the IRS to allocate resources to areas of 

concentrated workload.283 Table 4, below, shows the fiscal year 2000-2001 staffing levels for 

collection activities in Service Center and Field Collection operations, as well as the projected 

staffing levels for fiscal year 2002.284

Table 4. Service Center, Field Collection, and Revenue Officer Staffing Levels 

FY 2000 

Full-Time 

Equivalents 

FY 2001 

Full-Time 

Equivalents 

FY 2002 

Full-Time 

Equivalents 

(projected) 

 

Service Center Collection 2,501 2,634 2,662 

 

Field Collection1 9,254 9,016 9,486 

 

Revenue Officers2 6,195 6,089 6,559 

 Less: Filing Season Support (683) (376) (189) 

Revenue Officers (Net) 5,512 5,713 6,370 

Source: Internal Revenue Service 

1 Includes all GS-1169 series revenue officers, managers, clerical, and paraprofessional employees in the field. 

2 Includes only GS-1169 series revenue officers and managers (frontline field, technical, and insolvency personnel). 

The Revenue Officer category is a subset of the Field Collection category.

In addition to increasing Revenue Officer staffing levels, the IRS is decreasing the 

amount of Revenue Officer time applied to filing season activities.285 In fiscal year 2000, 

 279 Id.

280 Id.

281 Id.

282 Id. at 91. 

283 Id.

284 Id. at 92. 

285 Id. at 91. 
 66

compliance programs overall contributed 1,933 full-time equivalents to filing season programs 

that included Toll-Free Assistance, Walk-In Assistance, and Outreach Efforts (e.g., taxpayer 

education, Volunteer Income Tax Assistance, and Tax Counseling for the Elderly).286 The IRS 

stated that a key objective of the fiscal year 2001/2002 Staffing Tax Administration for Balance 

and Equity budget initiative is to reduce the reliance on compliance and enforcement staff for 

taxpayer assistance.287

In fiscal year 2001, the IRS expects to divert 40 percent fewer full-time equivalents to 

assistance programs.288 A second reduction of nearly 50 percent is expected to occur in fiscal 

year 2002 and, by fiscal year 2003, the IRS expects that detailees from Examination and 

Collection will be nearly eliminated.289 For Revenue Officers in particular, the IRS expects that 

the number of full-time equivalents detailed to filing season activities will be reduced from 683 

in fiscal year 2000 to 376 in fiscal year 2001 and to 189 in fiscal year 2002.290 These Revenue 

Officer full-time equivalents will be redirected to collection activities.291 The table above shows 

available Revenue Officer full-time equivalents after considering the impact of temporary 

assignments for filing season support.292

As indicated, the IRS has attributed the overall decline in collection and compliance 

efforts in recent years to a decrease in staffing levels, the diversion of resources to customer 

service, an increase in employee training, and an increase in the amount of time needed to 

resolve cases. In addition to the steps already discussed, the IRS stated that it is taking several 

measures to increase the resources applied to collection and compliance activities. 

First, the IRS stated that it would focus enforcement activities on areas most in need of 

attention through the IRS Strategic Planning and Budgeting process.293 For example, the 

National Nonfiler Strategy is a coordinated effort to bring nonfilers back into the system and 

keep them in the system, using information from State and private sector data sources to identify 

the most significant areas of noncompliance and determine the causes of noncompliance.294 This 

program also will involve education, outreach, and alternative treatment programs to address 

 286 Id.

287 Id.

288 Id.

289 Id.

290 Id. at 92. 

291 Id.

292 Id.

293 Id. at 93. 

294 Id.
 67

noncompliance of certain taxpayer groups.295 The IRS also is developing a strategy to reduce 

accounts receivable.296

In addition, the IRS stated that it would undertake several efforts to reengineer and 

realign work processes to improve the effectiveness of compliance activities.297 Among other 

things, this project will involve the use of certain scoring techniques to identify and assign cases 

that have the greatest impact on noncompliance.298 The IRS also will centralize and consolidate 

the support services associated with case processing, workload delivery, and technical support.299 

The IRS expects that this will result in efficiencies and the potential for reassigning enforcement 

personnel to frontline activities.300

Finally, the IRS stated that it would ensure a more constant and stable workforce with a 

new recruiting and hiring program.301 The IRS expects that this program will serve to 

continually replenish its workforce and allow the placement of employees in areas of 

concentrated workload.302

D. Treasury Inspector General For Tax Administration 

In general

The IRS Reform Act created the Office of Treasury Inspector General for Tax 

Administration. The Treasury Inspector General for Tax Administration conducts audits, 

investigations, and evaluations of IRS programs and operations (including the IRS Oversight 

Board).303 In addition, on an ongoing basis, the Treasury Inspector General for Tax 

Administration evaluates the adequacy and security of IRS technology. The Treasury Inspector 

General for Tax Administration also investigates criminal and administrative misconduct, such 

as violations of the Taxpayer Bill of Rights and ethical violations. Taxpayers may report 

allegations of IRS misconduct by a toll-free number maintained by the Treasury Inspector 

General for Tax Administration. Part of the Treasury Inspector General for Tax 

Administration’s responsibility includes protecting the IRS from external threats to corrupt or 

 295 Id.

296 Id.

297 Id. at 93-94. 

298 Id. at 94. 

299 Id.

300 Id.

301 Id.

302 Id.

303 Treasury Order 115-01(b) (January 14, 1999). 
 68

harm employees. The Treasury Inspector General for Tax Administration conducts periodic 

audits of at least one percent of all determinations in which the IRS has asserted the 

confidentiality provisions (either alone or in conjunction with the Freedom of Information Act or 

Privacy Act), or law enforcement considerations as the basis for denying requested 

information.304 

Semiannual report

The Treasury Inspector General for Tax Administration’s semiannual report to the 

Congress for the period April 1, 2000, through September 30, 2000, reports that the Treasury 

Inspector General for Tax Administration issued 162 audit reports during fiscal year 2000, more 

than double the number for fiscal year 1999. Financial results due to audit reports totaled $117.1 

million and an additional $1.4 billion in increased revenue and protected revenue. The Treasury 

Inspector General for Tax Administration estimates that its audit recommendations will improve 

tax administration for approximately 11.4 million taxpayers. In addition, the Treasury Inspector 

General for Tax Administration closed nearly 4,200 investigations of criminal wrongdoing and 

administrative misconduct during fiscal year 2000, a 43 percent increase over fiscal year 1999. 

Investigations recovered $12.9 million.305 

The following discussion highlights some of the material contained in the Treasury 

Inspector General for Tax Administration’s semiannual report. 

IRS implementation of the IRS Reform Act

According to the Treasury Inspector General for Tax Administration, many of the IRS 

Reform Act provisions, including training programs for thousands of IRS employees, have been 

implemented, which is a good improvement over prior years. For example, the the Treasury 

Inspector General for Tax Administration’s Office of Audit reported that IRS was in compliance 

for all seizure cases reviewed, all district office levies issues, and for 99 percent of the Customer 

Service Automated Collections System call site levies reviewed. However, the IRS was not yet 

in full compliance on restricting the use of enforcement statistics to evaluate IRS employees, not 

designating taxpayers as illegal tax protesters, providing proper and timely notice that a federal 

tax lien has been filed, and not withholding information in response to taxpayers’ written 

requests for information under the Freedom of Information Act of 1988 or the Privacy Act of 

1974.306

Providing security over information systems

 304 Sec. 7803(d)(3)(A). 

305 Letter from David C. Williams, Inspector General, to the Honorable Lawrence H. 

Summers, Secretary of the Treasury (October 30, 2000) (enclosing the Treasury Inspector 

General for Tax Administration’s Semiannual Report). 

306 TIGTA Semiannual Report at 5. 
 69

The Treasury Inspector General for Tax Administration reports that the IRS has 

conducted comprehensive security reviews of its major facilities and significantly reduced 

previously identified computer security problems. Nevertheless, despite such progress, more 

improvements are needed. Weaknesses in key programs include security certification and 

accreditation of sensitive systems, virus protection, and mainframe operating system controls. 

For example, the Treasury Inspector General for Tax Administration reports that of 258 sensitive 

computer systems, 232 have not been certified as required by the Office of Management and 

Budget and Treasury.307 Until such weaknesses are resolved, IRS systems and taxpayer data 

remain vulnerable to tampering, loss, or unauthorized disclosure.308 

Protecting revenue and minimizing tax fraud

The earned income credit continues to be a high-risk area for filing fraud. The Treasury 

Inspector General for Tax Administration reports that the IRS’ weaknesses are primarily: 

achieving full participation by eligible taxpayers; ensuring compliance through verification of 

taxpayers’ eligibility; and reducing inherent vulnerabilities, for example, multiple use of 

dependent Social Security numbers.309 

To protect revenue, the Treasury Inspector General for Tax Administration recommends 

that the IRS should expand early intervention efforts nationwide further to reduce unreported 

estate executor commissions, which could result in an additional $2.6 million in taxes and 

interest over five years. 

Providing customer service and ensuring tax compliance

The Treasury Inspector General for Tax Administration reports that the IRS currently 

does not have a reliable method to measure voluntary compliance by taxpayers or to measure the 

impact that increased customer service and decreased enforcement are having on voluntary 

compliance.310 Unless the IRS strengthens its enforcement capacity, the Treasury Inspector 

General for Tax Administration concludes that voluntary compliance will be severely eroded.311

Taxpayer rights

Separate audit reports on protecting taxpayer rights concluded that: significant 

improvements are needed in processing gift tax payments and associated extensions to file; 

increased attention is needed to ensure timely, accurate determinations on innocent spouse 

 307 Id. at 11. 

308 Id. at 3. 

309 Id. at 5. 

310 Id. at 4. 

311 Id. 
 70

claims for relief; bankruptcy automatic stay violations need to be better addressed by IRS; and 

opportunities exist to identify unreported taxes from employers’ quarterly federal tax returns.312

Managing Finances

The Treasury Inspector General for Tax Administration Office of Audit reported that the 

IRS’ financial management systems do not comply with the federal financial management 

systems requirements, federal accounting standards, or the U.S. Government General Ledger. 

Accordingly, as required by the Federal Financial Management Improvement Act of 1996, the 

IRS prepared a remediation plan to bring its financial systems into compliance. Although the 

Treasury Inspector General for Tax Administration found that the remediation plan was 

reasonable and soundly addressed some of the problems, the plan did not include all reported 

weaknesses and did not always clearly identify resource commitments. The Treasury Inspector 

General for Tax Administration recommended that IRS revise the plan to ensure that financial 

management weaknesses will be resolved adequately and on time. The IRS took further action 

in satisfaction of the Treasury Inspector General for Tax Administration’s requests. 

Criminal and misconduct investigations

The Treasury Inspector General for Tax Administration continues to operate, through the 

Complaint Management Division, a centralized clearinghouse for processing and tracking 

allegations of fraud, waste, abuse, and other forms of wrongdoing by IRS agents. During the 

reporting period, the Treasury Inspector General for Tax Administration received 4,763 

complaints, of which 2,053 warranted further investigation.313 Of the total complaints, 257 

allegations involved potential violations of section 1203 of the IRS Reform Act.314 

Investigations are opened on section 1203 actions if preliminary analysis reveals a basis for the 

allegation. During the reporting period, the Treasury Inspector General for Tax Administration 

initiated 164 section 1203 investigations.315

The Strategic Enforcement Division of the Treasury Inspector General for Tax 

Administration identifies and initiates criminal investigations involving fraud and abuse of IRS 

computer systems and violations of the Taxpayer Browsing Protection Act of 1997. During the 

reporting period, the Strategic Enforcement Division analyzed 296 leads of potential 

unauthorized access to tax information by IRS employees, resulting in 123 referrals to field 

special agents. The Treasury Inspector General for Tax Administration also completed 372 

 312 Id. at 17-19. 

313 Id. at 26, 46. 

314 This section provides for mandatory termination of an IRS employee for certain 

conduct. For more detailed discussion of section 1203 actions, see Part IV.C. 

315 TIGTA Semiannual Report at 26. 
 71

investigations related to threats, assaults, or harassment of IRS employees as they carry out their 

duties.316

Audit reports with unimplemented corrective actions

The Treasury Inspector General for Tax Administration reports that there are about 120 

significant recommendations for corrective action, contained in 44 audit reports, that remain 

outstanding.317 Many of the recommendations pertain to the Treasury Inspector General for Tax 

Administration’s review of the electronic fraud detection system, improvement to IRS computer 

systems, better compliance with processing requests under the Freedom of Information Act, 

improvements to the estate tax collection process, and the decline in the level of toll-free 

telephone service. 

E. Personnel Flexibility and IRS Management 

IRS Reform Act

The IRS Reform Act gave the IRS considerable authority beyond the personnel rules and 

procedures found in Title 5 relating to: 

• Pay authority for critical positions.--Upon request of the Treasury Secretary, the 

Office of Management and Budget is authorized to set a basic salary rate for Acritical 

pay positions@ at levels higher than those generally authorized in the civil service laws 

for critical positions. These rates, including bonuses, awards and differentials, cannot 

exceed the rate of pay for the Vice President (currently $175,000). 

• Streamlined critical pay authority.--The Treasury Secretary can designate positions, 

set pay, and appoint up to 40 individuals to critical administrative, technical and 

professional positions. Compensation cannot exceed that of the Vice President. 

• Recruitment, retention and relocation incentives.--The Treasury Secretary was given 

the authority to offer incentives for recruitment, retention, and relocation and to pay 

relocation expenses. 

• Performance awards for senior executives.--The Treasury Secretary was also given 

greater authority to pay performance bonuses to members of the Senior Executive 

Service. 

• New performance management system.--A new performance management system, 

stressing individual accountability is to be implemented. The IRS Reform Act 

prohibits the use of enforcement goals, quotas or statistics as the basis for awarding 

bonuses or merit pay. 

 316 Id. at 35. 

317 Id. at 49-61. 
 72

• Workforce classification and pay.--The Secretary can combine grades and salary 

ranges to create broad banded systems for any or all of the IRS work force. 

• Limited appointments to career reserved Senior Executive Service positions.--The 

IRS Reform Act permits the IRS to fill certain permanent positions with temporary 

employees. The IRS Reform Act broadens the definition of a career reserved position 

to include a limited emergency appointee. It also covers a limited-term appointee 

who immediately upon entering the career reserved position, served under a career or 

a career-conditional appointment outside of the Senior Executive Service, or where 

the Office of Personnel Management approved the limited emergency or limited term 

appointment in advance. 

• Workforce staffing.--Candidates for positions can be selected from the highest quality 

category regardless of individual numerical rating. Further, the IRS can establish a 

three year probationary period when a shorter period is insufficient to evaluate an 

employee. The Secretary may also detail an employee to a different assignment 

without regard to the 120 day limitation otherwise applicable. 

• Streamlined demonstration project authority.--The IRS Reform Act permits the IRS 

to take a streamlined approach to conducting research and testing alternative 

management constructs. A demonstration project under this section would not be 

subject to the ordinarily lengthy approval process. 

Implementation efforts

Recruitment efforts

To attract and retain highly qualified and exceptional individuals, the IRS is using a 

variety of techniques. First, the IRS uses professional search firms to identify such individuals 

and initially screen those who may not be interested in public service.318 Additionally, groups of 

several executives, often including the Commissioner, Deputy Commissioner, and Treasury 

officials interview Streamlined Critical Pay candidates. The Commissioner is the final selecting 

official for all Streamlined Critical Pay executives, with final approval by the Treasury 

Department. 

According to the IRS, the Streamlined Critical Pay executives have brought knowledge 

and expertise that would not otherwise have been available. For example, currently two of the 

four Division Commissioners, the National Taxpayer Advocate and the Chief, Criminal 

Investigation are all external hires with substantial experience.319 All of the Senior Industry 

Advisors in the Large and Mid-Size Business Division are from the industries to which they are 

 318 IRS Letter at 35. 

319 Id. at 39. 
 73

assigned.320 The Chief, Agencywide Shared Services, was recruited from a major international 

corporation where he managed the same functions.321

Loss of Streamlined Critical Pay executives

From the passage of the IRS Reform Act in July 1998 through April 25, 2001, the IRS 

has hired 29 Streamlined Critical Pay executives (21 currently working for the IRS).322 Through 

April 25, 2001, eight Streamlined Critical Pay executives have left the IRS as shown in Table 5, 

below. The average tenure of the executives who have left is approximately 17 months, with 

some staying as few as five months and others as long as 29 months. 

Table 5.--Streamlined Critical Pay Executives Who Have Left the IRS 

POSITION TITLE RATE OF 

PAY 

INCENTIVES/ 

BONUSES 

DATES OF 

SERVICE 

Chief Financial Officer $147,500 None 8/16/98 TO 6/29/99 

Director, Program Control 

Information Systems 

$130,000 None 12/19/99 TO 6/03/00 

Assistant Commissioner 

(Management and Financial Systems) 

Information Systems 

$135,000 None 5/9/99 TO 8/01/00 

Director, Government Program 

Management Office, Information 

Systems 

$160,000 $15,000 (Recruitment, 

11/2/98) 

11/2/98 TO 8/01/00 

Director, Real Estate and Facilities 

Management, Agencywide Shared 

Services 

$176,300 $37,800 (Recruitment, 

3/15/00) 

3/15/00 TO 7/31/00 

National Taxpayer Advocate $144,800* $15,000 

(Recruitment, 9/1/98) 

$25,000 (Annual 

Performance, 1/18/01) 

9/1/98 TO 10/10/00 

Deputy Commissioner/ Modernization $155,100* $25,000 

(Recruitment, 9/6/98) 

$20,000 (Annual 

Performance, 1/18/01) 

9/6/98 TO 10/08/00 

Chief Information Officer $181,400* $43,600 

(Recruitment, 8/11/98) 

$25,000 (Annual 

Performance, 1/16/01) 

8/11/98 TO 1/26/01 

*Salary at departure. Source: Internal Revenue Service 

 320 Id. 

321 Id. 

322 IRS Letter at 35. 
 74

Other personnel issues

Workforce classification and pay323.--On March 25, 2001 the IRS converted the first 

employees into the Senior Manager Payband established under the IRS Reform Act's workforce 

classification and pay authority (5 U.S.C. 5909). The new payband covers employees in 

positions formerly classified at the GS-14 and GS-15 grade levels who are second level 

managers or first level managers reporting directly to executives. These positions are found in 

all organizations within the IRS, and they share similar responsibility for meeting the IRS 

mission. The pay range for these positions will be from the minimum rate for GS-14 to the 

maximum rate for GS-15. Advancement through the range will be based on biennial salary 

reviews, considering performance as it is appraised under the new performance management 

system and the increasing difficulty of the position. 

The IRS is developing a strategy to place most other non-bargaining unit positions in 

paybands. In addition, the IRS is developing paybands for all Information Systems employees, 

and for criminal investigators (special agents). The IRS hopes get approval to proceed with these 

new initiatives early in the third quarter of this fiscal year. 

Performance management.--The Performance Management System for Executives, 

Managers, and Management Officials was implemented in fiscal year 2000. For fiscal year 

2001, the IRS incorporated leadership competencies into the performance expectations for 

executives and managers.324 This was done to facilitate alignment of the evaluations system with 

the systems for selection and development of organizational leaders.325 

In addition, the IRS is negotiating with the National Treasury Employees Union over 

impact and implementation of new Critical Job Elements for employees that are aligned with the 

IRS Balanced Measurement System.326 The IRS anticipates implementation of the new Critical 

Job Elements in summer 2001. 

F. Violations for Which IRS Employees May Be Terminated 

The IRS Reform Act defined 10 specific acts of misconduct for which an IRS employee 

may be terminated (“section 1203 violations”). These acts are: 

(1) willful failure to obtain the required approval signatures on documents 

authorizing a 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; 

 323 See generally IRS Letter at 41. 

324 IRS Letter at 41. 

325 Id. 

326 IRS Letter at 41. 
 75

(3) violation of the rights protected under the Constitution or the civil rights 

established under six specifically identified laws with respect to a taxpayer, 

taxpayer representative, or other employee of the IRS327

(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.328

In his or her sole discretion, the Commissioner may determine that there are mitigating 

factors which weigh against terminating an employee. This discretionary authority cannot be 

delegated. 

Each allegation of a section 1203 violation goes through a review and investigation 

process.329 First, the allegation is initially evaluated to determine whether it should be 

investigated as a section 1203 violation. TIGTA has primary responsibility for investigating 

allegations under section 1203. The facts found as a result of the investigation are then reported 

to the IRS for evaluation. IRS managers then must determine whether a violation of Section 

1203 has occurred. This determination is made by a Division-level or above manager, with 

 327 These laws are: (1) title VI or VII of the Civil Rights Act of 1964; (2) title IX of the 

Education Amendments of 1972; (3) the Age Discrimination in Employment Act of 1967; (4) the 

Age Discrimination Act of 1975; (5) section 501 or 504 of the Rehabilitation Act of 1973; or (6) 

title I of the Americans with Disabilities Act of 1990. IRS Reform Act, sec. 1203(b)(3)(B). 

328 IRS Reform Act, sec. 1203(b). 

329 See generally, IRS Letter at 51-53. 
 76

assistance of local labor relations specialists and the staff of the Centralized Adjudication Unit. 

The Centralized Adjudication Unit is involved in all determinations under section 1203 for the 

purpose of ensuring consistency throughout the IRS. If a determination is made that sufficient 

facts exists to support a section 1203 violation, the employee is given a letter advising that the 

IRS proposes to remove him or her from Federal service. The employee has a right to respond to 

the letter. The management official then must determine if the charge has been sustained by a 

preponderance of the evidence. If it is determined that the charge has been sustained, the case 

file is forwarded to the IRS national office for consideration by the Section 1203 Review Board. 

The Section 1203 Review Board then reviews the case to determine whether a penalty 

less than termination of employment is appropriate. The Section 1203 Review Board submits 

recommendations for mitigation to the Commissioner. If the Section 1203 Review Board does 

not find mitigation appropriate, the case is not submitted to the Commissioner and the statutory 

penalty of removal is imposed. 

As of March 31, 2001, there were 243 substantiated violations of section 1203.330 Of the 

243 substantiated violations, 213 were for failure to file a Federal tax return.331 The Section 

1203 Review Board has submitted 93 tax compliance cases (willful failure to timely file a return 

or willful understatement of tax) to the Commissioner.332 The Commissioner has exercised the 

authority to mitigate the removal penalty in 50 of those cases.333

Seven employees have been removed for willful failure to timely file a Federal tax return 

when the employee was due a refund because he or she had overpaid the tax due.334 The 

following information provided by the IRS, shown on Table 6, below, reflects all substantiated 

failure to file violations through December 31, 2000 considered by the Section 1203 Review 

Board.335 An employee who did not file a return is assumed by the IRS to have had a balance 

due. 

 330 IRS Letter at 64. 

331 Id. 

332 IRS Letter at 44. 

333 Id. 

334 This includes employees that resigned or retired before the IRS implemented the 

removal action. IRS Letter at 42. 

335 IRS Letter at 42-43. 
 77

Table 6.--Substantiated Failure to File Violations 

 Refund Balance Due 

Grade Removed Mitigated Removed Mitigated Total 

2 0 0 1 0 1 

3 1 5 5 1 12 

4 2 7 2 4 15 

5 0 3 7 2 12 

6 1 2 7 1 11 

7 1 7 8 2 18 

8 0 2 3 2 7 

9 0 3 2 1 6 

10 0 0 0 0 0 

11 0 0 0 2 2 

12 1 1 0 0 2 

13 1 2 1 0 4 

14 0 1 0 1 2 

15 0 0 0 0 0 

Executive 0 0 0 0 0 

Wage Grade 0 1 0 0 1 

Total 7 34 36 16 93 

 Source: Internal Revenue Service. 

Many employees and managers believe that the removal sanction for employee tax 

compliance violations is too harsh in some cases.336 The IRS indicates that the anxiety level of 

employees has increased since the IRS statistics show that the vast majority of cases are based on 

tax compliance.337

 336 See IRS Letter at 44, 59-62. 

337 Id. at 44. 
 78

V. THE 2001 FILING SEASON 

A. Overview 

For the 2001 tax filing season, which Commissioner Rossotti referred to as having been 

“smooth and almost error free,” the IRS has projected that net collections for fiscal year 2001 

will exceed the $1.9 trillion collected for fiscal year 2000.338 For fiscal year 2001, the IRS also 

projects that it will receive 215.4 million returns, including over 130.3 million individual returns, 

and it expects to issue over 96.8 million individual refunds. As of March 9, 2001, the IRS 

reported that the average dollar amount per refund was up over five percent from last year, and 

the average refund as of that date was $1,823.339 The IRS recently announced that 34.2 million 

tax returns were filed electronically as of April 6, 2001.340

At the request of the Subcommittee on Oversight of the House Committee on Ways and 

Means (“Oversight Subcommittee”), the General Accounting Office reviewed the IRS’s 

performance during the 2001 filing season. In its April 3, 2001, testimony before the Oversight 

Subcommittee, the General Accounting Office made four specific observations. First, the 

General Accounting Office noted that the IRS’s reorganization had little effect on the 2001 filing 

season, although some improvements to customer service are still needed. Second, the General 

Accounting Office reported that the IRS processed returns and refunds without any significant 

problems and has received a larger percentage or returns electronically, but the growth rate of 

electronic filing is slower than expected, and many taxpayers encountered trouble using their 

personal identification number (instead of signatures filed on paper). Third, according to the 

General Accounting Office, the IRS has done a better job answering telephone calls, although 

there remain concerns about the declines in the productivity of telephone assistors. Finally, the 

General Accounting Office finds continuing concerns regarding the quality of tax law assistance 

being provided by IRS walk-in sites, despite the increased staffing of the IRS field assistance 

program.341

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

Subcommittee on Oversight of the House Committee on Ways and Means (April 3, 2001) 

(hereinafter “Rossotti April 3, 2001, Testimony”) at 8. 

339 Id.

340 “Selected IRS Tax Filing Statistics,” Associated Press, April 12, 2001, available at 

<http://www.washingtonpost.com/wp-srv/aponline/20010412/aponline131909_000.htm> 

(hereinafter “A.P. April 12, 2001, Article”). 

341 Statement of James R. White, Director, Tax Issues, before the Subcommittee on 

Oversight of the House Committee on Ways and Means (April 3, 2001) (“hereinafter GAO April 

3, 2001, Statement”) at 2. 
 79

B. Electronic Tax Administration 

In general

The IRS has reported that, as of April 6, 2001, 34.2 million tax returns were filed 

electronically, which is an 11.6 percent increase from the same period last year. Of these returns, 

30.3 million were filed via computer, up 16.2 percent from the same period last year. In 

addition, 3.8 million of these returns were filed over the telephone, using the TeleFile system, 

which was down 14.7 percent from the same period last year.342 Oklahoma and Georgia joined 

Kentucky and Indiana in the Federal/State TeleFile option.343 In addition, the IRS has reported 

that 11 million taxpayers chose to file both their federal and state tax returns simultaneously in a 

single electronic transaction, using Federal/State e-file.

344 This year, 35 states and the District of 

Columbia are participating in the program. 

The General Accounting Office has found that, although the percentage of returns file 

electronically has increased, the rate of increase is below expectations. Based on this 

observation, both the IRS and the General Accounting Office find that it will be challenging for 

the IRS to reach its mandated goal of having 80 percent of all returns filed electronically by 

2007.345 

For the 2001 filing season, the IRS has set out to improve its electronic tax administration 

program, in order to ease taxpayer burden and make electronic filing more attractive. In 

addition, the IRS’s Web site and CD-ROMs continue to provide support and resources for 

taxpayers and practitioners. 

The Taxpayer Advocate Service recognizes the importance of electronic tax 

administration; nonetheless, National Taxpayer Advocate, Nina E. Olsen, has identified lowincome taxpayers as a group that may “be left behind in the push for electronic filing.”346 

According to the National Taxpayer Advocate, such individuals’ options for filing a tax return 

include filing a paper return and waiting four to six weeks for a refund, or retaining a tax 

 342 A.P. April 12, 2001, Article. 

343 Federal/State TeleFile allows taxpayers to file both Federal and State returns in a 

single telephone call. See IR-2001-29. As of March 1, 2001, more than 148,000 taxpayers filed 

both Federal and State returns by using this system. Id. 

344 Federal/State e-file allows the electronic filing of both Federal and State income tax 

returns at the same time. Id. 

345 Rossotti April 3, 2001, Testimony at 8; GAO April 3, 2001, Testimony at 6. See also

section 2001 of the IRS Reform Act. 

346 Statement of Nina E. Olsen, National Taxpayer Advocate, before the Subcommittee 

on Oversight of the House Committee on Ways and Means (April 3, 2001) (hereinafter “Olsen 

April 3, 2001, Testimony”) at 4. 
 80

preparer and paying a return preparation fee, a second fee for electronic submission of the return, 

and a third fee for obtaining a refund anticipation loan (if they need refunds immediately). 

Electronic filing for individual taxpayers

Expansion of the e-file program

The IRS is expanding availability of the e-file program, by increasing the number of 

different forms that taxpayers may file electronically. For example, for the 2001 filing season, 

the IRS added 23 additional forms to the individual e-filing program.347 The IRS expects that the 

remaining 38 forms will be eligible for electronic filing for the 2002 filing season, which will 

make e-filing available to 99.1 percent of all taxpayers.348

Personal identification numbers in lieu of paper signatures

The IRS is in the process of making the e-filing process entirely paperless. In prior years, 

the taxpayer’s signature (on paper) was required to be filed with an electronically-filed return. 

In 2000, the IRS successfully tested the use of a personal identification number code in lieu of a 

paper signature. This year, the program was extended to taxpayers nationwide. Thus far, four 

million taxpayers have utilized the personal identification number option.349

According to the General Accounting Office, as of March 11, 2001, approximately 5.9 

million returns had been filed electronically using a self-selected personal identification number. 

The General Accounting Office also indicated that returns filed electronically using a selfselected personal identification number had a higher reject rate (approximately twice as high as 

the rate usually experienced with electronic filing), which caused additional burdens for 

taxpayers utilizing this program.350

Expanded payment options

In the 2001 filing season, the IRS has offered more electronic payment options than have 

been available in the past. For example, debit payments may not be made through TeleFile, and 

credit card payments may be made for estimated tax payments on Form 1040ES, as well as with 

Form 4868, “Automatic for Automatic Extension of Time To File U.S. Individual Income Tax 

Return.” The IRS has reported that, as of March 10, 2001, 22,718 credit card payments 

 347 Rossotti April 3, 2001, Testimony at 9. Example of the additional forms that may 

now be filed electronically include Form 2106-EZ, “Unreimbursed Employee Business 

Expenses,” Form 2688, “Application for Additional Extension of Time To File U.S. Individual 

Income Tax Return,” and Form 8379, “Injured Spouse Claim and Allocation.” 

348 Id. 

349 Id. 

350 GAO April 3, 2001 Testimony at 8. 
 81

(averaging $3,177) were made and another 24,064 payments (averaging $1,026) were made by 

direct debit from taxpayers’ checking or savings accounts.351

E-Services and business systems modernization

The IRS’s e-Services project under business systems modernization are expected to lead 

to the IRS being able to conduct most transactions with taxpayers and their representatives in an 

electronic format. By 2002, the IRS hopes that e-Services will: (1) provide the ability for new 

electronic return originators to register electronically over the internet, (2) allow electronic 

delivery of taxpayer transcripts to authorized parties, and (3) allow those parties who are 

required to file Form 1099 and other information returns to verify the accuracy of taxpayer 

identification numbers prior to submission.352

Marketing the e-file program to taxpayers

The IRS’s notes that its marketing campaign for promoting electronic filing, “40 Million 

People Already Know e-file is the Way to Go,” has contributed to the success of the electronic 

filing season. The IRS has developed a fully integrated campaign with television, radio, and 

print advertising of the e-file program. The IRS plans to shift emphasis of its advertising 

campaign from awareness of the program, to emphasizing its value, such as saving taxpayers 

time.353

Electronic filing for business taxpayers

The IRS has reported that has expanded electronic filing options for business taxpayers. 

For example, since April 2000, employers could file electronically Forms 941, “Employer’s 

Quarterly Federal Tax Return.” Forms 941 and 940, “Employer’s Annual Federal 

Unemployment (FUTA) Tax Record,” also will be able to be filed electronically by companies 

and payroll service providers. Direct debit payments also was made available through Form 941 

TeleFile. Employers also have the option of providing certain information statements, such as 

Forms W-2, “Wage and Tax Statement,” to taxpayers electronically, rather than on paper.354

The IRS further noted that, in 2002, the electronic federal tax payment system (“EFTPS”) 

was very successful. For example, the system processed over 63 million federal taxpayements (a 

14 percent increase from 1999) and received $1.5 trillion (a 15 percent increase from 1999). The 

IRS credits the success of this system to a high level of service and accuracy for payments 

applied properly. The IRS is conducting a new pilot program to test its Internet-based 

 351 Rossotti April 3, 2001, Testimony at 9. 

352 Id. 

353 Id. 

354 Id. at 10. 
 82

application for businesses to pay taxes online. EFTPS-OnLine would allow business to enroll in 

the system, securely make federal payments, and check payment history online.355

IRS Web site

The IRS’s Web site, known as the “Digital Daily,”356 provides tax information and 

resources to taxpayers and practitioners. The IRS has noted that the “Digital Daily” has received 

nearly 1.3 billion hits this fiscal year. The “Digital Daily” provides: 

• tax forms, instructions, and publications; 

• the latest tax information and tax law changes; 

• tax tables and rate schedules; 

• hypertext versions of all taxpayer information publications; 

• all TeleTax topics; 

• answers to the most frequently asked tax questions; 

• a library of tax regulations; and 

• the weekly Internal Revenue Bulletin, which contains the latest revenue rulings, 

revenue procedures, notices, announcements, and proposed and final regulations. 

Earlier this year, the IRS launched its new “Small Business and Self-Employed 

Community” Web page, which can be accessed form its Web site. This Web page is designed to 

benefit small business owners and self-employed and start-up business owners. Moreover, for 

the first time, the IRS is offering industry-specific tax information for the construction and 

restaurant industries. For example, those in the food industry can access the Web site and 

receive information regarding tip reporting.357

CD-ROMs

More than 600 tax forms and instructions for the current tax year (as well as an archive of 

forms and instructions back to 1992) can be obtained on the Federal Tax Forms CD-ROM. In 

addition to the tax forms, 3,000 pages of tax information also is available on CD-ROM. 

Taxpayers can search, view on-screen, and print any of the information contained on the CDs. 

 355 Id. 

356 The IRS’s Web site is available at <http://www.irs.gov>. 

357 Rossotti April 3, 2001, Testimony at 11. 
 83

The CDs also contain all the business tax forms, publication and instructions for electronic filing 

of tax returns and information. 

C. Telephone and Walk-In Service 

Telephone service

The IRS offered 24-hour, seven-days-a-week telephone assistance throughout the 2001 

filing season. After April 16, 2001, the IRS has been providing around-the-clock service for 

refund and account callers, and service for tax law assistance will be provided Monday through 

Saturday from 7:00 a.m. until 11:00 p.m. 

The IRS notes that, through March 9, 2001, approximately 65 percent358 of taxpayers 

who wanted to speak with a customer service representative got through, compared to 61.7 

percent at the same time in 2000. While the IRS finds this level of service “unacceptable,” it 

does find that the increases in phone service are “encouraging,” showing benefits from its 

investments in training, management, and technology.359 The IRS further noted that it is unable 

to provide taxpayers with up-to-date information on their accounts, which causes frustration for 

both taxpayers and the IRS. 

The General Accounting Office has found that telephone assistance is less than what it 

could be because, first, telephone assistor productivity (i.e., how quickly assistor complete 

telephone calls) has declined for the third successive filing season, and second, implementation 

of the IRS’s Customer Communication Project has been delayed.360

Walk-in service

Walk-in service is available at more than 400 locations throughout the United States. At 

many walk-in sites, service was offered on 12 Saturdays between January 27, 2001, and April 

 358 The General Accounting Office found that, as of March 17, 2001, the 2001 level of 

telephone service at 76 percent, which it attributes to the data in 2001 not accounting for 

taxpayers who may have abandoned their calls before getting an answer. GAO April 3, 2001, 

Testimony at 10. The Treasury Inspector General for Tax Administration reported that the 

Inspector General’s auditors were able to gain access to a customer service representative 63 

percent of the time (based on 368 random test calls). Statement of the Honorable David C. 

Williams, Inspector General, Treasury Inspector General for Tax Administration, U.S. 

Department of the Treasury, before the Subcommittee on Oversight of the House Committee on 

Ways and Means (April 3, 2001) (hereinafter “TIGTA’s April 3, 2001, Testimony”). 

359 Rossotti April 3, 2001, Testimony at 12. 

360 GAO April 3, 2001, Testimony at 12. The Customer Communication enhancements 

are designed to free-up assistors so they may handle more calls by routing and answering calls 

through automation. Id. 
 84

14, 2001.361 The IRS hopes to broaden the services available at its local offices, with the 

assistance of additional personnel provided by the STABLE initiative. A new job category, 

called Tax Resolution Representative, will have the training and authority to provide one-stop 

service to taxpayers for issues ranging from answering tax questions to resolving payments 

problems.362

According to the General Accounting Office, Taxpayer Assistance Centers provide poor 

quality of tax law assistance to taxpayers. The General Accounting Office reported that IRS 

employees posing as taxpayers conducted 272 visits to Taxpayer Assistance Centers before the 

2000 filing season and another 272 visits during the 2000 filing season. IRS’s final report on the 

combined results indicated that, although 92 percent of assistors spoke to reviewers in a pleasant 

manner, 81 percent of the reviewers’ questions were not answered correctly, and 21 percent of 

the reviewers were denied service.363

D. 2001 Revenue Protection Strategy 

In general

During the 2001 filing season, validation of social security numbers and other tax 

identification numbers has been a significant portion of the IRS’s fraud and abuse prevention 

efforts.364

The National Taxpayer Advocate has recommended that the IRS strengthen its validation 

procedures.365 IRS Operations and the Taxpayer Advocate Service have worked together in 

developing what is referred to as a “soft” notice for taxpayers with secondary social security 

number problems. This notification allows taxpayers to correct their records before the filing of 

their next tax return. The Taxpayer Advocate Service estimates that 1.8 million taxpayers will 

have received such notice in fiscal year 2000. The National Taxpayer Advocate notes that this 

has prevented taxpayers’ 2000 refunds from being frozen before taxpayers had an opportunity to 

resolve this issue. 

 361 As of April 3, 2001, the IRS estimates that it had served over 3.37 million taxpayers 

at all Taxpayer Assistance Centers, which is a 4.54 percent decrease from 2000. Rossotti April 

3, 2001, Testimony at 12-13. 

362 Id. 

363 Id. at 15. 

364 Rossotti April 3, 2001, Testimony at 7. 

365 National Taxpayer Advocate FY 2000 Report at 111-112. 
 85

Earned income credit

The IRS plans to continue its emphasis on improving compliance with the earned income 

credit, including use of the IRS’s Dependent Database366 to identify questionable issues 

regarding the status of earned income credits, dependent exemptions, and filing status. In 

addition, the Earned Income Tax Credit Preparer Outreach Program also will continue. This 

program included visits by IRS revenue agents to tax professionals nationwide prior to January 

2001, to provide assistance and answer questions regarding the earned income credit. Some of 

these visits also included a review of files to determine if the due diligence requirements of the 

earned income credit have been met.367

Regarding the accuracy of the Dependent Database, the IRS noted that approximately 

10,000 returns were selected for examination between March 15 and May 2, 2000.368 Return 

selection criteria was most successful when combined with other IRS data on filing 

characteristics and duplicative claims of children for dependency exemptions and for the earned 

income credit. Based on the results of this examination, the IRS identified some limitations on 

the usefulness of its data. These limitations include: 

• the new Social Security Administration data, linking parents’ social security numbers 

to those of their children, remains limited because of the short time the Social 

Security Administration has been gathering the data; 

• the Health and Human Services data records were created in the system (thus, the IRS 

is unable to determine whether documents provided by taxpayers are more current 

than Health and Human Services records); 

• the data contains inconsistencies because the Health and Human Services database is 

reliant on data provided by the individual states (these inconsistencies include 

multiple records for the same child and missing data elements, such as the social 

security number for the child or the custodial party); and 

• not all of the states are providing all of their records (in December 2000, Health and 

Human Services indicated that four states had no records for children and two had 

partial records).369

 366 The Dependent Database includes records from the Social Security Administration 

and the Office of Child Support Enforcement at Health and Human Services. These records link 

the names and social security numbers of dependent children with the names of their parents and 

their parents’ social security numbers, along with custody and child support obligation 

information. 

367 National Taxpayer Advocate FY 2000 Report at 111-112; see also Olsen April 3, 

2001, Testimony at 3-4. 

368 IRS Letter at 82. 

369 Id. at 82-83. 
 86

The IRS has noted that, this year, it will use the Dependent Database application 

nationwide, with enhanced selection criteria, as part of the examination program and for the 

identification of noncompliant taxpayers and paid preparers. The IRS also indicated that it will 

conduct examinations prior to the release of tax refunds, and, thus expects revenue protection in 

fiscal year 2001. In addition, the IRS expects education and outreach efforts to result in revenue 

protection measurable by the reduction in error rates in returns filed during the 2002 filing 

season.370

The National Taxpayer Advocate has stressed that statutory and procedural changes to 

the earned income credit, which were developed to reduce error and fraud, must also protect the 

rights of taxpayers. The National Taxpayer Advocate has noted that, in many cases, taxpayers 

who claim the earned income credit do not have professional assistance in doing so, because of 

poverty, or, due to language or literacy barriers, cannot make an effective claim for themselves. 

In addition, the National Taxpayer Advocate has observed that the Dependent Database must be 

regularly and correctly updated to work properly and efficiently.371

 370 Id. at 83. 

371 Olsen April 3, 2001, Testimony at 3-4. 
 87

APPENDIX 














































2

1. Modernization 

1(a) Each division of the IRS has its own initiatives. 

1(a)(1) Is there any interaction between the divisions such that efforts are 

coordinated for modernization? If so, how are the divisions working 

together in modernizing the IRS?

Extensive interaction occurs among the operating divisions to ensure coordinated 

efforts for modernization, with an especially vigorous interaction at work in the 

IRS’ strategic planning and budgeting process. This process gives the top 

leadership of the IRS a forum for a structured, collaborative dialogue aimed at 

both defining future IRS strategies and priorities, and allocating resources. The 

process begins with a strategic assessment in which the heads of the operating 

divisions identify problems, trends and issues. Using these building blocks, we 

then collectively construct major strategies, operational priorities, and 

improvement projects. The identification of cross-divisional issues is an 

important part of the process, and we designated business division owners and 

partners for every priority and improvement initiative. We are beginning our 

second year under the new strategic planning and budgeting process, and have 

found it fosters close communication and coordination among the divisions, and 

promotes progressively tighter linkages between planning and budgeting. 

The integrative mechanisms that are necessary for a successful planning 

process are also essential for day-to-day operations. In designing our new 

organization, we built our line structure around servicing groups of like taxpayers 

-- like many private sector firms, we decided the organizational dimension that 

mattered most was customer segments. However, we recognized there were 

also other important dimensions and that many problems have multiple 

dimensions. 

Clearly geography is one dimension that needs coordination and proper 

emphasis. The IRS has long had a strong geographical identify at the local level 

and we believe we need a well-planned way of managing through this change. 

We are using designated “Commissioner’s Representatives” to help deal with 

both internal administrative issues and external representation to practitioners 

and the local community. Additionally, we are using a host of location based 

coordination councils to address local issues: 

• Councils and executive steering committees to oversee a wide range of 

operational and resource dimensions across division lines 

• A Tax Administration Council whose purpose is to see that essential tax 

administration policies and procedures affecting taxpayers in more than one 

business unit are appropriately consistent and in accord with the law. In 

addition, this Council will oversee efforts to ensure tax legislation is effectively 

implemented. 
3

• Cross-divisional councils for overseeing the redesign of our core business 

systems and modernizing the technology to support them, according to the 

blueprint. 

• IRS-wide councils to address selected management policy issues, such as 

Human Resources. Such councils recommend common management 

policies, facilitate the exchange of best practices, and give direction to any 

activities managed in common. 

1(a)(2) What difficulties have arisen in the transition to 4 operating 

divisions?

A natural learning curve occurs in a transition as sweeping as the one that the 

IRS is undertaking. Just a year ago, we managed IRS operations through 

geographically defined line units (districts and service centers), supported by a 

large functional structure (Examination, Collection) in national and regional 

offices. Today, we are organized around groups of like taxpayers, and the 

divisions have end-to-end accountability for all the functions and processes 

which affect those taxpayers, in every geographic location. 

Making a change this big is no easy task. Compounding the challenge is the 

need for us to couple the modernization of the organization with the 

modernization of business practices and the technology. All three of these 

elements of the modernization are necessary for success and very much 

interdependent. We expected and planned for difficulties during the transition, 

and a number of difficulties have actually arisen. 

One difficulty we are experiencing is getting accustomed to having program 

responsibility assigned to one division, but program delivery carried out by 

several divisions. For example, most of the collection procedures are the 

responsibility of Small Business/Self-Employed (SB/SE), but Wage and 

Investment (W&I) shares program delivery responsibilities for these activities. 

While the divisions are charged with addressing the unique needs of their 

taxpayer segments, we also need to ensure consistency of taxpayer treatment. 

We have also identified some conflicting assumptions about program ownership 

among the divisions but are sorting through those issues and expect to resolve 

them soon. 

Another difficulty is adjusting to a total “shared services” concept for our key 

support functions – information systems and facilities. In the new design, our 

support functions are managed centrally and no longer report to the operational 

managers. The new service delivery processes are viewed in some areas as 

more cumbersome and less effective than when they were under the control of 

the operational managers themselves. Any new system needs time to mature 

and it not surprising that, in this adjustment phase, the process is not working as 

well as it should. But we are confident that over time we will reach the level of 

effectiveness our design envisioned. Moreover, shared services offers a 
4

powerful mechanism for standardizing key support operations and provides a 

more effective mechanism for controlling costs. 

The difficulties described above are mostly internal growing pains. Externally, 

the reorganization has for the most part been transparent to the great majority of 

taxpayers. Taxpayers will begin to see more significant improvements in our 

delivery of services as we move to the critical next phases of the modernization -- 

reengineering business practices and modernizing the technology. When we 

have experienced difficulties with an external impact, we have managed to 

identify and promptly deal with the problems. For example, when we moved to 

the new organization we did not clearly define the responsibility for maintaining 

existing practitioner hotlines in each state. Once the issue was raised, the new 

divisions worked cooperatively to ensure that these hotlines were staffed and 

ready to service practitioners. 

We are also moving swiftly to staff up the new pre-filing components of our Wage 

and Investment (W&I) and Small Business/Self-Employed (SB/SE) divisions. To 

date, staffing has lagged behind where it needs to be to achieve the intended 

level of pre-filing services. We are currently engaged in a substantial recruitment 

effort in both the Stakeholder, Partnership, Education and Communications 

(SPEC) organization in W&I, and the Taxpayer Education and Communication 

(TEC) organization in SB/SE. 

In summary, the changes we are making will take many years to fully implement, 

and we will inevitably encounter risks and temporary setbacks along the way. 

We are managing these risks by openly confronting them, and honestly 

communicating what we are doing and why. 

1(a)(3) How are workarounds (temporary solutions put in place to keep the 

division operating until a final solution is developed) monitored such that 

the problem will be addressed as part of the overall plan? 

Modernization workarounds generally arose in two different situations: 

1) Business rules had not yet been finalized in specific functions or 

2) Required systems changes could/would not be made when initially needed 

The handling of these workarounds was very different. 

In the first situation, various design teams and/or the Centralized Transition 

Office (CTO) identified these procedural gaps, and then monitored through the 

Issues Tracking System. The design team discussed the most significant items 

during the periodic Status Meetings. When the new organization stood up in 

October 2000, we turned these issues over to the new divisions and their 

Business Systems Planning (BSP) staffs. To resolve issues that cross two or 

more divisions, we often commissioned special teams to study the problems and 
5

recommend solutions. For example, we formed a team to develop a Servicewide internal mail delivery system. 

We captured requirements for changes to various computer systems as they 

were identified, and documented them in various deliverables. We then 

incorporated them into formal change request documents [Requests for 

Information Services (RIS)]. We submitted these RIS’s to Information Systems 

(I/S), first as “placeholders” and later as “final” requirement packages. Both I/S 

and Modernization then track these RIS’s, until the changes are integrated into 

our various systems

1(a)(4) For each of the following divisions, please summarize the significant 

initiatives and how these initiatives relate to the IRS’s strategic goals; 

Wage and Investment (W&I); Large and Mid-Size Business (LMSB); TaxExempt and Government Entities (TEGE); Small business; Appeals; and 

Criminal Tax. 

The Internal Revenue Service (IRS) has three strategic goals: top-quality service 

to each taxpayer in every interaction; top-quality service to all taxpayers through 

fair and uniform application of the law; and productivity through a quality work 

environment. 

In order to reach these goals and improve service and compliance, the IRS has 

incorporated ten major strategies into its strategic plan: 

• Meet the needs of taxpayers 

• Reduce taxpayer burden 

• Broaden the use of electronic interactions 

• Address key areas of noncompliance 

• Stabilize traditional compliance activities 

• Deal effectively with the global economy 

• Meet the special needs of the tax exempt community recruit, develop and 

retain a quality workforce 

• Provide high-quality, efficient, responsive information and shared support 

services 

• Promote effective asset and information stewardship

Wage and Investment Division

The Wage and Investment Operating Division has developed initiatives for seven 

of the ten strategies, as they relate to the three IRS strategic goals. 

Strategic Goal #1) Service to each taxpayer in every interaction. Three of the 

ten IRS strategies relate to this goal. The first IRS strategy to “meet the needs of 

the taxpayers” involves offering higher quality, more readily available assistance 
6

to taxpayers who ask for help in filing their returns and paying the taxes they 

owe. To support this strategy, Wage and Investment (W&I) will: 

• Offer products and services tailored to specific taxpayer needs 

• Provide more education and assistance through convenient, easy-to-use 

distribution channels 

• Leverage partnerships 

• Allow taxpayers to designate a Third Party Authorization on all Form 1040 

series 

• Expand and improve assistance to Spanish speaking customers 

The second IRS strategy is “reduce taxpayer burden” by clarifying tax law 

responsibilities, resolving issues early in the process, providing more effective 

pre-filing guidance, and offering effective communication and education. To 

support this strategy, W&I will: 

• Improve notices 

• Deploy mobile units and information kiosks 

The third IRS strategy, “broaden the use of electronic interactions,” is aimed to 

convert most interactions with taxpayers and practitioners to electronic means as 

rapidly as possible, including electronic payments and electronic communications 

with taxpayers. The W&I initiatives that relate to this strategy are to: 

• Conduct marketing research to ensure that products and services meet 

customer needs 

• Develop an e-file strategy 

• Improve electronic filing and communication services 

• Expand the use of self-selected personal identification numbers (PIN) 

Strategic Goal #2) Service to all taxpayers through fair and uniform 

application of the law. IRS strategies four through seven relate to this goal. 

The fourth IRS strategy is to “address key areas of non-compliance.” IRS is 

promoting fairness by combating important areas of non-compliance, such as 

underreporting, abuse of trusts, corporate tax shelters, nonpayment of 

withholding and EITC overclaims. The W&I initiatives relating to this strategy are 

to: 

 

• Develop risk based compliance programs 

• Develop collection and exam workplans tailored to specific issues affecting 

those taxpayers 

• Focus effort on systems changes for EITC 

 

The fifth IRS strategy is to “stabilize traditional compliance activities” through 

promoting fairness in examination, collection and criminal investigation, while 

observing taxpayer rights. W&I’s initiative that addresses this strategy is 
7

implementation of risk-based compliance systems that are more effective and 

less burdensome to taxpayers who want to voluntarily comply. 

 

W&I does not currently have any initiatives to address strategic goals six and 

seven. 

Strategic Goal #3) Productivity through a quality work environment. The last 

three of the ten IRS strategies relate to this goal. The eighth IRS strategy is 

“recruit, develop and retain a quality workforce.” IRS plans to use tools such as 

job specialization, research, training, technology, education and strategic hiring 

to build the skilled workforce needed to support the IRS goals and strategies. To 

support this strategy, W&I will: 

• Equip employees with knowledge of unique needs and characteristic of the 

specific taxpayer they serve 

• Deliver employees the ability to access and update taxpayer account data 

through a single terminal and access path 

• Improve manager and leadership training 

• Deliver training to equip Customer Service Representative (CSRs) with 

specialized areas of expertise 

• Acquire and install approved workstations 

• Engage frontline employees and managers in key task such as writing the 

manual and training materials and determining business requirements for 

systems 

• Expand the Servicewide Electronic Research Program (SERP) and other 

research tools, providing training for front-line employees Redesign the 

content and delivery of the IRM for a web-based environment 

The ninth IRS strategy is to “provide high-quality, efficient, responsive information 

and shared support services” by effectively managing business systems and 

telecommunications services to meet customers and employees needs. To 

support this strategy, W&I will: 

 

• Improve the IRS web site continuously 

• Facilitate communication with stakeholders via the web site 

• Establish linkages to the IRS Intranet in order to improve internal 

communications 

W&I does not have any initiatives to address strategic goal ten. 

Large and Mid-Size Business Operating Division

The following are the significant initiatives for LMSB and their relation to the IRS 

Strategic Goals: 
8

1. Global Trading – A strategic initiative to build a tax administration to 

effectively deal with the global economy. 

Rapidly changing technology is driving the global economy and impacting 

business practices in every sector. The corporate organization of the immediate 

future is free of geographical anchors; it is transnational in operation and attitude. 

To support IRS goals, we will continue efforts to: 

• Address specific areas of non-compliance 

• Effectively use the tax treaty network (countries with which the U.S. currently 

has income or estate tax treaties) 

• Effectively use resources 

• Promote customer satisfaction by understanding issues from the taxpayer 

viewpoint 

• Promote employee satisfaction by providing critical and timely training 

• Enable development of appropriate new tax legislation 

2. Issue Management - A strategy to resolve disputes earlier with 

taxpayer(s) or eliminate controversy earlier in the process. 

During the past several years, large corporate taxpayers have been dissatisfied 

with out examination of their returns. Factors such as increasing cycle time (the 

date the taxpayer filed the return to the date the case is closed out of the 

examination stream), inability to consistently audit the most current filed tax year 

return, and lack of a comprehensive, consistent issue management strategy have 

contributed to increased burden on taxpayers, as well as, employee 

dissatisfaction and significant resource and budget commitments. To support 

agency goals, we will continue efforts to: 

• Address revamped business practices 

• Enhance IRS responsiveness to customers and reduce taxpayer burden 

• Assist taxpayers to be compliant and improve customer satisfaction 

• Improve employee satisfaction 

• Improve examination processes and resolve high-risk issues earlier in the 

process 

3. Highly Skilled & Satisfied Workforce – A strategy to recruit and retain a 

highly qualified, skilled and satisfied workforce. 

Continued attrition of LMSB experienced employees erodes our ability to provide 

customer service and take necessary, effective compliance actions. We need to 

continue to: 

• Improve our ability to attract and retain skilled employees 

• Update our employees’ business knowledge, accounting, and tax law skills to 

meet the challenges of e-commerce and the global economy 
9

• Improve our employees’ morale and trust in the IRS 

Tools and training cannot address future trends. We must change the attitude 

and mindset of the workforce at all levels to reflect our Mission. 

4. Abusive Corporate Tax Shelters – A strategic and balanced approach to 

strengthen our ability to deal with corporate tax shelters. 

The proliferation of corporate tax shelters presents an unacceptable and growing 

level of tax avoidance behavior. Over the past several years, Congress and the 

Administration repeatedly have provided targeted responses to specific shelters 

as they have come to light. We need to curb the growth of corporate tax shelters 

as a current response, as opposed to an after-the-fact, ad-hoc approach. To 

meet agency goals, we will continue efforts to: 

• Provide service to all taxpayers 

• Promote fairness and integrity 

• Address specific areas of non-compliance 

• Provide a driver to future legislation 

• Protect corporate tax revenue. 

Tax Exempt and Government Entities Operating Division

For FY2001, the Tax Exempt and Government Entities (TE/GE) Division of the 

IRS is pursuing three significant initiatives. These three initiatives are part of the 

IRS and TE/GE Strategic Plans and directly impact the Division's ability to serve 

its customers, ensure compliance, and protect the public interest. 

(1) Address Employee Plan (EP) Determination Workload Variations. 

TE/GE's Employee Plans organization is currently in an open period for 

amendments to employee benefits plans to address a series of recent legislative 

changes. TE/GE anticipates receiving over 200,000 determination letter 

requests to address plan changes in FY2002, in contrast to a normal annual 

volume of 40,000 requests. To address this projected workload increase, we are 

encouraging employees to adopt standardized employee plans through 

marketing and outreach, improving the determination application and review 

process, and adding employees and other resources to help process the 

additional determination receipts. TE/GE is also redesigning its Determination 

System, which should improve processing time, efficiency and quality. 

(2) Ensure the Accuracy of the Exempt Organizations (EO) Master File. 

Past analysis indicates that a significant amount of information in the EO Master 

File may be inaccurate or out-of-date. The lack of reliable information about 

exempt organizations inhibits our ability to serve our customers at the level they 

expect. We plan to redesign the EO Master File maintenance process, expand 
10

our current return imaging process, and work to introduce electronic filing for 

Form 990 filers. 

(3) Establish the Government Entities (GE) Organization and Programs. 

Historically, the IRS has under-served government entities. To increase service 

to these customers, TE/GE is establishing the new Government Entities 

organization. We are hiring and training additional employees, strengthening the 

tax-exempt bond program, and establishing partnerships with customer and 

stakeholder groups to provide better service with limited resources. During fiscal 

years 2000 and 2001, our Federal, State and Local Governments (FSLG), Indian 

Tribal Governments (ITG), and Tax Exempt Bonds (TEB) functions will be 

building and refining their programs and collecting information about their 

customer populations. 

Small Business/Self-Employed Operating Division

Small Business/Self-Employed Operating Division’s Strategy and Program Plan 

for FY 2000-2002 contains the following strategies that support the IRS strategic 

goals: 

Strategic Goal #1) Top Quality Service to Each Taxpayer in Every 

Interaction 

Strategy: Increase ability to meet customer account service expectations.

Our goal is to improve taxpayer ability to comply with the tax laws by making 

filing easier and providing individual service and prompt, professional treatment 

when tax is due. The following priority programs will assist in accomplishing this 

goal:

• Organize Customer Service Representatives (CSRs) by areas of expertise 

division-wide, using call routing effectively to provide specialized customer 

service via intelligent electronic call routing. At the same time, instead of 

being a "phone" assistor, or a "correspondence" assistor, these specialists will 

assist based on their expertise, regardless of the channel through which the 

taxpayer contacted the agency. SB/SE, as well as Wage and Investment 

Division (W&I), are adopting a more knowledge-specific approach to 

customer service, designed to increase both the quality of assistance 

taxpayers receive and the speed with which we assist them. 

• Designate additional trained phone assistors to provide adequate staff for 

both technical and account calls. W&I has taken similar steps. 

• Support W&I operated field assistance sites with technical backup. 
11

• Establish a methodology to develop e-government prototypes for SB/SE, and 

test the prototypes. The Internet is changing the way businesses operate 

and, by extension, the tax issues that confront businesses and the IRS. 

Additionally, SB/SE is pursuing several improvement projects to further increase 

its ability to meet customer account service expectations. We will: 

• Centralize 941/943 Federal Tax Deposit penalties and the related analysis 

and abatement processes into two or fewer centers. 

• Review the Business Master File Submission Processing process and 

develop a process that will identify best practices in the service centers and 

help ensure consistency of approach. 

• Centralize 1120-S (Subchapter S Corporation Return) and 2553 (Election by 

a Small Business Corporation) processing. The planned centralization from 

10 centers to the Ogden and Cincinnati Submission Processing Service 

Centers should reduce mishandling of the elections and erroneous 

conversions of the corporate returns. 

• Create a centralized toll free number for practitioners. 

• Store all Centralized Authorization File (CAF) input, power of attorney 

information, authorizing the IRS to have contact with the taxpayer’s 

representative in one place.

• Improve the Employee Identification Number (EIN) process through better 

taxpayer communications, support to customer service representatives, and 

business processes.

Strategy: Prevent compliance issues among start-up business through 

education and assistance. SB/SE will expand our business partnerships, 

specialize education programs for market segments, and assess current 

successful business programs. To assist in accomplishing this goal, we will: 

• Expand partnerships with established institutions, such as the National 

Association of Enrolled Agents and Association of Small Business 

Development Centers to provide joint products and services. 

• Establish a measurement program to determine the effectiveness of efforts to 

address noncompliance issues among start-up businesses. 

 

• Develop specialized education programs for market segments to support the 

overall IRS goal to develop market segment strategies to improve industry 

compliance. 
12

• Assess and expand successful programs, such as the IRS Digital Daily web 

site. This site features a special section for small business taxpayers, which 

offers an array of information. We will add additional tax information, simplify 

access, and ease navigation throughout the site. 

Strategic Goal #2) Service to All Taxpayers through Fair and Uniform 

Application of the Law 

Strategy: Stabilize and improve business results in Examination and 

Collection. SB/SE will accomplish this strategy by maximizing other resources 

to minimize the impact on Examination and Collection casework during the filing 

season. To assist in this effort, we will establish priority programs to:

• Maximize filing season use of resources from Taxpayer Education and 

Communication, Stakeholder Partnerships Education and Communication, 

and field assistance to minimize impact on Examination and Collection 

casework 

• Centralize processing of offers in compromise to improve quality, timeliness, 

and efficiency 

• Standardize criteria to reassign certain compliance cases, including Innocent 

Spouse, to Wage and Investment personnel 

• Use data from the Examination and Collection Quality Measurement 

Systems, and audit recommendations from the Treasury Inspector General 

for Tax Administration to target training and quality improvements 

• Implement an integrated SB/SE and Criminal Investigation trust fund 

compliance strategy to reduce pyramiding of trust fund taxes by in-business 

taxpayers 

• Centralize Examination selection to keep the case selection process separate 

from those who actually conduct the examination and to redefine the 

classification criteria for returns over $100,000 

• Focus Examination resources in known areas of noncompliance using 

available databases to stratify portions of the taxpayer population and 

determine where areas of noncompliance exist 

• Redesign core processes to reflect the new organization’s goals and 

objectives to improve customer service 

Strategy: Expand successful voluntary compliance agreement program. 

To further address service to all taxpayers, SB/SE expanded voluntary 

compliance agreements to include all agreements, policies or programs designed 
13

to improve compliance without the use of enforcement tools. These are 

alternative treatments. To accomplish this goal, we will: 

• Inventory all voluntary compliance agreement and similar programs. 

Voluntary compliance agreement programs have shown that partnering with 

associations and similar taxpayer groups produces agreements that reduce 

identified types of noncompliance. 

• Design a process for creating new alternative treatments. The expanded use 

of alternative treatments will enable SB/SE to reach additional customers and 

customer segments. 

Strategy: Address underreporting, nonfiling, abusive trusts and pass 

throughs. To accomplish this strategy, we will: 

• Initiate Schedule K-1 matching and use to target compliance resources 

• Increase Examination focus on partnerships, trusts, and offshore compliance 

and provide training to our employees on the related law 

• Expand efforts with Criminal Investigation to expose flagrant promotions, 

identify criminal violations, and develop joint projects in specific sub-markets 

• Consider using targeted notices and guidance 

• Develop a Communications Outreach Strategy to educate, inform and assist 

the trust community on trust filing requirements and abuses observed

Strategic Goal #3) Productivity Through a Quality Work Environment 

Strategy: Increase employee skills and confidence in management. To 

achieve productivity through a quality work environment, we will emphasize this 

strategy. Increasing employee skills and confidence will increase employee 

satisfaction and hold the agency’s employment stable while the economy grows 

and service improves. To accomplish this goal, we will:

• Develop specific career paths for Compliance and Taxpayer Education and 

Communication personnel 

• Plan and deliver targeted learning programs for employees in key 

occupations 

• Engage front-line employees and managers in key substantial tasks, such as 

rewriting the individual master file 
14

• Partner with private industry on the redesign and delivery of recruitment 

training 

Appeals

Appeals provides taxpayers with an independent impartial review of their cases 

after an audit is completed or collection action is proposed. It is the last 

opportunity for the IRS and the taxpayer to agree before a case goes to court. 

Appeals plays a critical role in ensuring that taxpayers have an opportunity to 

resolve their dispute. 

Keys to the success of the Appeals function include three factors: its 

independence, impartiality and fairness. Taxpayers will continue to receive highquality service from the offices that serve them now. To ensure the IRS strategic 

goal of improved customer service and satisfaction, Appeals will focus on 

streamlining its processes and offer new services like Fast Track Mediation. A 

snapshot of the new Appeals reveals: 

• An organization with three operating units: Wage & Investment (W&I), Small 

Business/Self-Employed - Tax Exempt/Government Entities (SB/SE-TE/GE) 

and Large & Mid-Size Business (LMSB). W&I's stand-up will occur 

approximately 18-24 months after the other Appeals units become 

operational. 

• SB/SE-TE/GE activities involve cases covering corporations with less than 

$5 million in assets, collection issues, estate and gift tax cases, selfemployed cases, tax exempt entities, and government entities. This unit 

will also have responsibility for the current Records and Processing 

sections. Other program responsibilities include innocent spouse, 

Freedom of Information Act appeals, excise and employment tax, 

Alternative Dispute Resolution (ADR) of bankruptcy, dyed diesel fuel and 

tax exempt bond cases. Initially, all W&I appeal cases will be processed 

by the SB/SE-TE/GE Appeals organization until the W&I Operating 

Division is operational. 

• LMSB activities cover corporate and partnership cases with assets greater 

than $5 million with the most complex issues, particularly international 

issues. It will include such activities as the Industry Specialization 

Program, Large Case ADR, Joint Committee, international issues and 

competent authority. 

• An empowered workforce of appeals officers who have delegated settlement 

authority on a limited basis. 

• A team-based environment for Appeals staff to increase quality and 

responsiveness. 
15

• New processes to resolve taxpayer disputes faster, such as Fast Track 

Mediation and the Mutually Accelerated Appeals Process. The Fast Track 

Mediation program allows examiners and SB/SE taxpayers an opportunity for 

mediation, with an appeals officer acting as a mediator, to assist the parties in 

resolving their disputes. Under the Mutually Accelerated Appeals Process, 

Appeals and the taxpayer set accelerated timelines and apply additional 

resources to more quickly resolve large, complex corporate cases.

• Improved feedback processes with compliance areas to ensure high-quality 

case development

Appeals Mission: 

To resolve tax controversies, without litigation, on a basis that is fair and impartial 

to both the Government and the taxpayer, and in a manner that will enhance 

voluntary compliance and public confidence in the integrity and efficiency of the 

Service. 

Strategic Priorities: 

• Ensure that each taxpayer has the right to resolve a dispute in an 

independent and timely administrative process, without going to court 

• Reduce the length of the Appeals process 

• Improve taxpayer awareness of Appeal rights and processes 

• Increase confidence in the overall fairness of the tax system by providing an 

efficient, independent administrative appeal process for all taxpayers. 

Appeals Initiatives 

The Appeals Division has developed initiatives to meet the IRS’s strategic goals: 

Strategic Goal #1) Service to each taxpayer. Appeals is taking steps to 

reduce the length of the Appeals process. To meet this goal, Appeals is working 

to: 

• Reduce backlogs for Coordinated Examination Program (CEP) and Collection 

cases 

• Improve case development/expedite case movement 

• Project character of potential Appeals cases 

• Implement staffing model to meet changing customer requirements 

To accomplish this strategy we plan to implement several new programs and 

enhance already-existing programs: 

• Integrated Collection System: Make available on workstations 
16

• Appeals Centralized Database System (ACDS): Enhance ACDS and enable it 

to receive case and issue information electronically from supplier and 

customer organizations; complete software fixes. - Mutually Accelerated 

Appeals Process (MAAP): The MAAP initiative is designed to reduce the time 

it takes to resolve Coordinated Examination Program (CEP) cases in Appeals 

• Appeals Quality Measurement System (AQMS): AQMS will measure the 

overall product quality of the Appeals organization 

• Test New Business Processes: Team Concept/Settlement Authority will 

create cultural changes that will expedite case closure by eliminating postsettlement approval for a majority of cases. Fast-Track Mediation, which 

utilizes Appeals mediators at the Compliance level to resolve cases at the 

lowest level, began its pilot on July 1, 2000 in four locations—Denver, 

Hartford, Jacksonville, and Houston—and has been extended through June 

2001. 

Strategic Goals #2) Service to all taxpayers through fair and uniform 

application of the law. Appeals is improving taxpayer awareness of Appeal 

rights and processes by: 

• Addressing appeal rights in notices, publications, and procedures 

• Simplifying and personalizing communications for individual taxpayers 

• Tailoring communications and processes for pro se taxpayers 

Criminal Investigation

Criminal Investigation investigates potential criminal violations of the Internal 

Revenue Code and related financial crimes in a manner that fosters confidence 

in the tax system and compliance with the law. 

This mission statement captures our role in tax administration, as well as the 

public's expectations as to how we should perform that role. 

Criminal Investigation has invested considerable energy and time into supporting 

the overall mission of the Service and its strategic goals. While a new mission 

statement and clarification of the public's expectations are fundamentally 

important, CI must also set specific goals and objectives to achieve the mission 

of enforcement when compliance is not met. 

1. Top-quality service to each taxpayer in every interaction 

Criminal Investigation has devised strategic initiatives to provide service to each 

taxpayer. 

In the area of pre-filing education to the taxpayer, we created the Office of 

Communications and Education (C&E). The office is charged with developing 

and managing a market driven educational program to foster voluntary 
17

compliance. We have selected, trained and assigned public information officers 

to the 35 field offices. They gather, create and disseminate deterrent publicity 

and educational media to taxpayers and other external stakeholders. A key 

marketing tool has been the use of "bundling". This mechanism allows for legal 

actions to be categorized and rolled into a larger media piece that can then be 

directly channeled into a market segment, occupation or other identifying groups 

(such as abusive trusts, return preparers). We have and will continue to 

aggressively provide taxpayer education by publishing information on abusive 

trusts, employment taxes and other organized tax evasion schemes as they 

emerge and threaten the public support of our tax system. We will continue to 

add information and other news articles to the CI Web site for media use and 

public access. The expansion of the CI Web site means increased media 

access, media coverage, and public awareness of our efforts to educate the 

taxpayer. In addition, the CI Web site has been a reference link in various other 

web sites seeking to educate and alert the public. 

We coordinate our pre-filing education and continuous education initiative 

throughout the year with internal and external stakeholders to ensure the 

messages generated, developed, and disseminated accomplish our goal of 

speaking with "one voice" 

In addition to the creation of a communication and education office serving both 

internal and external customers, CI created the Criminal Investigation Research 

section in the Office of Strategy. We believe that only through data research and 

evaluation can we truly provide service to each taxpayer. The analysis of the 

research will yield identification of trends, emerging fraud schemes and issues, 

and support development of strategic priorities to improve operational 

effectiveness and service. 

We believe the concerted efforts of the Operating Divisions and the functions will 

rate well with the taxpayers as we work to provide quality service and 

professional treatment in the administration of the tax laws. 

2. Top-quality service to all taxpayers through fair and uniform application 

of the law 

One result of our modernization and re-engineering is our creation of CI's Office 

of Strategy. We needed data to help us address all aspects of noncompliance. 

To provide service to all taxpayers and address the issues resulting from the 

non-compliant portion of the public, CI retooled its workforce, revised its strategy 

to emphasize criminal tax investigation, and created mechanisms to monitor and 

direct its workload. 

CI devised an interim compliance strategy that emphasized channeling IRS 

resources to criminal tax investigations and high level financial crime 
18

investigations. This initiative helped assure the American public that tax crimes 

and organized evasion schemes were serious crimes. 

CI became a member of high level councils to ensure the IRS designed a crossfunctional approach to address taxpayer issues and combat noncompliance. 

CI's participation with the Operating Divisions, combined with its own research 

efforts, resulted in the development and implementation of several operational 

initiatives to attempt to secure compliance across the board. 

The following initiatives highlight our current thinking and efforts: 

OPERATIONAL INITIATIVES 

• Operational Initiative 1: Target legal income cases important to 

compliance. Criminal Investigation will issue Annual Compliance Guidance 

(ACG) to all field offices once the CI Strategic Program Plan (SPP) is 

updated for the coming fiscal year. The ACG will provide detailed guidance to 

field offices on the steps required by the SPP. Through this process, we will 

tie the SPP to field operational goals and update field office guidance on an 

annual basis. 

• Operational Initiative 2: Invigorate the Fraud Referral Program. CI 

established a partnership with the Small Business/Self Employed Operating 

Division (SBSE) to improve the referral process. Criminal Investigation will 

actively participate in the selection and training of the SBSE fraud specialists. 

• Operational Initiative 3: Establish Lead Development Centers. We will 

establish Lead Development Centers (LDC) within each CI Area during FY 

2001. The Lead Development Centers will develop investigative leads from 

information provided by special agents, Operating Divisions (ODs), Fraud 

Detection Centers and other sources. We will evaluate the information for 

potential criminal violation through database research and analysis. We will 

forward the resulting "leads," which indicate criminal violations within IRS 

jurisdiction, to the appropriate CI field office for investigation. The LDC will 

ensure that “leads” referred for investigation meet the criteria and goals 

established in the CI Compliance Strategy. We will refer “leads” that indicate 

possible civil rather than criminal violations will be referred to the OD’s for 

appropriate action. Additional LDC’s will become operational in FY 2002. 

• Operational Initiative 4: Increase Communication and Cooperation with 

ODs at all levels. We have established the Financial Crimes and Planning & 

Strategy Sections and are partnering with the other Operating Divisions. WE 

are developing procedures to share information during the “strategic 

assessment” segment of the Strategic Planning Process. 
19

• Operational Initiative 5: Apply sufficient resources to maintain an 

effective Refund Fraud Program. Implementation of the Fraud Detection 

Center (FDC) blueprints is underway and on schedule. The management 

staff is fully in place and the first wave of investigative analysts and aides are 

onboard. CI's training program is also on target with the Investigative Analyst, 

updated fraud detection, and computer skills and BMF training completed.

In addition to the above initiatives, Criminal Investigations anticipates increases 

in the E-Commerce fraud. CI, as well as the other Operating Divisions, faces 

major challenges as commerce moves into the global, electronic method of 

operation and taxpayers file more returns electronically. Criminal Investigation 

must effectively educate, monitor, and enforce the income tax laws and related 

statutes in this environment. CI's response to the IRS' efforts to ease filing and 

the impending threat caused by E-Commerce fraud and identity fraud is the 

creation of an Electronic Crimes Section. 

The aforementioned objectives and creation of the Electronic Crimes Section will 

further the enforcement efforts of CI in seeking uniformity in the identification, 

investigative evaluation and potential prosecution of taxpayers that do not 

voluntarily meet their tax obligation or seek to erode the public's confidence in the 

tax system. 

3. Productivity through a quality work environment 

CI recognizes its employees must accept ownership of the strategic goals, 

receive necessary support crucial to providing good service to its customers, and 

be able to communicate upward and across the organization effectively about 

problems and obstacles to quality and professional service. In order to function, 

CI must be able to stabilize the level of enforcement activity, so employees can 

take the proper action in each case. 

CI has put in place several operational initiatives to increase productivity by 

stepping up its hiring initiative and strengthening its existing workforce. The 

following operational initiatives are underway: 

OPERATIONAL INITIATIVE

• Operational Initiative 1: National recruitment program. CI initiated a 

national advertising campaign. In addition, we are developing an automated 

application system to increase the potential applicant pool.

• Operational Initiative 2: Strengthen Special Agent (SA) training. CI will 

continue its efforts in retooling its workforce. Efforts at all levels of the 

organization will focus on providing criminal tax investigation training to meet 

the challenges of a global and Internet driven economy. The National 

Criminal Investigation Training Academy (NCITA) will ensure special agents 

receive the necessary criminal tax training. IRS recently received permission 
20

to contract with instructors. Additionally, CI plans to hire re-employed 

annuitants as instructors, utilizing the waiver of pension offset where 

appropriate. The ability to contract directly with instructors as well as the reemployed annuitants, will allow CI the capability of transitioning skills to new 

agents by recruiting for hire many of its highly skilled former special agents as 

NCITA instructors.

• Operational Initiative 3: Explicitly targets new SA hiring to highest 

priority geographic areas. Criminal Investigation has gained the support of 

the Office of Program Evaluation and Risk Analysis (OPERA) to identify the 

statistical drivers of legal income investigations to determine where special 

agents should be stationed. 

1(a)(5) LMSB has developed several initiatives that appear aimed at the 

needs of the largest companies under its jurisdiction. What initiatives will 

assist the smaller companies under LMSB jurisdiction?

We developed issue resolution initiatives to address the needs of all LMSB 

taxpayers. During our modernization design and implementation phases, we 

placed emphasis on developing processes and products that would benefit all 

LMSB taxpayers. We used pilot programs to test these new design processes 

and products. When we complete the pilot and implement a permanent program, 

the new products and issue resolution processes will be available to all LMSB 

taxpayers that meet the program requirements (e.g., Pre-filing Agreement 

Program). 

LMSB recognizes there are specific customer needs for the LMSB mid-market 

taxpayer and believes that the new initiatives will benefit the mid-size and smaller 

LMSB taxpayer. In addition, we have taken actions to coordinate issue 

management initiatives with the Small Business/Self-Employed Operating 

Division and will continue to coordinate efforts to provide enhanced published 

guidance to both of our taxpayer segments. 

The Pre-Filing Agreement (PFA) Program is now a permanent LMSB program 

open to all LSMB taxpayers meeting established criteria (see Rev. Proc. 2001-

22 for the PFA procedures). Under the PFA program, a LMSB taxpayer may 

request examination and resolution of a factual issue involving well established 

legal principles likely to be disputed in post-filing audits before the income tax 

return reporting the transaction is filed. We charge a user fee ranging from 

$1,000 to $10,000, based on the taxpayer’s asset size. A closing agreement 

completes the process, binding both the taxpayer and the Service as to the tax 

treatment of the transaction in question. 

The Industry Issue Resolution (IIR) Program is still in the pilot stage with 

completion planned for November 2001. Our goal is to provide guidance on 

frequently disputed industry issues to a number of affected LMSB taxpayers, 
21

rather than on case-by-case rulings or post-filing audit determinations or rulings. 

The current dispute resolution vehicles are taxpayer specific and thus are 

resource intensive and may result in conflicting decisions from lower courts and 

appellate court circuits. Although the emphasis is on prospective guidance in the 

form of Revenue Procedures providing safe harbor rules, such guidance may 

also be applicable at the post-filing stage depending on the nature of issues. The 

guidance resulting from the IIR process will apply to all taxpayers within an 

industry. 

Characteristics of potential IIR issues are: 

• Bona fide, fact specific transactions where the appropriate tax treatment is 

uncertain 

• Frequent and repetitive examination of the same issue because of the 

uncertainty of the tax treatment 

• Significant number of taxpayers in a given industry are affected by the issue 

• Factual issues, rather than legal interpretation, are in dispute. 

We announced the Comprehensive Case Resolution (CCR) as a pilot program 

in August 2000. Under this pilot LMSB taxpayers could request resolution of all 

open issues for all open tax years under examination in LMSB, in Appeals, or 

before the U.S. Tax Court. We announced a second pilot to extend the 

application period to April 30, 2001. 

The goal of the CCR program is to expedite resolution of all disputed issues by 

bringing all functions of the IRS making tax treatment determinations to work 

together. Taxpayers would waive their Appeals ex parte communication rights 

and agree to meet the pilot CCR processing timelines, including a requirement to 

complete the process in 12 months. A taxpayer may withdraw from the program 

within a set timeline. 

For selection to the CCR Pilot Program, a case must meet the following criteria: 

• The case has spent at least one open year in a Coordinated Examination 

(LMSB) and one year in Appeals or docketed in Counsel 

• The audit of the LMSB years is substantially complete 

• The case is likely to be closed in the CCR Pilot Program within 6 to 12 

months, and 

• The Appeals case is not likely to be settled before the CCR first conference.

 

1(b) During Problem Solving Days, representatives from the various 

functions (e.g. examination and collection) are available to assist the 

taxpayer in resolving his or her tax issues. The IRS recently created “tax 

resolution representative” positions, which combine both collection and 

examination duties. 
22

1(b)(1) Aside from Problem Solving Days, what efforts have been made to 

provide one-stop service for taxpayers? 

Beginning this year, any day can be Problem-Solving Day. Taxpayers will be 

able to call toll-free to schedule a telephone or in-person conference at their 

convenience to resolve matters too complex for the usual IRS service channels. 

In addition, two national Problem-Solving Days will be held on Saturdays in June 

and November. 

Two additional efforts to provide one-stop service to taxpayers are: 

• The Tax Resolution Representative (TRR) position, created to resolve a wide 

range of taxpayer problems. TRRs are generalists with strong crossfunctional skills. The TRR will be able to resolve most walk-in issues that 

arise at the Taxpayer Assistance Centers with a single interaction and offer a 

face-to-face channel for taxpayers on Compliance issues, especially during 

non-peak filing season. In addition to providing technical training, the 

Taxpayer Assistance Centers will have mechanisms set up to help the TRR 

resolve issues beyond their scope of training (e.g. a hotline to SB/SE). 

• The Accounts Resolution Guide currently used by Customer Service 

Representatives. It provides step-by-step procedures to answer account 

inquiries from beginning to end. Our Information Systems staff will provide 

the ability to link the guide with our Case Processing System, giving us instant 

interface with Internal Revenue Manuals and other research information. The 

improved version streamlines the research and resolution process by being 

more customer-focused. Employees will link to “pop-up and drop-down” 

menu information based on responses provided by taxpayers.

1(b)(2) How many “tax resolution representatives” are currently available to 

work on cases? How are they dispersed throughout the IRS, i.e., are they 

dispersed both geographically and functionally? 

We have 1,072 TRRs, with another 550 to be hired by the end of September 

2001. These TRRs are employed in 410 Tax Assistance Centers, located 

throughout the country. They are not functionally dispersed but all lines report 

through the CARE Field Assistance operations to the Commissioner, Wage and 

Investment. 

1(c) It is our understanding that the Field Service function of the Office of 

Chief Counsel has been eliminated. How are requests from the field 

covering several subject areas coordinated to ensure that uniform advice is 

given to the field? 
23

While we eliminated the Field Service Division of the former Office of the 

Associate Chief Counsel (Domestic) in the recent reorganization, the 

reorganization did not eliminate the performance of the functions previously 

carried out by the Field Service Division. The reorganized offices that emerged 

from the reorganization now perform both “field service” and “technical” functions. 

We coordinate cases involving matters within the jurisdiction of more than one 

Associate office in the same manner as prior to the reorganization. 

 

To better understand how the newly reorganized Associate Chief Counsel 

Offices combine field service and technical functions, it is helpful to understand 

what those functions are. We have no formal definition of “field service” or 

“technical” functions, and the lines between those functions are not always clear. 

Broadly speaking, field service functions include case specific assistance to the 

Field on matters such as case development during the audit stage or during 

consideration in the Office of Appeals, other than through the formal Technical 

Advice process. It also includes assistance to the Field on matters in litigation at 

the trial level as well as on appeal and on certiorari to the Supreme Court. 

Technical functions include broad, published guidance in the form of regulations, 

revenue rulings, notices, etc., as well as private letter rulings and formal technical 

advice on case specific legal issues outside of the litigation process. There are 

many other responsibilities of the Associate Chief Counsel offices that do not fall 

squarely within one function or the other. 

Prior to the reorganization, the Offices of the Associate Chief Counsel (Employee 

Benefits and Exempt Organizations) and the Associate Chief Counsel 

(International) fully or partially integrated their technical and field service 

functions. In other words, branches (the lowest organizational level) would 

perform both field service and technical functions. For example, the same 

branch that drafted a regulation might also review a trial brief and later an appeal 

recommendation concerning the interpretation of that regulation. If a case 

involved issues that covered subject matters outside the branch’s area of 

responsibility, the branch would request assistance from the office or offices that 

had responsibility for that subject matter. The respective offices then coordinated 

their efforts to provide a single response to the Field office that requested the 

assistance. 

The former Office of the Associate Chief Counsel (Domestic) did not integrate its 

field service and technical functions. It had a separate Field Service Division with 

branches whose subject matter jurisdiction generally mirrored the subject matter 

jurisdiction of one of the four technical divisions within Domestic. Procedures 

within Domestic required coordination of most issues between the Field Service 

branch and its technical counterpart division and vice versa. When the Field 

Service received a request that involved subject matters outside the jurisdiction 

of the assigned Field Service branch, the branch would request assistance from 

the office having jurisdiction over that subject matter. If that subject matter was 

within Domestic, the Field Service branch would request assistance from another 
24

Field Service branch. That branch, in turn, would coordinate with its technical 

counterpart. If the subject matter was not a Domestic issue, the branch would 

coordinate with the responsible Associate Chief Counsel, e.g., the Associate 

Chief Counsel (INTL). The Field Service branch would then consolidate all the 

responses to the requests for assistance and send the consolidated response to 

the Field office that sought the assistance from the National Office. 

In summary, although under the reorganization, the Office of Chief Counsel 

eliminated the Office of Associate Chief Counsel (Domestic) and the Field 

Service Division, the field service functions of the former Field Service Division 

and the technical functions of the former Domestic technical divisions are now 

integrated in a manner similar to those of the Associate Chief Counsel 

(International) and the former Associate Chief Counsel (Employee Benefits and 

Exempt Organizations). Branches in these newly reorganized offices now 

perform both technical and field service functions. When cases raise issues 

concerning subject matters outside the jurisdiction of the branch, the branch 

requests assistance from the office having jurisdiction over those issues and 

coordinates the response in the same manner as before the reorganization. 

1(d) What is the function of operating division counsel? How does the 

operating division counsel interact with the Chief Counsel’s office? 

The Division Counsel for Wage and Investments, Small Business/Self Employed, 

Large and Mid-Size Business, Tax Exempt and Government Entities, and 

Criminal Tax are part of the Office of Chief Counsel. The Division Counsel serve 

as the senior legal advisor and expert consultant to Treasury, Service and 

Counsel executives and officials on the legal issues, regulations, and needs 

relevant to serving the taxpayers within their respective divisions, or, in the case 

of Criminal Tax, the client. In addition, the Division Counsel provide legal 

services that range from program design and strategy, to legal advice to litigation 

representation. Each Division Counsel has offices around the country. Division 

Counsel attorneys provide local legal services to the field offices, are responsible 

for representing the Commissioner in litigation in the Tax Court and coordinating 

litigation with the Department of Justice in the Court of Federal Claims and the 

district courts. The Division Counsel provide legal services to the Division 

Commissioner and other headquarter and field operation personnel. 1

 They are 

responsible for coordinating legal issues with the technical subject matter experts 

in the various Associate Chief Counsel offices in the National Office. 

 

1

 Some Division Counsel, such as Tax Exempt and Government Entities (TEGE) and Criminal Tax (CT), are more fully 

integrated with their respective Division Commissioner than other Division Counsel. For example, CT attorneys conduct 

case reviews, review all search warrants, participate in operational planning, conduct taxpayer conferences, and share 

work space with Criminal Investigation (CI) employees. 
25

2. Technology 

2(a) What progress has been made to convert the master file into a realtime, modern database format, such that IRS employees will have access to 

up-to-the-minute taxpayer records and information? 

The Customer Account Data Engine (CADE) will provide a modern system for 

storing, managing, and accessing authoritative records of taxpayer accounts, 

replacing existing antiquated master files and information returns processing 

systems. It will develop a central database for managing taxpayer information 

and software systems that support different transactions using taxpayer account 

information. 

In March 2001, CADE completed the systems requirement review. These 

requirements form the basis for systems design, development and deployment. 

In March, the PRIME Alliance initiated the Systems Design phase, which will be 

followed by systems development. Systems development includes the building 

of the business solution, integrating the system with other business systems, 

piloting and testing. 

CADE’s full deployment of the Individual Master File (IMF) is expected by 2006. 

The planning to incrementally stage Business Master File and Information 

Returns Processing functionality on the CADE IMF footprint will start October 

2001. 

2(b) The Treasury Inspector General for Tax Administration ("TIGTA") has 

noted that the IRS can be a major political and economic target for 

terrorists, computer hackers, and unscrupulous employees. What steps 

has the IRS taken to prevent outsiders and insiders from breaching IRS 

security and illegally accessing taxpayer information stored on IRS 

computers? 

The IRS has long understood that protecting taxpayer information is essential to 

the operation of our self-assessment tax system. The IRS established policies 

and procedures to protect the security and confidentiality of taxpayer information 

in accordance with applicable laws and federal guidance, including the Privacy 

Act of 1974, the Computer Security Act of 1987, and Section 6103 of the Internal 

Revenue Code. A particularly noteworthy example is the Taxpayer Browsing 

Protection Act, which was signed into law in August 1997. In short, this law helps 

to better address internal threats to taxpayer records by making all cases of 

willful unauthorized access and inspection of taxpayer records – electronic and 

paper – a crime. In addition, the Government Information Security Reform Act of 

2000 requires the IRS to implement an “agency-wide risk-based security 

program”, to assure that security is addressed throughout the systems life cycle, 

by conducting continuous reviews of the security assurance level of our 

corporate assets. 
26

Since 1997, the Office of Security, within the IRS, has been actively involved in 

identifying and correcting security weaknesses throughout the IRS. The General 

Accounting Office, the Treasury General for Tax Administration (TIGTA) and the 

Office of Security identified these weaknesses. The Office of Security conducts 

comprehensive security reviews of IRS facilities that identify both local and 

systemic weaknesses that require either local action or broader steps such as 

policy guidance, revised operating procedures, training or new technological 

approaches. During the four years since 1997, we have made major 

improvements in physical, data and systems security assurance, although a 

number of weaknesses remain. The General Accounting Office made note of 

IRS progress in this area in their most recent High Risk Update (January 2001), 

in which they state “IRS has made notable progress in improving computer 

security at its facilities, corrected a significant number of identified weaknesses, 

and established a Service-wide computer security management program that 

should, when fully implemented, help the agency effectively manage it’s security 

risks”. Some of our significant achievements include: 

1. Improvement of the security status of existing systems. 

We have developed and implemented security standards and procedures have 

been developed and implemented for the installed base of systems, including 

standards for IBM mainframe systems, Unisys systems, UNIX, and Windows NT 

systems. We conduct vulnerability assessments are conducted using these 

standards as a baseline. 

2. Development of security architecture for the IRS modernized systems 

environment. 

IRS hired Computer Sciences Corporation as its PRIME contractor for BSM. IRS 

and CSC together with several other leading technology and management 

companies form the Prime Alliance. This alliance forms the main public/private 

partnership in BSM. Working with the PRIME Alliance, the IRS has established 

an Enterprise Architecture that has integrated security features throughout the 

architecture. 

3. Improvements to the established systems certification and accreditation 

process. 

The IRS has made progress in improving its paper-based systems certification 

and accreditation process. First, it has built it into the systems life cycle used for 

developing new systems. Second, it is automating the process to make use of 

automated tools and government best practices. 

4. Continuing emphasis on the Unauthorized Access (UNAX) program. 

In 1997, the IRS established its UNAX program to focus on manager 

responsibility and communication to employees, to establish and maintain a 
27

culture of personal responsibility and accountability, and to protect the 

confidentiality of taxpayer records. We have taken a number of steps, including 

expanding the ability to detect unauthorized access through tracking tools, 

communicating extensively about UNAX prohibitions, issuing written guidance to 

managers and employees, administering stringent penalties, and tracking 

disciplinary outcomes to determine effectiveness. 

5. Creation of an enterprise Computer Systems Incident Response Center 

(CSIRC). 

The IRS improved its incident response capability with its recent establishment of 

the CSIRC, which focuses on managing incident detection and response agencywide. A cooperative effort between Information Systems Operations, TIGTA and 

the Office of Security, we created the CSIRC to provide real time monitoring, 

allow IRS to respond to security incidents quickly and precisely, and provide the 

documentation necessary to prosecute intruders. 

6. Facilities upgrades to improve security 

Over the last 4 years the IRS has dramatically improved physical security at key 

facilities. Work continues in this area. We cannot identify locations & the nature 

of the upgrades in answering this question in writing, because of sensitivity 

issues. However, we can arrange for a specific briefing on these issues. 

7. Development of assessment tools and techniques that allow IRS to 

identify and prioritize areas of vulnerability in an objective, measurable 

manner. 

IRS has adopted, modified and implemented the draft Information Technology 

Security Assessment Framework developed for the Federal Chief Information 

Officer Counsel by the National Institute of Standards and Technology. This 

Framework provides a structured tool for IRS to use in assessing the security 

posture of the enterprise, and ties that assessment to strategic and tactical plans 

that will facilitate prioritization of resources. 

As with any organization, the resources available for security enhancements and 

upgrades are limited and must be prioritized. Many of the corrective actions we 

are taking are multi-year efforts. In 2001, we are further enhancing our cybersecurity capabilities to better deal with increasing threats from hackers, viruses 

and other breaches. Because the solutions are complex and involve specialized 

skills, we are working with other federal agencies to identify best practices. As 

we are increasingly relying on centralized systems, we have also focused our 

security efforts on identifying the physical security and disaster recovery 

capabilities needed to mitigate the risks associated with terrorist threats. 

Although we have been able to reallocate resources to address most risks, 

others still exist that will require substantial longer-term investments, which are 

currently unfunded. 
28

At IRS, we understand that although new technologies will help to streamline the 

agency’s operations and improve the delivery of services to taxpayers, these 

same technologies must be controlled to ensure adequate security. This 

continues to take on greater significance as IRS’ reliance on paper decreases 

and its dependence on new technologies increases. To support this new service 

delivery, IRS plans to move toward a more comprehensive Mission Assurance 

approach, creating a more seamless relationship between security and the 

business processes of the organization. To accomplish this we must involve 

business executives more intimately in the risk management of the assets and 

business processes they manage. 

In summary, the IRS has taken many significant steps during the past four years 

toward implementation of a robust, reliable and responsive security program to 

protect taxpayer data from external and internal intrusion. These steps address 

the issue comprehensively by focusing on all aspects of security – information, 

personnel, physical – and incorporating both advanced preventive measures and 

remedial mitigating measures for weaknesses that are already documented. We 

believe that the IRS program will become even stronger during the next several 

years as we strengthen the bond between security and the business processes 

of the IRS and build security into the structures that are the foundation of a 

modernized IRS. 
29

3. E-Filing 

The IRS Reform Act set a goal for the IRS to have at least 80 percent of all 

tax returns filed electronically by the year 2007. 

3(a) What steps have been taken to meet this goal? 

During the past several years, the IRS has made significant progress toward 

accomplishing the goal established by the Congress. In accordance with the 

requirements of RRA98, we issued a strategic plan titled “A Strategy for Growth” 

that articulates Electronic Tax Administration’s mission, goals and strategies for 

revolutionizing how taxpayers transact and communicate with us. We designed 

the strategic plan for Electronic Tax Administration to eliminate barriers, provide 

incentives and use competitive market forces to make progress toward the 

overriding goal that taxpayers will file 80 percent of all tax and information returns 

electronically by 2007. 

As a step towards meeting this goal, IRS presented the following initiatives for 

2001: 

Enabled 23 new forms that will increase participation in the e-file program; 

Authorized taxpayers to give the ERO the authority to enter their Self-Select 

PINs for the current year; 

Increased the number of certain schedules that can be filed electronically – 

Schedule E – from 5 to 15 (Supplemental Income and Loss) 

Form 4562 – from 8 to 30 (Depreciation and Amortization) 

Form 6198 – from 5 to 10 (At-risk Limitations) 

Form 4835 – from 2 to 4 (Farm Rental Income and Expenses) 

Form W-2 – from 20 to 50 (Wage and Tax Statement) 

Form 8271 – from 1 to 2 (Investor Reporting of Tax Shelter Registration 

Number) 

Accepted electronically filed Forms 1040, 1040A and 1040EZ from U.S. 

possessions. 

Offered taxpayers the option of filing their Form 4868, Telefile with Direct 

Debit, over the telephone. 

Authorized the acceptance of TY 2001 estimated tax payments concurrently 

with e-file, direct debit. 

Expanded FedState TeleFile Program to include Oklahoma and Georgia. 
30

Added new credit card processor – Phone Charge – that offer phone and 

Internet access. 

Based on these changes, IRS e-file receipts have continued to increase this filing 

season. Through March 8, 2001, approximately 27.5 million taxpayers filed 

electronically, a 9.5 percent increase over the prior year. Nearly 25,000 

taxpayers have authorized automatic withdrawals as of March 3, an increase of 

42 percent over the same time last year. 

A wide range of electronic filing and payment options is also available to 

businesses. During 2000, the Electronic Federal Tax Payment System (EFTPS) 

processed more than 63 million federal tax payments, totaling more than $1.5 

trillion. Employers can also file their quarterly employment tax returns, Form 

941, electronically either through a payroll service provider, on-line from their 

office computer, or else small businesses can use the 941 TeleFile system to file 

over the telephone. For the first time this year, employers can also file their 

annual unemployment tax return, Form 940, electronically. Congress mandated 

the electronic filing of Form 1065, Partnership Returns, for Partnership with 100 

partners or more in 2001. 

3(b) When can taxpayers expect to file their tax returns over the IRS's Web 

site? 

The IRS will issue a report to the Congress on filing over the Internet later this 

spring. We are preparing the report in accordance with the FY 2001 Treasury, 

Postal Service and General Government Appropriations Bill, which states: 

In its June 30, 2000 annual report to Congress, the private sector 

Electronic Tax Administration Advisory Committee (ETAAC) emphasizes 

its position that IRS should stress partnerships, not competition with the 

private sector and state and local governments in achieving its electronic 

tax administration objectives. In this regard, ETAAC believes it is 

inappropriate for the IRS to offer no-cost electronic filing over the Internet, 

either by developing its own software or aligning with a limited number of 

“authorized e-file providers.” IRS is directed to provide the House 

Committee on Appropriations a report commenting on this ETAAC position 

as well as making any recommendations to address the concerns raised 

by the ETAAC within 60 days of the enactment of this Act. The 

Committee shares some of these concerns and further recommends that 

IRS delay implementing no-cost Internet tax filing services until such 

report has been submitted to the Committee for its review. 

The report to Congress will summarize the responses to a Request for 

Information the IRS issued last year to determine the feasibility and likelihood of 

the private sector offering free Internet filing to taxpayers. The report will also 
31

reiterate prior statements that the IRS has no plans to offer Internet preparation 

or filing services itself in any form. 

3(c) What security and privacy measures will be implemented to protect 

taxpayer privacy? 

During the past year, we completed a comprehensive set of changes and 

upgrades to strengthen the security for millions of taxpayers using the e-filing 

program. Taxpayers and tax practitioners can feel safe and secure using IRS efile during this year’s filing season. The IRS has strengthened its systems’ 

security and remains vigilant to keeping the e-filing process the safest possible. 

The IRS has moved rapidly to strengthen areas identified by the General 

Accounting Office during last year’s filing season. In all, the IRS has completed 

more than three dozen upgrades. The changes made by the agency include: 

- Revamping the e-file system architecture 

- Reconfiguring e-file operating systems 

- Installing strengthened perimeter defenses 

- Bolstering intrusion detection capability 

- Strengthening password controls 

- Improving management practices 

We will continue working with our e-filing partners, practitioners, GAO and other 

stakeholders to guarantee that our systems remain the safest possible. During 

this year’s filing season, we will conduct internal reviews to ensure the e-filing 

systems safety. However, the future of IRS security programs depends on 

continuing the system modernization efforts and obtaining the necessary funding 

to address the IRS’s aging technology. 

Our electronic filing systems are only open to IRS partners in the e-filing 

program. The general public does not have access to these modem-to-modem 

systems, which add en extra layer of security. We have set high standards for 

electronic return originators and transmitters participating in IRS e-file. We 

monitor and enforce stringent suitability requirements for these outside groups. 

3(d) What is being done to develop free or low-cost filing alternatives? 

We will issue a report to Congress on filing over the Internet later this spring. The 

report to Congress will summarize the responses to a Request for Information 

that the IRS issued last year to determine the feasibility and likelihood of the 

private sector offering free Internet filing to taxpayers. The report will also 

reiterate prior statements that the IRS has no plans to offer Internet preparation 

or filing services itself in any form. 
32

3(e) What steps has the IRS taken over the past year to expand the types of 

returns and forms that can be filed electronically? 

We have made significant progress over the last year in increasing the number of 

returns that can be filed electronically. These efforts yielded the introduction of 

new business e-file options for Forms 940, 941 and 1065. We have expanded 

the number of forms and schedules available for individual filers with the addition 

of 22 forms/schedules for 2001 and the remaining 38 forms in 2002, providing full 

Form 1040 e-filing capability. We have added signature alternatives with the 

self-selected PIN initiative introduced during the 2001 filing season. Beginning 

April 2001, an on-line extension of time to file (Form 4868) will also be available 

through the TeleFile system. The IRS is currently piloting an on-line electronic 

payment system with full implementation scheduled for Fall 2001. 
33

4. Internet Refund Status Information by 2002 

Refund inquiries significantly contribute to the demand for IRS toll-free 

telephone service (44 million calls in 2000). It is our understanding that the 

IRS plans to implement an Internet based refund status information service 

in 2002. 

4(a) What progress has been made toward implementation of this service? 

When will the program be tested? 

The analysis of the major components of the business solutions are being 

analyzed and designed as part of the Milestone 3 phase of the project, and will 

be completed in July 2001. Detailed development and implementation plans for 

2002 are being created and will be completed prior to exiting MS3. Negotiations 

are being conducted at this time for the testing part of the project. 

Milestone 3, is one of the 5 decision points used for planning and managing work 

throughout the life cycle of a BSM project. The IRS uses a system called the 

Enterprise Life Cycle (ELC) to plan and manage work throughout BSM. The ELC 

establishes a set of repeatable processes and a system of reviews, checkpoints, 

and milestones that reduce the risks of system development. Every product in 

the ELC process must be reviewed, accepted and approved before it moves to 

the next milestone. There are several review processes and strict measurement 

criteria that help reduce risks and ensure even the smallest detail is not 

overlooked. 

4(b) Have the business and functional requirements of the refund 

application been developed? 

We expect to complete Milestone 3 design, including the development of 

business and functional requirements in July 2001. Milestone 3, is one of the 5 

decision points used for planning and managing work throughout the life cycle of 

a BSM project, and, where the analysis of the major components of the business 

solutions are analyzed and designed. 

4(c) What security and privacy measures will be implemented to protect 

taxpayer privacy?

Along with the security initiatives noted in 2(b), we are addressing security and 

privacy in the Business Systems Modernization effort. In the future, this effort will 

give taxpayers the ability to access Internet based refund status. Currently under 

development is the Security Technology Infrastructure Release (STIR), which will 

provide a standard platform for Web-based applications. The STIR design 

follows a rule-based architecture, which governs user access to information by 

controlling different data permissions for IRS employees, organizations with 

which IRS has a trusted relationship, and the public at large. 
34

4(d) How is the program being integrated into the IRS overall modernization 

plan? 

The Program is being integrated into the IRS overall modernization plan as part 

of one of the objectives of Customer Communications 2002. Through Internet 

Refund/Fact of Filing the project will provide a tax refund status information 

application to taxpayers via the Internet. This objective is being tracked through 

risks, issues and mitigation to ensure deployment for 2002. 

This objective, as part of the CC2002 project is also part of the IRS Business 

Systems Modernization’s Near-Term Sequencing and Release Planning; the 

2002 release initiative; and the Enterprise Architecture with relationship and 

dependencies to peer projects (e.g. STIR) and to IRS legacy systems fully 

described. 
35

5. Special Pay Provisions 

The IRS Restructuring and Reform Act of 1998 (“IRS Reform Act”) provides 

the IRS with certain personnel flexibilities to bring in experts and revitalize 

the IRS workforce. These personnel flexibilities include, but are not limited 

to the following: (1) streamline critical pay authority for up to 40 

individuals; (2) the ability to set the pay for certain critical pay provisions at 

levels higher than under prior law; and (3) the ability to offer recruitment, 

retention and relocation incentives (collectively referred to in this letter as 

“special pay provisions”). 

5(a) How many persons has the IRS hired under the IRS Reform Act special 

pay provisions? 

From the passage of the Act in July 1998 through April 25, 2001, IRS hired 29 

Streamlined Critical Pay executives (of which 21 are currently on board). There is 

currently 1 executive pending final approval and 4 being reviewed for approval. 

(See Table 5-a) 

5(b) How many have since left the IRS? 

As of April 25, 2001, eight executives have left the IRS. 

5(c) What is the average tenure of these individuals? 

The average tenure of the executives who have departed is 17 months. Three of 

the executives were with the IRS for over two years with the longest being 29 

months. 

5(d) What difficulties does the IRS face in retaining these individuals? 

What is the IRS doing to retain and attract these individuals? 

The Streamlined Critical Pay authority was given to the IRS for a very specific 

purpose: 

To enable the Commissioner to attract the extremely highly qualified and 

exceptional individuals needed to modernize the Service and improve its 

operations. This authority provides expanded personnel flexibilities, including the 

ability to offer higher salaries than are normally available with the Senior 

Executive Service and other options such as the payment of relocation 

expenses, which enables the Service to attract top level executives. 

To attract critical pay executives, the IRS currently contracts with three executive 

search firms: Page-Wheatcroft, Korn-Ferry; and Foster Partners, an affiliate of 

KPMG. 
36

The IRS has been quite successful in convincing a number of senior executives 

from the private sector that public service can be an important component of their 

career. Critical pay executives are attracted by: 

• The chance to join the IRS during a key transitional period 

• The opportunity to design and influence the changes that will dictate how the 

Service will operate well into the twenty first century 

• Working with the top management team to change the entire organization to 

include creating the new organizational structure, redesigning business 

processes, modernizing business systems, and developing new balanced 

measures. 

• The opportunity to modernize an organization on such a large scale. 

Modernizing the IRS impacts all IRS employees and all taxpayers. 

This authority was not created to permanently retain these highly skilled, sought 

after employees. Nor was it meant to increase the number of senior executives 

in government service. Successful retention of these employees is not evaluated 

by length of time in service. Most critical pay employees are hired for very 

specific roles and to provide specialized skills at critical points in the 

modernization effort. (See question 5(f) below). 

5(e) For the persons who have left the IRS, please provide the position, rate 

of pay, recruitment, retention, and location, and other incentives given to 

such individuals. 

LIST OF STREAMLINED CRITICAL PAY EXECUTIVES 

WHO HAVE LEFT THE IRS 

POSITION TITLE RATE OF 

PAY 

INCENTIVES/BONU

SES 

DATES OF 

SERVICE 

Chief Financial Officer $147,500 None 8/16/98 TO 

6/29/99 

Director, Program Control 

Information Systems 

$130,000 None 12/19/99 TO 

6/03/00 

Assistant Commissioner 

(Management and Financial 

Systems) IS 

$135,000 None 5/9/99 TO 8/01/00

Director, Government Program 

Management Office, IS 

$160,000 $15,000 

(Recruitment, 

11/2/98) 

11/2/98 TO 

8/01/00 

Director, Real Estate and 

Facilities Management, AgencyWide Shared Services 

$176,300 $37,800 

(Recruitment, 

3/15/00) 

3/15/00 TO 

7/31/00 

National Taxpayer Advocate $144,800* $15,000 

(Recruitment, 

9/1/98) 

$25,000 (Annual 

9/1/98 TO 

10/10/00 
37

Performance, 

1/18/01) 

Deputy Commissioner/ 

Modernization 

$155,100* $25,000 

(Recruitment, 

9/6/98) 

$20,000 (Annual 

Performance, 

1/18/01) 

9/6/98 TO 

10/08/00 

Chief Information Officer $181,400* $43,600 

(Recruitment, 

8/11/98) 

$25,000 (Annual 

Performance, 

1/16/01) 

8/11/98 TO 

1/26/01 

*Salary at departure. 

5(f) What are the titles and job descriptions of the individuals hired under 

the IRS Reform Act’s special pay provisions? What specific 

accomplishment has the IRS achieved that would not have been realized 

without the ability to hire these individuals using the special pay 

provisions? (See table 5-a)

The streamlined Critical Pay executives had extremely successful careers prior 

to their government service and bring a wealth of knowledge and expertise to the 

Service that otherwise would not have been available. These executives make 

key and highly significant contributions to the successful operations of the 

Service based on the extensive range of skills and experience that they bring to 

the IRS from their diverse backgrounds as evidenced by the contributions of our 

most recent departing executives. 

Paul Cosgrave’s leadership and dedication have been crucial to the IRS. From 

8/11/98 to 1/26/01 Mr. Cosgrave provided clear, creative strategic direction in 

both business and technology arenas helping us to successfully reach a number 

of key milestones in our efforts to modernize the nation's tax agency. Under Mr. 

Cosgrave’s leadership the IRS: 

• Created a consolidated nationwide IS organization, where nearly 100 percent 

of the IT resources are directed, in accordance with industry standards, by the 

Office of the CIO. 

• Completed a nearly flawless Y2K conversion resulting in many areas of 

standardization and consolidation of our information systems operations 

− Consolidated an unwieldy collection of 11 different, independent e-mail 

systems into one consistent system, which has significantly improved our 

ability to communicate across the country 

− Consolidated the mainframe operations -- going from 67 different 

mainframes in 12 different locations to under 20 computers now 

centralized in our 3 computing centers. This will, over a period of years, 
38

allow us to reinvest almost $700 million of savings into our modernization 

activities 

• Completed the IRS Enterprise Architecture, or Blueprint, which, for the first 

time, clearly defined how our business operations will be improved and how 

the IRS will take advantage of today's modern technology 

• Established the Business Systems Modernization program, which is now well 

under way to replace IRS’ outdated technology with modern systems 

Val Oveson oversaw the transformation of the National Taxpayer Advocate's 

office to reflect the Restructuring and Reform Act. From 9/1/98 to 10/10/00 Mr. 

Oveson’s leadership the National Taxpayer Advocate's office: 

• Reported directly to the National Taxpayer Advocate for the first time. The 

move to this nationwide network added more independence 

• Reorganized 74 Taxpayer Advocates as part of the Taxpayer Advocate 

Service (TAS). In all, TAS has more than 2,000 employees, including 

caseworkers, dedicated to helping taxpayers work out problems. 

• Took on a greater role assisting taxpayers in tax disputes with the IRS, 

championing taxpayer's rights and providing recommendations for improving 

tax legislation. 

• Prepared a new, expanded annual report to Congress. This report fills a 

unique niche at the IRS. The National Taxpayer Advocate office prepares its 

own independent summary of the 20 most serious problems encountered by 

taxpayers, legislative recommendations for improvements and assessments 

of IRS efforts to improve customer service and reduce taxpayer burden. 

John LaFaver led the first major IRS reorganization since the 1950’s. The 

redesigned organizational structure will be completed by October 2000. From 

9/6/96 to 10/08/00 Mr. LaFaver: 

• Oversaw the massive transformation of the IRS into the four new customerbased divisions 

• Developed detailed organizational designs for the 11 organizational units and 

the national headquarters organization. 

• Determined a staffing and selection strategy for the operating divisions. 

• Developed and implemented transition planning in the new organization. 

• Assumed a leadership role in the Tax Administration Visioning project – a key 

element in defining the future Business Systems Modernization Program 

The Service has recruited an exceptionally talented and experienced workforce 

to provide vision, leadership and guidance which, supplemented by the 

experience and skills of the career executive corps, has enabled the Service to 

successfully meet the massive challenges of the complete restructuring 

mandated by Congress. Our current critical pay executives bring external 

experiences, practices, and knowledge not currently available within the 

organization: 

• The new Deputy Commissioner Modernization/Chief Information Officer was 

a top executive in the technology area at Time-Warner. 
39

• Two of the four Division Commissioners and one of the Deputy 

Commissioners are external hires and provide specific industry background 

and experience, change management experience and senior leadership. 

• All of the Senior Industry Advisors in the Large and Mid-Size Business 

Division have been recruited from the industries to which they are assigned 

making them uniquely suited to providing the most current technical advice to 

the Service. 

• The new National Taxpayer Advocate had a long and distinguished career in 

tax advocacy and is well known in legal circles and in Congress. 

• The Chief, Criminal Investigation is an attorney with a successful career at 

Justice and in private law practice. 

• The Chief, Agency-Wide Shared Services was recruited from a major 

international corporation and brings to the agency commercial service support 

best practices. 

• The Associate Commissioner for Business Systems Modernization was 

previously President of the Professional Services Council and joined the 

Service with a wealth of experience and background in modernizing systems. 

• The new chief, Information Technology Services was just recruited from 

Marriott, International where he was Senior Vice President Information 

Research Operations and Services. 

• The recent hire for Chief Business Strategist and Business Architecture in the 

Wage and Investment Division is one of the leading experts in the United 

States on designing and operating call centers. 

• The Director, Stakeholder, Partnership, Education and Communications 

Office in the Wage and Investment Division came to the Service from Karch 

International where he was Chief Operating Officer and had directed a wide 

array of successful marketing projects. 

• The Director International Operation in the Large and Midsize Division was 

formerly the Director, E-Business Tax Policy and Practices at 

PriceWaterhouseCoopers and had over 15 years of corporate international 

tax experience. 

(Position descriptions are available upon request.) 

 41

6. Other Personnel Issues 

6(a) For the previous 12 months, please provide a summary of the IRS's use of 

the other IRS Reform Act personnel flexibility provisions (e.g., streamlined 

demonstration project authority, workforce classification and pay, performance 

management reforms, etc.) and update on the implementation of "Balanced 

Measures." 

Workforce Classification and Pay:

On March 25, 2001, IRS will convert the first employees into the Senior Manager 

Payband established under the Reform Act's workforce classification and pay authority 

(5 U.S.C. 5909). The new payband, covering employees in positions formerly classified 

at the GS-14 and GS-15 grade levels that cover second level managers or first level 

managers reporting directly to executives. These positions are found in all 

organizations within the Service, and they share similar responsibility for meeting the 

IRS mission. The pay range for these positions will be from the minimum rate for GS-14 

to the maximum rate for GS-15. Advancement through the range will be based on 

biennial salary reviews considering performance as it is appraised under the new 

performance management system and the increasing difficulty of the position. 

We are now developing a strategy to place most other non-bargaining unit positions in 

paybands. We envision separate bands for managers of single grade level positions 

and first level managers of dual grade level positions combined with some second level 

managers of lower grade employees and, finally, a band for senior management 

officials. In addition, we are developing paybands for all Information Systems 

employees, and for our criminal investigators (special agents). We hope to gain 

approval to proceed with these new initiatives early in the third quarter of this fiscal year. 

Performance Management:

We have continued improvement of the Performance Management System for 

Executives, Managers and Management Officials, which was implemented in FY 2000 

to more closely align individual performance with organizational success through the 

Business Planning process and balanced Measurement System. For Fiscal Year 2001, 

we incorporated leadership competencies into the performance expectations for 

executives and managers to facilitate alignment of the evaluations system with the 

systems for selection and development of organizational leaders. 

In addition, we are currently negotiating with the National Treasury Employees Union 

over impact and implementation of new Critical Job Elements for employees that are 

aligned with our Balanced Measurement System. We anticipate implementation of the 

new CJEs in summer 2001.

6(b) Section 1203 of the IRS Reform Act provides that IRS employees may be 

terminated for certain proven violations. 

6(b)(1) How many employees have been terminated for each violation enumerated 

in section 1203? 
 42

Please see attached spreadsheet 

6(b)(2) How many employees have been terminated for filing late returns that 

showed a tax refund due the employee? 

The response to this question is based only on cases submitted to the Section 1203 

Review Board for evaluation. The data that was used to answer question 6(b)(1) does 

not identify whether the return was a refund or a balance due. The IRS collects this 

data only on cases submitted to the Section 1203 Review Board. 

The Review Board may recommend to the Commissioner that the penalty be mitigated 

or, by deciding not to make a recommendation, may allow the removal penalty imposed 

by law to be carried out. As of December 31, 2000, we removed 7 employees for willful 

failure to timely file a Federal tax return involving a tax refund. This includes employees 

who resigned or retired after we submitted their case to the Review Board. If the Review 

Board did not recommend mitigation of penalty and the employee resigned or retired 

before we implemented the removal action, we count that case as a removal. 

The following table reflects all 1203(b)(8) cases considered by the Review Board 

through December 31, 2000. An employee who did not file a return is assumed to have 

had a balance due. 

Refund Balance Due 

Grade Removed Mitigated Removed Mitigated Total 

2 0 0 1 0 1 

3 1 5 5 1 12 

4 2 7 2 4 15 

5 0 3 7 2 12 

6 1 2 7 1 11 

7 1 7 8 2 18 

8 0 2 3 2 7 

9 0 3 2 1 6 

10 0 0 0 0 0 

11 0 0 0 2 2 

12 1 1 0 0 2 

13 1 2 1 0 4 

14 0 1 0 1 2 

15 0 0 0 0 0 

Executive 0 0 0 0 0 

Wage Grade 0 1 0 0 1 

Total 7 34 36 16 93 

 
 43

The following examples reflect the common fact patterns in Section 1203(b)(8) cases 

involving tax refunds: 

Case 1-- A GS-3 file clerk, with nine years of IRS service at the time of the 

offense, filed a refund return six months late. Five months before the return was 

due, we suspended the employee for 14 days for a prior year’s late filing and late 

payment, and for serious off-duty misconduct. The employee’s significant 

disciplinary record for both tax and non-tax issues, combined with the fact that 

the discipline was imposed shortly before the current return was due, resulted in 

the Review Board decision not to recommend mitigation of penalty. 

Case 2-- A GS-4 clerk with 7 years service at the time of the offense filed a 

refund return seven months after an extension of time to file lapsed, after receipt 

of a notice regarding his failure to file. He had been counseled for late filing TY 

90 and 92. Audits of TY 94, 95 and 96 resulted in disallowed Earned Income Tax 

Credit and dependent claims. We offset the refund for TY 98 to meet some of 

this liability. The employee’s failure to file until after receipt of a notice, combined 

with his tax compliance record resulted in a Review Board determination not to 

recommend mitigation of penalty. 

Case 3--An employee with over 20 years service in tax law enforcement duties 

failed to timely file a refund return. The employee had a history of tax 

compliance discipline. When asked to explain why this return was not timely 

filed, the employee said the reasons were personal, and refused to elaborate. 

The Review Board did not recommend mitigation in this case. 

6(b)(3) Please describe the impact these provisions have had on the functioning 

of the IRS. 

We submitted the report at the end of this narrative to the Congress in June 2000. The 

report gives a detailed description of the IRS implementation of Section 1203, including 

statistics that were current at the time of the report. While we have more current 

statistics, the processes and issues described have not changed substantively. As the 

Commissioner states in his letter forwarding the June 2000 report, employees and 

managers expressed two main concerns about Section 1203. One was the fear that 

unfounded allegations of harassment and retaliation could cost them their jobs. We 

have been able to ease that concern through distribution of facts about actual case 

dispositions. We did not penalize employees Section 1203 for honest mistakes or on 

the basis of unfounded allegations. 

The second concern cited by many employees and managers is the belief that the 

removal sanction for employee tax compliance violations (Section 1203(b)(8) and 

Section 1203(b)(9)) are too harsh in some cases. While a non-employee taxpayer will 

suffer no penalty for a late filed refund return (other than forfeiting the refund if the 

return is not filed within three years), an IRS employee is subject to removal. The 

perception of inequity is not limited to refund returns, but the disparity in treatment is 
 44

most obvious in those cases. Our distribution of information about the implementation 

of Section 1203 has increased employee and manager anxiety, as they see that the 

vast majority of cases are based on tax compliance. 

The Commissioner has used his authority to mitigate the penalty in 50 of the 93 tax 

compliance cases that have been through the entire process established for Section 

1203 cases. The mitigation of penalty decisions have reduced the impact of Section 

1203 in cases where removal would be too harsh, but even these employees had to 

experience the potential of removal as their cases moved through the process.
SUMMARY OF SECTION 1203 ......................................................................... 46 

The Law........................................................................................................... 46 

Willfulness Criteria........................................................................................... 47 

Standards Are Not New................................................................................... 47 

IMPLEMENTATION OF THE LAW..................................................................... 48 

Procedural Guidance....................................................................................... 48 

Training and Outreach..................................................................................... 48 

ACTING ON SECTION 1203 ALLEGATIONS.................................................... 50 

Life Cycle of an Allegation ............................................................................... 50 

Receipt and Initial Analysis........................................................................... 50 

Inquiry or Investigation ................................................................................. 51 

Evaluation..................................................................................................... 51 

Local Disciplinary Processes Under Section 1203 Procedures .................... 52 

National Office Review ................................................................................. 52 

Processing Tax Compliance Cases................................................................. 53 

STATISTICS AND CASE EXAMPLES ............................................................... 54 

Allegations Received, Investigated and Resolved........................................... 54 

Removals Under Section 1203........................................................................ 56 

Case Examples ............................................................................................... 57 

CONCERNS RAISED BY EMPLOYEES AND MANAGERS.............................. 59 

General Concerns ........................................................................................... 59 

Specific Concerns............................................................................................ 60 

“The Fear of Section 1203 Allegations Discourages Proper Actions”........... 60 

“The Tax Compliance Provisions Impose Excessively Severe Penalties In Some 

Cases".......................................................................................................... 61 

APPENDICES .................................................................................................... 62 

1. Section 1203 of RRA ’98 ........................................................................... 62 

2. IRS Definitions of “Willful”.......................................................................... 62 

3. Flowcharts ................................................................................................. 62 
46

SUMMARY OF SECTION 1203 

The Law 

Section 1203 of the IRS Restructuring and Reform Act of 1998 (P.L. 105-206) 

provides that the Commissioner of Internal Revenue shall terminate the 

employment of any employee if there is a final administrative or judicial 

determination that the employee committed any of 10 enumerated acts or 

omissions. The Commissioner has the authority to mitigate the penalty, but may 

not delegate this authority to any other officer. The Commissioner’s 

determination on penalty, whether to remove or mitigate, may not be appealed in 

any administrative or judicial proceeding. 

The penalty provisions of Section 1203 reflect the view that certain acts or 

omissions by IRS employees are intolerable, and the normal sanction for those 

offenses should be removal. Acts or omissions covered by Section 1203 are: 

1. Willful failure to obtain required approval signatures on documents 

authorizing a seizure 

2. Providing false statements under oath on a material matter involving a 

taxpayer or taxpayer’s representative 

3. Violation of the rights protected under the Constitution or six listed civil 

rights laws, of a taxpayer, taxpayer representative, or other employee of 

the IRS 

4. Falsifying or destroying documents to conceal mistakes in a matter 

involving a taxpayer or taxpayer representative 

5. Assault or battery on a taxpayer, taxpayer representative, or other 

employee of the IRS 

6. Violations of the Internal Revenue Code, Treasury Regulations or IRS 

policy to retaliate against or harass a taxpayer, taxpayer representative, or 

other employee of the IRS 

7. Willful misuse of the provisions of Section 6103 of the Internal Revenue 

Code for the purpose of concealing information from a congressional 

inquiry 

8. Willful failure to file any Federal tax return as required by law, unless the 

failure is due to reasonable cause and not to willful neglect 

9. Willful understatement of Federal tax liability, unless the understatement is 

due to reasonable cause and not to willful neglect 
47

10. Threatening to audit a taxpayer for the purpose of extracting personal gain 

or benefit 

(The full text of Section 1203 is attached as Appendix 1) 

Willfulness Criteria 

Each of the ten offenses under Section 1203 includes an element of intent. The 

IRS has emphasized that simple mistakes and unintentional errors made in good 

faith are not Section 1203 violations. For example, intent for Section 1203(b)(1) 

is shown when the employee has actual knowledge or acts with reckless 

disregard of the requirements to obtain required approval signatures before 

proceeding with a seizure. For Section 1203(b)(8), the employee’s failure to file 

a Federal tax return as required by law must reflect the voluntary intentional 

violation of a known legal duty for which there is no reasonable cause. The IRS 

included definitions of willfulness and intent in the “RRA “98 Section 1203 

Procedural Handbook,” (Document 11043 (5/99). An extract from that document, 

which we distributed to all employees, is enclosed as Appendix 2. 

Standards Are Not New 

The conduct addressed in Section 1203 has always been regarded as serious 

misconduct. What has changed is the penalty imposed for violations. Prior to 

the enactment of Section 1203, the general rules for imposing discipline required 

a deciding official to consider a wide range of factors in arriving at the appropriate 

penalty. These factors include the nature and seriousness of the offense, the 

employee’s work record, the notoriety of the offense, and the impact of the 

offense on confidence in the employee’s ability to perform his/her duties. When 

managers applied these factors to specific cases, they could impose a range of 

penalties. Section 1203 eliminated the variation in penalty, unless the 

Commissioner of Internal Revenue personally decides to reduce the penalty from 

removal to some lesser sanction. 

While the general statement that the conduct covered by Section 1203 was 

always regarded as serious misconduct is true, in one area Section 1203 has 

changed the significance of an offense. Prior to Section 1203, the IRS viewed 

untimely payment of Federal tax liability as a more serious offense than late 

submission of a return. We regarded late payment of a balance due as serious 

misconduct, depending on the amount due and the degree to which the payment 

was overdue. We did not treat a return filed late with a minimal balance due, or a 

refund return, as a serious offense. Section 1203 does not address late 

payment, but makes all willful late filing a removal offense. 
48

IMPLEMENTATION OF THE LAW 

Procedural Guidance 

We recognized that Section 1203 reflected a renewed emphasis on employee 

conduct issues, and that employees needed a clear statement from management 

on the impact of the law on their daily work. Guidance for employees has taken 

many forms—memoranda, voice mail messages from the Commissioner and 

Deputy Commissioner for Operations, a procedural handbook and training 

guides. A chronology of the procedural guidance appears as in a table below, 

under “Training and Outreach.” 

The most important procedural guidance is contained in “RRA ’98 Section 1203 

Procedural Handbook” (Document 11043, 5/99). The Handbook contains an allemployees memorandum from the Commissioner, an overview of Section 1203 

and the implementing procedures, plain language definitions of “intent” and 

“willfulness,” and detailed procedures. The procedures are designed to ensure 

that each allegation of a Section 1203 violation is dealt with in a manner that 

protects the rights of the employee accused of the violation as well as those of 

the accuser. 

Training and Outreach 

The IRS emphasized the importance of Section 1203 through training for all 

employees, as well as through special training for managers and labor relations 

specialists on their responsibilities under the law. Initially we conducted all 

employee training, involving in-person classes for about 100,000 employees, 

beginning in late 1998 and early 1999. After feedback and numerous focus 

group interviews indicated that employees were still uncertain about their rights, 

responsibilities, and risks under the law, and that the initial training had created 

unnecessarily inflated fears, we revised the training and conducted a new round 

of training in May 1999. 

Outreach to employees began with the enactment of Section 1203, and 

continues to this day. I and other senior executives take questions from 

employees during “town hall” meetings as we travel around the country, and 

Section 1203 is usually a topic in these discussions. A page on the IRS intranet 

is devoted to Section 1203, including frequently asked questions. The intranet 

page also provides sample case scenarios to illustrate the application of the tax 

compliance provisions, which account for almost all of the removals under 

Section 1203. In addition, a March 2000 conference of front line Collection 

managers included presentations on Section 1203 from several IRS senior 

executives and the Treasury Inspector General for Tax Administration. 
49

A list of the major training and outreach publications and events appears in the 

table below. The publications emphasize that employees are not at risk of 

removal for conscientiously performing their duties, even if they make a mistake 

in doing so. Section 1203 only addresses willful and intentional misconduct. 

Table 1: Training and Outreach Publications and Events 

July 1998 to April 2000 

July 1998 Highlights of the Restructuring and Reform Act of 1998, 

“Significant Issues Effective Upon Date of Enactment”, 

Document 10829 

August 1998 Labor Relations Continuing Professional Education on 

Restructuring and Reform ’98 Conduct Provisions 

Memorandum for All Employees: “IRS Restructuring and 

Reform Act of 1998 Conduct Provisions” 

September 1998 

IRS Restructuring and Reform Act of 1998 (RRA ’98) 

Conduct Provisions “Employee’s Guide”, Document 10848 

Interactive Video Teletraining for Heads of Office and 

Executives 

Restructuring and Reform Act of 1998, Title I §1203 

Process Overview, “Instructor’s Guide” 

IRS Restructuring and Reform Act of 1998, §1203(b) 

Conduct Provisions, “Instructor’s Guide”, Training 9990-

103 

IRS Restructuring and Reform Act of 1998, §1203(b) 

Conduct Provisions, “Employee’s Participant Guide”, 

Training 9990-102 

October 1998 

IRS Restructuring and Reform Act of 1998, §1203(b) 

Conduct Provisions, “Manager’s Participant Guide”, 

Training 9990-101 

December 1998 STRAIGHT TALK NEWSLETTER: “Title I: IRS embarks on 

training,” including training on Section 1203 

January and 

February 1999 

All Employees Briefings on Section 1203 

STRAIGHT TALK NEWSLETTER: Question and Answer 

on “quotas” for Section 1203 discipline 

Memorandum for All Employees: “Employee Tax 

Compliance Obligations” 

February 1999 

Section 1203 Training Implementation Plan 

Memorandum for All Employees: “Section 1203 

(Termination of Employment for Misconduct) Training and 

Communication” 

March 1999 

What you Need to Know About Section 1230, Tri-fold 

publication, Document 10997; included with paychecks 
50

All Employees Briefings on Section 1203 

“RRA ’98 Section 1203 Resource Guide”, Document 

11042 

“RRA ’98 Section 1203 Procedural Handbook”, Document 

11043 

Procedures for Processing Allegations for §1203 Violations 

(for Labor Relations Staff) 

April and May 

1999 

STRAIGHT TALK NEWSLETTER: Announcing opportunity 

for public comment on Section 1203 regulations 

July 1999 Video Broadcast of Commissioner meeting with VirginiaWest Virginia District managers question and answer 

session 

All Employee Memorandum from Commissioner “Report 

on Actions Concerning Misconduct Allegations and 

Disciplinary Actions” provided Section 1203 statistics and 

summary case information 

September 1999 

STRAIGHT TALK NEWSLETTER: Announcing availability 

of All Employee Memorandum, and providing Section 1203 

Questions and Answers 

January 2000 STRAIGHT TALK NEWSLETTER: Announcing availability 

of data on Section 1203 allegations and disciplinary 

actions 

Meeting of first-level Collection managers, to discuss the 

importance of their work and their role in the new IRS 

organization. Included presentations by TIGTA and IRS 

executives on Section 1203 issues. 

March 2000 

STRAIGHT TALK NEWSLETTER: Describing results of 

meeting with Collection managers, including discussion of 

Section 1203 

STRAIGHT TALK NEWSLETTER: Describes actions 

needed to address taxable local travel reimbursements, 

and the impact of Section 1203 on corrected Federal tax 

returns 

April 2000 

IRS Headlines Voice Message: A reminder to file Federal 

tax returns timely to avoid a Section 1203 violation 
51

ACTING ON SECTION 1203 ALLEGATIONS 

Life Cycle of an Allegation 

An allegation of a violation of Section 1203 must go through five stages before 

we remove an employee. These include: 

• Receipt and initial analysis 

• Inquiry or investigation 

• Evaluation 

• Local disciplinary processes 

• National Office review 

Tax compliance issues normally arise through the Employee Tax Compliance 

program, and are addressed separately below. Appendix 3 contains a general 

process flowchart, as well as specific flowcharts for particular provisions of 

Section 1203. 

Receipt and Initial Analysis 

A Section 1203 allegation may be made to the Treasury Inspector General for 

Tax Administration (TIGTA), or to any employee of the IRS. In some cases, an 

employee accused of misconduct by a taxpayer self-reports the allegation to a 

supervisor or the TIGTA. Regardless of who receives the allegation, the first 

step is to evaluate the allegation to determine whether it should be pursued as a 

Section 1203 matter. 

Division-level management or above evaluate allegations under Subsections 

(b)(1), related to seizures, (b)(3)(A), related to Constitutional rights, and (b)(6), 

related to harassment or retaliation, to determine whether the threshold 

established in the law has been met. For example, Subsection 1203(b)(6) 

addresses violations of the Internal Revenue Code, Treasury regulations, or IRS 

policies for the purpose of retaliating against or harassing a taxpayer, taxpayer 

representative, or other employee of the IRS. The initial analysis of such an 

allegation would be done by Division-level management, to determine whether 

there was a violation of the Internal Revenue Code, Treasury regulations, or IRS 

policy. If we found a violation of the Internal Revenue Code, Treasury 

regulations, or IRS policy, we investigate the allegation to determine whether 

there was an intent to retaliate or harass. 

Subsection (b)(3)(B) provides that a violation of one of six Civil Rights statutes is 

covered by the mandatory termination of employment provisions of Section 1203. 

Violations of these statutes with respect to a fellow IRS employee are also 

covered by the Equal Employment Opportunity program, which includes 

processes for an employee to seek relief from discrimination. Upon the 
52

completion of Equal Employment Opportunity program process, whatever the 

outcome may be for the employee seeking relief, a special unit reporting to the 

National Director, Equal Employment Opportunity and Diversity, reviews the file 

to determine whether the matter warrants a referral for investigation under 

Section 1203. 

The TIGTA performs the initial analysis of alleged violations of the remaining 

non-tax provisions of section 1203. Any IRS employee receiving such an 

allegation must refer it immediately to the TIGTA. In addition, any allegation of 

criminal misconduct is immediately referred to the TIGTA, as are allegations 

against managers, GS-15s, Senior Executives and Criminal Investigations 

employees. 

Inquiry or Investigation 

The TIGTA has primary responsibility for investigations of allegations under 

Section 1203. TIGTA special agents conduct these investigations, and report the 

results the IRS for evaluation. In some cases, facts developed during the initial 

analysis of an allegation are sufficient to resolve the matter. For example, the 

initial analysis may establish that an employee violated IRS policy by acting 

unprofessionally in dealing with a taxpayer. The information necessary to 

establish that the employee acted unprofessionally may also be sufficient to 

establish that the behavior was not intended as an act of retaliation or 

harassment, and the matter may be dealt with as a non-1203 misconduct or 

performance matter. 

Evaluation 

Once IRS management established the facts through an inquiry or investigation, 

they must evaluate the information to determine whether a violation of Section 

1203 has occurred. A Division-level or above manager, with the assistance of 

local labor relations specialists and the staff of the Centralized Adjudication Unit 

(CAU) makes this decision. The CAU participates in all determinations under 

Section 1203, to ensure consistency throughout the IRS. 

Evaluation of the results of the investigation or inquiry may lead to a finding that: 

• No misconduct occurred 

• Insufficient evidence exists to prove misconduct 

• Sufficient evidence exists to charge non-1203 misconduct 

• Sufficient evidence exists to charge 1203 misconduct. 

A finding of no misconduct, or of insufficient evidence to prove misconduct, 

results in a “clearance letter” or a “closed without action letter,” respectively. A 

finding of non-1203 misconduct results in discipline under regular disciplinary 

procedures. Depending on the nature of the misconduct, the employee’s work 
53

record, and other factors, the discipline could range from informal counseling to 

termination of employment. A finding of sufficient evidence to support a 1203 

charge results in local disciplinary action under Section 1203 procedures. 

Local Disciplinary Processes Under Section 1203 Procedures 

When Division-level management or above finds sufficient evidence to charge 

under Section 1203, they give the employee a letter advising that the IRS 

proposes to remove him or her from the Federal service. The employee has a 

right to respond to the proposal letter, and may do so orally or in writing. Many 

bargaining unit employees exercise their right to representation by the NTEU at 

an oral reply. After the reply, a deciding official determines whether the 1203 

charge has been sustained by a preponderance of the evidence. This factual 

determination is reviewable through arbitration or an appeal to the Merit System 

Protection Board. If the deciding official determines that the 1203 charge is 

sustained, the case file is forwarded to the National Office for consideration by 

the Section 1203 Review Board. 

National Office Review 

The Section 1203 Review Board examines all cases in which a 1203 charge has 

been sustained to determine whether a penalty less than termination of 

employment may be appropriate. The current Review Board members are the 

Deputy Commissioner for Operations, who serves as Chairman, the Assistant 

Deputy Commissioner for Operations, the National Director, Equal Employment 

Opportunity and Diversity, and the Regional Commissioner for the Western 

Region. The Centralized Adjudication Unit assembles the case files, and a 

representative of the Office of Chief Counsel attends and participates in all 

Review Board meetings. 

The Review Board submits recommendations for mitigation of penalty to the 

Commissioner of Internal Revenue for decision. If the Review Board does not 

recommend mitigation of the penalty, they do not submit the case to the 

Commissioner and the statutory penalty of removal is imposed. After National 

Office review, all case files are returned to the local management official for 

notification to the employee and implementation of the decision. 

Processing Tax Compliance Cases 

The Employee Tax Compliance Program generally identifies potential violations 

of the two tax compliance provisions of Section 1203. They match computer files 

identifying IRS employees against tax administration files to find employees who 

appear to have tax compliance problems. If inquiries from the Employee Tax 

Compliance Unit do not resolve the matter, they forward the case to local 

management for action. Cases involving apparent willful failure to timely file a 
54

Federal tax return or apparent willful underreporting of income are flagged as 

potential 1203 (b)(8) and (b)(9) cases, respectively. The process described 

above is then followed, except that IRS management conducts the fact finding 

inquiry rather than the TIGTA. 

STATISTICS AND CASE EXAMPLES 

Allegations Received, Investigated and Resolved 

The statistics on Section 1203 indicate that allegations of violation of law or 

policy for the purpose of retaliation and harassment under subsection (b)(6) are 

the most common, but very few of those allegations are substantiated. 

Employee tax compliance cases based on willful failure to timely file account for 

the next largest group of cases, and most of the substantiated cases. 

Data in the following tables show the number of allegations received by the 

TIGTA and the allegations received by the IRS. The numbers should not be 

added. Allegations received by the TIGTA include some matters referred by the 

IRS, which would also be counted in the IRS numbers. There is also a large 

number of reporting offices contributing to these statistics. We know that some 

IRS offices were very conservative in counting potential 1203 allegations, 

including in their count matters that other offices did not. For example, we do not 

believe Section 1203 was intended to cover routine workplace disputes between 

employees and their managers. Nevertheless, we understand that some offices 

reported potential 1203 (b)(6) retaliation or harassment cases based on the use 

of either word in an employee grievance. Others did not include these 

harassment claims unless they appeared to be more than an aggressive 

pleading in an otherwise routine grievance. 
55

Table 2: 1203 Allegations Received and Investigated 

July 1998 to May 2000 

Allegation Type TIGTA 

Receipts* 

IRS 

Receipts* 

Investigations 

or Inquiries 

Completed 

Substantiated 

Violations of 

Section 1203** 

Seizure Without Approvals 

(b)(1) 

14 8 7 0 

False Statement Under 

Oath (b)(2) 

15 8 5 0 

Constitutional or Civil Rights 

Violation (b)(3) 

169 193 170 0 

Falsifying or Destroying 

Records (b)(4) 

38 46 24 1 

Assault or Battery (b)(5) 0 7 3 0 

Retaliate or Harass (b)(6) 399 990 830 0 

Misuse of 6103 (b)(7) 0 3 3 0 

Failure to Timely File 

Federal Tax Return (b)(8) 

5 443 256 102 

Understatement of Federal 

Tax Liability (b)(9) 

30 31 15 2 

Threat to Audit For Personal 

Gain (b)(10) 

13 52 36 4 

Total 683* 1781* 1349 109 

*The TIGTA refers most of the allegations they receive to the IRS for action, either as a report of 

investigation or a referral for a management inquiry. The numbers in these columns should not

be added. 

**Allegations are considered “substantiated” if the TIGTA investigation or management inquiry 

develops information sufficient to support the allegation. As the case is considered at various 

stages of the discipline process, additional information may be developed that results in a finding 

that there was not a violation of Section 1203. The numbers that appear in this column are 

adjusted to reflect the most recent information available. 
56

Some allegations reveal improper conduct or poor performance that is not within 

the scope of Section 1203. For example, approximately 40 complaints 

considered under section 1203(b)(6) as potential harassment or retaliation 

resulted in discipline for unprofessional conduct. Several of these cases are 

described in the case examples that appear after the next table. 

Removals Under Section 1203 

The 109 substantiated Section 1203 violations cited above include all cases in 

which a TIGTA investigation or management inquiry resulted in a finding of 

sufficient evidence to support a Section 1203 charge. If an employee presents 

information in response to a proposed removal that refutes the charge, the case 

is no longer counted as a substantiated 1203 allegation. 

We do not remove an employee under Section 1203 until the Section 1203 

Review Board considers his or her. Some employees elect to resign or retire 

before the case completes this process, and a small number are removed under 

other authorities, such as termination of employment during probation. The table 

below reflects the current status of the substantiated Section 1203 allegations. 

Table 3: Status of Substantiated 1203 Allegations 

As of May 16, 2000 

 Failure to Timely 

File Federal Tax 

Return (b)(8) 

Other Provision 

of §1203 

Removals 26 2 

Employee Separated 

From IRS By 

Resignation, Retirement, 

or non-1203 Action 

26 1 

Case In Process 50* 4 

Total 102 7 

* Of the 50 cases in process, the Review Board has considered 10. At its 

May 2000 meeting, the Review Board has concluded that it will 

recommend mitigation of penalty to something less than removal. The 

Review Board deferred action on specific recommendations on the level 

of discipline until its June 2000 meeting. 
57

Case Examples 

The following examples illustrate the common fact patterns in Section 1203 

cases. The definition of “willful” under the Subsection 1203(b)(8) is the voluntary 

intentional violation of a known legal duty, for which there is no reasonable 

cause. Thus, these case examples include information about the employee’s 

knowledge of his or her responsibilities, including the briefings the employee may 

have received on those responsibilities. 

Case 1 Section 1203(b)(8) Timely File Federal Tax Return----Removal 

The employee was appointed to her position on February 4, 1996. She 

acknowledged receipt of the IRS Rules of Conduct on that date, and 

acknowledged receipt of the OGE Standards of Ethical Conduct on February 18, 

1997. She had been reminded annually by the Service Center Director, via an All 

Employee memorandum, of her obligations to file her Federal income tax return, 

accurately report income, and pay tax due as required by law. 

The employee was a GS-3 Clerk at the time of the violation. She did not file her 

1996 Federal income tax return until March 23, 1999, and only after managerial 

intervention, and three notices from the Service Center. The return reflected a 

balance due. She attributed the filing delay to a difficult pregnancy, however, 

provided no medical evidence in support of her contention that the condition 

precluded her from meeting her tax compliance obligations. Accordingly, the 

Review Board found her failure to file to be attributable willful neglect, and not to 

reasonable cause. 

Case 2 Section 1203(b)(8) Timely File Federal Tax Return----Removal 

The employee did not file her 1996 Federal income tax return until October 9, 

1998. She was a GS-4 Mail Clerk at the time of the violation. The employee 

stated she did not file the return because it required payment of taxes and she 

did not have the funds available at the time it was due. All employees of the 

organization are reminded yearly of their tax compliance obligation. The 

employee did not offer a valid explanation for her late filing and had not applied 

for a filing extension. Accordingly, the Review Board decided the employee’s tax 

non-compliance was willful. 

Case 3 Section 1203(b)(10) Threat to Audit For Personal Gain----Removal 

The employee was identified as the driver of a vehicle involved in a hit and run 

accident. He was subsequently arrested for driving while intoxicated and leaving 

the scene of an accident. While in custody, the employee identified himself as an 

IRS employee and declared that he would “find out” about the arresting officer, 

and would have “a good time” with him. The employee’s assertion that his 

judgment was impaired due to intoxication, was not accepted. He had not only 

been able to drive home without further incident following the accident, but also 

responded coherently to the arresting officer’s questions, and engaged him in 
58

conversation. Although the employee did not specifically use the word “audit,” 

his remarks to the arresting officer were clearly interpreted as such, and were 

made for personal gain. 

Case 4 Section 1203(b)(8) Timely File Federal Tax Return----Removal 

The employee was a GS-9 Revenue Officer, employed with the IRS for five 

years. The employee acknowledged receipt of IRS Interim Handbook of 

Employee Conduct and Ethical Behavior on two occasions (shortly after her 

appointment in 1995, and again in June 1998). The handbook specifically 

addresses employee tax obligations. Additionally, the employee’s District 

Director issued an annual memorandum to all employees, reminding them of 

their tax obligations and responsibilities. 

The employee received a counseling letter in February 1996 regarding the late 

filing of her 1993 Federal tax return. Despite the counseling, she again failed to 

file her return timely for tax year 1997. The employee raised unfamiliarity with 

“extension to file” provisions, and a missing/inaccurate Form 1099, as defense. 

Evidence proved neither claim was creditable. Accordingly, the Review Board 

decided the employee’s tax non-compliance was willful. 

Case 5 Section 1203(b)(8) Timely File Federal Tax Return----Not Willful, Other 

Disciplinary Action 

The employee, a GS-4 Clerk, filed her 1997 tax return on January 20, 1999. 

The employee identified and raised the non-compliance. Shortly after attending 

a Section 1203 training session, the employee notified her supervisor of the 

matter. She learned in the training session that ALL returns must be filed timely. 

She advised her supervisor that for the past several years, she had not filed 

timely because she had always been entitled to a refund (this was subsequently 

corroborated). At no time prior to the training session had the IRS notified her of 

a non-compliance matter. She acknowledged that she now fully understands her 

filing obligations and would ensure that they are met in the future. Accordingly, 

the Review Board found the non-compliance was not willful and recommended 

mitigation of the removal penalty. 

Case 6 Section 1203(b)(6) Violation of law or procedure to Harass and 

Retaliate----Not Substantiated as 1203 violation, Counseled for Unprofessional 

Conduct 

A taxpayer representative alleged that a revenue agent used a hostile approach 

in conducting an audit, appearing to have reached conclusions before the audit 

started. A management inquiry found that the revenue agent speculated about 

the potential outcome of the audit and the consequences of such an outcome, 

but was not harassing the representative. Management counseled the revenue 

agent that speculation is inappropriate. 
59

Case 7 Section 1203(b)(6) Violation of law or procedure to Harass and 

Retaliate----Not Substantiated as 1203 violation, Counseled for Unprofessional 

Conduct 

A taxpayer complained that a revenue agent’s information request was an effort 

to intimidate the taxpayer. A management inquiry found the revenue agent 

issued a 25 page request to the taxpayer, most of which was legal references. 

The revenue agent explained that he was attempting to document the legal 

support for the Government’s position, and was not attempting to intimidate the 

taxpayer. Management counseled the revenue agent for demonstrating poor 

judgement. 

Case 8 Section 1203(b)(6) Violation of law or procedure to Harass and 

Retaliate----Not Substantiated as 1203 violation, Counseled for Unprofessional 

Conduct 

An employee was accused of harassment of a fellow employee, which involved 

spreading rumors about the fellow employee’s military record. Management 

counseled the employee for causing dissension and discord in the workplace. 

Case 9 Section 1203(b)(6) Violation of law or procedure to Harass and 

Retaliate----Not Substantiated as 1203 violation, Letter of Reprimand for 

Unprofessional Conduct 

During a continuing professional education class, the employee questioned a 

guest speaker about a case both had worked on. The guest speaker had 

reversed the employee’s action on the case. After the class session concluded, 

the employee again confronted the speaker about the case, and got within inches 

of the speaker’s face. The speaker reported that he thought the employee was 

going to strike him. Management proposed a three day suspension for 

unprofessional conduct, which was reduced by the deciding official to a one day 

suspension. The employee grieved the suspension, and the case was settled 

with a reprimand. 

CONCERNS RAISED BY EMPLOYEES AND MANAGERS 

General Concerns 

When the Congress enacted Section 1203, the initial reaction from employees 

and managers was confusion and concern. RRA’98 modified many of the rules 

for dealing with taxpayers and taxpayer representatives, and it took some time 

before we could distribute definitive guidance and our front-line employees could 

absorb the information. Many comments focused on the changing expectations, 

and reflected concerns that employees could be removed for violating rules they 

did not understand. Training and procedural guidance on new tax administration 

rules and on Section 1203 have addressed some of these issues, although the 
60

vast size and number of changes in IRS procedures cause continuing anxiety 

and uncertainty among employees and managers. This concern is closely 

related to concerns about section 1203 because some of the section 1203 

offenses refer to IRS policy or procedure. The Internal Revenue Manual, which 

is the principal document for defining IRS policy and procedure, exceeds 50,000 

pages and is constantly changing. In conditions of uncertainty and anxiety, it is 

sometimes viewed as the safest course to take no action or to take action very 

slowly. 

Specific Concerns 

Two persistent themes in employee and manager feedback regarding Section 

1203 remain. The first is that the fear of a Section 1203 allegation discourages 

proper action by an IRS employee; the second is that the IRS subjects 

employees to unduly severe penalties for certain tax offenses. 

“The Fear of Section 1203 Allegations Discourages Proper Actions” 

The most common allegation under Section 1203 is that an employee has 

violated the Internal Revenue Code, Treasury Regulations or IRS policy for the 

purpose of retaliating against or harassing a taxpayer, taxpayer representative, 

or other IRS employee (1203(b)(6)). Many employees believe this provision 

encourages taxpayers and their representatives to make unfounded claims when 

the employee is simply doing his or her job. IRS managers raise similar 

concerns about employees who claim harassment or retaliation when a manager 

takes proper action to correct conduct or performance problems. 

The fear of being the subject of a 1203 complaint and the subsequent 

investigation, even if the complaint is eventually not substantiated, is frequently 

cited by employees and managers as a major concern in their everyday work. 

Our data provides some support for the perception that significant numbers of 

unsubstantiated complaints trigger investigations. The IRS and the TIGTA have 

completed 830 inquiries or investigations under 1203 (b)(6). About 40 of these 

allegations involved some lapses in professional behavior, but none was 

substantiated as a 1203 violation and the vast majority, over 95%, involved no 

misconduct. 

The IRS has not conducted a comprehensive review of the unsubstantiated 

allegations, but the staff who deal with the allegations on a daily basis report 

many allegations fit the patterns cited by employees and managers. Common 

fact patterns include: 

• Taxpayers who claim harassment after receipt of a series of proper 

notices of tax delinquency 

• Taxpayers who claim that the routine enforcement of the Internal Revenue 

Code is unconstitutional 
61

• Employees who claim harassment or retaliation when relief sought 

through a grievance or Equal Employment Opportunity complaint is denied 

Some of the complaints under 1203(b)(6) can be readily dismissed as 

unfounded, but many cannot. The inquiry and analysis called for in the 1203 

procedures is designed to establish the relevant facts, and enable managers to 

make a fact-based determination about the allegation. The need to conduct a 

careful investigation also means that cases stay open for a considerable period 

of time. Employees cite the anxiety of this period when they know an allegation 

has been made but they have not been advised of the findings. 

The IRS has attempted to deal with employee and manager concerns about the 

impact of unfounded allegations by publicizing the results of the inquiries, 

including the low number of substantiated cases. In addition, the IRS reemphasized the importance of timely feedback to employees who are the subject 

of a specific allegation on the findings of the TIGTA investigation or management 

inquiry. We have also stressed the fact that complaints and allegations would 

have to be investigated regardless of the specific provisions of Section 1203. 

“The Tax Compliance Provisions Impose Excessively Severe Penalties In Some 

Cases” 

The employee tax compliance provisions of Section 1203 cause concern for 

employees and managers who believe the sanction imposed is too severe in 

some cases. IRS employees and taxpayers know that they must file an accurate 

return and pay their taxes on time, and that failure to do so can result in 

penalties, as this has been longstanding policy. However, the concern arises 

because of the Section 1203 requirement to remove an employee on the first 

offense in situations where non-IRS taxpayers would face little or no punishment. 

The clearest example of this severity of treatment is in cases involving failure to 

file a refund return on time. A non-employee taxpayer who fails to file a refund 

return on time may forfeit the refund if the return is not filed within three years of 

the due date, but will otherwise suffer no penalty. An IRS employee is subject to 

removal on the first such offense. While the Commissioner can reduce the 

penalty in a circumstance such as this, the employee is subject to the threat of 

removal and an extended period of uncertainty while the case is processed. 

Similar considerations sometimes apply when an employee with no prior tax 

compliance problems files a late balance due return. Some of the cases 

considered as potential Section 1203 violations involve relatively short periods of 

delinquency and relatively small amounts due. A non-employee taxpayer would 

be subject to a late filing penalty of up to 25% of the balance due, plus interest. 

For a late filed return with a $2,000 balance due, the late filing penalty for a nonemployee taxpayer is $500 penalty, plus interest and an estimated tax penalty. 
62

The employee bears the same penalties and interest sanctions, and loss of his or 

her job. 

We have tried to address the concerns over the tax provisions of section 1203 by 

stressing that RRA 98 only requires termination iif the employee cannot show 

reasonable cause, and also by exercising our authority to mitigate the penalty 

when termination is excessively harsh under the circumstances. 

APPENDICES 

1. Section 1203 of RRA ’98 

2. IRS Definitions of “Willful” 

3. Flowcharts 




67

7. TIGTA Reports 

7(a) TIGTA reports that both internal and external communication by the 

IRS needs improvement. 

7(a)(1) What efforts are being undertaken to improve communications with 

taxpayers and the practitioner community?

The operating divisions (OD) are looking at ways to improve communications 

with both employees and external stakeholders. Each OD has a communications 

director who will develop and implement communications strategies tailored to 

meet the needs of their specific stakeholders. For example, we have a new 

website for self-employed taxpayers. The agency is improving our website to 

provide more services and meet the needs of all the tax communities. We are 

planning many other improvements, such as making the language in our notices 

more understandable, and are already following the “plain language” guidance 

for government communications. 

7(a)(2) To what extent have resource limitations prevented the full 

implementation of customer service initiatives (e.g., the ability to access 

the toll-free number, and the availability of personnel able to assist 

Spanish-speaking taxpayers)? 

Resource limitations prevent us from assisting every taxpayer that calls or walksin, or responding to written inquiries as quickly as we would like. We are, 

however, making progress in many of our customer service initiatives by moving 

to more self-assistance applications for taxpayers utilizing automated services by 

phone or through the Internet. Taxpayer attempts to our toll-free services were 

26,126,051 through March 10, 2001. For the same time period in FY 2000 it was 

34,152,749. We believe much of this demand reduction is due to better access to 

IRS systems, quicker response times, improved publications, web based selfassistance initiatives, and education efforts. In 2001 we are providing increased 

access to our automated refund assistance service by allowing taxpayers to 

select this option when they call our Toll-Free lines. We have increased the 

number of calls going to our TeleTax refund application by 57% over 2000. With 

the increased FTE received in FY 2001 for Toll-Free assistance during the filing 

season, we were able to move some tax topics back to live assistance from 

messaging assistance and reduce the need for Compliance resource assistance 

by about 55%. We also increased our Toll-free Spanish assistance by nearly 

200 employees and have a dedicated site in Puerto Rico. Additional resources 

would permit us to move more quickly on our customer service initiatives by 

allowing us to provide more live assistance for complex issues while continuing 

to move less complex issues to self-assistance, as planned in our long-term 

vision. 
68

For our Accounts Management staffs, resource limitations impair their ability to 

achieve desired levels of customer service. However, our capacity to expand in 

any one year is limited by other factors, including our ability to recruit and train 

large numbers of new employees, and space and equipment acquisition 

timeframes. With incremental increases in resources, we have, and can continue 

to make improvements in service. 

7(b) TIGTA notes that the IRS is still not in full compliance with: 

7(b)(1) Restricting the use of enforcement statutes to evaluate IRS 

employees; 

7(b)(2) Not designating taxpayers as illegal protestors; 

7(b)(3) Providing timely notice that a federal tax lien has been filed; 

7(b)(4) Properly withholding information in response to Freedom of 

Information Act or Privacy Act requests by taxpayers. 

What is the IRS doing to correct this problem?

7(b)(1) Restricting the use of enforcement statutes to evaluate IRS 

employees. 

We have managed the implementation of the IRS Restructuring and Reform Act 

of 1998 Section 1204 requirements on the use of enforcement statistics by: 

• Establishing business units to conduct quarterly certifications and perform an 

annual independent review of the program 

• Centralizing responsibilities for general Section 1204 oversight, guidance, and 

training on the appropriate use of data and statistics in the Organizational 

Performance Division and having each business unit coordinate Section 1204 

activity for their respective areas. 

• Providing training for managers through a course on managing statistics in a 

balanced measurement system and for employees through a course on 

understanding the use of statistics 

• Updating and revising the Internal Revenue Manual to provide guidelines for 

the new IRS business units and improve the independent review process. 

• Working with TIGTA on its annual review and facilitating their audit of the 

program. 

7(b)(2) Not designating taxpayers as illegal protestors. 

We have taken the following steps to communicate and reinforce the 

requirements prohibiting IRS officers and employees from using the Illegal Tax 

Protestor (ITP) or any similar designation: 
69

• Issued memorandum to IRS employees providing guidelines to discontinue 

the use of the ITP or any other similar designations, remove those existing 

designations from individual masterfile and other databases, and disregard 

any designation not located in the individual masterfile. 

• Posted a question and answer paper, clarifying section 3707 issues and 

memorandums on section 3707, to the National Resource Center website. 

• Submitted a Request for Information Services (RIS) (EXM-8-0106) to 

eliminate the transaction code (TC) 148-02 from the masterfile. The TC148-

02 was an indicator identifying ITPs. 

Eliminated references to the ITP designation in the Internal Revenue Manuals 

and other internal documents. 

7(b)(3) Providing timely notice that a federal tax lien has been filed. 

TIGTA has completed two mandatory lien audits: 

• “The IRS Should Improve It’s Federal Tax Lien Procedures,” issued 

September 1999 

• “Compliance With Requirements for Notifying Taxpayers of Federal Tax Lien 

Filings Has Not Yet Been Achieved,” issued September 2000. 

The TIGTA is conducting the FY 2001 mandatory lien audit. 

As the result of the two completed audits, TIGTA made five recommendations (2 

– 9/99 and 3 – 9/00) to improve the lien process. We initiated a total of fourteen 

corrective actions to address the recommendations and of this date have 

completed eleven. The three remaining corrective actions are scheduled for 

completion on or before June 1, 2001. 

The following corrective actions have been completed: 

September 1999 Audit 

1) We programmed the Automate Lien System (ALS) to reissue notices and 

recalculate the time period for requesting a hearing. However this process 

will require manual input of undelivered mail and new address information 

where available. ALS will then recalculate the taxpayer’s time period for 

requesting a hearing. 

2) We issued memorandum to appropriate field and customer service 

employees to ensure that either the “&” or “and” is used in spousal situations. 

We will add a new procedure requiring employees to provide multiple address 

information, if appropriate. We will also include a reminder that partnership 
70

information is not available to ALS and should be sent to the ALS Unit for 

manual input and automated preparation of RRA 98 lien notices. 

3) We have procedures to address the issuance of the RRA 98 lien notices to 

taxpayers’ representatives. However, a future enhancement to the ALS will 

allow users to generate a taxpayer representative contact letter and will 

associate a copy of the original RRA 98 lien notice and attachments sent to 

the taxpayer after the manual input of certain information. 

4) Customer Service issued Taxpayer Service Electronic Bulletin Board (TEBB) 

#99280, dated August 23, 1999, titled Post Lien Filing Notice. It added 

instructions to the Internal Revenue Manual (IRM) 21.9.4, Enforcement 

Actions, and IRM 21.9.8, Automated Call System (ACS) Support, to 

implement the actions agreed to by Collection. The TEBB instructions have 

also been added to the IRM 21 revision being issued January 1, 2000. 

5) We enhanced the ALS system to retain manually input information related to 

the return of RRA 98 lien notices for ACS employees. 

6) We added procedures to the Lien Handbook requiring employees to forward 

the Form 12153 and envelopes to Appeals for hearings requested after the 

30-day period has elapsed. Issue interim procedures by November 30, 1999. 

7) We added IRM procedures to the Lien Handbook to clarify that Form 

668(Y)(c) be printed and mailed, at a minimum, weekly. Issue interim 

procedures by November 30, 1999. 

8) We added provisions to the IRM for field employees to research case files for 

new address information when RRA 98 lien notices are returned undelivered. 

Issue interim procedures by November 30, 1999. 

9) We conducted program reviews to measure compliance of RRA Notice of 

Federal Tax Liens (NFTL) notification requirements. 

September 2000 Audit 

1) We revised the current quarterly compliance review checksheet to incorporate 

Power of Attorney (POA) notification, case file review for new address, and 

re-issuance of collection due process notice. 

2) We prepared a memo informing the field of the new requirement for group 

managers to review documentation to ensure that the taxpayer’s 

representative receives a copy of the Collection Due Process Notice. 

 

The following corrective actions have not been completed: 

September 2000 Audit we will: 

1) Revise the IRM to require group managers to include POA notification in their 

case review. Proposed Completion Date: 4/01/01 

2) Return cases with legal and or procedural violations to appropriate district for 

corrective actions. Proposed Completion Date: 4/01/01 
71

3) Receive verification from district management that the corrective actions, for 

cases in corrective action 2, are complete. Proposed Completion 

Date:6/01/01 

7(b)(4) Properly withholding information in response to Freedom of 

Information Act or Privacy Act requests by taxpayers. 

We have conducted three annual reviews of the IRS FOIA/Privacy closed case 

files since the enactment of the RRA98 statute. Each year we have incorporated 

the TIGTA findings into corrective action plans. We have completed most of the 

corrective actions, but a few are either ongoing initiatives or are nearing 

completion, with September 2001 as the anticipated completion date. 

The TIGTA reported no significant findings or widespread evidence that the IRS 

incorrectly applied the confidentiality statutes (the issue that the statute charged 

TIGTA to review). In addition, the error percentages given in the report are 

attributable only to the denied documents (including partial denials and instances 

of no record of responsive documents). The denied, partially denied and nodocuments-responsive replies to FOIA and Privacy Act requests constitute only a 

fraction of the total volume of requests processed each year. The universe of 

FOIA requests lies between 25 and 30 thousand. The universe of denials 

sampled is approximately 6,000. From a sample of approximately 150 requests 

resulting in an IRC 6103 or FOIA(b)(7) denial, this years TIGTA review 

considered16. Of that 16, a significant portion was due to misinterpretation of 

computer transcripts resulting in constructive denial of data rather than 

intentional withholding of data. 

Though the IRS is short of “full compliance,” our compliance ratio is greater than 

90%. In fact, preliminary discussions of the current review indicate the TIGTA 

may have no further recommendations for improvement other than those already 

in progress. Recommended actions include efforts to increasing training in 

computer transcript reading skills and continuing training in the application of the 

various FOIA exemptions (including (b)(7)). 

7(c) TIGTA recently reported that the IRS processing procedures were not 

designed to identify and correct a credit when outdated estate tax returns 

were used by taxpayers. As a result, an estimated 1,250 estates of 

decedents may have overpaid $11.6 million. More generally, TIGTA 

reported that the IRS had payments totaling $2.3 billion in its Excess 

Collections Accounts and that taxpayers do not always receive credit for 

certain tax payments due to computing system limitations and processing 

procedures. What is the IRS doing to correct these problems? 

Our Submission Processing “pipeline” operations changed procedures to 

systemically identify outdated estate tax returns, earmark them for additional 

review, and match the proper credit to the appropriate tax year. The IRS notifies 
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taxpayers of the credit adjustments through its math error notice processing. 

(Completed in May 2000) 

To ensure we apply credits in Excess Collections to taxpayer's accounts, we: 

• Used a TIGTA program to generate two "clean-up" listings allowing credits to 

be matched and moved from Excess Collections back to the appropriate 

taxpayer's account. (Completed December 2000) 

• Are making programming changes to periodically generate a listing of all 

"OPEN" credits in Excess Collections. We will review this listing and apply 

payments appropriately to the taxpayer's account. (Implementation July 2001) 

• Implemented procedures to keep credits on Masterfile for accounts that 

require a return to be filed. The account will remain open and available on 

Masterfile during the statutory period so the IRS may actively pursue the 

taxpayers return and case resolution. (Implemented April 2000) During this 

time, we will send the taxpayer a notice every 6 months as a reminder that we 

have credit(s) available and the taxpayer must file to receive the 

credit.(Implementation April 2001) 
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8. Fiscal Year 2000 Financial Statements 

The GAO's financial audit for fiscal year 2000 identified six material 

weaknesses in the IRS's internal controls. These weaknesses related to the 

IRS's control over: (1) the financial reporting process; 2) management of 

unpaid assessments; (3) refunds; (4) property and equipment; (5) 

budgetary activities; and (6) computer security. According to the GAO, 

these weaknesses have allowed inappropriate refunds to be paid, reduced 

the effectiveness of the IRS in enforcing the tax code, resulted in error in 

taxpayer accounts, and increased taxpayer burden. GAO, Financial Audit: 

IRS Fiscal Year 2000 Financial Statements (GAO-01-394, March 2001) at 84. 

These weaknesses also were identified in GAO's financial audit for fiscal 

year 1999. GAO, Financial Audit: IRS Fiscal Year 1999 Financial 

Statements (GAO/AIMD-00-76, February 29, 2000). 

8(a) Has any progress been made in strengthening the IRS's control over 

these areas?

We made significant progress in strengthening controls in these areas and in 

improving our accounting practices. While we are pleased with our progress, we 

recognize that, to retain a clean opinion and improve management of our 

operations, we must maintain the same momentum for our future audits, continue 

to address identified problems, and focus on our modernization efforts. 

Financial Reporting Process -- “...IRS did not have adequate internal controls 

over its financial reporting process. IRS was unable to routinely, reliably, and 

timely generate the information needed to prepare its financial statements and 

manage operations on an ongoing basis.”: 

• We revised our reporting and disclosure for the statement of net cost to 

properly classify IRS programs. 

• We developed a set of policies and procedures for preparing our custodial 

financial statements. 

• We continue to make progress towards replacement of our core 

administrative financial system and on the Custodial Accounting Project 

(CAP). 

• The new Integrated Financial System (IFS) will provide timely and reliable 

financial, cost, and property accounting data, fulfilling the needs of the IRS for 

management information. As part of the modernization effort at the IRS, the 

IFS project is following a disciplined enterprise life cycle approach and is 

currently in the approval stages with a projected implementation date of 

October 1, 2003. The Custodial Accounting Project will provide a single data 

repository of taxpayer accounts and information for financial reporting. This 

project has received approval from the Core Business System Executive 

Steering Committee (CBS ESC) to continue Milestone 4 development 

activities, with a projected completion date of July 2003. We included the 
74

project on the list of approved projects that receive Information Technology 

Investment Account funding, and the CAP functionality is included in the IRS 

Modernization Blueprint 2000. Additionally, through other modernization 

efforts, we replace existing legacy systems. We need these systems and 

related process improvements to fully address the root cause of this material 

weakness. 

Management of Unpaid Assessments – “...the lack of an effective subsidiary 

ledger; errors and delays in recording taxpayer information, payments, and other 

activities; and the inability to actively pursue significant amounts in outstanding 

taxes owed to the federal government continue to hinder IRS’ ability to effectively 

manage unpaid assessments.” 

• We improved our ability to substantiate unpaid assessments. 

• We established a task group to review and recommend necessary changes to 

address the issues related to Trust Fund Recovery Penalty (TFRP) 

processing (e.g., delays in posting, related tax liabilities, etc.). This group 

developed programming requirements to design an automated TFRP system 

(that allows for systemic links). We have completed Phase I initial 

programming. By the end of FY 2002, we will complete the implementation of 

Phase II which will systematically accept downloads of data and crossreference payments received for assessments made. 

• We will include a Taxpayer Account Subledger to provide the ability to identify 

duplicate trust fund recovery assessments, taxes receivable, compliance 

assessments, and write-offs for financial reporting purposes in the CAP. 

• We addressed the process of matching information return data to tax returns 

at a high level in multiple model views throughout version 1.0 of the 

Enterprise Architecture (or the Modernization Blueprint). The Tax 

Administration vision specifically calls for electronic receipt of information 

returns (e.g., W-2, 1099), which will accelerate the tax return matching 

process and prevent erroneous refunds. 

Refunds – “...weaknesses in IRS’ controls over refund disbursements and other 

management challenges expose the federal government to material losses due 

to disbursing improper refunds.” 

• We have succeeded in several of our efforts to prevent erroneous Earned 

Income Tax Credit (EITC) refunds from being issued. Specifically, we: 

(1) Used the IRS’ dependent database to identify questionable issues relating 

to EITC 

(2) Implemented the new legislation requiring re-certification before the 

taxpayer can claim EITC on the current tax year due to improperly 

claiming EITC in the previous year (Since 1999, we have worked over 

55,000 re-certification cases.) 
75

(3) Banned taxpayers from claiming EITC for either two or ten years after the 

tax year where we decided the taxpayer’s claim was due to intentional 

disregard of the rules and regulation or fraud (This has resulted in 7,680 

two-year bans and 62 ten-year bans for processing year 2000, and 337 

two-year bans and two ten-year bans for processing year 2001, midFebruary.) 

(4) Implemented an automatic freeze on refunds where there is an open 

examination 

• We expect to implement a programming change to better identify returns that 

may have discrepancies in 2001. 

• We issued procedures requiring employees and their managers to document 

their monitoring of manual refunds to ensure we do not issue duplicate 

refunds, starting October 1, 2000. 

Property and Equipment (P&E) – “...serious weaknesses in its P&E systems and 

controls continue to prevent it from having P&E information available on an 

ongoing basis for management purposes and from having reasonable assurance 

that its assets are properly safeguarded and used only in accordance with 

management policy.” 

Prior to October 1999, we had multiple information systems organizations in IRS 

outside the Chief Information Officer (CIO) organization. This was a major 

contributing factor to the lack of accountability and commitment in maintaining an 

accurate and complete Information Technology (IT) inventory, thus the 

longstanding property material weakness. Today, the IRS has one information 

systems organization with total responsibility for the IT inventory. Since October 

1999, the Information Systems organization has made significant progress in 

improving how the inventory is managed and maintained. 

 

To implement the GAO recommendation that “systems and controls be in place 

for FY 2000,” we devoted our P&E employee resources to undertake and 

accomplish that task. The IRS had already established the Financial and 

Management Controls Executive Steering Committee (FMC ESC). The FMC 

ESC is chaired by the Deputy Commissioner and is the major coordination point 

in IRS for improving financial management systems. The FMC ESC established 

the Property Subcommittee consisting of executive participation by the offices of 

the CIO, Chief Financial Officer (CFO), and Procurement. This Subcommittee 

met weekly and made decisions to ensure we developed and monitored systems 

and controls for P&E. This Subcommittee will continue until we have resolved all 

property issues. 

Pending the implementation of an integrated property management system, the 

Property Subcommittee developed an interface between the IRS’ requisition 

tracking system (RTS), its automated financial system (AFS), and its property 

tracking system, the Integrated Network and Operations Management System 
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(INOMS). By establishing a common identifier, the procurement award number 

(PAN), it allowed all systems involved in IT acquisition to account for the order, 

the receipt, the payment, the location, and the disposition of items in the 

inventory system, throughout the entire lifecycle of the asset’s acquisition, 

ownership and disposition by IRS. IRS employees performed extensive manual 

research to back-fill the linking information into the INOMS database prior to 

inputting the common identifier on a daily basis. The automated integrated 

capability is scheduled for implementation as outlined in the IRS Strategic Plan. 

Also during FY 2000, we issued a policy to capture the costs of internally 

developed software. We will use this policy as guidance in accordance with the 

Statement of Federal Financial Accounting Standards (SFFAS) Number 10, 

titled, Accounting for Internal Use Software, with an effective date of October 1, 

2000. 

We implemented the new Single Point Inventory Function (SPIF) in each of the 

major offices with trained, dedicated, full time resources for IT property inventory 

activities--a first for the IRS. This includes policy and procedures that establish 

clear accountability in the receipt, distribution, and disposal of ADP hardware, 

software and telecommunications property at all designated sites. The issuance 

of Policy P-1-229, "Management and Control of ADP Property," designates the 

CIO as the official responsible for the ownership, management, and control of all 

IT assets in the IRS. This in itself is a major improvement in controlling who can 

acquire, relocate, and dispose of IT property. It also identifies the roles and 

responsibilities of designated personnel to support the SPIF Automated Data 

Processing (ADP) property management function. 

We established the Asset Management Modernization Project Office whose full 

time job is to implement industry "best practices" and deploy new automation 

tools (e.g., Peregrine 35 upgrade, auto discovery capability, and new scanner 

technology). 

The Information Systems personnel completed a 100 percent book-to-floor and 

floor-to-book inventory of all the computer hardware and software at all offices 

throughout the IRS. Additionally, we reengineered our physical inventory process 

to adopt industry “best practices,” allowing the physical inventory process to 

continue throughout the fiscal year using auto discovery tools to reduce the 

annual physical inventory costs. Other improvements currently being 

implemented involve an improved disposal process that ensures we update 

inventory records promptly. 

For near-term and long-term improvements, we have plans to implement two 

additional improvement phases that enhance processes related to automation 

capabilities. This will include the integration of non-IT assets with IT assets 

creating a single repository for all IRS property and equipment. In addition, We 
77

also plan to integrate the three related subsystems (procurement, asset, and 

financial tracking systems) as outlined in the IRS Strategic Plan. 

Budgetary Activities – “...IRS’ internal controls continued to be inadequate in 

providing reasonable assurance that its budgetary resources were routinely 

accounted for, reported, and controlled.... Undelivered orders were not always 

reduced...or were understated due to inappropriate deobligating of funds.... 

errors in IRS’ accrued expenses recorded at the end of fiscal year 1999, which 

resulted in misstating the beginning balance of undelivered orders for fiscal year 

2000. ...IRS recorded incorrect activity as adjustments to obligations.” 

During FY2000, we 

• Reduced the number of employees with authority to override automated 

spending controls 

• Reduced the dollar amount and duration of transactions held in suspense 

• Issued policy memoranda and implemented procedures to deobligate funds 

no longer required for a specific purpose 

• Worked closely with the Procurement Division to identify and de-obligate 

funds that were no longer required 

• Developed a subsidiary ledger of undelivered order and all related activities 

that allowed for easier review and audit of obligations 

• Worked with Procurement, FPM’s and COTR’s of several major projects, that 

had recently been completed, to ensure the appropriate accruals were 

established and unneeded funds were de-obligated 

• Instituted new policy requiring the BFC to verify the accuracy of the ship 

date/delivery date on the invoice and the receipt date in the accounting 

system 

• Developed systemic process of posting accrual information from payments 

made after September 30th.

• Developed system of matching subsequent payments to accruals as 

recommended by GAO 

• Revised interface between IPS/RTS and AFS so that appropriate receipt 

information is processed in AFS 

• Worked with GAO to eliminate offsetting upward and downward adjustment 

transactions that were identified as incorrect adjustments to obligations. 

In FY 2001, we 

• Continue to work with the Procurement Division and all functional areas to 

identify and de-obligate funds that are no longer required 

• Are enhancing the undelivered order subsidiary ledger developed in FY 2000 

by providing additional information, an improved format, easier access, etc. 

• Are working with the Procurement Division to get period of performance 

information in IPS/RTS to interface with AFS -- This will allow the IRS to focus 

on de-obligating funds on obligations that have expired performance dates 

• Are exploring positive incentives to entice functional unit to de-obligate funds 
78

• Are working with the Procurement Division to allow “acceptance date” in 

IPS/RTS to interface with AFS -- This will allow end users to input receipt date 

information into AFS and not generate a payment 

• Are working with GAO on an alternative approach to the fiscal year end 

accrual process that will allow accruals to be based on estimates and not 

necessarily subsequent disbursements 

• Are working with the Procurement Division to allow non-commercial 

procurements to be processed through IPS/RTS -- This will allow receipt 

information to be interfaced through IPS/RTS to AFS and improve the accrual 

process 

• Are identifying offsetting upward and downward adjustments periodically, 

during the fiscal year, as prescribed by GAO. 

Computer Security – “Much remains to be done to resolve the significant control 

weaknesses that continue to exist within the IRS computing environment.” 

Recognizing the critical need to enforce federal law and regulations concerning 

privacy and non-disclosure of confidential tax information, we created the Office 

of Security (OS) to establish and enforce standards and policies for all major 

security programs including, but not limited to, physical security, data security, 

and systems security. The OS gives us a proactive, independent security group 

directly responsible for the adequacy and consistency of security and privacy 

over all our operations. 

The OS’ approach is consistent with GAO's September 1996 report, Information 

Security: Opportunities for Improved OMB Oversight of Agency Practices, which 

noted that, "Such a program can provide senior officials a means of managing 

information security risks and the related costs rather than just reacting to 

individual incidents." OS is reviewing each type of facility so we can set priorities 

for resources and to measure and demonstrate success in improving the overall 

security posture of the IRS. OS is taking a proactive approach by conducting 

security reviews at the computing centers and campuses at least twice a year. 

OS is also working with local and Headquarters management to develop 

solutions, monitor implementation, and conduct on-going reviews to ensure 

weaknesses do not reoccur. This focus on critical assets has been further 

supplemented by the Presidential Decision Directive (PDD) 63, Critical 

Infrastructure Protection. 

Since 1997, the Office of Security, within the IRS, has been actively involved in 

identifying and correcting security weaknesses throughout the IRS. These 

weaknesses have been identified by the General Accounting Office, the Treasury 

Inspector General for Tax Administration (TIGTA) and also by the Office of 

Security. The Office of Security conducts comprehensive security reviews of IRS 

facilities that identify both local and systemic weaknesses. Their 

recommendations require either local action or broader steps such as policy 

guidance, revised operating procedures, training or new technological 
79

approaches. During the four years since 1997, we have made major 

improvements in physical, data and systems security assurance, although a 

number of weaknesses remain. The General Accounting Office made note of our 

progress in this area in their most recent High Risk Update (January 2001). They 

said “IRS has made notable progress in improving computer security at its 

facilities, corrected a significant number of identified weaknesses, and 

established a Service-wide computer security management program that should, 

when fully implemented, help the agency effectively manage it’s security risks”. 

Some of our significant achievements include: 

• Improvement of the security status of existing systems. We have developed 

and implemented security standards and procedures for the installed base of 

systems, including standards for IBM mainframe systems, Unisys systems, 

UNIX, and Windows NT systems. We conduct vulnerability assessments 

using these standards as a baseline. 

• Development of security architecture for the IRS modernized systems 

environment. Working with the PRIME Alliance, we have established an 

Enterprise Architecture, which has integrated security features throughout the 

architecture. 

• Improvements to the established systems certification and accreditation 

process. We have made progress in improving our paper-based systems 

certification and accreditation process. First we built it into the systems life 

cycle used for developing new systems. Second, we automated the process 

to make use of automated tools and government best practices. 

• Continuing emphasis on the Unauthorized Access (UNAX) program. In 1997, 

we established our UNAX program which, focuses on manager responsibility 

and communication to employees, to establish and maintain a culture of 

personal responsibility and accountability to protect the confidentiality of 

taxpayer records. We have: 

• Expanded the ability to detect unauthorized access through tracking tools 

• Communicated extensively about UNAX prohibitions 

• Issued written guidance to managers and employees 

• Administered stringent penalties, and 

• Tracked disciplinary outcomes to determine effectiveness 

• Creation of an enterprise Computer Systems Incident Response Center 

(CSIRC). We improved our incident response capability by establishing of the 

CSIRC, which is focused on managing incident detection and response 

agency-wide. A cooperative effort between Information Systems Operations, 

TIGTA and the Office of Security, we created the CSIRC to provide real time 

monitoring, and allow us to respond to security incidents quickly and 

precisely, and to provide the documentation necessary to prosecute intruders. 
80

• Facilities upgrades to improve security. Over the last 4 years we have 

dramatically improved physical security at key facilities. Work continues in this 

area.

• Development of assessment tools and techniques that allow us to identify and 

prioritize areas of vulnerability in an objective, measurable manner. We have 

adopted, modified, and implemented the draft IT Security Assessment 

Framework developed for the Federal CIO Counsel by the National Institute 

of Standards and Technology. This Framework gives us a structured tool to 

use in assessing the security posture of the enterprise, and tying that 

assessment to strategic and tactical plans that will facilitate prioritization of 

resources. 

We are addressing security and privacy in its Business Systems Modernization 

effort. In the future, this will give taxpayers the ability to access Internet based 

refund status information. We are developing the Security Technology 

Infrastructure Release (STIR), to give us a standard platform for Web-based 

applications. The STIR design follows a rule-based architecture, which governs 

access to and control of information based on users, by controlling different data 

permissions for IRS employees, organizations with which IRS has a trusted 

relationship and the public at large. 

As with any organization, the resources available for security enhancements and 

upgrades are limited and must be prioritized. Many of the corrective actions we 

are taking are multi-year efforts. In 2001, we are further enhancing our cybersecurity capabilities to better deal with increasing threats from hackers, viruses 

and other breaches. Because the solutions are complex and involve specialized 

skills, we are working with other federal agencies to identify best practices. As 

we are increasingly relying on centralized systems, we have also focused our 

security efforts on identifying the physical security and disaster recovery 

capabilities needed to mitigate the risks associated with terrorist threats. 

Although we have been able to reallocate resources to address most risks, 

others remain that will require substantial longer-term investments, which are 

currently unfunded. 

We understand that although new technologies will help to streamline the 

agency’s operations and improve the delivery of services to taxpayers, these 

same technologies must be controlled to ensure adequate security. This 

continues to take on greater significance as IRS’ reliance on paper decreases 

and its dependence on new technologies increases. To support this new service 

delivery, we plan to move toward a more comprehensive Mission Assurance 

approach, creating a seamless relationship between security and the business 

processes of the organization. This will involve business executives more 

intimately in risk management of the assets and business processes they 

manage. 
81

In summary, we have taken many significant steps during the past four years 

toward implement a robust, reliable and responsive security program to protect 

taxpayer data from external and internal intrusion. These steps focus on all 

aspects of security – information, personnel, physical – and incorporating both 

advanced preventive measures and remedial mitigating measures for 

weaknesses that are already documented. We believe our program will become 

even stronger during the next several years as we strengthen the bond between 

security and the business processes and build security into the structures that 

are the foundation of a modernized IRS. 

8(b) How have the IRS's accounting practices improved? 

IRS Accounting Practices:

We implemented reconciliation procedures for IRS fund balances and ensured 

prompt review/reconciliation was performed. Other improvements to IRS 

accounting processes are discussed above in relation to improving controls on 

material weaknesses, specifically we: 

• Revised our reporting and disclosure for the statement of net cost 

• Developed policies/procedures for preparing custodial financial statements 

• Improved our ability to substantiate unpaid assessments 

• Took steps to prevent erroneous EITC refunds 

• Developed an interface between our requisition tracking, financial, and 

property tracking systems 

• Issued policy to capture costs of internally developed software 

• Completed 100 percent book-to-floor and floor-to-book inventory of all 

hardware and software and reengineered the physical inventory process to 

allow it to continue throughout the fiscal year 

• Reduced the number of employees with authority to override automated 

spending controls 

• Reduced the dollar amount and duration of transactions held in suspense 

• Implemented procedures to deobligate funds no longer required for a specific 

purpose 
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9. Revenue Protection 

9(a) In filing season 2000, the IRS planned to test the Dependent Database 

to ensure the validity of identifying numbers in its efforts to prevent 

overclaims of the earned income tax credit. The Dependent Database 

includes records from the Social Security Administration and the Office of 

Child Support Enforcement at Health and Human Services, which links the 

names and social security numbers of dependent children with the names 

and social security numbers of their parents. 

9(a)(1) Has the IRS tested the Dependent Database? What were the results 

of the test? How accurate is it? What errors in the database have been 

detected? 

The Dependent Database (DDB) identifies potentially non-compliant returns 

during returns processing. It pulls data from both internal and external data sets, 

including those provided by the Department of Health and Human Services 

(HHS) and the Social Security Administration (SSA). 

We completed testing of the DDB in FY 2000 and implemented the system 

nationwide in January 2001. Upon receipt of the HHS data in February 2000, we 

selected about 10,000 returns for examination between March 15 and May 2, 

2000, and classified them for potential errors. We held potential refunds on 

these returns and forwarded the cases to Examination. The return selection 

criteria, developed with HHS and SSA data, were most successful when 

combined with other IRS data on filing characteristics and duplicate claims of 

children for dependency exemptions and the EITC. For example, when a child’s 

SSN was used multiple times, the data helped determine which taxpayer was 

most likely to be noncompliant in claiming tax benefits for that child. 

Because many of the selected returns are still in the examination process, we 

have not yet completed our final analysis. However, we have identified some 

limitations in the usefulness of the data: 

• The new SSA data, linking parents’ SSNs to those of their children, remains 

limited because of the short time SSA has been gathering the data. 

• The HHS data records do not contain the date when the records were created 

in the system. Thus, the IRS is unable to determine whether documents 

provided by taxpayers are more current than HHS’ records. 

• The data contains inconsistencies because the HHS database is reliant on 

data provided by the individual states. These inconsistencies include multiple 

records for the same child and missing data elements, such as the SSN for 

the child or the custodial party. 
83

• Not all of the states are providing all of their records. In December 2000, 

HHS indicated four states had no records for children and two had partial 

records. 

9(a)(2) Has the use of the Dependent Database had any effect on revenue 

protection? 

In Fiscal Year 2000, we limited our work on the DDB application, including the 

use of the HHS and SSA data, to testing. This year we are using the DDB 

application nationwide, with enhanced selection criteria, as part of the 

Examination Program and for the identification of noncompliant taxpayers and 

paid preparers. We will design future education and outreach efforts based on 

findings from the analysis of the DDB data. Because we will conduct 

examinations before the release of tax refunds, we expect revenue protection in 

FY 2001. We expect education and outreach efforts to result in revenue 

protection measurable by the reduction in error rates in returns filed during the 

2002 filing season.

9(b) What efforts are being made to stop the promotion of illegal tax 

avoidance schemes (e.g., taxpayers claiming that the income tax does not 

apply to individuals, etc.)? 

Criminal Investigation’s (CI) new organizational structure will promote more 

efficient and effective operations. Headquartered in Washington, DC, reporting 

directly to the Commissioner of Internal Revenue, CI is ideally placed to 

formulate policy, direct, guide, and support field operations and promote better 

cooperation within the IRS. We realigned CI’s field offices to better conform to 

the boundaries of the federal judicial districts. This realignment will enhance 

cooperation and coordination with the United States Attorney’s offices and 

facilitate the accomplishment of the IRS mission to apply the tax law with integrity 

and fairness to all. 

The CI Compliance Strategy, established in 1999, will continue to guide 

operations. This strategy is comprised of three interdependent and mutually 

supporting programs, Legal Source Tax Crimes, Illegal Source Financial Crimes, 

and Narcotics Related Financial Crimes. This balanced approach to case 

development and investigation has enabled CI to effectively use all statutes 

within its jurisdiction, the grand jury process, and a broad range of all 

enforcement techniques to combat tax, money laundering, and currency crimes. 

It also provides the flexibility needed to quickly respond to changes in local 

compliance priorities, issues, and financial crime trends. 

 

Publicity Strategy 

Criminal Investigation has established a public information officer position in each 

of the 35 field offices. The special agents assigned to these positions serve as 

points of contact for all internal and external CI communications initiatives, 
84

including press releases and the coordination of important law enforcement 

media events. News coverage of successful prosecutions helps foster 

compliance and public confidence in the tax system. 

In order to educate and warn the public about illegal tax schemes, Criminal 

Investigation maintains an Internet website at 

www.treas.gov/irs/ci, and the Small Business Self-Employed Operating Division 

maintains a website at www.irs.gov/smallbiz. These websites identify tax fraud 

alerts and contain detailed information, press releases, and case summaries 

related to various schemes: “Abusive Trust Scheme”; “Employment Tax Fraud”; 

“Why Do I have to Pay Taxes?”; “Social Security Refund Hoax”; and “Slavery 

Reparations Tax Refund Scam.” 

Criminal Investigation will continue to update the material on its website, and add 

new sections covering other program areas as appropriate. 

Below is a summary of our enforcement efforts associated with some of the more 

common illegal tax schemes. 

Foreign and Domestic Trusts 

According to USA Today, more than $4.8 trillion in wealth will be inherited or 

transferred from one generation to the next by 2015, with much of it transferred 

through a variety of trusts. Filings of trust returns are now the third most 

frequently filed income tax return after individual and corporate returns. Although 

the vast majority of these transfers are legal, the potential for fraud is 

widespread. 

In fiscal year 1999, Criminal Investigation elevated abusive foreign and domestic 

trusts from an emerging issue to a program area. We elevated this issue 

because of the proliferation of abuse promotions in the U.S. Criminal 

Investigation is aggressively combating trust schemes by conducting 

investigations of abusive promoters and their clients, where appropriate. We 

address fraudulent trust issues through a national strategy that includes Criminal 

Investigation, Small Business/Self Employed (SBSE), Large & Midsize Business 

(LMSB), Chief Counsel, and the Department of Justice. As part of this strategy, 

we place emphasis on cross-functional coordination, the identification of 

fraudulent trust promotions, and the use of civil and criminal enforcement actions. 

Criminal Investigation and civil components have engaged in outreach activities, 

such as presentations to professional organizations, the creation and distribution 

of an information pamphlet, IRS Public Announcement Notices, warnings posted 

on the Internet and extensive media coverage to help people recognize and 

avoid fraudulent trust promotions. 
85

Nonfiler Program 

The nonfiler population has increased throughout the decade. To address this 

concern, the Internal Revenue Service has implemented a cross-functional 

National Nonfiler Strategy. The overall goal of this strategy is to bring taxpayers 

back into compliance. 

Criminal Investigation’s role in this program is the enforcement of the tax laws for 

individuals who are not responsive to outreach efforts. Criminal Investigation has 

devoted resources to identify these individuals and in the most flagrant cases, 

criminal prosecution has and will continue to be recommended. Historically, CI 

has been involved in projects aimed at identifying and prosecuting the most 

flagrant nonfilers in a variety of occupations and industries, including wage 

earners, accountants, lawyers, doctors, public officials, the self-employed, 

corporate officers and narcotics traffickers. Criminal Investigation has also been 

involved in prosecuting those nonfilers who belong to groups that support militant 

anti-government and anti-taxation philosophies. 

Criminal Investigation has increased its participation in the FBI’s Joint Terrorism 

Task Forces being organized in major cities. The unique investigative skills of CI 

special agents have proven effective in investigations of extremist elements that 

support anti-taxation, anti-government philosophies. Many of these individuals 

fail to file tax returns or file frivolous returns. Criminal Investigation will develop 

and conduct high impact investigations of nonfilers in various occupations and 

industries, as well as those nonfilers who file non-processable returns or seek to 

undermine the tax system by employing frivolous arguments the courts have 

repeatedly rejected. Criminal Investigation’s ability to investigate and prosecute 

flagrant cases and to generate publicity is a valuable compliance tool. 

Employment Tax Fraud 

“Pyramiding” and “employee leasing” are perhaps the two greatest areas of 

concern for Criminal Investigation involving employment tax fraud. “Pyramiding” 

is the fraudulent practice of companies withholding employment taxes from 

employees but failing to remit payment to the IRS. Businesses involved in 

“pyramiding “ frequently file for bankruptcy to avoid payment for these liabilities, 

then start a new business under a different name. “Employee leasing” is the 

practice of contracting with outside businesses to handle all administrative, 

personnel, and payroll concerns for employees. In some instances, employee 

leasing companies fail to pay to the IRS any portion of the collected employment 

taxes. 

We believe the continued use of appropriate criminal enforcement actions and 

the publicity generated by those actions will help deter those who are involved in 

this illegal activity. Criminal Investigation is exploring the need to form dedicated 

teams of criminal investigators and civil component employees to investigate and 

prosecute responsible parties. 
86

Questionable Refund Program 

The Questionable Refund Program (QRP), administered by CI, is a nationwide 

multifunctional program established in January of 1977. The QRP identifies 

fraudulent returns, stops the payment of fraudulent refunds, and refers identified 

fraudulent refund schemes to CI field offices. While the primary focus is on 

individual tax returns, we also review business tax returns under the QRP. 

Questionable Refund Detection Teams (QRDT) are located in the CI Fraud 

Detection Centers (FDCs) on the ten campuses. The QRDT reviews 

questionable tax returns identified by manual or computerized screening 

techniques. We refer schemes with criminal potential to CI field offices for 

investigation. In addition, many returns are referred to other appropriate 

Operating Divisions as well as to the Adjustments Section for appropriate civil 

action. 

Communications from Electronic Return Originators (ERO), financial Institutions, 

return preparers, and concerned citizens also identify QRP schemes. 

The Electronic Fraud Detection System (EFDS) is a computer system located in 

the FDCs on the ten campuses and many CI field offices. The EFDS automates 

the computer identification output for potentially fraudulent Electronic Filed (ELF)

tax returns, increases data available for analysis, and assists in the development 

of information relating to paper and ELF schemes detected by the QRDTs. The 

EFDS not only provides a means to review potentially fraudulent ELF tax returns 

“on-line” but also allows queries of various databases to identify other returns 

with similar characteristics. 

The QRP area also attracts a relatively new type of crime, that of identity theft. 

On October 30, 1998, The Identity Theft and Assumption Deterrence Act of 1998 

went into effect. Criminal Investigation is now able to investigate and recommend 

prosecution under this statute in tandem with the investigation of substantive tax 

and money laundering violations from refund fraud and money laundering 

schemes. 

9(c) What progress has been made in developing a business results 

measure for voluntary compliance to assist in targeting areas of 

noncompliance? 

Balanced measures are being developed at the strategic and operational 

management levels along with associated reporting mechanisms. Measures will 

be used in assessing IRS’ overall performance in meeting its missions and 

strategic goals, and include such aspects as voluntary compliance, customer 

satisfaction, burden, and productivity. 

We have developed the conceptual framework for a series of strategic measures 

focused on three core components that make up overall compliance: filing 

compliance, reporting compliance, and payment compliance. Each of the three 
87

core components has a key corresponding rate measure (i.e., the voluntary filing 

rate, the voluntary reporting rate, and the voluntary payment rate). The proposed 

measures also include some absolute amount figures so as to provide insights 

into their relative share of the tax gap. Finally, the conceptual framework calls for 

additional breakouts by type of tax and by IRS business operating division, within 

each of the three core components, to help further target areas of 

noncompliance. Work is focused on ways to secure data for the major portions 

of this conceptual measures framework for voluntary compliance. Development 

of Service-wide strategic measures is on track for September 2001 release, with 

corresponding data reporting for many of these measures on track for September 

2002. 

 

9(d) What benefits have resulted from diverting compliance resources to 

customer service? 

We have been able to provide an increased level of service to our customers in 

both our walk-in sites and our toll-free services. In our toll-free operation, as 

mentioned in an earlier question, we have reduced our compliance requirement 

55% over our 2000 need; however, compliance personnel continue to assist in 

customer service during the filing period beginning in early January through our 

April peak. They have already answered 328,000 plus inquiries through March 

10, 2001 on our most complex tax law questions. Diverting compliance personnel 

provides needed quality expertise to our toll-free work force. We have plans to 

continue to train our own customer service employees and specialize our work in 

toll-free to meet customer demand by the beginning of January 2003. The 

Service also developed operational balanced measures for all major units within 

the operating/functional divisions. Depolyment of measures to the territory or 

equivalent level will be completed at the beginning of FY2002. Development of 

Servicewide strategic measures is on track for 9/2001, with appropriate data 

reporting on track for 9/2002.
88

10. Collection 

10(a) The IRS has noted that the due process provisions of the 

IRS Reform Act, which increase taxpayers' rights during the collection 

process, have increased the IRS's workload far more than anticipated. 

10(a)(1) Have staffing needs to implement these provisions been met? 

Staffing needs have increased as a result of the additional due process 

requirements imposed by RRA 98. The IRS has been analyzing the impact of 

these provisions on workload to determine appropriate staffing. 

At the front end of the collection process, due process provisions have raised the 

need for resources at our Automated Collection System sites. Before the 

implementation of the Act, many of our levy actions were systemic and required 

minimal staff intervention. Now, we must have individually reviewed the facts and 

circumstances of each case before initiating a lien or levy action. In addition, 

once the hearing request is received, ACS is required to take actions to prepare 

the case for referral to Appeals. ACS staff that had formerly been applied to 

working collection cases have being redirected to handle the processing of 

Collection Due Process (CDP) requests. 

To ensure that we maximize our staffing resources, we are examining our 

internal operations and workflow to identify opportunities to streamline and 

improve our handling of these accounts. The IRS convened an executive level 

task force to review the due process program. An implementation team is in 

place to implementation process improvement recommendations identified by the 

task force to include: 

• Establishing a due process program review in Appeals. 

• Developing a Best Practices and Case Management Guide for 

managers. 

• Creating a standardized Appeals referral form to clearly identify the 

issues being raised by the taxpayer and to assist Appeals in analyzing 

workload. 

• Establishing special purpose job aids and an internal CDP web-site to 

provide quick reference materials. 

• Developing of Abbreviated Appeals Case Memos to streamline the 

hearing process in situations where the taxpayer and the Service have 

reached agreement. 

• Establishing a procedure that provides time for the collecting office to 

work with the taxpayer after a hearing request has been made. 

• Establishing an inventory tracking system to assist in assessing and 

predicting due process workload. 

• Reviewing lien filing and systemically proposed levy notice criteria. 
89

• Developing a test where employees familiar with automated collection 

system (ACS) processing are assigned to Appeals to assist in due 

process hearing requests. 

When the due process provisions went into effect in January 1999, Appeals had 

approximately 60 settlement officers trained to work collection issues. Currently, 

229 Appeals personnel, including 67 settlement officers, handle CDP cases. To 

handle the workload associated with CDP cases, Appeals is increasing the 

number of CDP trained employees to 482 in FY 2001. By the end of FY 2001, 

Appeals will have applied 180 FTEs to close 8,175 CDP cases. Projections for 

the first quarter of FY 2002 anticipate processing improvements resulting in 75 

FTEs closing approximately 4,600 CDP cases. 

1999 2000 2001* 1st Qtr 2002* 

CDP inventory 4808 6602 13,296 13,105 

Cases closed N/A N/A 8,175 4,600 

FTE applied N/A N/A 180 75 

Employees 

trained 60 67 482 482 

* Projected 

(10)(a)(2) How has the compliance cycle been affected by the due process 

provisions? 

The due process provisions have definitely slowed and lengthened the overall 

compliance cycle. In employment tax cases, for example, we estimate that in the 

best possible case it will take almost one year from issuance of the CDP notice 

for the Service to resume collection after a taxpayer has fully exhausted his due 

process rights. This estimate assumes that the case is moving through the 

process efficiently, with the taxpayer and the Service earnestly attempting to 

resolve the liability and without any delays attributable to a backlog. We estimate 

that, under the same scenario, other types of cases will take at least two-thirds of 

a year to process. A flowchart that shows the "best case scenario" timeline for a 

CDP case is attached. 

These estimates are largely based on statutory waiting periods and the 

requirement that no collection action be taken prior to the exhaustion of the 

taxpayer's judicial due process rights. The CDP statute permits the taxpayer to 

contest the Appeals officer's determination by filing a petition in the Tax Court or 

U.S. District Court within 30 days of the determination. Accordingly, Appeals 

holds the case in its inventory until the taxpayer's statutory period under the 

Federal Rules of Civil Procedure for notifying the Service of a court petition has 

expired. In District Court actions, the total holding period is 180 days: 30 days to 

file a complaint, 120 days to notify the Government, and 30 days for the IRS to 

receive and process the notice that a court proceeding has been initiated. For 

Tax Court cases, the holding period lasts 90 days: 30 each to file a petition, 
90

serve the petition on the Government, and for the IRS to receive and process the 

petition. 

If the taxpayer does not seek court review of the Service's action, the case is 

than returned to the collecting office for appropriate action as determined by 

Appeals. 

During this almost year long CDP period, the IRS takes no collection action. In 

the case of business trust fund taxpayers that continue to accrue additional 

liabilities even after requesting a CDP hearing, the process can be repeated with 

each new quarter of liability. 

10(a)(3) What difficulties have arisen in implementing the due process 

provisions? 

As with any complex, new statute, implementing the Collection Due Process 

provision has been extremely challenging. 

The technical challenges have included redesigning our computer systems to 

suspend the running of the collection statute while the CDP is pending. This 

capability went into effect in January 2001. 

More noteworthy, however, has been the challenge of designing an efficient 

process that does not disproportionately expend resources on taxpayers and 

practitioners who abuse it to delay collection. Appeals settlement officers' 

inventories contain a significant percentage of cases advancing frivolous, 

patently meritless arguments. Moreover, the same taxpayers who advance 

these claims often request unreasonable or previously rejected payment 

arrangements during the CDP process. Nevertheless, before an appeals officer 

can issue a determination in one of these cases he must fully analyze each claim 

and payment offer. 

Even after the determination letter is issued, these taxpayers often request 

additional Appeals hearings due to "changed circumstances", as permitted by the 

statute. The Service may resume collection at this point, nearly a year following 

issuance of the CDP notice. However, we must still expend valuable resources 

to address these new requests, instead of applying the resources to legitimate 

cases. 

10(b) What progress has been made in increasing taxpayers' rights during 

collection actions? 

Significant progress has been made in implementing the letter and spirit of the 

CDP statute. To ensure the protection of taxpayer due process rights, we have 

provided tax law and procedural training to a significant number of Appeals and 

Collections officers. We should complete training for all Appeals settlement 
91

officers, as well as those Appeals officers who handle CDP cases, by the end of 

May. 

In addition, we have taken steps to ensure that taxpayers are fully informed of 

their rights. Finally, we have designed our systems to identify cases for which 

collection is prohibited. We are confident that we will continue to enhance the 

due process benefits afforded taxpayers under the Collection Due Process 

statute. 

10(c) What additional legal authority does the IRS need to fully collect taxes 

due and owing? 

We are concerned about the abuses described in response to Question 10(a)(3), 

and have had initial discussions with Treasury to identify possible legislative 

solutions. We anticipate recommending these solutions to the Joint Committee 

on Taxation and other appropriate Congressional committees in the near future. 

Generally, we are exploring ways to reduce the length of time it takes to process 

employment tax cases, and minimize the use of abusive tactics and frivolous 

claims to delay collection. 

10(d) What is the staffing level for compliance activities for this year as 

compared to last year? What are the projected needs for staffing in this 

area? 

The table below shows the Fiscal Year (FY) 2000 -2001 staffing levels for 

collection activities in Service Center and Field Collection operations as well as 

the projected staffing levels for FY 2002. The FY 2002 levels reflect plans to hire 

470 Revenue Officers in FY 2001. Since our last hiring initiative in FY 1995, we 

have experienced a steady decline in the number of field collection staff available 

to collect delinquent taxes and to secure delinquent tax returns. These additional 

Revenue Officers will stabilize the workforce and allow IRS to allocate resources 

to areas of concentrated workload. 

In addition to increasing our Revenue Officer staffing levels, IRS is decreasing 

the amount of Revenue Officer time applied to filing season activities. In FY 

2000, Compliance programs overall contributed 1,933 FTEs (Full Time 

Equivalents) to filing season programs that included Toll-Free Assistance, WalkIn Assistance and Outreach Efforts (e.g., Taxpayer Education, VITA and Tax 

Counseling for the Elderly). A key objective of the FY 2001/2002 STABLE 

(Staffing Tax Administration for Balance and Equity) budget initiative is to reduce 

this reliance on compliance and enforcement staff for taxpayer assistance. In 

FY 2001, 40 percent fewer FTE will be diverted to assistance programs. A 

second reduction of nearly 50 percent will occur in FY 2002 and, by FY 2003, we 

expect that detailees from Examination and Collection will be nearly eliminated. 
92

For Revenue Officers specifically, the number of FTEs detailed to filing season 

activities will be reduced from 683 in FY 2000 to 376 in FY 2001 and to 189 in 

FY 2002. These Revenue Officer FTEs will be redirected to collection activities. 

The table below shows Revenue Officer FTEs available after considering the 

impact of details for filing season support. 

FTE Category FY 2000 FY 2001 FY 2002 

Projected 

Service Center Collection 2,501 2,634 2,662 

Field Collection * 9,254 9,016 9,486 

Revenue Officers ** 6,195 6,089 6,559 

 Less: Filing Season Support 683 376 189 

Revenue Officers (Net) 5,512 5,713 6,370 

* Includes all GS-1169 series revenue officers, managers, clerical and paraprofessional 

employees in the field. 

** Includes only GS-1169 series revenue officers and managers (frontline field, technical 

and insolvency) Note: The Revenue officer category is a subset of Field Collection. 

To address the growing number of Offer in Compromises cases, we are 

reviewing and reengineering our work processes and centralizing those cases 

most effectively worked in a service center environment. As part of that effort, 

we will be addressing the backlog in inventory and implementing improvements 

to efficiency. 

Beginning in July 2001, all new OIC receipts will be sent to one of two service 

centers, depending on where the taxpayer resides. A staged implementation is 

planned between July and November, with actual casework beginning in August 

2001. The table below shows the impact on staffing based on the projected 

increase in OIC cases and the centralization of OIC case processing. 

Expected Field 

Svc. 

Center Field

Svc. 

Center Total 

Receipts Closures Closures FTEs FTEs FTEs

FY-2000 Actual 109,296 84,391 - 1,230 - 1,230 

FY-2001 Proj. 129,230 87,000 - 1,267 - 1,267 

FY-2002 Est. 144,252 84,806 73,568 1,236 938 2,174 

FY-2003 Est. 161,020 84,806 91,920 1,236 1,126 2,362 

FY-2004 Est. 179,736 84,806 101,466 1,236 1,243 2,479 

Collection Field staffing will remain constant at FY 2002 levels with the 

increase in receipts being handled in a more efficient and effective bulk 

process environment in the service centers. 

10(e) Over the past several years, collection and compliance efforts have 

declined. The IRS has attributed the decline to a decrease in staffing 
93

levels, diversion of resources to customer service, employee training, and 

increased time to needed to resolve cases. What does the IRS plan to do to 

increase its compliance activities? 

The IRS is taking several steps to increase resources applied to collection 

compliance activities. First, through the IRS Strategic Planning and Budgeting 

process, we are focusing our enforcement resources on those areas most in 

need of attention. In addition, we are undertaking several efforts to reengineer 

and realign work processes, with the goal of improving the effectiveness of our 

compliance activities. Finally, a new recruiting and hiring strategy will assure a 

more constant and stable workforce. 

In the Strategic Planning and Budgeting process, new compliance strategies are 

being developed and current strategies are being updated to better focus 

collection compliance resources on those areas most in need of attention. For 

example: 

The National Nonfiler Strategy is a broad-reaching, multifunctional effort to 

bring nonfilers back into the system and to keep them there. It is supported 

by a continuing research effort aimed at identifying the most egregious 

taxpayer groups and determining causes of the noncompliance. By using 

information from State and private sector data sources, we expect to improve 

our case selection criteria and provide useful case file information to our 

Collection employees. In addition to direct enforcement efforts, we will 

develop education, outreach and alternative treatment programs to address 

noncompliance of those taxpayer groups likely to respond to such programs. 

A strategy to reduce Accounts Receivable is also being developed. As part of 

that strategy, we are piloting an effort to address trust fund pyramiding 

problem with in-business taxpayers through the use of the general civil 

injunction provision of the Internal Revenue Code. Through the IRS Office of 

Government Liaison and Disclosure and in partnership with the Federation of 

Tax Administrators (FTA), we are seeking 100% participation in the State 

Income Tax Levy Program (SITLP) with the 41 States that have an income 

tax. We also are working with the Financial Management Service (FMS) and 

other Federal agencies to expand and enhance the Federal Payment Levy 

Program (FPLP). 

IRS has instituted a number of reengineering and redesign projects designed to 

improve the efficiency of its operations and to provide a higher level of 

consistency in its treatments. 

The Collection Reengineering project will address a number of mainline 

collection functions. For example, we will examine the assignment of trust 

fund cases from the Collection notice stream to Collection field enforcement 

to minimize delays between assessment and compliance contact. We will 
94

seek to simplify our policy and procedures around referrals to Appeals, the 

pyramiding of trust fund liabilities, and case documentation and managerial 

review requirements. In the long term, we will be examining and rethinking all 

of our fundamental collection processes with the goal of improving efficiency 

and consistency in our treatment of taxpayers. 

To address the growing number of Offer in Compromise cases, we are 

reviewing and reengineering our work processes and centralizing those cases 

most effectively worked in service center environment. As part of that effort, 

we will be addressing the backlog in inventory and implementing 

improvements to efficiency. The table in answer 10(d) shows how IRS will 

handle the growing number of receipts and the effect on staffing levels. 

A project to enhance the Automated Collection System (ACS) will explore the 

use of the predictive dialer technology to commence outcall campaigns to 

targeted inventories. This improvement will allow the ACS outcall process to 

route answered calls back to employees dedicated to answering calls. It will 

also route no answer and busy calls to a research function designed to 

determine suspended or deferred status. 

The Compliance Risk project will identify and assign those cases that have 

the greatest impact on compliance. Through behavioral and application 

scoring of cases, high-risk cases will be identified and assigned earlier in the 

collection process. 

Our Vision Migration Strategy will centralize and consolidate the support 

services associated with case processing, workload delivery and technical 

support. This will streamline support services, resulting in efficiencies and the 

potential for reassigning enforcement personnel to front line activities. 

To assure a constant and stable workforce, we have instituted a recruiting and 

hiring program that will result in hiring approximately 470 new Revenue Officers 

this fiscal year. This program will serve to continually replenish our workforce 

and will allow us to place employees in areas of concentrated workload. 

10(f) How has the IRS’ ability to collect past due taxes improved or declined 

over the previous year? 

In comparison with FY 2000 results, IRS is experiencing both positive and 

negative trends in Collection activity during FY 2001. Enforcement actions are 

increasing in FY 2001, with positive trends in the number of liens filed and levies 

issued in both ACS and Field Collection. Through February 2001, both 

delinquent notice yield and Taxpayer Delinquent Account (TDA) dollars collected 

have increased. However, the number of TDA dispositions has decreased 

slightly in FY 2001. This is due to the need to redirect resources from TDA work 
95

to handle the dramatic increase in the numbers of Offers in Compromise as well 

as Collection Due Process activities. 

10(g) Over the previous 12 months, has the time that elapses from the filing 

of the return to the first compliance contact been reduced? What is the 

current average amount of time that elapses between filing and the first 

compliance contact? 

Factors affecting identification and assignment of workload, such as the dollar 

amount, the taxpayer’s response, the nature of the liability (IMF or BMF), IRS 

workload and available resources, do not allow us to compute average or 

standard timelines for compliance contact. However, the following information 

will give some perspective in the issue of timing: 

• The time that elapses between the filing of a tax return and the time the first 

notice is mailed to the taxpayer has remained constant at six weeks over the 

years. This timing may expand to 8 weeks at the end of year cycles, as we 

gear up our processing systems for the next calendar year. 

• If the taxpayer doesn’t pay after the first notice, four additional notices are 

issued over the next 42 weeks prior to assignment to ACS. 

• However, accounts meeting high-risk criteria are assigned to ACS 

approximately six weeks after the first notice. These cases account for 

approximately 20% of the inventory. 

• In 2000, the average ACS assignment required 33 weeks prior to resolution. 

The FY 2001 plan projects a reduction to 26 weeks. 

10(h) It is our understanding that the IRS has instituted a policy that it will 

not enter into an installment agreement with a taxpayer unless the full 

amount due will be paid. If the taxpayer also is unable to qualify for an 

offer in compromise, e.g., the taxpayer has a home, but still wants to make 

payments to the IRS, what options does the IRS make available to resolve 

the liability? 

The determination that the IRS may not enter into an installment agreement with 

a taxpayer unless the full amount of tax due will be paid is based on a legal 

interpretation of the interplay of IRC sections 6159 and 7122, rather than any IRS 

policy. IRS Counsel advises that the Internal Revenue Code provides that only 

Section 7122, the offer in compromise provision, permits a taxpayer to resolve a 

tax liability for less than the full amount of the tax liability. Counsel further 

advises that Section 6159, the installment agreement provision, does not 

supersede Section 7122. 
96

Last fall, a task force was charged with recommending ways to simplify and 

streamline the offers in compromise process. It is also examining alternatives for 

accepting offers in compromise where equity is present, but cannot be used to 

fund the offer, and the acceptance of offers in compromise where demonstrable 

hardship exists. 

Nevertheless, we recognize that there is a gap in the payment alternatives 

available to certain taxpayers. We would welcome legislative guidance on how 

to close this gap. 


99

11. Offers in Compromise 

11(a) What is the average time from submission to completion for an offer 

in compromise? Has this time been shortened as compared to last year? 

While we do not measure the “average” time, in fiscal year 2000 we completed 

processing 83% of the offers in compromise we received within one year of the 

offer’s submission. We resolved 38% of these cases within the first six-months 

and the remaining 45% by the end of the year. Through January 2001, we have 

resolved 32% of the offers in compromise submitted within the first six-months. 

11(b) What has been done to shorten the time frames for processing offers 

in compromise? 

To shorten the time frames for processing offers in compromise, field resources 

have been realigned to increase the number of staff assigned. In FY 2000 we 

increased the revenue officer, paraprofessional, and clerical staff assigned from 

762 to 1,230 FTEs and will further increase the staffing to 1267 by the end of FY 

2001. We also reviewed our processes and procedures in an effort to shorten 

processing timeframes. As part of that effort, we will be addressing the backlog in 

inventory and providing additional recommendations to redesign the Offers in 

Compromise (OIC) process. 

To address the increasing workload in the OIC program, we conducted a pilot 

project in two service centers to test the feasibility of processing offer in 

compromise cases of less than $50,000 in a centralized environment. Based on 

the results of the test, we expect centralized bulk processing of OICs to produce 

gains in both staffing and time per case closure. Beginning in July 2001, all new 

OIC receipts will be sent to one of two service centers, depending on where the 

taxpayer resides. A staged implementation is planned between July and 

November, with actual casework beginning in August 2001. The table in answer 

10(d) shows the impact of OIC centralization on staffing and inventory levels. 

11(c) In 1999, the IRS added a fixed monthly payment option to the offer in 

compromise program. 

=

= (1) How many taxpayers have taken advantage of this program? 

 (2) Are these taxpayers making their payments timely? 

Our current automated Offer in Compromise system does not readily provide 

information about this kind of offer. However, we have plans to enhance our 

reports system to provide this type of information in the future. 
100

11 (d) The IRS Reform Act expanded the offer in compromise program to 

cases in which settlement would promote effective tax administration, 

including situations involving severe or unusual economic hardship. Have 

taxpayers been taking advantage of this expanded offer in compromise 

program?

While the Service undertook a substantial effort to publicize the provisions of the 

new type of offer and embarked on a training program to educate Service 

personnel on the new provisions, receipts have not been as high as we 

expected. For FY 2000 and through February 2001, fewer than 1% of the total 

offers were filed under the effective tax administration (ETA) provision, including 

situations involving severe or unusual economic hardship. In FY 2000, only 580 

such requests were received out of the total of 109,296 filed; through February 

2001, only 380 have been received out of a total of 47,554 filed. All of the ETA 

offers claimed hardship issues for consideration. Approximately 88% of these 

offers have been accepted; the remaining 12% were either rejected or withdrawn. 

11(e) What, if any, are the administrative obstacles to prompt resolution of 

offers in compromise? 

The IRS Restructuring and Reform Act added additional requirements that 

lengthened the offer in compromise process. The law mandated a separate, 

independent administrative review before the Service could reject an offer in 

compromise or return the offer for failure to provide financial information. It also 

expanded the bases for compromise to include settlements that would promote 

effective tax administration. Hence, we must now also determine whether these 

special circumstances exist for each offer. 

Also, in an effort to add flexibility to the program and to open the offer process to 

more taxpayers, we have relaxed our processibility requirements. We no longer 

automatically return offers that do not meet processibility standards unless the 

taxpayer is in bankruptcy or has failed to file tax returns. While this change has 

reduced taxpayer burden, it has increased IRS processing time and has caused 

our inventories to increase. We must now spend more time perfecting offers 

which we would have returned immediately to the taxpayer in the past. 

As we discussed in response to Question 10 (h), Chief Counsel’s interpretation of 

IRC 6159 no longer allows Service representatives to accept installment 

agreements that would not fully satisfy the entire tax liability. OIC and deferred 

payment offer have become the most feasible alternative of resolving these 

cases. The result is a substantially increased OIC inventory. This increased 

inventory also requires significantly more time per case to resolve than that 

required, for example, to complete an installment agreement disposition. 

Evaluating and processing offers in compromise requires numerous processing 

steps that currently must be performed manually. Future automation could 
101

alleviate some of the case building and financial verification aspects, saving 

costs and processing time. 
102

12. Innocent Spouse 

The IRS Reform Act made several changes to expand the availability of 

innocent spouse relief. 

12(a) What is the current backlog of innocent spouse claims?

As of 3/6/01, we have 40,278 claims, affecting 21,198 taxpayers, where we have 

not notified the taxpayer of a determination. In FY 2000, we exceeded 

projections, processing a total of 42,546 innocent spouse claims, despite a 22% 

increase in receipts from the prior year. This meant that of the 111,243 claims 

(affecting 58,549 taxpayers) received since July 1998, we had not notified 21,136 

taxpayers of our determination by the end of the fiscal year. 

We believe with current increased staffing at the Centralized Site and with 

systems improvements we will be able to meet our projections for FY 2001. Our 

projected closures for FY 2001 is 57,659. 

12(b) What is the average processing time for these claims? 

Average processing time varies from field area to field area and from field areas 

to the Centralized Site. The time calculated for processing takes into account 

required waiting periods to receive information and communicate with taxpayers, 

some of which is statutorily mandated, and normal processing times. For 

example, built into the process, before we can make a determination, is a 45-day 

waiting period to contact and wait for a response from the nonrequesting spouse. 

Also built into the process, after we have notified the taxpayer of a determination, 

is a 30-day opportunity for the taxpayer to request an administrative appeal and a 

90-day period for the taxpayer to petition the Tax Court. Some of these 

timeframes may decrease now that a Technical Correction to section 6015 allows 

us to secure waivers, which will eliminate part of the processing time. 

Claims receive an initial screening soon after receipt so we can notify taxpayers 

who file claims that do not qualify or do not meet basic requirements soon after 

filing. We decide those claims that pass this initial screening based on their 

merits. Claims that pass initial screening have longer lapse times than the other 

claims since they require an assessment of the facts, circumstances, and the 

complex technical aspects of section 6015. 

We measured the lapse time from initial receipt of a claim to the date of a 

determination letter to the taxpayer and categorized the claims by type of 

disposition, comparing the full history of receipts to FY 2000 receipts. We found 

the following: 
103

Time from Claim Filing to Notification of Decision 

Average Lapse Time Full History FY 2000 Receipts 

Days Days 

 

Non-Qualifying Claims 142 80

Basic Req. Not Met Claims 128 81

Merit Claims 318 238

Note: The above information is based on those claims where we have notified 

the taxpayer of a determination. 

12(c) What steps are being taken to decrease the backlog in requests for 

innocent spouse relief? 

We are taking the following steps: 

• By May 2001, we will have increased the staffing at the Centralized Site by 50 

positions during FY 2001, an increase of over 46% from the 107 employees in 

FY 2000. Thirty of the new positions are temporary in nature, created to deal 

specifically with the current backlog of inventory. We also upgraded the tax 

examiner position, increasing the number of examiners who make 

determinations on more complex claims. 

• In January 2001, we developed and implemented an Integrated Case 

Processing (ICP) application in the Centralized Site. This computer 

workstation application embeds the algorithm for working an innocent spouse 

case that leads the examiner through the complex decision-making process, 

creating a workpaper trail to document the decision. We believe this 

application will allow us to increase productivity and provide more consistent 

application of the law. Additional phases of ICP will include account research 

and screening phases of the process. 

• In January 2001 we implemented a new automated Master File account used 

for recording and maintaining information relating to separate spousal 

account transactions. It replaces the manual Automated Non-Master File 

system. 

• Early in FY 2001 we detailed appeals officers to 120-day assignments in local 

field quality review sites to assist with backlogs in that stage of the process in 

the field. 
104

We believe the above initiatives, will help us make significant progress toward 

achieving our goal of processing claims within prescribed timeframes. By 

December 31, 2001, we predict that our inventory level will be at a point where 

we can process claims received after that date within timeframes that closely 

approximate best case scenario timeframes. 

12(d) Does the IRS have sufficient staff to process these claims? If not, 

what are the staffing needs? 

We believe that with the staffing increases already accomplished and 

implementation of the recent computer-based decision-making tool, we have 

sufficient staff to process claims within acceptable lapse times. 

12(e) A taxpayer requesting relief under Code section 6015(b) has the 

burden of showing that he or she did not know or have reason to know of 

the understatement. When a taxpayer requests allocation of liability under 

Code section 6015(c), the IRS has the burden of demonstrating that the 

taxpayer did not have “actual knowledge” of any item giving rise to the 

understatement. The Taxpayer Advocate has identified these differing 

knowledge standards as a problem area. Has the IRS had difficulty 

applying the knowledge tests in administering the innocent spouse 

provisions? If so, please explain. 

We recognized this potentially confusing distinction in the knowledge standards 

early in the implementation process. Our national centralized innocent spouse 

case review identified that examiners were having difficulty correctly addressing 

these standards. Also, our Innocent Spouse Tracking System identified 

knowledge as the major reason for our denial of claims. 

Identification of this problem was one reason we conducted two focus group 

sessions with experienced examiners during the development of the Proposed 

Regulations, issued this past January. Last May we completed a gap analysis of 

the knowledge criteria, identifying a need for additional training in this area. We 

developed and delivered training, “Innocent Spouse: Knowledge Criteria and 

Proposed Regulations,” early this March. 

One of the factors considered under the equitable relief provisions pertaining to 

underpayments is the “reasonable belief that the tax would be paid.” We 

identified this as yet another knowledge standard where we needed additional 

guidance. We included some guidance in the training delivered early this March 

and we are reviewing the results of a test we conducted on underpayments to 

decide if we need additional guidance and training. 

We are supporting the removal of the knowledge requirement under section 

6015(c). We have received and decided few claims to date under that section 

(4,725 out of 42,324 decided “based on merit” or only 11% as of 3/6/01). In our 
105

view, these low numbers support the elimination of a second standard, which has 

proven to be difficult and resource intensive to administer. We recognize that we 

would have to provide for a potential increase in claims if we eliminate these 

criteria. 

Even with the potential removal of the knowledge requirement under section 

6015(c), the remaining knowledge requirements that require difficult judgment 

decisions, will continue--the actual or constructive knowledge requirement of 

section 6015(b) and the “reasonable belief tax would be paid” requirement for 

underpayments under the equitable relief provision. 

12(f) What are the other legislative and administrative obstacles to prompt 

resolution of innocent spouse cases? 

None








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13. 2001 Filing Season 

13(a) In August 1999, the IRS launched a service on its Web site that allows 

taxpayers to apply for installment payment arrangements online and mail in 

a computer-generated form. 

13(a)(1) How many taxpayers have taken advantage of the on-line 

application? 

13(a)(2) What percentage of installment agreement applications are made 

online.

The "application" on the Internet for Installment Agreements does not directly 

allow a taxpayer to apply for an installment agreement on-line. Rather, it takes 

people through a process to calculate how much they can pay per month, to 

determine if that amount fits within Collection prescribed guidelines for granting 

an installment agreement. If this amount meets the guidelines, and the taxpayer 

believes they can continue the payments for the prescribed period of time, the 

system direct the taxpayer to download the Installment Agreement form, 

complete it with the information obtained from the on-line guidance, and mail it to 

the IRS. We do not track any information about how many people actually use 

the website to determine their eligibility or download the form, or any other 

information about taxpayers or installment agreements. 

We count the number of "hits" for the Installment Agreement page; however, 

there are some anomalies in the data and we are not sure the page counts one 

hit every time some accesses the page. We count a hit for all the components 

that make up a page as it is sent from the server to the visitors browser, such 

that a complex page with graphics and files associated could register multiple 

"hits," and therefore multiple "visits" every time a visitor accesses a page. The 

Installment Agreement page counter tracks the number of visits to the "graphics" 

version and the "plain text" version of the website. The Interactive Installment 

Agreement page counts one "hit" every time a visitor accesses, so one could 

then interpret the "visits" reported as a unique visit. Since we established the 

counter in November 2000, the system has recorded 3426 visits on 

http://www.irs.ustreas.gov/prod/ind_info/coll_stds/collect.html, the graphics page, 

and 1820 visits on http://www.irs.ustreas.gov/plain/ind_info/coll_stds/collect.html, 

the plain text page. In total, the system has recorded 5246 visits to the 

Installment Agreement page. We capture this information and give it to the 

Collection content owner. 

13(b) Please highlight the challenges and significant accomplishments 

associated with the 2001-filing season. 

As always, our most significant challenge is meeting customer demand. We must 

hire and train15,000 to 20,000 employees in our submission processing centers, 

our account management call and correspondence sites, and our walk-in 
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locations. We have 10 center locations, 27 call center sites and nearly 500 walkin locations. This has become increasingly more difficult in the current economic 

climate. In 2001 we also reorganized into our new operating units which will 

serve us well but complicates the filing season. We are modernizing our 

processes, which also brings its own sets of challenges and affects our every day 

business. We however believe we have met these challenges and are 

experiencing an excellent filing season. Our most recent filing season statistics 

are shown in the table on the next page. 

2001 CUMULATIVE FILING SEASON STATISTICS 

 

As of : (April 06, 2001) 2000 2001 % Change 

Total Return Receipts (000's) 77,158 77,010 -0.19% 

Paper Returns Filed (000's) 46,488 42,768 -8.00% 

Elec. Returns Filed: 

 Total (000's) 30,670 34,242 11.65% 

 Practitioner 22,336 25,207 12.85% 

 Telephone 4,522 3,856 -14.73% 

 Home Computer 3,812 5,179 35.86% 

Refunds: 

 Total # (000's) 61,868 61,705 -0.26% 

 Total $ (Millions) $102,303 $107,356 4.94% 

 Average $ $1,654 $1,740 5.20% 

 Direct Deposit # (000's) 24,801 28,202 13.71% 

IRS Home Page Hits: (4/08/01) 791,037,691 1,323,913,134 67.36% 

E-mail (ETLA) Receipts1 182,636 130,625 -28.48% 

Telephone: 

 Total Assistor Calls 

Answered2 

13,634,280 13,151,295 -3.54% 

 Assistor Level of Service2 62.10% 66.60% 7.25% 

 Total Automated Calls 

Answered3 

33,517,848 41,983,655 25.26% 

Telephone Quality Rates: 

 Tax Law Quality4 71.03% 70.91% -0.17% 

 Accounts Quality4 57.45% 69.89% 21.65% 

 Tax Law Correct Response 

Rate5 

n/a 81.50% - 

 Accounts Correct Response 

Rate5 

n/a 88.40% - 

Total TeleTax Calls: 

 Total Calls Answered 23,828,528 40,127,244 68.40% 

 Tax Law 3,886,497 3,279,240 -15.62% 

 Refund 19,942,031 36,848,004 84.78% 
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Taxpayer Assistance Sites:6 

 IRS Assisted (04/07/01) 4,981,774 4,287,789 -13.93% 

 Volunteer Assisted (03/01) 1,500,550 1,111,596 -25.92% 

 Outreach and Other (03/01) 277,004 169,449 -38.83% 1

As of Apr. 07, 2001. Does not include deletes or test emails. 

2

As of Apr. 07, 2001. Includes only Product Lines 1040 (tax law), 8815 (accounts), & 4262 (refunds). 

3

As of Apr. 07, 2001. Includes TRIS call completions & TeleTax calls received from the call prompter. 

4

Through February of Fiscal Year 5

Through March of Fiscal Year 6

 See accompanying highlights for explanation of this area 

"n/a" means data not available. Also, details may not add to totals due to rounding. 

, which is our goal.