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

 1999 TAX RETURN FILING SEASON AND THE IRS BUDGET FOR FISCAL YEAR 2000

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 13, 1999

                               __________

                             Serial 106-75

                               __________

         Printed for the use of the Committee on Ways and Means

                     U.S. GOVERNMENT  PRINTING OFFICE
66-583 CC                    WASHINGTON : 2000 _______________________________________________________________________
            For sale by the U.S. Government Printing Office,
Superintendent of Documents, Congressional Sales Office, Washington, DC 
                                 20402

                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

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

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                       Subcommittee on Oversight

                    AMO HOUGHTON, New York, Chairman

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

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S

                               __________

                                                                   Page

Advisory of April 5, 1999, announcing the hearing................     2

                               WITNESSES

Internal Revenue Service, Hon. Charles O. Rossotti, Commissioner.     6
U.S. General Accounting Office, Tax Policy and Administration 
  Issues, General Government Division, James R. White, Director, 
  accompanied by Dave Attianese and Gary Mountjoy, Assistant 
  Directors......................................................    35

                                 ______

H&R Block, Inc., Mark A. Ernst...................................    59
National Association of Enrolled Agents, Donna Joyner-Rodgers....    70
National Society of Accountants, and Padgett Business Services, 
  Roger Harris...................................................    65

                       SUBMISSION FOR THE RECORD

Indiana Depatment of Revenue, Kenneth L. Miller, letter and 
  attachment.....................................................    84

 
 1999 TAX RETURN FILING SEASON AND THE IRS BUDGET FOR FISCAL YEAR 2000

                              ----------                              

                        TUESDAY, APRIL 13, 1999

                  House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:06 p.m., in 
room 1100, Longworth House Office Building, Hon. Amo Houghton 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE

April 5, 1999

No. OV-5

                   Houghton Announces Hearing on the

                   1999 Tax Return Filing Season and

                the IRS Budget for the Fiscal Year 2000

    Congressman Amo Houghton (R-NY), Chairman, Subcommittee on 
Oversight of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on the 1999 tax return filing season 
and the Administration's budget request for the Internal Revenue 
Service (IRS) for fiscal year 2000. The hearing will take place on 
Tuesday, April 13, 1999, in the main Committee hearing room, 1100 
Longworth House Office Building, beginning at 1:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include IRS Commissioner Charles O. Rossotti, 
representatives from the U.S. General Accounting Office, and 
professional tax practitioner groups. However, any individual or 
organization not scheduled for an oral appearance may submit a written 
statement for consideration by the Committee and for inclusion in the 
printed record of the hearing.
      

BACKGROUND:

      
    The 1999 tax return filing season refers to the period of time 
between January 1st and April 15th when Americans will file over 200 
million individual and business tax returns. During this period, the 
IRS is expected to issue over 92 million tax refunds and answer over 
120 million telephone calls from taxpayers asking for assistance.
      
    The Administration's budget requests $8.2 billion to fund the IRS 
for fiscal year 2000. This level of funding will support about 98,000 
employees who will collect about $1.8 trillion in taxes, according to 
Administration estimates.
      
    Beyond supporting the traditional activities of the filing season, 
the fiscal year 2000 budget request also addresses several additional 
activities. First, the budget request includes $140 million to 
implement the Organization Modernization Concept which would reorganize 
the IRS into four operating divisions correlated to the needs of 
taxpayers. The new operating divisions will be: (1) wage and investment 
income, (2) small business and self employed, (3) large and mid-size 
businesses, and (4) tax exempt organizations. Second, the budget 
request includes $40 million to implement operational changes and new 
taxpayer safeguards which were contained in the IRS Restructuring and 
Reform Act of 1998 (Act). Examples of the new taxpayer rights contained 
in the Act which the IRS is implementing include relief for innocent 
spouses who filed joint tax returns, and new due process rights in 
collection actions (such as pre-levy notices). Third, the Act directed 
the IRS to develop new performance measures to evaluate its employees. 
One criterion which the Act directed the IRS to use in evaluating its 
employees was ``the fair and equitable treatment of taxpayers by 
employees.'' The IRS is still in the process of developing these new 
performance measures.
      
    In announcing the hearing, Chairman Houghton stated: ``The IRS is 
experiencing a whirlwind of activity this year. The agency is coping 
with a challenging filing season while it tries at the same time to 
implement the most significant internal reorganization in 40 years, add 
numerous new taxpayer safeguards, develop a new system to measure the 
performance of its employees, and upgrade its aging computer systems 
while making them Y2K compliant. We want to review the IRS budget and 
its operations to see if it is meeting all of these challenges in a 
balanced, timely manner that protects the interests of all taxpayers.''
      

FOCUS OF THE HEARING:

      
    The Subcommittee will explore how the IRS intends to allocate its 
fiscal year 2000 budget resources. It will also focus on what effect 
the IRS funding level will have on its ability to fulfill its basic 
responsibility of administering the nation's tax laws, while at the 
same time pursuing a major internal reorganization, implementing 
significant new taxpayer rights, and assuring that its computers are 
compliant with the millennium date change (Y2K).
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect 5.1 format, with their name, address, and 
hearing date noted on a label, by the close of business, Tuesday, April 
27, 1999, to A.L. Singleton, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Oversight office, room 1136 Longworth 
House Office Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1 
format, typed in single space and may not exceed a total of 10 pages 
including attachments. Witnesses are advised that the Committee will 
rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.
      

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

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                

    Chairman Houghton. Ladies and gentlemen, I would like to 
begin this hearing.
     I just want to make an announcement. In about 10 minutes 
we're going to have to go vote. We have two votes, and then 
that's going to be it for the day. So we will have to adjourn 
at that particular time.
    Anyway, we're delighted to have you here, Commissioner. I 
would like to say a few words and then turn the mike over to 
Mr. Coyne for any comments he has.
    Today the Subcommittee is going to examine the current tax 
return filing season and the budget request for the IRS for 
fiscal year 2000.
    The IRS is experiencing a whirlwind of activity. Earlier 
this year, there was some apprehension about possible 
difficulty in the current filing season, but the results so far 
are encouraging. First, there has been a double-digit increase 
in the percentage of tax returns which taxpayers are filing by 
electronic submission. Electronic filing means, of course, 
faster refunds for taxpayers and less paper clutter at the IRS.
    Second, the average refund this year has increased to 
almost $1,600, which is about 15 percent higher than the 
average refund last year. The primary reason for the higher 
refunds probably is the new child credit and educational 
credits, which Congress passed in the Taxpayer Relief Act of 
1997. These new family tax breaks were effective for calendar 
year 1998, so they are showing up for the first time on the 
current tax returns.
    While the new child credit provides welcome tax relief to 
working families, the IRS has observed that many families who 
were eligible for the new child credit were failing to properly 
claim it on their tax returns. In such cases, the IRS has been 
taking the initiative by correcting the taxpayers' oversight 
and sending them the correct, higher refund amount. I believe 
this action is a good example of positive taxpayer service 
which hopefully will be more common at the IRS in the future.
    We should all breathe a great sigh of relief that the 
filing season has gone so well, probably better than in any 
recent years, because the IRS has a lot to do this year, with 
little margin for error, because of the enormous pressures on 
it.
    Beyond the demands of the filing season, the IRS has 
several major activities which it is pursuing. First, the IRS 
is in the middle of the most significant internal 
reorganization, probably the most significant, in over 40 
years. It holds the promise of better taxpayer service, but it 
also holds the peril of important issues falling through the 
cracks in the new bureaucratic structure.
    Second, the IRS still is implementing numerous taxpayer 
safeguards which Congress enacted in the IRS Restructuring and 
Reform Act of 1998. This includes an impressive array of new 
taxpayer rights, as well as congressional direction to 
establish new performance measures to evaluate IRS employees.
    Third, the Service must still complete the upgrade of its 
computer systems to assure compliance with the century date 
change, often nicknamed ``Y2K''.
    The IRS has a lot to do in the next few years, and it has 
got to accomplish these tasks with a relatively flat budget. 
This will test the ability of the agency to allocate its 
resources wisely. So today the Subcommittee will review these 
issues and may be able to find ways to assist the Commissioner 
in meeting his objectives. So I look forward to hearing the 
testimony of today's witnesses.
    [The opening statement follows:]

Opening Statement of Hon. Amo Houghton, a Representative in Congress 
from the State of New York

    Good afternoon and welcome to our hearing. Today the 
subcommittee will examine the current tax return filing season 
and the budget request for the Internal Revenue Service for 
fiscal year 2000.
    The IRS is experiencing a whirlwind of activity. Earlier 
this year there was some apprehension about possible difficulty 
in the current filing season, but the results so far are 
encouraging. First, there has been a double-digit increase in 
the percentage of tax returns which taxpayers are filing by 
electronic submission. Electronic filing means faster refunds 
for taxpayers, and less paper clutter at the IRS.
    Second, the average refund this year has increased to 
almost $1,600, which is about 15 percent higher than the 
average refund last year. The primary reason for the higher 
refunds probably is the new child credit and educational 
credits which Congress passed in the Taxpayer Relief Act of 
1997. These new family tax breaks were effective for calendar 
year 1998, so they are showing up for the first time on the 
current tax returns.
    While the new child credit provides welcome tax relief to 
working families, the IRS has observed that many families who 
were eligible for the new child credit, were failing to 
properly claim it on their tax returns. In such cases, the IRS 
has been taking the initiative by correcting the taxpayers' 
oversight and sending them the correct, higher refund amount. I 
believe this action is a good example of positive taxpayer 
service which hopefully will be more common at the IRS in the 
future.
    We should all breathe a sigh of relief that the filing 
season has gone so well, because the IRS has a lot to do this 
year with little margin for error. Beyond the demands of the 
filing season, the IRS has several major activities which it is 
pursuing. First, the IRS is in the middle of the most 
significant internal reorganization in over 40 years. It holds 
the promise of better taxpayer service, but it holds the peril 
of important issues ``falling through the cracks'' in the new 
bureaucratic structure.
    Second, the IRS still is implementing numerous taxpayer 
safeguards which Congress enacted in the IRS Restructuring and 
Reform Act of 1998. This includes an impressive array of new 
taxpayer rights, as well as Congressional direction to 
establish new performance measures to evaluate IRS employees.
    Third, the Service must still complete the upgrade of its 
computer systems to assure compliance with the century date 
change, often nicknamed ``Y2K.''
    The IRS has a lot to do in the next few years, and it must 
accomplish these tasks with a relatively flat budget. This will 
test the ability of the agency to allocate its resources 
wisely. Today the subcommittee will review these issues and may 
be able to find ways to assist the Commissioner to meet his 
objectives.
    I look forward to hearing today's witnesses.

                                

    I would ask Mr. Coyne if he has some remarks to make.
    Mr. Coyne. Thank you, Mr. Chairman.
    Today, the Oversight Subcommittee will hold its annual 
hearing to review the administration's proposed fiscal year 
2000 budget for the Internal Revenue Service and to determine 
how well the 1999 tax return filing season is going. The issues 
we discuss here today are important to the integrity of our tax 
collection system, and the public's expectations about customer 
service, fairness, and efficiency.
    Last year, the IRS received the resources it needed to do 
the job. Again, it appears that adequate funding will be 
provided to the IRS for this coming year. The President's 
proposed $8.1 billion IRS budget targets each priority area and 
does so in an accountable fashion. The budget includes 
increases of $250 million for year 2000 conversion activities, 
$140 million for organization modernization, $40 million for 
implementation of the recently enacted IRS Restructuring and 
Reform Act of 1998, and $17 million for customer service 
training. Also, the budget calls for $144 million for improved 
administration of the EITC to strengthen EITC-related customer 
service, public outreach, enforcement, and research activities.
    While it is easy to criticize the tax collector and its 
work force, I believe that last year proved that such an 
approach does not solve any problems. Rather, the new and 
improved IRS will be the result of improved IRS management, 
employee training, and technology. Implementation of the 1998 
IRS reform measures is well underway, and I believe that these 
changes are having a positive effect on taxpayers nationwide.
    Finally, I want to commend the IRS Commissioner, Mr. 
Rossotti, for his actions, which are geared toward development 
of a first-class, fair Federal tax system. By all accounts, the 
current tax return filing season is going well, as the Chairman 
pointed out. Undoubtedly, the Commissioner's decisions to 
expand the IRS' hours of operations to nights and weekends, and 
to shift IRS auditors and collection staff to taxpayer 
assistance activities, have contributed to a more taxpayer-
friendly tax season. At the same time, the Commissioner has 
streamlined IRS operations and is preparing the agency for the 
next millennium.
    I thank Chairman Houghton for holding this important 
hearing, and I look forward to continuing our efforts to 
improve our tax system for all of the taxpayers of the country.
    Thank you.
    Chairman Houghton. Thanks very much, Mr. Coyne.
    Would anybody else like to make a comment or initial 
statement? If not, Commissioner Rossotti, we're delighted to 
have you here.
    Commissioner Rossotti. Thank you very much, Mr. Chairman.
    Chairman Houghton. Again, in just a few minutes we may have 
to recess for a bit, if you would bear with us, please.

 STATEMENT OF HON. CHARLES O. ROSSOTTI, COMMISSIONER, INTERNAL 
                        REVENUE SERVICE

    Commissioner Rossotti. Thank you very much, Mr. Chairman, 
and Mr. Coyne, for your opening comments.
    Yes, as you observed, we are having a successful filing 
season, especially when you consider the challenges and risks 
that we faced when nearly all of our mission-critical systems 
were made Y2K compliant and placed back into production for 
this season. It was just because of that massive amount of 
change, coupled with the heavy volume during the filing season, 
that we had the view that we were facing a major risk going 
into the season.
    But, by closely managing this risk and all these changes in 
an integrated fashion, fortunately, the 1999 filing season has 
been relatively error free. So probably the most important 
thing we can say is what did not happen, which is we did not 
have, at least so far, with a few days to go, major problems.
    There is a chart over here which has some arrows on it, 
which I think is sort of a qualitative way and gives my own 
personal view of what has been better, the same, or worse, as 
compared with what we had reason to expect. As you can see, 
most of the arrows are up.
    The electronic filing is up 17 percent overall, and with 
filing from people with their own home computers, it is 
actually up 156 percent.
    Our website has been extraordinarily successful. We've had 
over 600 million hits to our website this year, which is more 
than double the number of hits last year. We did expand the 
hours of service to 24 hours a day, 7 days a week, and that's a 
permanent feature which was begun this January.
    Now, as you will notice, there's a down arrow there on 
level of service, phone service. The expansion of service to 24 
hours a day, plus the massive amount of training we were doing, 
did cause us some service problems in the early part of the 
filing season. So our level of access so far for the cumulative 
period was only 68 percent this year, compared to our target of 
80-90 percent. In the last 4 weeks, however, we have been able 
to get that back up to 86 percent.
    We have also served about 4.3 million taxpayers at our 
walk-in sites, and we've had, of course, 13 weekends where 
we've been open on Saturday.
    I would also say one of the things we have done this year 
is to change, and I think make far more stringent, the way we 
measure our level of accessibility on the telephones and our 
call quality, to a way that more accurately reflects the actual 
experience of taxpayers. This will give us the foundation to 
improve in the future, and we certainly have plenty of room to 
improve. Many of these improvements in future filing seasons 
will depend on overall changes we're making in our management, 
our training, and especially our technology.
    I think it's very important to note that this filing season 
is a very important milestone for the year 2000 program. We now 
have 93 percent of our mission-critical systems Y2K compliant, 
and they stood the test during the filing season.
    We are now in the process of conducting further integrated 
tests to integrate our application programs with our vendor-
supplied hardware and software, conducting a full-scale test 
from beginning to end of all of our systems, which will be a 
major focus for the rest of this year.
    Towards the end of this year, in the last phase of our 
testing, all of the further tax law changes that will be 
required for the next filing season will be incorporated into 
our applications, and then we will run this entire environment 
in a way that closely approximates what we will face after the 
clock turns on January 1, 2000. So I think we can say that, 
overall, this is a very positive picture, but I do want to 
emphasize that it's not over until it's over, and we still have 
a considerable number of risks ahead.
    Now, as you noted, Mr. Chairman and Mr. Coyne, in your 
statements, in addition to the filing season and Y2K, we are 
also managing pervasive change in many other directions and 
dimensions of the IRS in response to the direction given to us 
through RRA 98. Some of those are listed on the other chart, 
there on that second bullet.
    I am not going to read them all, but they basically boil 
down to about 157 near-term initiatives, to improve service and 
treatment, 1,260 Tax Code changes, planning the reorganization, 
beginning the replacement of our technology, implementing a 
whole new set of balanced performance measures, and one that I 
want to stress in particular is a tremendous volume of training 
for virtually every one of our 100,000 employees.
    So far this year, just in the first half of the year, we 
have delivered over 6.5 million hours of training, which is 
almost too big a number to imagine. But it is not nearly 
enough. Our employees still will tell you, if you talk to them, 
that they don't feel adequately prepared to cope with all this 
change. So we have a lot more still to do.
    Beyond the current fiscal year, the one that's coming up, 
2000, is a big turning point in the overall history of the IRS, 
as mandated by the Restructuring and Reform Act. We are really 
looking at the whole agency from top to bottom.
    As you noted, we are planning a major reorganization. Some 
of that will be implemented this year. Much more of it will be 
implemented during fiscal year 2000.
    We have already put in place a new top management team, 
using the authority that the Congress granted us, and we are 
implementing new balanced performance measures, as I mentioned.
    Updating our business practices and our technology requires 
almost a complete replacement of this enormous base of 
technology. We did make a major step in December of last year 
by awarding a PRIME contract to Computer Sciences Corp., and 
some other leading companies in the technology industry, to 
help us update our technology and our business practices that 
are supported by that technology. We are now in the intense 
planning phase, working with Computer Sciences and their 
partners, to begin the first projects later this year.
    Just commenting briefly on the budget, we recognize that, 
despite all these challenges, we're in a tight budget 
environment. We recognize the stringent funding constraints 
that exist with budget caps and, therefore, requested what we 
think is really the bare minimum, $8.105 billion. It is 
virtually flat with last year. So we view this as a minimal 
funding request that is what we need to continue to make some 
progress on the mandate that we've gotten from Congress.
    Some of the key highlights of this funding request are $40 
million for implementing the RRA, customer service and 
electronic tax initiative, $17 million for training and tax law 
training, and $140 million for the overall modernization 
program, which includes a significant amount of money, $36 
million actually, for additional training.
    So, just to conclude, I think we can say that the '99 
filing season has been successful. The Y2K effort has been as 
it should be, mostly invisible to taxpayers, and we were able 
to make some improvements in taxpayer service.
    We also recognize that fully achieving our mission and our 
commitment to taxpayers will take a number of years, but we're 
convinced of the value of this effort and, with the support of 
Congress and the public, we are confident that we can succeed.
    Thank you, Mr. Chairman.
    [The prepard statement follows:]

Statement of Hon. Charles O. Rossotti, Commissioner, Internal 
Revenue Service

    Mr. Chairman and Distinguished Members of the Subcommittee, I am 
pleased to appear before you today to discuss the IRS' 1999 tax filing 
season and some of the initiatives we are undertaking on behalf of 
America's taxpayers.

                              Introduction

    The IRS is having a very successful filing season, especially given 
the enormous challenges and risks we faced when nearly all of our 
mission critical systems were made Y2K compliant and placed back into 
production for the 1999 filing season. The massive amount of change 
made to our systems in the last year, coupled with the extremely heavy 
volume of processing that occurs during the filing season, posed major 
risks as we began the season.
    However, I am pleased to report that by managing this massive risk 
and change in an orderly and integrated fashion, the 1999 tax filing 
season has been relatively error free to date. Projected net 
collections for FY 1999 are $1.7 trillion. During FY 1999, we also 
project to receive 228 million returns, including over 126 million 
individual returns, and expect to issue over 93 million individual 
refunds. As of April 2, 1999, refunds are up over four percent over 
last year, and the average refund is $1,575. On-line filing is running 
156 percent ahead of last year's pace and has already exceeded last 
year's total volume of 942,000. And of course, the successful 
completion of the filing season is a major milestone on the road to 
solving the Y2K problem.
    In addition to the Y2K conversion and filing season challenges, we 
are also managing pervasive change in many dimensions of the IRS in 
response to the direction given to us by the public and Congress in the 
IRS Restructuring and Reform Act of 1998 (RRA 98). These include:
     implementing 157 near-term initiatives to improve service 
and treatment of taxpayers, of which 82 are mandated by the IRS 
Restructuring and Reform Act of 1998 (RRA 98);
     implementing 1,260 tax code changes from the Taxpayer 
Relief Act of 1997 and RRA 98, many of which require significant and 
complex interpretations to guide taxpayers and employees;
     completing the planning for a fundamental reorganization 
of the IRS to increase accountability for meeting taxpayer needs;
     taking the first steps in a long-term effort to redesign 
and replace our business systems and supporting information technology;
     implementing a completely redesigned and balanced system 
for measuring performance throughout the organization; and
     providing essential training related to all these many 
changes for nearly every one of our over 100,000 full time and seasonal 
employees.
    In summary, much has been done and some critical risks have been 
managed, but far more change and many more risks lie ahead. Let me 
briefly summarize the major areas of current activity.

                             Y2K Conversion

    The IRS made significant progress in preparing for the Year 2000. 
As of last month, approximately 93 percent of our mission critical 
systems were made Y2K compliant and successfully placed back into 
production for the 1999 filing season.
    In fact, as of April 2, 1999, we have processed over 60 million of 
the 70 million returns received. This is almost two percent more than 
last year. In addition, any problems that we encountered had a minimal 
impact on a small number of taxpayers and were generally fixed within 
24 hours of being identified. We believe that the success of this 
year's filing season is a reflection of the quality of the work being 
performed to prepare the IRS for the Year 2000.
    From April on, most of our efforts will be applied to wrapping up 
remediation activities on some smaller systems, infrastructure 
components and most importantly, completing the full-scale End-to-End 
Testing. While this picture is generally positive, I want to emphasize 
that there is still risk and a great deal of work to be done.

Ensuring Our Success

    There are a number of factors and efforts that I believe will 
contribute significantly to a successful Y2K effort.
    Management Commitment. Y2K is an IRS top priority, as well as one 
of my own this year. In support of our Y2K repair project, I chair a 
monthly Executive Steering Committee with representatives from 
Treasury, the IRS, and the National Treasury Employees Union. In 
addition, I meet regularly with the IRS' Chief Information Officer and 
other key executives to obtain individual project status updates, 
monitor key risks, and to ensure that all necessary actions are being 
taken.
    Independent Assessments. In order to validate that we are doing 
everything possible to ensure that the IRS is Year 2000 compliant, we 
continue to receive independent assessments of our work from 
BoozAllen & Hamilton, Inc. and Northrop Grumman, Inc. 
BoozAllen is performing risk identification and assessment on 
all Century Date Change (CDC) Program activities, while Grumman is 
performing a 100 percent review of our code renovation. They have 
reviewed over 75 percent of our code and have found only one in every 
30,000 lines of code that requires reprogramming.
    A Flexible Schedule. The Y2K challenge forces us to continually 
adjust our schedule and to deploy people and resources to attack the 
most critical problems. For example, our original schedule was altered 
for several of our systems due to infrastructure issues. We prioritized 
our schedule so that systems involved in the filing season were either 
converted, tested, and implemented in January or held off until after 
the filing season. If we do not continue to manage risks and schedules 
in this flexible fashion, we may increase the likelihood of failure and 
end up delaying, rather than accelerating, actual progress.

Current Priorities

    As we move into the spring of 1999, we will focus our Y2K 
conversion efforts in a few key areas.
    End-to-End Testing. Like many other organizations, we are 
conducting integrated tests to ensure that our Y2K remediated systems 
will actually function together once we reach January 2000. We have 
been conducting End-to-End Testing since last July and have been 
successful to date. As we move towards the summer of 1999, we will 
begin incorporating more and more of our mission critical systems into 
the End-to-End tests. These activities leading up to the Fall of 1999 
will prepare us for the final phase of End-to-End Testing which begins 
in October. During this last phase, all of the tax law changes for 
Filing Season 2000 will have been incorporated into our software 
applications. This will allow us to run the test in an environment that 
is as close as possible to what we will actually face in the Year 2000.
    End Game Planning. We are also devising an ``end game'' strategy 
that will guide our activities during the critical ``rollover'' weekend 
of December 31, 1999 through January 2, 2000. End game plans will be 
developed for all of our organizations that are critical to tax 
processing activities. We will delineate the necessary activities to 
plan, provide resources and execute response capabilities to mitigate 
Year 2000 related problems that may affect national tax processing.
    Taxpayer Impact. Mr. Chairman, in addition to our internal 
technical challenges, there is a question about the Y2K impact on 
taxpayers. We want to be sure that taxpayers who attempt to file in 
good faith or pay on a timely basis are not harmed because of a Y2K 
computer problem beyond their control. At the present time, the IRS has 
discretion to abate penalties for reasonable cause, but has only 
limited discretion to abate interest. We are currently working with the 
Treasury Department to develop abatement policies and recommendations 
to address this issue. We will certainly keep the Subcommittee aware of 
our progress and advise you of any legislative changes that may be 
needed.
    Contingency Planning. The IRS is also developing contingency plans 
that outline the necessary procedures to follow in the event that any 
of the IRS' mission critical tax processing systems suffer a major 
failure. These plans concentrate on those areas that have the greatest 
impact on tax processing activities in addition to the areas we know to 
be particularly affected by the Y2K problem. We do not think we will 
encounter such a failure, but it is better to have plans ready in case 
they are needed.
    We are confident that the IRS will be capable of fulfilling its 
mission in the Year 2000 and beyond. While we recognize that 
significant risks still exist, we believe that the CDC Program 
leadership is taking the necessary steps to address them.
    As we continue to develop our contingency and end game plans and 
closely monitor our schedule and progress, we will keep the 
subcommittee apprised of any Year 2000-related errors, their impact on 
taxpayers, and our actions to alleviate any taxpayer burden.

                     Electronic Tax Administration

    As the financial world moved toward electronic transactions, the 
IRS did the same. The opportunity for growth in electronic tax 
administration is clear. More than 30 percent of American homes now 
have computers and more than half of those also have modems. An 
estimated 50 million individuals used some form of Internet application 
in 1997. Most Americans routinely use credit and debit cards for 
recurring financial transactions, as well as for major expenditures. In 
addition, a growing number of state and local governments accept credit 
or debit cards for payment of taxes and fees.
    Industry watchers also predict that an increasing number of U.S. 
households will do their banking on-line--whether through a dial-up 
direct connection or through the Internet. An estimated 4.5 million 
households were banking on-line in 1997. By the year 2000, that figure 
could swell to 10 to 16 million households.
    PC services are also becoming less expensive, or even free. Last 
year, certain tax software companies offered free electronic filing for 
the first time and more did so this year. Many financial institutions 
also distribute free software to account holders who want to do their 
banking by personal computer.
    The challenge for the IRS, in conjunction with the private sector, 
is to develop products and services that are so simple, inexpensive and 
trusted that taxpayers will prefer them to the traditional methods of 
calling and mailing.
    Today, I want to highlight our progress in several critical areas 
this filing season including: electronic tax return filing; electronic 
payments, and direct deposit.

Individual Taxpayers

    Twenty-five million individual taxpayers took advantage of IRS' e-
file options last year. They learned that filing through an authorized 
practitioner, over the telephone, or on-line is fast, safe and 
virtually error-proof.
    The 1999 filing season is turning out to be another growth year for 
Electronic Tax Administration as more taxpayers than ever before are 
enjoying the benefits of filing taxes electronically. Through April 2, 
1999, nearly 25 million individual taxpayers filed using one of three 
convenient e-file options; a 16 percent increase over the same period 
last year.
     Nearly 18.4 million taxpayers e-filed their tax returns 
electronically through an IRS-authorized Electronic Return Originator 
(ERO); a 17.7 percent increase over the same period last year.
     Approximately 1.8 million taxpayers filed their tax 
returns on-line via their home computer through a third party 
transmitter. On-line filing is running 156 percent ahead of last year's 
pace and has already exceeded last year's total volume of 942,000.
     Almost 4.8 million taxpayers filed their returns over the 
telephone using the award winning TeleFile system. For the first time, 
taxpayers in Indiana and Kentucky can file both their federal and state 
returns in a single telephone call during the pilot of the first 
Federal/State TeleFile option.
     Overall, 7.4 million taxpayers have chosen to file both 
their federal and state tax returns simultaneously in a single 
electronic transmission. This year, 35 states and the District of 
Columbia are participating in the program.
    In addition, this filing season the IRS is conducting two pilots 
which provide a paperless filing experience for thousands of taxpayers. 
These pilots involve the use of Personal Identification Numbers (PIN) 
as the taxpayer's signature, thus eliminating the need to file the 
paper signature jurat.
     Nearly 452,000 taxpayers have participated in the On-Line 
Signature Pilot where the IRS distributed e-file Customer Numbers to 
taxpayers who prepare their own returns using tax preparation software 
to file from their home computers.
     Another 322,000 taxpayers have participated in the 
Practitioner Signature Pilot where taxpayers choose a PIN when filing 
through 8,100 participating practitioners.
    Also new this year, taxpayers filing balance due returns have 
several options for not only filing electronically, but paying 
electronically as well.
     Over 33,000 taxpayers filing balance due returns paid 
using an Automated Clearing House (ACH) debit as part of their 
electronic return. Taxpayers can file early and have the debit occur as 
late as April 15th.
     Another 5,600 taxpayers used credit cards to pay the taxes 
due as part of two credit card pilots that the IRS is conducting this 
year. Under the first pilot, US Audiotex (San Ramon, CA) is processing 
credit card payments over the telephone. After e-filing by computer--
either from home or through a tax preparer--or by TeleFile, a taxpayer 
can charge the balance due with a toll-free phone call. US Audiotex is 
accepting MasterCard, Discover or the American Express card. In the 
second pilot, individuals using Intuit's (Mountain View, CA) TurboTax 
or MacInTax software to e-file from their computers are able to use a 
credit card to pay the balance owed to the IRS. Taxpayers can charge 
their balance due to a Discover Card brand.

Business Taxpayers

    Business taxpayers are also benefitting from the wide range of 
electronic filing and payment options that are available to them.
     On February 16, 1999, the IRS announced that taxpayers 
have made more than $2 trillion in tax deposits electronically since 
the government established the Electronic Federal Tax Deposit System 
(EFTPS) in November 1996. Over two million businesses are now enrolled 
in the Hammer Award-winning EFTPS system which allows taxpayers to make 
their federal tax deposits over the telephone or by using a personal 
computer, eliminating the need for paper deposit coupons, checks, or 
trips to the bank. During FY 1998, taxpayers made $1.2 trillion in tax 
deposits through EFTPS which accounts for over 80 percent of all 
federal tax deposits.
     During Fiscal Year 1998, 750,000 quarterly employment tax 
returns were filed over the telephone by small businesses, in addition 
to the nearly 582,000 Forms 941 that were filed electronically by 
payroll service providers. In FY 1999, the IRS expects over 2.3 million 
Forms 941 to be either filed electronically or over the telephone.
     Under the Simplified Tax and Wage Reporting System 
(STAWRS), the IRS is working with other federal agencies and states to 
reduce employer burden by conducting single point filing projects in 
the states of Iowa and Montana, establishing a Harmonized Wage Code 
database, and improving customer service.

Planning for the Future

    In addition to successfully managing the current filing season, the 
IRS is also planning for the future. As required by the IRS 
Restructuring and Reform Act of 1998, the IRS issued its first-ever 
Strategic Plan for Electronic Tax Administration for public comment on 
December 3, 1998. The Strategic Plan is designed to eliminate barriers, 
provide incentives and use competitive market forces to make 
significant progress toward the congressionally mandated goal of 80 
percent of all tax and information returns being filed electronically 
by 2007.
    As also required by the Act, the IRS established last year the 
Electronic Tax Administration Advisory Committee (ETAAC) to provide an 
organized public forum for the discussion of ETA issues in support of 
the objective that paperless filing should be the preferred and most 
convenient method of filing tax and information returns. The ETAAC, 
which is comprised of representatives from various groups including tax 
practitioners and preparers, transmitters of electronic returns, tax 
software developers, small and large businesses, employers and payroll 
service providers, individual taxpayers, state governments, and 
financial industry members, provides continuing input into the 
development and implementation of the Strategic Plan for Electronic Tax 
Administration.

             Providing Information and Service to Taxpayers

    From web-based technology to 24-hour-a-day/7-days-a-week phone 
service to sitting down one-on-one with a taxpayer with a problem, the 
Internal Revenue Service is working to provide the easiest and most 
efficient ways for taxpayers to get the information and assistance they 
need not only during filing season, but throughout the year.

Web Site

    An increasing number of taxpayers are discovering that the IRS home 
page on the World Wide Web (www.irs.ustreas.gov) is an excellent and 
convenient source for tax forms and tax information. And they can get 
them around-the-clock, 365-days-a-year and from anywhere in the world. 
Since coming on line in January 1998, taxpayers have downloaded over 69 
million forms, publications and products. For the first two months of 
the filing season there have been over 24 million downloads as compared 
to 9.4 million for the same period in 1998--an increase of almost 150 
percent.
    Anyone with Internet access can receive: tax forms, instructions, 
and publications; the latest tax information and tax law changes; tax 
tables and rate schedules; and hypertext versions of Publication 17, 
``Your Federal Income Tax'' all TeleTax topics; answers to the most 
frequently asked tax questions; a library of tax regulations; the 
weekly Internal Revenue Bulletin, which contains all the latest revenue 
rulings, revenue procedures, notices, announcements, proposed 
regulations and final regulations.

Web Site Alerts

    This filing season, the IRS also created a new page found on its 
web site to alert taxpayers and practitioners about problems that could 
affect them. Similar to a product recall notice, the ``Special Taxpayer 
Alert,'' describes the problem, its scope--such as the number of people 
likely to be affected, where they are located--and most importantly, 
what the IRS is doing to fix the problem, and what, if anything the 
taxpayer needs to do about it. In most cases, taxpayers do not have to 
take any action. However, if they want more information, taxpayers can 
call our toll-free, 24-hour-a-day/7-day-a week phone number 1-800-829-
1040.
    Thankfully, there were few problems to report on the ``Special 
Taxpayer Alerts Page.'' The alerts we posted included: a report that 
some employees received W-2 forms from their employers that had an 
``X'' in or near an incorrect checkbox, a printing error in Form 4562 
(Depreciation and Amortization) and a production delay for Package 
1040-ES/V (Estimated Tax for Individuals) due to ice and snowstorms.

Web Site Small Business Corner

    The Small Business Corner located on the IRS web site was 
inaugurated in January 1999 to benefit the over 23 million small 
business taxpayers and the 800,000 start-up businesses begun each year. 
It is intended to provide these taxpayers with easy-to-access and 
understand information. This type of convenient ``one-stop shopping'' 
for assistance could provide most, if not all of the immediate products 
and services that a small business needs. If also offers the potential 
for Web-based Q&As which can help the IRS identify and address trends 
and systemic problems. Improved electronic access to information should 
also result in decreased demand for telephone and walk-in assistance.

Expanded Web Site Tax Professional Corner

    The Tax Professional's Corner of the IRS' web site was developed to 
provide a quick listing of the information resources most needed by Tax 
Professionals. It provides news items, early release of items to be 
issued in the Internal Revenue Bulletins, drafts of revised forms, e-
file resources and links to the most technical items on our site. The 
twelve categories of information will continue to be expanded.

Web-based Customer Service

    This filing season, the IRS continues to provide interactive e-mail 
customer service to taxpayers on the web site. This capability is very 
limited and was conducted as a test of the capability, and is not 
necessarily a permanent addition to our customer service offerings.
    We are also offering interactive help in navigating our web site, 
assistance with certain Employment Tax Issues, and help for certain 
priority programs like the Banks, Post Offices and Libraries Program 
and the Corporate Partnership Program. Users in these areas on our web 
site will be able to e-mail their questions without leaving the site. 
It will use intelligent routing to get the question to an available 
assistor, who then researches and responds by ``pushing back'' a hot 
link URL providing the answer to the user. If this pilot is successful, 
we will expand it to cover other functions responsible for customer 
service. We are currently exploring future possibilities for this 
application with our internal customers.

CD-ROM

    The Federal Tax Forms CD-ROM contains more than 600 tax forms and 
instructions, and some 3,000 pages of topic-oriented tax information. 
Users can electronically search, view-on-screen, or print-out any of 
the items contained on the CD. Available through the Government 
Printing Office's Superintendent of Documents, the three-issue 
subscription is $25. As of March 22, 1999, almost 65,000 subscriptions 
were sold.
    In conjunction with the Small Business Administration, the IRS also 
recently produced the joint small business CD-ROM, ``Small Business 
Resource Guide: What You Need to Know About Taxes and Other Topics.'' 
It is an interactive multi-agency product utilizing the latest 
technology to provide the small business taxpayer with easy-to-access 
and understand information. A total of 17,000 copies will be available 
for distribution; half of which will go to SBA Small Business 
Information Centers.
    Similar to the web-based ``Small Business Corner,'' the information 
is organized by stages of the business life cycle and provides guidance 
on preparing a business, financing a business, record keeping, 
selecting a business structure, employment tax information and other 
important topics. All of the business tax forms and publications are 
available, most in fill-in-the-blank and/or searchable format. For 
those users with Internet access, there are also direct links to the 
web sites of most federal regulatory and state tax agencies. The CD-ROM 
will be tested at strategic locations, such as the SBA's Business 
Information Centers.

TAXI On-line Learning Lab

    In July of 1998, the Internet application TAXI went live. This is 
an on-line learning lab for first-time taxpayers, students aged 13-18, 
who learn about taxes in school. It covers the reasons we pay taxes and 
how the students can meet their tax obligations. Particularly important 
is the availability of electronic filing options and teaching early on 
the benefits of electronic filing. First time taxpayers will learn 
electronic filing methods rather than paper-based filing and how to 
interact electronically with the IRS. This was a successful 
collaborative effort between IRS and the American Bar Association's 
Section of Taxation. Additional modules are planned as follow-ons to 
the existing four units.

IRS Local News Net

    IRS Local News Net is a list server which supplements the web 
site's Digital Dispatch (there are over 40,000 Digital Dispatch 
subscribers) by providing localized, targeted and immediate information 
for tax professionals. It is a system capable of reliable and efficient 
delivery of information to the tax professional community across the 
nation.
    The system is structured to support the localized nature of 
information based upon the tax professional's specific local needs. Any 
District Office, Service Center or Computing Center that needs to 
communicate with the public or with tax professionals on a regular 
basis can request a list server. Local News Net Servers are being 
developed primarily to reduce the print and postage costs incurred with 
the Director newsletters.

                          Telephone Assistance

24/7 Phone Service and Access

    One of the hallmarks of the IRS' new commitment to providing top 
quality service to taxpayers is 24 hours-a-day/7 days-a-week toll-fee 
telephone service (1-800-829-1040) which we began on a trial basis at 
the end of the 1998 filing season. So-called ``24/7'' phone service 
became a permanent IRS service feature on January 4, 1999. As of March 
27, 1999, more than 28 million taxpayers have been served, compared to 
almost 30 million over the same filing period last year.
    As the subcommittee is aware, the expansion of hours of service to 
24 hours/7 days a week, combined with increased training demands to 
implement the new tax law and preceding requirements, did cause the 
effective level of service to decline, especially during the beginning 
of the filing season. For the season as a whole so far, our level of 
access is 68 percent in 1999 compared to our target range of 80-90 
percent. In the last four weeks, however, the level of access averaged 
88 percent.
    One of the very important steps we are taking to improve telephone 
service is to change the way we measure service and quality to better 
reflect the real world way that taxpayers receive it. These are more 
stringent, but also more useful ways, of measuring.
    Concerning access, we have begun to measure the percentage of calls 
in which the taxpayer receives actual service, in relation to the 
percentage of time the taxpayer simply gains access to our system. In 
terms of call quality, we are now rating the quality of a sample of 
actual taxpayer calls and rating those who receive complete and 
accurate service, as well as technical tax law or account accuracy.
    In order to deliver truly high quality communication to taxpayers, 
we need to improve the management, organization, technology and 
training that support these operations. This is a major objective of 
our overall modernization program.

Forms By Fax

    Taxpayers can receive about 100 different tax forms 7 days-a-week, 
24-hours-a-day from IRS TaxFax. In addition to forms and instructions, 
taxpayers can receive faxed copies of TeleTax topics and small business 
newsletters. Taxpayers use the voice unit of their fax machine to dial 
the service at 703-487-4160. The only cost to the taxpayer is the cost 
of the call.

Recorded Tax Information

    TeleTax has 148 topics available 24 hours a day using a Touch-tone 
phone. Taxpayers can call (toll-free) 1-800-829-4477 to hear recorded 
information on tax subjects such as earned income credit, child care/
elderly credit, dependents or other topics such as electronic filing, 
which form to use, or what to do if you cannot pay your taxes. Nearly 
nine million taxpayers used TeleTax last year for recorded tax 
information; as of March 27, 1999, over six million have taken 
advantage of the service.

Automated Refund Information

    Last year more than 52 million taxpayers used the Automated Refund 
Information system on TeleTax to check on the issuance of their refund 
checks. As of March 27, 1999, the number stands at nearly 22.5 million. 
Taxpayers may call 1-800-829-4477 to check on their refund status 
Monday through Friday from 7 a.m. to 11:00 p.m. if using a Touch-Tone 
phone, or 7:30 a.m.--5:30 p.m. for rotary or pulse service.

                           Walk-in Assistance

Saturday Service

    Delivering on its promise to supply even more reliable and helpful 
taxpayer assistance, the Internal Revenue Service provided Saturday 
walk-in service during the 1999 filing season on 13 Saturdays at nearly 
262 locations nationwide, compared to six Saturdays in 178 locations in 
FY 1998. As of March 27, 1999, we served over 122,000 taxpayers on 
weekends. So far this filing season, we have served over 4.3 million 
taxpayers at all of our walk-in sites--a five percent increase over 
last year.
    The Saturday Service sites were selected based on their weekend 
accessibility, year-round operational status, and high traffic volume, 
including 32 non-traditional locations, such as shopping malls, 
community centers and post offices.
    On each of the Saturday Service Days, IRS employees provided 
taxpayers with the following services: (1) distribution of forms and 
publications; (2) answers to account and tax law inquiries; (3) 
verification of Individual Taxpayer Identification Number 
documentation; (4) processing of alien clearances; and (5) acceptance 
of payments.
    The first six Saturday sessions focused on assisting low-income 
taxpayers who may be eligible for the earned income tax credit (EITC). 
We assisted over 15,000 EITC taxpayers through March 27, 1999 compared 
with about 4,000 during the last filing season.

Problem Solving Days

    Problem Solving Days continue to be a great success story on the 
problem resolution front. Begun in November 1997, over 32,000 taxpayers 
have taken advantage of this innovative program. Monthly Problem 
Solving Days are held at all IRS District Offices and taxpayers can 
make an appointment to meet with IRS personnel to resolve special tax 
problems they have. In addition, many taxpayers who called to set up an 
appointment for a Problem Solving Day had their problems resolved over 
the phone, and never had to come in person.
    Taxpayers comment that they like the opportunity for face-to-face 
contact and that they appreciate that someone is listening to them and 
trying to resolve their problem. Employees also respond favorably to 
Problem Solving Days. They especially like the multi-functional 
approach to problem solving which ensures that the taxpayer's problem 
can be heard by someone with the right set of skills to help resolve 
the issue.
    Both taxpayers and employees recognize that not all of the issues 
coming in during PSD will be resolved in favor of the taxpayer. Audits 
must still be conducted, and IRS is not offering amnesty. Taxpayers do, 
however, appreciate the opportunity to sit down with someone to discuss 
the issue at hand and get a complete explanation of what needs to be 
done even if the result may be different from their expectations.
    Mr. Chairman, as I testified earlier this year at the 
subcommittee's hearing on the Taxpayer Advocate's Annual Report to 
Congress, the taxpayer advocates have built a lot of equity into 
Problem Solving Days and I want to see it continue, but more 
importantly, I want to build these practices into our everyday 
treatment of taxpayers. The taxpayer advocates can also help us solve 
the recurring, systemic and practical problems that plague the IRS. 
From their many meetings with taxpayers, including Problem Solving 
Days, they see trends and patterns emerging. If they help us diagnose 
these overarching taxpayer problems, the National Taxpayer Advocate and 
I will do our best to get the right prescription to cure them.

Volunteer Programs

    During FY 1998, over 3.5 million taxpayers were assisted by more 
than 39,000 IRS Volunteer Income Tax Assistance volunteers and more 
than 32,000 Tax Counseling for the Elderly volunteers at a combined 
16,500 sites. Last year, 2,400 VITA and TCE sites also provided e-file 
to over 400,000 taxpayers.
    We also opened up VITA and TCE offices that were in locations close 
to our walk-in offices observing EITC awareness day. Our volunteer 
programs are set up in shopping centers, libraries, churches and 
community centers, This provided an additional avenue of support to 
taxpayers visiting an IRS office for EITC assistance.
    In addition to this type of volunteer assistance, our outreach 
program targeted EITC education and assistance. We identified EITC 
coordinators in our offices who are responsible for the full complement 
of our EITC outreach activities. Since the end of February, this 
program has reached nearly 100,000 EITC taxpayers through social 
workers, community organizations, homeless shelters and similar 
organizations.

The IRS Corporate Partnership Program

    The IRS Corporate Partnership Program expanded dramatically; far 
beyond the initial goal of 500 companies and 600,000 employees. There 
are now more than 2,100 companies with more than 13 million potential 
employees in the program who can get forms through the corporation's 
Internet site or local LAN. The program has also grown by 210 members 
as a result of a side bar 'link' on the IRS web site.

Forms Simplification Research

    For the 1999 filing season, 11 new forms were developed and 177 
forms and instructions and 39 publications were revised.
    In 1998, the IRS conducted focus groups to obtain taxpayers' 
feedback on the new form and worksheets developed for the child tax 
credit. For the first time, we provided access to draft 1998 tax forms 
on the web site to obtain comments from practitioners and others about 
new and revised forms. In prior years, only paper copies of draft forms 
were published and distributed for comment. We have also added 
worksheets from publications to the web site. These worksheets 
supplement existing forms when an extra calculation is needed to 
compute a credit, exclusion, or a deduction.
    During 1999, our tax forms and publications personnel are working 
with an outside contractor to redesign the earned income credit and 
child tax credit forms and instructions. As part of the project, focus 
groups were conducted using the current IRS products. After redesign, 
focus groups will be conducted to test taxpayers' reactions.
    Also in development is a forms simplification research plan that 
will provide strategies for moving taxpayers to the simpler tax forms 
and for targeting where revisions are needed.

Tax Package Innovations

    The 1998 Form 1040 tax packages were revised to provide more white 
space and increase the print size of the text for improved readability. 
Throughout Form 1040 packages, and on the covers, tax law changes for 
1998 are highlighted, including the new child tax credit (generally 
$400 per child), the education credits, and the deduction for student 
loan interest. To protect taxpayers' privacy, their Social Security 
numbers are no longer preprinted on the peel-off label sent with the 
tax package. This change is highlighted on the covers, in the ``What's 
new for 1998'' section of the packages and on the front of the tax 
return by reminding taxpayers to enter their social security numbers on 
the return. We also moved information about other sources of 
assistance, such as Forms by Fax, near the front of the tax booklet.
    For better customer service, other changes were made to the 1998 
individual tax forms and packages. In case the IRS needs to contact the 
taxpayer while the return is being processed, there is an optional 
space for the taxpayer to enter a daytime telephone number. The tax 
packages will also include more information about the Problem 
Resolution Program.

Newspaper Supplement Program

    The Newspaper Supplement Program promotes distribution of IRS forms 
in selected areas that do not currently have sufficient outlets for tax 
products. There are currently 13 newspapers enrolled in the program 
with a circulation of 1.57 million readers. Each newspaper distributes 
six pre-selected tax items (Forms 1040, 1040EZ, 4868, Schedules EIC, 
A&B, and Publication 2053, Quick and Easy Access to IRS Tax Help and 
Forms) in one of their upcoming Sunday editions. The IRS will supply 
the newspapers with enough forms to satisfy one Sunday circulation. All 
participating newspapers distribute in one or more of the counties 
identified as needing additional tax form outlets.

                          More Taxpayer Rights

    The 1999 filing season brings a major expansion in taxpayer rights 
due to the landmark IRS Restructuring and Reform Act of 1998. From new 
rules ranging from protecting innocent spouses to burden of proof to 
greater power for the National Taxpayer Advocate, taxpayers are finding 
an array of new options available to assist them.
    Delivering on the new law and the hundreds of specific changes to 
both the tax code and our organization is an enormous task. As I 
previously noted, we are in the process of: (1) implementing 157 near-
term initiatives to improve service and treatment of taxpayers, of 
which 82 are mandated by the Restructuring Act; (2) implementing 1,260 
tax code changes from the Taxpayer Relief Act of 1997 and the 
Restructuring Act, many of which require significant and complex 
interpretations to guide taxpayers and employees; and (3) providing 
essential training related to these many changes to nearly every one of 
our over 100,000 employees.
    The IRS is fully committed to implementing these laws and changes 
on behalf of America's taxpayers. However, as in any cases where there 
is such a multitude of change, problems and mistakes may occur and 
timetables may need to be adjusted.

Strengthening Taxpayer Advocate

    The power of the National Taxpayer Advocate was significantly 
expanded by the Restructuring Act which both enhanced the role and 
independence of the National Taxpayer Advocate. The expansion includes 
creating a national system of taxpayer advocates serving in local IRS 
offices. These local taxpayer advocates also work independently, 
reporting to the National Taxpayer Advocate rather than to the IRS' 
examination, collection and appeals functions. The Act also increased 
the presence of local taxpayer advocates so that one will be available 
to taxpayers in each state.
    One of their tools is the Taxpayer Assistance Order, which can be 
requested by a taxpayer suffering or about to suffer a ``significant 
hardship'' involving tax law administration. The orders can be issued 
if the National Taxpayer Advocate determines a significant hardship 
exists that justifies granting the emergency assistance order.

Easier Access to The Problem Resolution Program

    This filing season, the National Taxpayer Advocate also spotlighted 
the Problem Resolution Program with a new toll-free number for people 
with long-standing tax troubles. The hotline for help--1-877-777-4778--
is available for taxpayers who have not been able to promptly resolve 
problems through normal IRS channels. The call puts taxpayers in touch 
with the trouble-shooters at the Problem Resolution Program. A personal 
taxpayer advocate will be assigned to each taxpayer to help clear up 
problems and ensure each case is given a complete, impartial review. 
For routine questions, taxpayers are asked to first call 1-800-829-1040 
before calling the Taxpayer Advocate's Problem Resolution Program 
number.

Citizen Advocacy Panel

    On March 16, 1999, National Taxpayer Advocate Val Oveson introduced 
the Brooklyn District's Citizen Advocacy Panel (CAP), bringing the 
total number of panels to four. There is now a CAP in each of the four 
geographic regions of the United States. The other three are located in 
the South Florida District (Ft. Lauderdale); Midwest District 
(Milwaukee); and the Pacific Northwest District (Seattle).
    CAP members are non-tax experts from the local community who will 
help identify problems and make recommendations to improve IRS systems 
and operations. The CAPs have a number of benefits. They will help the 
IRS identify taxpayer issues and concerns; give taxpayers a voice; and 
provide an additional avenue for taxpayer access to problem resolution 
procedures

                    1999 Revenue Protection Strategy

    During the 1999 filing season, validation of Social Security 
Numbers (SSNs) and other tax identification numbers will continue to be 
a very visible portion of our fraud and abuse prevention efforts. In 
1998, there were 3.4 million occurrences on the electronic filing 
system of missing, invalid or duplicate uses of SSNs causing tax 
returns to be rejected back to the transmitter.
    We are expanding the validation of SSNs/TINs to virtually all forms 
and schedules requiring identification numbers. We will identify 
dependent SSNs claimed on more than one return and improper claiming of 
children for the dependency exemption and/or EITC. Taxpayers with 
incomplete returns, invalid or duplicate SSNs, or returns demonstrating 
patterns consistent with suspicious claims or profiles can expect their 
refunds to be delayed or disallowed pursuant to ``math error'' 
procedures or audits.
    We will also continue the EITC Communications Strategy which is 
composed of three parts:
     Awareness. Taxpayers and practitioners need to understand 
the EITC eligibility rules and the consequences of non-compliance.
     Deterrence. We will inform taxpayers and practitioners of 
planned compliance and the penalties for intentional non-compliance.
     Prevention. We will publicize availability of free return 
preparation assistance and electronic filing provided on a pro-bono 
basis or through VITA and Tax Counseling for the Elderly.
    A major component of the communications strategy, an in-depth 
review of EITC related forms, schedules, worksheets, instructions and 
publications, is currently underway. This process is a joint effort 
with IRS and an external consultant. The goals are to revise and 
simplify the forms and instructions to increase understanding and 
awareness of eligibility rules and to streamline the process to compute 
the EITC amount accurately.
    Starting in 1999, under new tax law rules, we will issue math error 
notices if EITC is claimed on the 1998 return and recertification is 
required, but Form 8862, Information To Claim Earned Income Tax Credit 
After Disallowance, is not attached to the return. Recertification is 
required if the tax year 1997 return was audited and EITC was not 
allowed. The entire refund, or in some cases, only the EITC portion of 
the refund will be held until the recertification form is reviewed, or 
until an audit is conducted to verify entitlement. Both processes 
provide an opportunity for taxpayers to furnish the necessary 
information or documents to prove EITC eligibility.
    The IRS will maintain the enforcement segment of the Revenue 
Protection Strategy by maintaining the resource levels dedicated to the 
investigation and prosecution of taxpayers and tax return preparers 
involved in fraudulent refund schemes. Resources remain available to 
audit returns in specific problem categories as well as for those 
individuals required to recertify entitlement to EITC. Monitoring 
visits to Electronic Return Originators (EROs) will continue to ensure 
compliance.
    For the fiscal year ending September 30,1998, IRS Examination 
closed approximately 295,000 cases with recommended assessments of $454 
million. Fewer resources were expended to collect these assessments 
since many of the returns claimed refunds, which were not issued until, 
or unless eligibility was verified. Also, at the end of the fiscal 
year, approximately 500,000 returns identified during the 1998 filing 
season were still in the audit process.
    Through September 30, 1998, we identified over 2,800 fraudulent 
refund schemes involving multiple returns for paper and/or 
electronically-filed returns. We detected more than 26,000 fraudulent 
returns and prevented the issuance of over $65 million in refunds. 
Furthermore, over 400,000 questionable returns that did not warrant 
criminal investigation were referred to Examination.

                Modernization and FY 2000 Budget Request

    Fiscal years 1999 and 2000 represent a crucial turning point for 
the IRS. In this period we are aggressively addressing the problems 
described by Congress and the American people over the past few years. 
As mandated in the Restructuring and Reform Act, the IRS is expected to 
do a far better job of serving the public based on an much better 
understanding of the taxpayer's point of view. Delivering on this 
mandate is our top priority in the FY 2000 budget.
    The problems that led up to the passage of the Restructuring Act 
can be solved but they will require fundamental change in order to 
modernize almost all aspects of the IRS. This process also carries with 
it considerable cost and risk. Our plans may need to be revised and 
operational problems may occur. However, there is no low risk plan for 
the massive job we must do at the IRS that I described at the beginning 
of my testimony.
    We will complete the plan for our new organization structure this 
year and have already begun implementing parts of it. Much more 
implementation will occur in FY 2000. Using the authority granted by 
Congress, we also have put in place a new top management team and are 
actively recruiting to fill leadership positions in our new operating 
divisions.
    Updating our business practices for dealing with taxpayers requires 
almost a complete replacement of IRS information technology systems, 
which are built on a 30-year old fundamentally deficient foundation 
that cannot provide accurate up-to-date information about taxpayer 
accounts. And GAO has repeatedly reported IRS cannot provide reliable 
financial information to manage the Agency. On December 9, 1998, the 
IRS awarded a Prime Systems Integration Services Contract (PRIME) to 
Computer Sciences Corporation (CSC) and their partners. We are 
currently working with CSC to update our strategic systems plan and to 
implement near-term projects which will focus on improved phone service 
and electronic filing options.
    Despite these many challenges, in preparing the budget request for 
FY 2000, we are well aware of funding constraints and have therefore 
requested the bare minimum. Without this funding, the entire reform and 
restructuring program demanded by Congress and the public could stall 
and the risks increase.
    The FY 2000 resource request of $8.105 billion will enable steady 
progress on the many changes needed to deliver on the reform and 
restructuring program and the Year 2000 Conversion. This request in 
total is essentially level with resources provided in FY 1999, which 
totaled $8.125 billion including $505 million from the Y2K emergency 
fund.
     This is an unlikely combination--major changes requiring 
investment with a flat budget.
    This combination is only possible in FY 2000 for three reasons: 
first, because of the stringent fiscal constraints we are carrying out 
many of the changes by diverting resources from on-going programs such 
as compliance; second, the Congress advance funded our ITIA to a level 
that will sustain us through FY 2000; and third our current estimates 
of specifically identified and known year 2000 costs are less than the 
costs for FY 1999.
    These three factors enable us to include in our budget request some 
absolutely essential items for implementing the required changes. These 
include $40 million for implementing the Restructuring Act's customer 
service and ETA initiatives, $17 million to train our employees in the 
tax laws that Congress passed; and $140 million for implementing the 
modernization plan called for in the Restructuring Act which will 
increase accountability for service to specific groups of taxpayers. 
The money for implementing the modernization plan will be used to 
reorganize and provide new skills for the IRS workforce.
    I want to particularly stress that increased training of our 
employees is essential for delivering on the mandates that Congress 
gave us and the service that the public expects. About 70% of IRS 
employees deal directly with taxpayers. Taxpayers have every right to 
expect that in every such encounter with an IRS employee, whether it's 
a phone call asking a question about how to fill out a return, or a 
meeting with a revenue agent in an audit, the IRS employee should 
understand the current tax law and have the skills to understand the 
facts and circumstances of that taxpayer. A year ago, when I took 
office, it was abundantly clear that there was already a serious 
deficit in this area. Since then, Congress has given us the 
responsibility of implementing 1260 changes to the Tax Code and a 
mandate to restructure the whole way we do business with taxpayers. The 
money in the budget request, including that part included within 
modernization program, is essential and will only begin to rectify our 
training deficit.
    Overall, this budget will continue the trend of the last six years 
in which the IRS workforce has been shrinking in relation to the size 
of the economy. In FY 2000, while the workload grows as a result of the 
growth in the economy and the additional demands of the Restructuring 
Act, the total workforce size will remain approximately constant. This 
trend will only be possible if we make the investments in organization, 
training and technology that are needed.

                               Conclusion

    Mr. Chairman, on balance, the 1999 tax filing season has been 
successful. The concurrent Y2K conversion effort was virtually seamless 
to taxpayers and we were able to make some significant strides to 
improve taxpayer services. Granted, many of the changes needed to carry 
out our new mission statement, such as reorganizing our outdated 
structure and replacing our archaic technology will take years. That 
does not mean, however, that we cannot get everyone in the organization 
working today to understand what we are trying to accomplish and to 
take some important steps forward in the right direction. We are 
convinced of the necessity and value to America's taxpayers of reaching 
this higher level of performance. With the continued support of the 
Congress and the American people, we are confident we can succeed. 
Thank you.

                                

    Chairman Houghton. Thanks very much, Commissioner.
    I want to ask just three questions, and then I will pass it 
along to my other associates here.
    First of all, let me say that I think you've done a 
wonderful job. The IRS is an entirely different organization 
since you've been there. I'm sure others before you have done 
their part, also, but it has peaked. The efficiency, the cost 
control, the services and everything, I think is extraordinary. 
However, I have three basic questions.
    First of all about people. I understand, in order to keep 
your costs down, that you have not hired people in I don't know 
how many years--five, six, seven, something like that. I wonder 
whether that's a smart idea, because, as we all know, when you 
pull back out of the market for people and then go in again, it 
takes many years to sort of get your identity back there. Also, 
if you don't have younger people coming in, you're not 
refreshing--As I understand, you're average age is going up.
    Now, you can't do everything. Obviously, you tried to 
balance this thing out. But that's one question.
    Second, I understand that you've got a goal of something 
like 80 percent of electronic filing by the year 2007. But in 
your own documents, you say that by the year 2005 it's only 
going to be about 30 or 33 percent. I don't know how you're 
going to get there.
    Then the third issue really is one of tax simplification, 
how you're going to come on that. So maybe you would like to 
wait on those things, ponder them a little bit, and then we'll 
be back as soon as we vote.
    OK, we don't have to leave now. Go ahead.
    Commissioner Rossotti. Well, I think those are all very 
important questions. Let me deal with the people question 
first.
    I think you have put your finger on one of our major 
problems, but it's a long-term problem. If you look at the 
current total staff of the IRS today, it's about 15,000 fewer 
than it was 5 years ago. The only way that has been achieved is 
by essentially cutting off virtually all hiring and by allowing 
a reduction in the work force with those who leave not being 
replaced.
    To show you how serious this is, just to take one 
occupational category as an example, the IRS revenue agents are 
one of the major occupational groups. Those are the people who 
actually go out and audit tax returns and know the tax law. 
There's about 14,000 in that occupation in the IRS.
    We're losing about 450 revenue agents a year just from 
normal retirements. In the last 4 years, we have hired exactly 
28 revenue agents, virtually none. Basically there has been 
none.
    If you went through the other occupational groups--for 
example, special agents, who are the criminal investigators, we 
have hired about four criminal investigators. It's essentially 
none. There has basically been a hiring freeze.
    What I have proposed with the budget we have submitted is 
that we would at least have enough money to resume hiring to 
replace those who leave, not to increase the total size of the 
staff. I think that's a reasonable approach. But we need to 
have assurance that we can have this funding for a number of 
years because you can't hire people and then get rid of them 
the next year.
    So I think we have a strategy to deal with this, but it is 
a major turnaround from where we have been in this agency.
    With respect to the electronic filing, we do have a plan in 
place. This year we'll have about a quarter of the returns 
actually filed electronically. By 2005, our current 
projections, which are a wide range, because it depends on what 
we do, would actually have somewhere between 45 and 60 million 
returns. So, especially if we can hit the upper end of that, it 
would be closer to about half, as opposed to the lower 
percentage.
    But I think the key point to make here is that ``business 
as usual'', just keeping going and hoping that we will grow, 
will not get us to the goal that Congress has set. We have to 
do more aggressive actions than that. Part of those have to do 
with the technology programs that we're attempting to 
implement.
    So part of the planning is to identify the gap that you 
have to solve in order to reach your goal, and we recognize 
there is a gap and there are additional steps that we need to 
take, some of which are identified in our plan.
    I'm sorry, Mr. Chairman. I forgot what the third question 
was. I didn't write it down.
    Chairman Houghton. Simplification.
    Commissioner Rossotti. Oh, simplification. Yes.
    Well, of course, the major role of the IRS is to help the 
taxpayers and work with the taxpayers to comply with the law as 
it exists, and it's mainly the responsibility of the Treasury, 
the administration and Congress, to work on the Code itself.
    However, there are some new things in the Restructuring and 
Reform Act that give the IRS some role in this. One of the most 
important is the Taxpayer Advocate, who has been given the job 
of reporting to Congress on observations that he has from 
working with taxpayers on the problems that are caused by the 
administration of the Tax Code. Of course, he reported to this 
Committee earlier this year, and he is also reporting to the 
Senate Finance Committee, as a matter of fact, on Thursday, in 
a hearing they're going to have on complexity of the Tax Code. 
That is a voice that has been given by Congress to us to, I 
think, be one of many voices to try to hopefully deal with or 
at least contribute to the debate on complexity.
    I really think this is a case where it is not the primary 
role of the IRS, but perhaps we can be a player or contributor 
to your leadership and your debates on how to deal with issues 
of complexity.
    Chairman Houghton. Thank you.
    Mr. Coyne.
    Mr. Coyne. I have no questions.
    Chairman Houghton. Mr. Portman.
    Mr. Portman. Mr. Commissioner, thank you for your testimony 
today, and congratulations on the relatively smooth filing 
season. I just have a few questions regarding the IRS 
Restructuring and Reform Act and its implementation.
    The Chairman was talking earlier about your electronic 
filing, goal to reach 80 percent by 2007. As the Chairman 
knows, that's in the Restructuring and Reform Act, through this 
Subcommittee, and we're the ones putting your feet to the fire 
on that. I think that's appropriate.
    But everything that has been addressed in the opening 
statements and in your testimony practically comes out of the 
Restructuring and Reform Act and, therefore, this Subcommittee 
has a special interest in it and really a responsibility to 
make sure it's being implemented right.
    I think of the IRS reorganization, which is in the Act. 
Just looking at your testimony, the balanced performance 
measures, which is a major change at the IRS and is going to 
take some time to see whether that is working well. But it will 
fundamentally change the incentive system at the IRS, instead 
of being statistics driven. This is a major change the 
Subcommittee took the lead on, and electronic filing, the goal 
we talked about, the computer technology, the funding for that, 
the way in which we're asking the IRS to not only modernize but 
do it with regard to special funding that we have provided for 
that, the Taxpayer Advocate you just mentioned, totally 
restructured under the Restructuring and Reform Act.
    There are more than 50 new taxpayer rights that, of course, 
you addressed in your op ed yesterday with Mr. Rubin and so on. 
Your own term for 5 years, the flexibilities that you have to 
be able to hire people, as you talked about bringing in top 
people. This all comes under this substantial, the first time 
since 1952, major reform of the IRS that this Subcommittee took 
the lead on.
    The one piece that is missing here--and you and I have 
talked about it--is the Oversight Board. It is so important. 
The reason we thought it was essential to put in place a 
private/public oversight board was to ensure that these 
reforms, in fact, do take place, and to ensure, frankly, that 
after Charles Rossotti is gone--and I hope that's not for a 
long time--that there is somebody there who understands and has 
some continuity as to the institutional memory of the place and 
why we're making these reforms and keeping them going, and to 
bring in the knowledge and expertise that we've talked about 
from the outside, to be able to make sure these reforms really 
work. And finally, accountability.
    I would just like to make a very strong statement today on 
my behalf and on behalf of the U.S. Congress, that passed this 
legislation overwhelmingly, that we are deeply disappointed 
that the Clinton administration has yet to send nominees to the 
U.S. Senate. It violates the law, not just the spirit but the 
letter of the law. This was to be done 6 months after 
enactment. The enactment was last July, 8 months ago. The date, 
I think, was January 22. Still, the nominations have not gone 
to the U.S. Senate.
    Until we have this Oversight Board in place, we will not 
feel as though we have even taken the first step toward 
implementing the IRS Restructuring and Reform Act. I hope other 
Members of this Committee, on a bipartisan basis, will join me 
today in urging you to do all you possibly can to get the White 
House to follow the law, to establish this board that is so 
essential.
    My question to you today, I guess, without trying to put 
you on the spot, would be twofold. No. 1, do you believe this 
board would be helpful in going forward in your efforts to 
reform and reorganize the IRS?
    Commissioner Rossotti. Well, based on the time I've had in 
office, I would say that I believe it will be helpful, very 
helpful, and for exactly the reason that was contemplated, I 
think, in the legislation and the preceding commission, which 
is that if it works as intended, we will have a group of people 
who have continuity and who have hopefully the incentive and 
the time to actually learn in detail about these very complex 
programs, technology and other things that we're implementing, 
to give us critical feedback. I mean, it's just what a 
corporate board does; give us critical feedback, but also I 
believe, if we're on the right track, give us some validation 
and support from a group of people that represent the public 
interest in an informed and ongoing way. Those are what I see 
as the benefits of the board being.
    Let me just say I'm looking forward to having this board to 
work with, as soon as it becomes operational.
    Mr. Portman. My second question, Mr. Commissioner, would be 
do you have any update for the Subcommittee today on the status 
of those nominations going to the Senate?
    Commissioner Rossotti. It's my understanding that the 
nominees are going through what's called the ``vetting'' 
process, which means the FBI and other background kinds of 
checks that need to be done, which takes some time, as I 
remember from my case. That's the best information I have.
    Mr. Portman. The final question I have for you is, we talk 
a lot about these reforms. Back home we're hearing from our 
constituents, ``Gee, it's still April 15, we still have to pay 
our taxes, we're still not getting through on all the phone 
calls--''
and that's one area where I'm disappointed we haven't been able 
to increase the phone answering this year.
    Tell us what you think about a timeframe in terms of making 
the kind of cultural changes that you talked about so 
articulately, in terms of changing the mentality at the IRS to 
more of a service organization, to make it, indeed, more 
taxpayer friendly?
    Commissioner Rossotti. Well, I think you mentioned two 
things there that are related but not the same. In terms of the 
phone service, this is partly a cultural change, but it has a 
lot more to do with very practical issues, about technology and 
training.
    I mean, the thing that we did this year was to extend the 
24-hour, 7-days-a-week phone service. I think this is important 
for a lot of people. On Monday I had a hearing before the Small 
Business Committee, and the point was that small business 
people often during the regular working hours can't take time 
out to talk to the IRS. So having that service at other hours 
is important.
    But that is not a simple thing to do, when you have 20,000 
people around the country that are, in part at least, answering 
phones. So getting that 24-hour service organized is something 
that was very, very challenging, in terms of the scheduling and 
the training of the people to do that. It actually had the 
effect, unfortunately, of actually reducing our level of 
access, at least in the first part of the season.
    The other thing is, just management and technology, one of 
the first things that we're going to be doing under the new 
technology blueprint is putting in some new technology to 
manage the phone traffic, the Internet traffic. Right now we 
don't really have the right kind of technology to effectively 
manage that.
    This is the first year, for example, in the whole history 
of the IRS, that we actually have data that tells us, in the 
right level of detail, what the nationwide phone traffic is, in 
terms of different kinds of calls and where they should be 
going, which is absolutely essential as a foundation in 
beginning to plan how to provide good service.
    So the issue of phone service is not simply a matter of 
decreeing well or a cultural issue of getting people to be more 
friendly on the phone. It's a very major logistical and 
training operation to make this happen.
    Having said that, I think the cultural issue you raise has 
to do with a number of things, both--I'll call them tangible 
and intangible things. On the intangible side, but yet 
important, are things like what we have done, in terms of 
simply stating a 27-word mission statement that clearly states 
exactly what the mission of the agency is. I think if you go in 
any desk today in the IRS, even a data transcriber in the 
service center, you are likely to see this little card that 
we've given to every employee that clearly sets, in the first 
words, to provide top quality service, to provide American 
taxpayers top quality service through these various means.
    The other thing is, as you mentioned, changing the system 
of measurements. You do communicate what you value in an 
organization by how you reward people, by how you measure 
organizational performance.
    In the past, as I think has become evident from the 
hearings and other things we've done, there was a very strong 
emphasis on one part of what the IRS does, which is enforcement 
revenues. It's an important part, but it's 2 percent of the 
total revenues we collect. I don't mean to say that we don't 
need to do enforcement because we do. But if that's the sole or 
almost principal thing that you measure, you know, that's going 
to drive a lot of things that you do. That has been an issue 
that has bounced around the IRS for over 40 years.
    The hard thing is to figure out what you put in place of 
it. I think we have worked very hard and it has actually been 
our first priority in terms of implementation, even before 
these other things. We are now rolling out in this fiscal year 
a system of balanced measures, which does have customer 
satisfaction as a factor, as well as quality of work that is 
done and employee satisfaction, as well as quantity, and not 
really focused on enforcement revenues.
    That is probably one of the most important things that we 
can do, to communicate to the entire work force what we really 
value.
    Now, we have to back that up with training. I again stress 
that training is one of our most important short-term 
challenges. We have requested significant funding, or at least 
some additional funding in the budget, and I can't stress too 
hard--In fact, if you look at these manuals over here, these 
four binders, that is what is called IRM 21. This is the set of 
manuals right here, those four volumes, that represent what the 
21,000 customer service reps, most of whom are GS-8s, are 
expected to know in order to be able to deal with incoming 
phone calls.
    This is changing all the time because of the 1,260 tax law 
changes that were put into place this season. So if you stop to 
think about what that means, that's a regular challenge. Now, 
we shouldn't even have these manuals on paper. We should have 
all of this in the form of computer-accessible, searchable 
text, which we're starting to put through in many of our sites, 
but we don't have it at all of our sites yet.
    Mr. Portman. The point is, these changes won't take place 
overnight. I congratulate you on the filing season and your 
progress so far.
    Thank you, Mr. Chairman.
    Chairman Houghton. OK. Mr. Hayworth.
    Mr. Hayworth. Thank you, Mr. Chairman.
    Commissioner Rossotti, I want to thank you very much for 
coming down to update us on this. Before I turn to my questions 
about the tax filing season, I wanted to let you know I have 
some questions about the draft Low Income Housing Tax Credit 
Audit Technique Guide that's been developed by the IRS. I will 
submit those questions to you in writing and would appreciate 
you getting back to me on that matter.
    Would that be OK?
    Commissioner Rossotti. Sure.
    Mr. Hayworth. Thank you, Mr. Commissioner.
    Well, you offer very graphic evidence of the challenge that 
confronts and confounds not only your customer service 
representatives but those of us on this Committee, in terms of 
the Tax Code changes that developed. It is something to look at 
those four volumes to offer yet another compelling sight for 
all of us to be mindful of the fact that the system has grown 
so cumbersome and so complex that we do need to be about the 
business of simplification, from our end as well as from yours, 
as you are trying to reorganize.
    You brought up the whole notion of e-filing. I know that, 
as the Chairman outlined in his introductory comments, there 
remains some concerns about Y2K. But my concerns, Mr. 
Commissioner, are more elemental, just in terms of security, 
for the lack of a better term, for those returns that are filed 
via home computer.
    Have you detected any attempts to ``hack'' into the system? 
Have there been any problems or breaches of security? And 
furthermore, about the whole issue of taxpayer privacy, 
something that we addressed as we were trying to expand the 
rights of taxpayers last year, legislatively.
    Does the electronic filing perhaps lift the veil of privacy 
that taxpayers are entitled to?
    Commissioner Rossotti. Let me just say that in our whole 
electronic filing program, one of the major considerations in 
our ability to expand it is to ensure that we have adequate 
security and privacy. This is one of the things that we have to 
constantly work on and it constrains us, frankly, on how fast 
we can move ahead with things, like using the Internet, which 
as you know has major security issues.
    As it is now, most of the electronic filing that currently 
is done, the 30 million or so, does not come through the 
Internet. It comes through the ordinary phone network. It comes 
from what are called electronic return originators through to 
providers that come to us through secure channels. So I think 
we can be very reassuring to taxpayers that, as the current 
system works, it is secure and there is no violation of their 
privacy.
    But going forward, as we try to expand the number of ways 
that we give to taxpayers to file electronically, this is one 
of the major considerations that we are working on. We have, 
within our chief information office organization, a whole 
office that is basically the security and privacy office, whose 
sole job is to look at everything we do from the point of view 
of privacy and security. We also have outside contractors, like 
Mitre Corp., for example, that work on the intelligence systems 
for the Defense Department, that advise us on these security 
issues.
    So if we were not concerned about these security issues in 
a very, very serious way, we could probably expand the options 
for filing and paying quicker, but we can't do that. We have to 
make sure that we do protect the privacy.
    Now, insofar as hacking and so forth, of course, our 
website is subject to attack, as any website is. It is outside, 
however, our firewalls and is totally apart from our other 
taxpayer system. So we have been able to maintain security in 
that fashion.
    I don't want to minimize this threat. Just like good 
service and compliance are two things that have to be weighed, 
convenience to taxpayers and privacy are two things that always 
have to be weighed. This is what makes it challenging, to be 
able to accomplish our service goals.
    Mr. Hayworth. Let me turn back to the human equation, if I 
could, Mr. Commissioner.
    I recall last year the whole notion of the problem-solving 
days, where taxpayers and several of my constituents had the 
opportunity to sit down face to face with someone from the 
Internal Revenue Service, who helped them with a particular tax 
problem. And while we move and make great strides 
electronically, I know it's very important to keep the human 
part of the equation into this. As we all agree, just as you're 
testifying personally here today, there is no substitute for 
this eye-to-eye, face-to-face contact.
    Do you plan more problem-solving days in 1999?
    Commissioner Rossotti. We do. We have problem-solving days 
every month, as a matter of fact. We're continuing to do that. 
We have two kinds. We have some that are planned locally, where 
they are conforming to what the local need in that district or 
territory is, and then we have a couple of national problem-
solving days to get the publicity. So we are definitely doing 
that. We're going to continue doing that. It's been extremely 
successful.
    But I also want to note that we're trying to draw the 
lesson from problem-solving days in building our whole new 
organizational structure in the future. We know that there are 
some taxpayers, because of their personal preferences, but also 
in some cases just because of the complexity of issues, who do 
have to sit down face to face.
    So our whole design for our new structure is to allow the 
taxpayers to choose the best way for them to deal with us. Many 
taxpayers would rather deal over the Internet and phone from 
their offices. We want to make that much more convenient than 
it is now.
    We are also planning to have a whole network of offices 
that will essentially have problem-solving days every day, if 
you will, as part of their built-in structure, as we go 
forward. So we would basically allow the taxpayer to make a 
choice based on their preferences and their situation on what 
is the best way to deal with us.
    Mr. Hayworth. Commissioner, I thank you very much.
    Mr. Chairman, thank you for the time.
    Chairman Houghton. Mr. Neal.
    Mr. Neal. Thank you, Mr. Chairman.
    Commissioner Rossotti, you don't have to respond to policy 
questions here, but if you care to, feel free. Capital gains 
and the AMT--how are members of the public reacting to the 
complexity of those issues? Are they taking more time asking 
questions of your staff? Do you think they're spending more 
time with those forms? Is there any relief in sight?
    Commissioner Rossotti. Unfortunately, filing season is not 
over yet, but we will compile statistics and analyses on what 
has happened during the filing season with different kinds of 
forms and so forth. But, regrettably, I just don't have any 
meaningful information on that right now.
    Mr. Neal. You don't have any anecdotes from staff members?
    Commissioner Rossotti. Well, we know there are taxpayers 
that are claiming things like the child credit and the student 
loan credit and so forth.
    As a matter of fact, if you want an anecdotal piece of 
information that shows why things are not always as simple as 
you might think, we're up 17 percent in electronic filing. But 
in one part of our electronic delivery system, which is the 
Telefile, where for the really simple returns, you just dial in 
on a touch tone phone and dial in your return, we're actually 
down slightly on those, even though it was growing fast before.
    We think that the reason that's the case--although we don't 
have proof of this yet--is many people that use that simple 
method are students, and since there are more opportunities now 
for students to claim, for example, deductions on interest and 
credits, which can't be done through telefile, they have been 
driven to a more complex form. So you have these kinds of 
things that go on.
    But at this point, honestly, I think I'm just giving 
anecdotal information. I really don't have a meaningful 
analysis at this point.
    Mr. Neal. Commissioner, I understand that, with the 15th 
approaching, some of this data has yet to be secured. But, at 
the same time, the Taxpayer Advocate has noted these problems 
along the way. These clearly are problems that this Congress, 
hopefully in this session, is going to have to address. 
Taxpayers are filling out more forms, and they get more 
confused about the forms as they fill them out.
    I'm not arguing here that we did not have good intentions. 
I'm simply pointing out that the result has been less than what 
we had desired.
    Commissioner Rossotti. Yes.
    Mr. Neal. Thank you, Mr. Chairman.
    Chairman Houghton. OK. I think we ought to recess now. 
We'll be back after the second vote. Thank you very much.
    Do you have time?
    Commissioner Rossotti. Yes, sir.
    Chairman Houghton. Thank you.
    Commissioner Rossotti. My time is your time.
    [Recess.]
    Chairman Houghton. All right, if we could reconvene.
    Mr. Hulshof.
    Mr. Hulshof. Thank you, Mr. Chairman. Mr. Commissioner, 
thanks for bearing with us through our votes today.
    I have just a couple of questions. As a preface, it's 
interesting that you're here this week, and thank you for 
giving us time this week.
    I insist on doing my own taxes at home. My wife is truly 
the classic ``innocent spouse'' when it comes to that. I will 
tell you as well that I'm proud of my legal background, and I 
have taken every tax law course the University of Mississippi 
offered when I was going to school there. I have to tell you, 
that the time the IRS has estimated as far as us muddling 
through these forms is on the low end. I just mention that to 
you, as someone who really does go through this exercise every 
year.
    As I have been going through that process, I have been 
thinking about electronic filing, because we've been talking a 
lot about it and we've been encouraging the American people to 
do it. So I have been keeping in my mind ways to make it easier 
for taxpayers to participate in electronic filing as I consider 
myself to be just an average American citizen trying to pay 
taxes on time.
    One of the concerns that I have about that is some of the 
impediments that might prevent taxpayers from filing 
electronically. For instance, are taxpayers allowed to file the 
supporting schedules electronically or not?
    Commissioner Rossotti. Well, in some cases yes, in some 
cases no. I mean, the difficulty that we have right now is 
that, because of the technology limitations, we can't accept 
all forms and all schedules. That is exactly, as you point out, 
one of the things that is a barrier that limits how many people 
can file. In our strategic plan, that is one of the things 
we're working on. Of course, our goal is to have you file all 
forms and all schedules. It's going to be a couple of years 
before we reach that.
    Mr. Hulshof. Let me also talk about what I think motivates 
people to file electronically. Of course, people who believe 
they're going to get a refund of what they've overpaid to the 
Federal Government, those people are more likely, of course, to 
file electronically, as opposed to, say, someone who has a 
balance due.
    How do we motivate those taxpayers with balances due to 
file electronically? Do you have any ideas on that?
    Commissioner Rossotti. Yes. I think there are two things 
that we're doing. One we basically need to inform and educate 
taxpayers about. If you have a balance due, and you have to 
send in a paper check, you still have to send it in an envelope 
and that kind of reduces the incentive.
    We have now this season, for the first time, put into place 
a way that you can actually pay electronically, through credit 
cards and debit cards. Congress gave us that authority. Now, on 
the credit cards we still have a problem--a little bit of a 
barrier, if you want to call it that--because Congress said we 
were not allowed to pay the credit card companies a fee, so 
it's the taxpayer that has to pay a fee for the use of the 
credit card, as opposed to the normal case, where the seller 
provides it. But still, it is a convenience. This will be the 
first year that we've had those services available.
    But the other thing that is really important is that, from 
the taxpayer's point of view, the chance of an error occurring 
on electronic returns is very, very minimal. On a paper return, 
just because of the inherent process of paper, they're higher.
    The best way to reduce burden on a taxpayer, as well as 
reduce the cost to the IRS, is not to have any more 
transactions at all after you file that return. The taxpayer 
does not want to receive one of those infamous IRS notices, and 
we don't want to send the taxpayer notices just because of some 
error that may have occurred. So that is an advantage to the 
taxpayer.
    The final thing is, you do get an acknowledgement if you 
file electronically, so you have clear evidence that you filed 
the return. So I think by making it possible to file all forms 
and schedules, by making it possible to pay as well as file 
electronically, and by the benefit of accuracy and 
acknowledgement, we give some incentives.
    I think the last point is the fact that a lot more people 
are starting to use their tax preparation software in their 
home PC, which is a benefit to the taxpayer----
    Mr. Hulshof. Right.
    Commissioner Rossotti. And once you've got that on your 
computer, you just push the button and you go.
    Mr. Hulshof. Right.
    Let me ask you, because my time is dwindling, it was last 
December, I think, that the Internal Revenue Service awarded 
the PRIME contract to Computer Sciences Corp., obviously to 
help upgrade the computer system. Again, when I was first 
honored with a seat on this Committee, before your tenure, we 
had many discussions--and maybe some of those behind you recall 
those discussions--about the moneys appropriated for the 
computer technology for the Internal Revenue Service, where we 
head in one direction and suddenly have to go in a different 
direction, at a loss of taxpayer moneys.
    Also, with the indulgence of the Chairman, this has not 
been identified in the FY 2000 budget. Should it be, and can we 
expect in future budgets that we're going to see a line item as 
far as the amount of moneys for the computer system?
    Commissioner Rossotti. Yes.
    Let me just answer the last question. The reason it was not 
identified in fiscal year 2000 is because, in the previous 2 
fiscal years, Congress did set up what was called the 
Information Technology Investment Account, and there's $500 
million that's been appropriated which we have not tapped any 
of yet, because we wanted to make sure that we had all the 
things in place that we need to have in place to be able to 
manage that kind of a huge program wisely. One of those was 
getting the PRIME contract awarded.
    There were several others that we're working on. One of 
them is updating our strategic plan. So we are hoping that, 
beginning in July of this year, or let's say the summer of this 
year, that we will first go back to get the approval to begin 
to use that account. But we will not need any additional 
appropriation in fiscal year 2000 for the program.
    Now, in fiscal year 2001, we have actually asked for an 
advanced appropriation because, once we get started, we've got 
to really sustain this program.
    Let me just say this is one of the biggest challenges that 
we have in the IRS. We really have to go back and replace these 
computer systems. Just to give you one example, all of the 
taxpayer records in this country are on a computer system that 
was designed during the Kennedy administration, and it's on 
tape files. None of us has seen a tape file in at least 15 
years.
    This is really an impediment to service; it's an impediment 
to good accounting controls that GAO wants; and it's a huge job 
to replace it. So we're going to take it very cautiously, but 
once we get going, we want to sustain that program over a 
period of years.
    Mr. Hulshof. Thank you, Mr. Commissioner, and thank you, 
Mr. Chairman.
    Chairman Houghton. OK. Fine.
    Mr. Coyne has a question.
    Mr. Coyne. Thank you, Mr. Chairman.
    Mr. Commissioner, the administration has requested $8.1 
billion for the budget for the year 2000, $8.1 billion, and 
it's very close to the levels appropriated for 1999.
    Why is it important that the Service receive the full 
amount that's been requested?
    Commissioner Rossotti. I think it's important that we 
receive this funding--in fact, I would say it's essential that 
we receive this funding--simply to fulfill the mandate that 
Congress has given us and I think the public expects, as 
documented in the Restructuring and Reform Act.
    This is a major, major change. I think both the Chairman 
and you noted this in your opening remarks. This includes near-
term things that we have to do, such as implement 71 taxpayer 
rights provisions. We have about 2,500 people that are being 
reallocated just for fiscal year 2000 to implement these 
rights. And then we have the things that we have to do to fix 
some of the major underlying problems of the agency, such as 
the reorganization and improved management structure and, most 
importantly, the technology.
    Last, of course, but a part of these other programs, is the 
training that we have to do. We have a horrible training 
deficit. We have to begin to do what the Chairman noted in his 
question to me earlier, which is begin to have a plan which 
will actually refresh the personnel staff, to begin to hire to 
replace people that are leaving the agency. Without doing these 
things, we really have no chance of delivering on what I think 
the public expects, and of really administering the law in a 
fair and equitable way to the 123 million individual taxpayers.
    So those are, I believe, critically important requirements 
that are necessary in order to deliver on what the Congress and 
public have told us they want us to do.
    Mr. Coyne. If the IRS was not to get the $8.1 billion 
requested, what programs would go unfunded?
    Commissioner Rossotti. I think the basic point is that we 
have already stretched all the diversions that we can do, so we 
would be into basically slowing down or delaying or not 
proceeding with some of the major reform efforts that I think 
we've committed to. We haven't really done a contingency plan, 
because I don't think there is a good contingency plan.
    Mr. Coyne. Thank you, Mr. Commissioner.
    Chairman Houghton. Mr. Watkins.
    Mr. Watkins. Thank you, Mr. Chairman, and Commissioner 
Rossotti.
    As you know, the Arkansas-Oklahoma district had some big 
time problems a couple of years ago. Have most of those been 
resolved?
    Commissioner Rossotti. Well, it certainly was the case that 
there was a good deal of contention and a whole range of what I 
would call human kinds of problems in that district, especially 
in Oklahoma. I've gone out there and visited.
    We do have a new management out there----
    Mr. Watkins. I've seen that.
    Commissioner Rossotti. I think that there were some local 
problems there that related to individuals in management, but 
there was also an overlying problem that I think happened to 
coincide with the local problems, which had to do with--I'll 
call it the overuse and overemphasis on enforcement statistics 
as a way of measuring performance, which put a lot of pressure 
on people. You put those together with the local problems and 
you had, as you know, some very difficult situations.
    Mr. Watkins. You might like to know, Commissioner, that 
I've had extensive townhall meetings back during the 
President's work period in February, and just now coming off 
the Easter break and work period. I have to share with you that 
it's the difference between daylight and dark from what it was 
2 years ago.
    Commissioner Rossotti. What was that?
    Mr. Watkins. It's a lot better.
    Commissioner Rossotti. Thank you.
    Mr. Watkins. We don't always jump just every time someone 
says something, but I have received less complaints this time. 
I do get some that I question myself, and when I think they're 
not legitimate I kind of check them out and call them back. My 
district is mainly small towns and everyone knows everybody 
else. So if you know someone, you can call and say, ``Hey, let 
me ask you this. Is this person shooting straight or is this 
person--'' and they usually can tell you what's been going on 
in those communities.
    I just had one a couple of days ago, and after I checked it 
out, I didn't even follow it back up. I thought it was not one 
that--so usually you can find out about some of those along the 
way. And there are some that you feel are very legitimate and 
you would like to get some folks to follow up on, hopefully in 
a very cooperative way.
    But I think there are a lot less problems out there. I 
think I concur with most of the comments that have been made by 
the Chairman and others. I want to salute you and your staff 
for trying their best. You know, we deal with a thousand and 
one problems up here, and we'll never solve them all, but we'll 
try to do the best we can.
    I do have one question, and maybe you can get me with the 
right person to follow up on this. There's a little family in 
the hometown where I lived for a number of years, a mom and pop 
type operation, a family that had a lady bookkeeper and 
secretary. They found out, after letting her go as a 
disgruntled employee, they checked and realized that this lady 
had not been taking proper care of the books. She was the 
bookkeeper.
    They called the IRS to report the problem, which I thought 
was a very good move. They called and said they had found a 
problem here. They have gone about making sure they paid the 
taxes when they realized it. But now they're going to be 
penalized big time, and they said they didn't think they would 
have that situation. I kind of concur. It looks like kind of a 
double-whammy on them. They are a working family, a family-type 
business situation.
    I was wondering, would you mind if I met with one of your 
staff people and----
    Commissioner Rossotti. Certainly. That's the kind of 
problem that we have the Taxpayer Advocate for. What I would 
like to do is get the Taxpayer Advocate locally there in touch 
with you and your office.
    Mr. Watkins. I have used a couple of times the Taxpayer 
Advocate. I don't know if--It seems like on this particular 
case I have had them involved, because I've had my staff 
involved there.
    Commissioner Rossotti. I think that's exactly why we've got 
them, to deal with those kind of cases. They can look into it 
and take the taxpayer's point of view and see what we can do in 
dealing with those issues.
    Mr. Watkins. I would appreciate it.
    Commissioner Rossotti. We'll get in touch with your office 
and do that.
    Mr. Watkins. I try not to--Like I say, I screen a lot of 
these myself, because I know everyone is going to have 
complaints.
    Commissioner Rossotti. That's fine. I appreciate that. 
That's why we have the Taxpayer Advocate. We have beefed that 
up significantly. We're doing a lot to make it more effective. 
There are always going to be concerns like that. We'll get them 
in touch with you.
    Mr. Watkins. I know you're continuing to refine it and 
fine-tune it. Just like most of us up here, we're trying to do 
our job. But I just had extensive townhall meetings this past 2 
weeks, and like I said, in February, and I think there's a 
tremendous amount of difference this year than what it was even 
a year ago.
    Commissioner Rossotti. That's good to hear. Thank you. 
We'll get in touch with your office and find out how we can 
help that taxpayer--this was in your district?
    Mr. Watkins. Yes, in my district.
    Commissioner Rossotti. We'll get the taxpayer advocate out 
in Oklahoma to deal with that.
    Mr. Watkins. Thank you, Mr. Chairman.
    Chairman Houghton. Thank you, Mr. Watkins.
    Commissioner, I understand that Mr. Portman has arranged a 
brief colloquy with you about tornados in his district. Would 
you like to kick off?
    Mr. Portman. Thank you, Mr. Chairman. I appreciate it.
    Commissioner, as you know, we've had a terrible tornado 
that ripped through the heart of the district I represent. 
We've had about 800 homes damaged or destroyed and a lot of 
businesses destroyed. That happened last Friday, and four 
people were killed and a lot injured. Many folks are without a 
home tonight. The area has not yet been determined to be a 
Federal disaster area. The request has been made to FEMA and 
they're doing evaluations as we talk.
    In my view--and I think you share this view--the April 15 
filing deadline should be the last thing on these folk's minds, 
as they begin to put their lives back together. We have 
coordinated with the IRS to ensure that administratively help 
is available, and I want to thank the district office, Ashley 
Bullard, for having an IRS representative at my office today, 
which is only a few miles from where all this devastation took 
place. They will be there until the 15th to help taxpayers in 
filing for extensions, receiving replacement refund checks, and 
expediting the processing of any refunds.
    My question to you, sir, is whether you can provide us with 
your assurance that all appropriate administrative remedies 
will be taken to assist these taxpayers during this ordeal.
    Commissioner Rossotti. Mr. Portman, I couldn't concur more, 
that if somebody has had tornado damage or a home destroyed, 
that the last thing they need to worry about is taxes. So I 
give you my assurance that whatever powers we have to mitigate 
any consequences for taxpayers, we will definitely do those.
    I think, as you noted, you were in contact with our 
district director out there, Mr. Bullard, and he will have the 
authority to help the taxpayers any way we can, within the 
limits of our authority.
    Mr. Portman. Can you tell us a little bit more about the 
efforts you normally would undertake to assist disaster 
victims? Again, we don't have the disaster declaration yet, but 
if we were to get that, perhaps what you could do in that case 
as well.
    Commissioner Rossotti. I think part of those things we are 
already doing, such as putting people in your offices, and we 
have a special hotline, a local phone number there. We can 
expedite refunds; we can get lost refunds to people; we can 
extend the time to file, so that they don't have to worry about 
the penalties. These are things we can do and are doing in the 
situation that exists now.
    I think what happens, if we get the declaration that it is 
a disaster area, we get the additional authority--for example, 
to abate interest. Today, even though you extend the time to 
file and pay, you can still be liable for the interest. That is 
not an authority we can have under the current circumstances, 
that we would be able to have with the aid of it being declared 
a disaster area.
    Mr. Portman. Thank you very much.
    I appreciate the time, Mr. Chairman. I guess all Members of 
the Committee have to deal with this at one time or another, 
and it's helpful to know the IRS has some administrative 
procedures where they can help the victims of a tornado. Thank 
you.
    Chairman Houghton. Thanks, Mr. Portman.
    Mr. Commissioner, I just have one final question. There has 
been some publicity recently about the IRS steadily reducing 
the audits in the nineties. Would you like to make a comment 
about that?
    Commissioner Rossotti. Yes, indeed. There was a story in 
the New York Times, for example, on Monday, that talked about 
that.
    I think the important thing to understand about the audits 
is that audits are some of the most labor-intensive things that 
we do. By definition, they're a one-at-a-time kind of a thing, 
so they are directly related to how much staff time we have and 
the number of people that need to be audited.
    I think what has happened, say, over the last 10 years is 
that the economy has grown substantially, while the staff of 
people to do audits has been reduced. So clearly, you're going 
to have to do less audits.
    Now, on top of that, what has happened is the economy has 
not only grown in terms of total growth, but the number of more 
complex and, let's say, higher income returns has grown even 
more. So you have a situation where you have rapidly growing 
numbers of high-income returns, and you have a declining number 
of auditors or examiners. Clearly, the audit rate is going to 
go down, particularly the face-to-face, more labor-intensive 
audits. So the numbers that were in the newspaper articles are 
accurate and they do reflect a substantial decrease.
    Now, the whole approach that we have tried to propose to 
deal with not only audits but the whole issue of compliance 
going forward is to, first of all, recognize that we do have to 
have the budget to at least stabilize the size of the IRS. We 
cannot continue to lose revenue agents, lose people and not 
replace them, because of the very reasons that you noted in 
your questions, Mr. Chairman, and also just because of the 
growth in the economy.
    However, I do think that we do not have to go back and add 
large numbers of people to just do things the way they were 
done 5 or 10 years ago. Through the use of better management 
and better technology, we can target these audits to where they 
need to be and make that just one part of our overall 
compliance strategy and use that approach to try to live within 
the means that we have available to enforce the laws and ensure 
compliance.
    If modernization, as we call it, is designed to be a 
balanced program that recognizes that the majority of people do 
want to pay their taxes, then we want to make it easy and 
efficient and then we want to use our enforcement resources in 
a highly efficient and targeted way where that's really 
necessary. That's what the whole strategy is.
    But we cannot continue to lose our auditors while the 
economy grows and expect to be able to administer the law.
    Chairman Houghton. Right. I guess the thing I was trying to 
search for is that, in order to have an auditing function, you 
must have a critical mass of audits to make them meaningful, 
other than just passing over the transom and just saying you 
have an auditing function and really, in effect, not.
    I would be interested if you could have one of your people 
send us sort of a concept of what you're trying to do. I 
understand that statistically you can do much more and much 
faster, and you don't have to have quite as extensive an audit 
as you had in the past, but there comes a point below which you 
obviously don't want to go. It's too long to discuss it here, 
but I think it would be interesting if you could have a follow 
up on that.
    Commissioner Rossotti. Yes, sir. We will do that.
    Chairman Houghton. Are there any other questions? If not, 
thank you very much, and congratulations for the great job 
you're doing.
    Commissioner Rossotti. Thank you very much, Mr. Chairman.
    Chairman Houghton. Now I would like to call the second 
witness, James R. White, Director, Tax Policy and 
Administration Issues, General Government Division of the U.S. 
General Accounting Office.
    All right, Mr. White. You may proceed.

     STATEMENT OF JAMES R. WHITE, DIRECTOR, TAX POLICY AND 
   ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION, U.S. 
 GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY DAVE ATTIANESE AND 
               GARY MOUNTJOY, ASSISTANT DIRECTORS

    Mr. White. Mr. Chairman and Members of the Subcommittee, I 
am pleased to be here to discuss IRS' proposed budget for 
fiscal year 2000 and give a status report on the current 1999 
filing season. Accompanying me are Dave Attianese and Gary 
Mountjoy, both GAO Assistant Directors with experience on IRS 
matters.
    To begin, I want to acknowledge that IRS is in the process 
of planning and implementing a major modernization, key parts 
of which were mandated by Congress in the IRS Restructuring and 
Reform Act passed last year. I emphasize this because, as I 
will explain, modernization will impact Congress' ability to 
use IRS' budget as a tool for oversight.
    My statement makes four main points about IRS' budget 
request which are summarized in bullets beginning at the bottom 
of page 1 of my full statement.
    First, IRS is requesting a little over $8 billion and 
98,000 full-time equivalent positions for FY 2000--virtually 
the same as its proposed operating level for this year. 
Although the overall budget request is unchanged, there is some 
increases and decreases within it. For example, the budget 
request includes $197 million for organizational modernization, 
implementation of the IRS Restructuring and Reform Act, and 
customer service training.
    We recognize that these are critical initiatives. However, 
we are unable to comment on the reasonableness of the requested 
funding because IRS is still developing its modernization 
plans.
    The budget proposes less funding for information systems, 
but that does not include $288 million the IRS plans to spend 
in FY 2000 out of the Information Technology Investment 
Account, which holds funds appropriated in past years.
    My second budget point is about the implications of IRS' 
budget format for congressional oversight. The budget format 
understandably reflects the current IRS, not the modernized 
IRS. For example, the proposed budget does not separately 
identify funding for the newly independent Office of the 
Taxpayer Advocate. Nor does it include two important 
performance measures, voluntary compliance and taxpayer 
compliance burden, that have yet to be developed. Nor does it 
sort out the IRS resources actually devoted to compliance and 
assistance, or the impact of diverting compliances resources to 
assistance.
    While it is understandable that the budget does not yet 
reflect the modernized IRS, because modernization is still 
being planned, this will complicate congressional oversight. 
One interim solution would be for IRS to include more 
information in the narrative part of the budget.
    My third point is a budgetary status report on IRS' 5-year 
effort to make its information systems year 2000 or Y2K 
compliant. The current estimate of total cost for the 5 years 
is $1.3 billion. That's about $345 million higher than its 
estimates from a year ago. The increased cost is due primarily 
to changes in business requirements for major system 
replacement projects, and to a decision to upgrade or replace 
some additional computer hardware and software. For FY 2000, 
IRS is requesting $250 million for its Y2K efforts.
    My last budget point is on IRS' request for information 
systems. The FY 2000 request is for about $1.5 billion, 
including the above $250 million for Y2K. This proposed 
spending is consistent with our prior recommendations and 
congressional limitations on new systems investment by IRS. 
This money is for FY 2000.
    IRS has also requested some money for FY 2001 for 
information systems. This advance FY 2001 appropriation request 
is for $325 million. We do not believe that IRS has adequately 
justified that request in accordance with Federal technology 
investment requirements. Thus, Congress should consider either 
not funding the request, or restricting obligation of the funds 
until IRS develops the requisite cost analysis to justify the 
amount requested.
    I would also like to briefly comment on the current 1999 
filing season.
    The filing season is not over, but preliminary data show 
that the accessibility and quality of IRS' phone service has 
deteriorated considerably compared to last year, although 
accessibility has improved in recent weeks.
    The data also shows the number of tax returns filed 
electronically is continuing to increase, although fewer are 
being filed by phone. Many taxpayers are making mistakes with 
respect to the new child tax credit, and new systems for 
processing returns and remittances have been working well.
    Mr. Chairman, that concludes my statement, and I would be 
happy to answer any questions.
    [The statement of Mr. White follows:]

Statement of James R. White, Director, Tax Policy and Administration 
Issues, General Government Division, U.S. General Accounting Office

 Tax Administration: IRS' Fiscal Year 2000 Budget Request and 1999 Tax 
                             Filing Season

    Mr. Chairman and Members of the Subcommittee: We are pleased to 
participate in the Subcommittee's inquiry into the administration's 
fiscal year 2000 budget request for the Internal Revenue Service (IRS) 
and the status of the 1999 tax filing season.
    Our statement is based on (1) our review of the administration's 
fiscal year 2000 budget request for IRS and supporting documentation; 
(2) interim results of our review of the 1999 tax filing season; (3) 
our ongoing review of IRS' restructuring efforts; and (4) our past and 
ongoing audits of various IRS activities, including efforts to 
modernize its computer systems, make its systems Year 2000 compliant, 
and implement the government Performance and Results Act.
    With respect the fiscal year 2000 budget request, our statement 
makes the following points:
     For fiscal year 2000, the administration is requesting 
about $8.2 billion and 97,862 full-time equivalent (FTE) positions for 
IRS--almost the same as IRS' proposed operating level for fiscal year 
1999. Although the request reflects little change in the overall 
funding available to IRS, there are some changes in how IRS plans to 
use the fiscal year 2000 funds. For example, the request includes about 
$197 million for three initiatives--organizational modernization, 
implementation of the IRS Restructuring and Reform Act of 1998 (RRA98), 
and customer service training.\1\ These are critical initiatives. We 
cannot comment on the reasonableness of the requested funding, however, 
because IRS (1) is still developing plans that could affect the costs 
associated with organizational modernization and (2) did not provide us 
with sufficient detail to explain how some of the estimates were 
developed.
---------------------------------------------------------------------------
    \1\ Public Law 105-206, July 22, 1998.
---------------------------------------------------------------------------
     Congressional oversight of IRS' fiscal year 2000 
operations could be made more complex because (1) the fiscal year 2000 
budget request is formatted in a way that may not reflect IRS' 
organizational structure in fiscal year 2000 and (2) many of the 
performance measures included in the fiscal year 2000 budget request 
are new and two important measures (voluntary compliance and taxpayer 
burden) have yet to be developed. Both of these situations are 
understandable, however, because IRS (1) has not finished planning for 
the organizational modernization and (2) is in the initial stages of a 
major effort to develop a more balanced set of performance measures.
     IRS' current 5-year cost estimate to make its information 
systems Year 2000 compliant is $1.3 billion--about $345 million higher 
than its March 1998 estimate. Changes in business requirements for one 
of IRS' replacement projects and a decision to upgrade or replace 
hardware and software for minicomputers/fileservers and personal 
computers account for some of the increase. For fiscal year 2000, IRS 
is requesting $250 million for its Year 2000 efforts. Most of that 
amount has been allocated to the Century Date Change Project Office and 
one of IRS' Year 2000 replacement projects. About $60 million of the 
$123.4 million allocated to the Project Office covers funding requests 
for various activities that have not yet been approved by IRS.
     IRS is requesting $1.46 billion for information systems in 
fiscal year 2000. IRS' plans for spending those funds are consistent 
with our prior recommendations and related congressional direction. IRS 
is also requesting for fiscal year 2001 an advance appropriation of 
$325 million for its multi-year capital account for systems 
modernization. IRS has not adequately justified that request in 
accordance with federal information technology investment requirements. 
Thus, Congress should consider either not funding the request or 
restricting obligation of the funds until IRS develops the requisite 
cost analyses to justify the amount requested.
    With respect to the 1999 filing season, preliminary data show that 
(1) the accessibility and quality of IRS' telephone service has 
deteriorated considerably since last year, although accessibility has 
improved in recent weeks; (2) the number of individual income tax 
returns filed electronically is continuing to increase, although fewer 
returns are being filed by telephone; (3) many taxpayers have made 
mistakes with respect to the new child tax credit; and (4) new systems 
for processing returns and remittances have been performing well.

 IRS' Fiscal Year 2000 Budget Request Maintains Staff and Funds at the 
                         Fiscal Year 1999 Level

    For fiscal year 2000, the administration is requesting $8.249 
billion and 97,862 full-time equivalent (FTE) positions, including $144 
million and 2,095 FTEs to be funded outside the spending caps for the 
earned income tax credit compliance initiative.\2\ As shown in appendix 
I, that request is virtually the same as IRS' proposed operating level 
for fiscal year 1999 ($8.246 billion and 97,959 FTEs). The overall 
increase of $3 million between the fiscal year 1999 operating level and 
the fiscal year 2000 request is the net result of several increases and 
decreases, the most significant of which are:
---------------------------------------------------------------------------
    \2\ Fiscal Year 2000 will be the 3rd year of funding for this 5-
year initiative.
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     an increase of $197 million for various initiatives, 
including organizational modernization;
     an increase of $249 million to maintain current service 
levels; and
     a decrease of $444 million in funding for IRS' information 
systems, which includes funding for information technology investments 
and IRS' efforts to make its systems Year 2000 compliant.

The Reasonableness of Requested Funding for Initiatives Is Uncertain

    The fiscal year 2000 budget request includes $197 million for three 
initiatives--$140 million for organizational modernization, $40 million 
and 500 FTEs to implement various provisions of RRA98, and $17 million 
for training to enhance customer service. (See appendix II.) Although 
we agree that these are critical initiatives for IRS to undertake, we 
have no basis for determining whether the requested funding is 
reasonable because IRS (1) is still developing plans that could affect 
the amount of funding actually needed for organizational modernization 
and (2) did not provide specific details concerning how some of the 
estimates were developed.
    Beginning in fiscal year 2000, IRS plans to reorganize its 
operations by establishing four main operating divisions to serve 
specific groups of taxpayers, including those with only wage and 
investment income, small business/self-employed individuals, large and 
midsize businesses, and tax exempt organizations. The administration 
has requested $140 million for organizational modernization in fiscal 
year 2000. According to IRS, these funds are needed to cover the costs 
for employee buyouts, relocations, and retraining in conjunction with 
the reorganization. We could not assess the reasonableness of the $140 
million estimate because planning for the reorganization is ongoing. 
Until IRS' plans are finalized, it will be difficult to estimate such 
things as buyouts, relocation expenses, and training needs.
    The fiscal year 2000 budget request also includes $40 million and 
500 FTEs for the implementation of various customer service provisions 
in RRA98. Of the $40 million, $27 million is being requested to 
implement taxpayer protection and rights provisions, such as increased 
notices and processing for innocent spouse relief and due process in 
collection actions, Spanish language taxpayer assistance, grants for 
low income tax payer clinics, and enhanced toll-free telephone and 
Internet access to IRS. The other $13 million is earmarked for efforts 
designed to increase the use of electronic filing.
    Another initiative included in the budget request calls for 
enhancing customer service through improved training. For this 
initiative, the administration is requesting $17 million. According to 
IRS, $13 million of this request is needed to permanently increase 
training funds that had been reduced during the past few years. IRS 
believes that its limited training funds have contributed to a 
deterioration in the competency of its employees, particularly 
frontline employees who have contact with taxpayers.
    IRS did not provide detailed support to show how it developed the 
budget estimates for implementing the RRA98 provisions and for 
training. This made it difficult for us to assess whether IRS had a 
reasonable basis for those estimates.
    While each of these three initiatives appear to be critical if IRS 
is to provide first-class customer service, without additional 
information it is unclear what level of funding would be adequate for 
these initiatives in fiscal year 2000.

   Oversight Could Be More Complex While IRS Modernizes Its Structure

    Congressional oversight of IRS' fiscal year 2000 operations could 
be more complex while IRS is modernizing its structure because (1) the 
budget format may not reflect IRS' operating structure in 2000; and (2) 
many performance measures presented in the fiscal year 2000 budget 
request are new, and two important measures--voluntary compliance and 
taxpayer burden--have not been developed. The absence of a voluntary 
compliance measure, for example, makes it is difficult to assess the 
effects of IRS' diversion of enforcement resources to implement RRA98 
and enhance customer service.

Budget Format May Not Reflect IRS Operating Structure in Fiscal Year 
2000

    The format of IRS' fiscal year 2000 budget request may not reflect 
IRS' organizational structure in fiscal year 2000. This is 
understandable given the fact that IRS has not finalized its 
restructuring plans. Until those plans are finalized, it would be 
premature for IRS to revise its budget format. At the same time, 
however, any significant disconnect between the existing budget 
structure and IRS' operating structure could make congressional 
oversight more complex.
    The format of IRS' fiscal year 2000 budget request is consistent 
with the format of IRS' fiscal year 1999 budget and generally reflects 
IRS' current operating structure. However, starting later this year, 
IRS will be shifting from being geographically based in 33 districts 
offices to a customer-based structure built around four major groups of 
taxpayers--wage and investment income, small business and self 
employed, large and mid-size business, and tax exempt. Technology 
management is to be centralized, with each of the four major operating 
components being the business owner for systems that support it. IRS 
has not completed its planning for this organizational modernization 
and, thus, it is not yet clear how much change will actually take place 
in fiscal year 2000 versus years after 2000 and how those changes might 
affect oversight, if at all.
    In conjunction with its organizational modernization, IRS is 
exploring plans to develop new financial and budget structures that 
could aid Congress in its oversight of IRS. We were told that IRS, as 
part of that effort, would be considering the needs of this 
Subcommittee and other congressional overseers. In that regard, there 
are two aspects of IRS' current budget structure that could hinder 
effective oversight. Those two aspects, which we discussed in our 
testimony on IRS' fiscal year 1999 budget \3\ and which are still 
relevant, involve (1) the inability to determine how many FTEs and 
dollars IRS is devoting to enforcement versus assistance and (2) the 
lack of a separate budget activity for the Office of the Taxpayer 
Advocate.
---------------------------------------------------------------------------
    \3\ Tax Administration: IRS' Fiscal Year 1999 Budget Request and 
Fiscal Year 1998 Filing Season (GAO/T-GGD/AIMD-98-114, March 31, 1998).

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Mix Between Enforcement and Assistance is Not Clear

    Achieving IRS' mission requires a mix of enforcement and 
assistance. Congressional oversight would be enhanced, in our opinion, 
if Congress knew how IRS was allocating its resources between those two 
areas. That information cannot be derived from IRS' budget estimates.
    For example, IRS is requesting $991.5 million and 20,874 FTEs for 
the Telephone and Correspondence budget activity within the Processing, 
Assistance, and Management appropriation. That activity covers all non 
face-to-face contacts between IRS and taxpayers. Such contacts include 
typical forms of assistance, such as answering telephone calls and 
correspondence, as well as several enforcement activities, such as 
audits handled through correspondence and attempts to collect overdue 
taxes via the telephone. The budget estimates do not show how much of 
IRS' request for Telephone and Correspondence is for assistance versus 
enforcement. Similarly, despite its name, the Tax Law Enforcement 
appropriation is not exclusively for enforcement. The $3.3 billion and 
43,677 FTEs being requested for that appropriation include an 
unspecified amount of money and FTEs for various forms of assistance, 
including walk-in service and taxpayer education efforts. Finally, the 
$144 million and 2,095 FTEs being requested for the EIC compliance 
initiative also involve a mix of assistance and enforcement, but, 
again, that mix is not apparent in IRS' budget estimates.

Absence of a Separate Budget Activity for the Office of the Taxpayer 
Advocate

    The Office of the Taxpayer Advocate is responsible, among other 
things, for the resolution of taxpayer problems through the Problem 
Resolution Program. Because of concerns about that Office's 
independence, Congress included provisions in RRA98 that, among other 
things, authorized the National Taxpayer Advocate to appoint local 
advocates, evaluate and take personnel action with respect to any 
employee of any local advocate's office, and submit annual reports 
directly to the Senate Committee on Finance and the House Committee on 
Ways and Means. We believe that congressional oversight of the 
Advocate's Office and IRS' efforts to solve taxpayer problems would be 
further enhanced and any concerns about the Advocate Office's 
independence would be further mitigated if funding for that Office was 
separately identified in IRS' budget.
    According to IRS, the fiscal year 2000 budget request includes 
about $43.6 million and 628 FTEs for the Office of the Taxpayer 
Advocate. However, those amounts are not separately identified in IRS' 
budget estimates but are included within the Telephone and 
Correspondence budget activity in the Processing, Assistance, and 
Management appropriation.\4\ According to the National Director for 
Budget, IRS would have had to make substantial coding changes to its 
financial system to set up a separate line item for the Advocate's 
Office in IRS' budget request. The National Director explained that it 
would not have been practical to start developing new financial codes 
for some organizational functions, such as the Advocate's Office, when 
many other changes may be needed later as IRS proceeds with its 
organizational modernization. We agree that it makes sense to make all 
needed changes to IRS' financial and budget structures at one time. 
Until a separate budget activity is established for the Advocate's 
Office, congressional oversight might be enhanced if the narrative part 
of IRS' budget estimates provided data on the amount of resources being 
devoted to that activity in the current year and being requested for 
the coming year.
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    \4\ According to IRS' National Director for Budget, the Taxpayer 
Advocate's share of the budget will actually be much higher than the 
amount included in the request because IRS is in the process of 
transferring to the Advocate's Office funding responsibility for 
caseworkers who had been funded by other functions, such as Examination 
and Customer Service.

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The Development of Performance Measures Is a Work in Process

    IRS is changing most of its performance measures and the way it 
uses measures to focus attention on priorities, assess organizational 
performance, and identify areas for improvement. A balanced set of 
performance measures is critical, not only for IRS management but also 
for effective oversight of IRS. As explained by IRS:

         It is essential to establish appropriate quantitative 
        performance measures for the IRS and for its major component 
        operations. This is required by the government Performance and 
        Results Act and is essential to the proper operation of any 
        large organization. For this reason, an integral part of the 
        overall modernization program for the IRS is the establishment 
        of balanced performance measures which support and reinforce 
        achievement of the IRS' restated mission and overall strategic 
        goals.

    IRS is designing Service wide performance measures in support of 
its mission and strategic goals as well as performance measures at the 
individual program level. In September 1998, the Commissioner announced 
a new mission statement for IRS. It says that the mission of IRS is to 
``provide America's taxpayers top quality service by helping them 
understand and meet their tax responsibilities and by applying the tax 
law with integrity and fairness to all.'' To achieve this mission, IRS 
established three strategic goals--service to each taxpayer, service to 
all taxpayers, and productivity through a quality work environment.
    To achieve the first goal--service to each taxpayer--IRS plans to 
make filing easier; provide first quality service to taxpayers needing 
help; provide prompt, professional, helpful treatment to taxpayers in 
cases where additional taxes may be due; and improve taxpayers' access 
to toll-free telephone assistance. To achieve the second goal--service 
to all taxpayers--IRS plans to increase fairness of compliance and 
overall compliance. To achieve the third goal--productivity through a 
quality work environment--IRS plans to increase employee job 
satisfaction and productivity while service improves. IRS said that it 
is realigning processes and activities to ensure that they support the 
mission of IRS and incorporate the principles of a balanced measurement 
system that focuses across three areas--business results, customer 
satisfaction, and employee satisfaction.
    Identifying and defining Servicewide and program level performance 
measures is work in process for IRS. As shown in table III.1, IRS has 
defined 15 Servicewide performance measures and has one placeholder for 
a productivity measure that has yet to be defined. Nine of the 15 
Servicewide measures are new. IRS has also defined 68 measures to gauge 
its performance in specific functional areas.\5\ (See table III.2.) Of 
the 68 program level measures, more than half (40) are new.
---------------------------------------------------------------------------
    \5\ IRS' functional area include such activities as Submission 
Processing, Telephone and Correspondence, Examination, and Collection.
---------------------------------------------------------------------------
    Understandably, the lists of measures included with the fiscal year 
2000 budget estimates are neither final nor complete because IRS is in 
the process of planning its organizational modernization and 
identifying performance measures. According to IRS' National Director 
for Budget, IRS will continue to revise and add other measures as it 
proceeds with the organizational modernization and implementation of 
RRA98. In that regard, IRS' list of Servicewide performance measures 
does not include two critical measures--voluntary compliance and 
taxpayer burden. Also, one existing Servicewide measure--toll-free 
level of access--is not, in our opinion, the most appropriate measure 
of IRS' performance in providing telephone service.

IRS' Performance Measures Do Not Address Voluntary Compliance and 
Taxpayer Burden

    IRS' performance measures do not yet include any measures of 
voluntary compliance and taxpayer burden. While performance in both 
areas is difficult to measure, they are two critical indicators of IRS' 
performance and thus should be a vital part of any measurement system 
that IRS develops. According to IRS officials, IRS recognizes the 
importance of measuring these two areas of performance and plans to 
continue to explore valid and reliable ways to measure them at the 
strategic level to gauge IRS-wide performance.
    Voluntary Compliance--IRS' Organizational Performance Management 
Executive told us that IRS would be unable to measure voluntary 
compliance without something similar to the discontinued Taxpayer 
Compliance Measurement Program (TCMP). In the past, IRS used TCMP 
studies to assess voluntary compliance among taxpayers. Those studies 
involved detailed audits of valid samples of tax returns. IRS projected 
the results of those audits to determine the extent of voluntary 
compliance among various groups of taxpayers. IRS conducted its last 
TCMP studies on returns filed for tax years 1987 and 1988. IRS 
abandoned the TCMP studies due to concerns about the additional cost 
and burden placed on taxpayers. Since then, IRS has not considered TCMP 
studies to be a viable option for assessing voluntary compliance.
    Additionally, the Organizational Performance Management Executive 
explained that the TCMP studies had other limitations. For example, the 
TCMP studies could not be used to gauge compliance in ``real time''--
either during the tax year in question or the year after the tax year 
in question. Also, IRS can not attribute all changes in compliance to 
its performance because voluntary compliance can be affected by other 
factors, such as the economy and geographical location.
    We believe that a modified version of the TCMP studies, that 
reduces the burden on taxpayers, could be useful in assessing voluntary 
compliance. For example, IRS could (1) use smaller samples that project 
nationwide results, (2) sample groups of taxpayers and project the 
results to specific groups of taxpayers, or (3) continuously sample a 
small number of returns over a period of several years.
    Taxpayer Burden--IRS discontinued a performance measure it once 
used to gauge taxpayer burden--a ratio that compared private sector 
costs to the cost for IRS to collect $100 in ``net tax'' revenue.\6\ 
IRS discontinued this measure because it was based on an outdated 
methodology and was considered to be a poor indicator of overall 
burden. IRS is currently working with a consultant to develop a new 
means to measure taxpayer burden. Additionally, results of IRS' 
taxpayer satisfaction surveys may provide some valuable insights on 
taxpayer burden.
---------------------------------------------------------------------------
    \6\ Net tax revenue is defined to include all revenue collected 
(i.e. income, employment, estate and gift, and excise taxes) less 
refunds.

Level of Service Would Be a More Appropriate Servicewide Measure of 
---------------------------------------------------------------------------
IRS' Performance in Providing Telephone Service

    One important way that IRS helps taxpayers understand and meet 
their tax responsibilities is through toll-free telephone assistance. 
By calling IRS, taxpayers can, among other things, get answers to tax 
law questions, inquire about the status of their account, or order 
forms and publications. It is important that IRS and Congress know how 
well IRS provides this critical service. Toward that end, IRS has 
included ``toll-free level of access'' as one of its Servicewide 
performance measures. We believe, however, that toll-free level of 
access is not the most appropriate Servicewide measure for assessing 
IRS' performance in providing telephone service. The more appropriate 
measure, in our opinion, is ``toll-free level of service.''
    The only difference between these two measures, and the reason we 
favor level of service, is the way in which abandoned calls are handled 
in computing the measures.\7\ IRS computes level of access by adding 
the number of calls answered and the number of abandoned calls and 
dividing that sum by the total number of call attempts (which is the 
sum of calls answered, calls that are abandoned, and calls that receive 
a busy signal).\8\ Level of service is computed by dividing the number 
of calls answered by total call attempts. Thus, in effect, level of 
access considers abandoned calls as successful call attempts while 
level of service considers them unsuccessful. Although level of access 
is a useful measure because it indicates the extent to which taxpayers 
are able to access IRS' system (i.e., not get a busy signal), it does 
not indicate the extent to which taxpayers are successful in actually 
talking to someone in IRS. For that reason, we believe that level of 
service is the more appropriate Servicewide measure of IRS' performance 
in providing telephone assistance.
---------------------------------------------------------------------------
    \7\ Abandoned calls are ones in which the taxpayer has gained 
access to IRS' system but subsequently decided, for unknown reasons, to 
hang up before an IRS assistor came on the line.
    \8\ Appendix I of IRS' Fiscal Year 2000 Congressional Justification 
incorrectly describes this measure as being computed by dividing calls 
answered by calls attempted. That is actually the way level of service 
is computed.

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Impact of Diversion of Resources Is Uncertain

    IRS' budget request for fiscal year 2000 discusses the diversion of 
resources in fiscal year 1999 to implement various provisions of RRA98 
and to provide assistance to taxpayers. There is insufficient 
information, however, for IRS or Congress to assess the overall impact 
of these diversions.
    RRA98 contains various provisions that give additional protection 
to taxpayers (such as a relief from joint liability for innocent 
spouses), shift the burden of proof from taxpayers to IRS in certain 
circumstances, and make IRS liable for some legal fees incurred by 
taxpayers. IRS says that it plans to divert about 2,500 FTEs and $200 
million in fiscal year 1999 to implement these provisions. According to 
IRS, this diversion marks the ``beginning of a continuing curtailment 
of some compliance activities, primarily the examination of tax returns 
and the collection of delinquent accounts.'' In addition, IRS says that 
another 200 FTEs will be detailed from the Collection function to the 
Customer Service function in fiscal year 1999 to increase the quality 
of service to taxpayers through the walk-in program. Other diversions 
are possible as IRS attempts to improve the quality of its telephone 
service, which we discuss later.
    Although IRS has made statements in the past about the potential 
impact of these resource diversions on enforcement revenue, its current 
position is that the monetary effect of such diversions is unknown. We 
agree with that position. To correctly assess the monetary effect of 
such diversions, IRS needs to be able to estimate not only the negative 
effect on enforcement revenues but also the potential positive effect 
on non-enforcement revenues from any improved taxpayer service 
resulting from the resource diversions.
    It is expected, for example, that implementation of RRA98 will 
result in better service to taxpayers. Better taxpayer service could 
lead to an increase in voluntary compliance, which, in turn, could lead 
to increased revenues. Without a measure of voluntary compliance, as 
discussed earlier, there is no way for Congress, IRS, or others to 
assess such an impact.

 The 5-Year Cost Estimate for Making IRS' Systems Year 2000 Compliant 
 Has Increased, and Some Needs for Fiscal Year 2000 Are Still Uncertain

    IRS' efforts to make its systems Year 2000 compliant represent one 
of the most expensive civilian agency programs.\9\ The current 5-year 
cost estimate for IRS' Year 2000 efforts is $1.3 billion--about $345 
million more than its March 1998 cost estimate. IRS estimates that if 
its Year 2000 efforts are unsuccessful, the adverse effects could 
include millions of erroneous tax notices and delayed or erroneous 
refunds. Accordingly, the Commissioner of Internal Revenue has 
designated this effort a top priority. IRS is requesting about $250 
million and 239 FTEs for its Year 2000 efforts for fiscal year 
2000.\10\ About $34 million of the $250 million is for a contingency 
fund for needs that may be identified later in calendar year 1999.
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    \9\ IRS' Year 2000 efforts are necessary because IRS' information 
systems were programmed to read two-digit date fields. Therefore, if 
unchanged, these systems would interpret 2000 as 1900, seriously 
jeopardizing tax processing and collection activities.
    \10\ The $250 million is referred to as an increase in IRS' budget 
request because IRS' fiscal year 1999 appropriation did not 
specifically include funds for IRS' Year 2000 efforts. For fiscal year 
1999, IRS' Year 2000 efforts were funded from a governmentwide Year 
2000 fund that was established in the Omnibus Consolidated and 
Emergency Supplemental Appropriations Act for Fiscal Year 1999 (P.L. 
105-277). This Act provided $2.25 billion in emergency funding for Year 
2000 computer conversion activities for nondefense activities. The 
Director of the Office of Management and Budget (OMB) is responsible 
for allocating these funds. As of February 12, 1999, OMB had released 
$1.56 billion; $690 million remains available for emerging 
requirements. IRS received $483.3 million from the fund, of which 
$358.3 million is to be used for Year 2000 activities. According to the 
Department of the Treasury budget documents, Congress earmarked the 
remaining $125 million for other information systems investments that 
were initially included in IRS' fiscal year 1999 budget request.
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    To make its information systems Year 2000 compliant, IRS was to (1) 
fix existing systems by modifying application software and data and 
upgrading hardware and system software where needed, (2) replace 
systems if correcting them is not cost-effective or technically 
feasible, and (3) retire systems that will not be needed after the year 
2000. IRS' Year 2000 efforts include the following two major system 
replacement projects:
     The Service Center Mainframe Consolidation (SCMC) project 
involves consolidation of IRS' mainframe computer processing operations 
from 10 service centers to 2 computing centers. Specifically, SCMC was 
to (1) replace and/or upgrade mainframe hardware, systems software, and 
telecommunications networks; (2) replace about 16,000 terminals that 
support frontline customer service and compliance activities; and (3) 
replace the system that provides security functions for online taxpayer 
account databases with a new system called the Security and 
Communications System. Replacement of the terminals and implementation 
of the Security and Communications System are critical to IRS' 
achieving Year 2000 compliance.
     The Integrated Submission and Remittance Processing System 
(ISRP) is to replace IRS' two primary tax return and remittance input 
processing systems (the Distributed Input Processing System and the 
Remittance Processing System) with a single system that is to be Year 
2000 compliant.
    IRS established a goal to complete most of its Year 2000 work by 
January 31, 1999, to help ensure that it would (1) have a Year 2000 
compliant environment implemented for the 1999 filing season and (2) 
provide time for resolving any problems that surfaced during the 1999 
filing season and its Year 2000 end-to-end testing.
    For fiscal year 2000, IRS is requesting (1) $123.4 million for the 
activities of the Century Date Change (CDC) Project Office, which 
oversees the conversion and testing of changes made to existing 
systems; (2) $100.6 million for SCMC; and (3) $26.4 million for ISRP.

5-Year Cost Estimate Increased

    The 5-year cost estimate for IRS' Year 2000 efforts increased by 
$345.2 million between March 1998 and March 1999. In March 1998, the 5-
year cost estimate for fiscal years 1997 through 2001 was about $1 
billion; IRS' current cost estimate is $1.35 billion. Table 1 shows 
that the activities under the purview of the CDC Project Office and 
SCMC account for most of the increase.

                                        Table 1.--5-Year Cost Comparison
                                                  [In Millions]
----------------------------------------------------------------------------------------------------------------
                                                                   Fiscal years    Fiscal years
                                                                     1997-2001       1997-2001
                        Spending category                           (March 1998     (March 1999     Difference
                                                                     estimate)       estimate)
----------------------------------------------------------------------------------------------------------------
CDC Project Office..............................................          $572.0          $701.4          $129.4
SCMC............................................................           332.2           499.8           167,6
ISRP............................................................          101.7a           149.9            48.2
                                                                 -----------------------------------------------
  Total.........................................................        $1,005.9        $1,351.1          $345.2
----------------------------------------------------------------------------------------------------------------
a Does not include estimates for fiscal years 2000 and 2001. IRS budget documents indicate that thee estimates
  were identified in April 1998. If these amounts are included, the ISRP cost estimate is $146.3 million--only
  $3.6 million less than the current estimate.
Source: IRS' Year 2000 cost summaries for fiscal years 1997-2001.

CDC Project Office

    The CDC Project Office is responsible for (1) overseeing 
efforts to fix over 60 million lines of application software, 
(2) ensuring that hardware and systems software are compliant, 
and (3) overseeing the Year 2000 testing of IRS' information 
systems. As shown in table 1, IRS' 5-year cost estimate for CDC 
increased by $129.4 million between March 1998 and March 1999. 
Most of the increase--$99 million--is for fiscal year 1999.
    We had difficulty identifying which aspects of the CDC 
Project Office budget accounted for all of the $99 million 
increase because at the time IRS officials developed the March 
1998 estimate they were still refining their Year 2000 needs. 
At that time, IRS had allocated about $50 million to a 
contingency fund that was to become available for needs as they 
emerged. According to IRS officials, for those needs that were 
defined as of March 1998, the largest cost increases are for 
certain contractor services and for computer hardware and 
software for IRS' personal computers and minicomputers/file 
servers.
    As we noted in our June 1998 report on IRS' Year 2000 
efforts, IRS placed priority on assessing and fixing its 
mainframe computers, which encompass most of IRS' tax 
processing systems.\11\ Accordingly, the needs for IRS' 
minicomputers/file servers and personal computers were less 
defined at that point in time. For example, since developing 
the March 1998 estimate, IRS has decided to replace about 
35,000 personal computers and the associated systems and 
commercial off-the-shelf software. As part of this replacement 
effort, IRS plans to reduce the number of commercial software 
and hardware products for personal computers in its inventory 
from about 4,000 to 60 core standard products.
---------------------------------------------------------------------------
    \11\ IRS' Year 2000 Efforts: Business Continuity and Contingency 
Planning Needed for Potential Year 2000 Failures (GAO/GGD-98-138, June 
15, 1998).
---------------------------------------------------------------------------
    Table 2 shows the CDC Project Office's spending categories 
and associated dollar amounts for fiscal year 1999 as of 
February 23, 1999.

 Table 2.--CDC Project Office Spending Categories and Associated Dollar
                      Amounts for Fiscal Year 1999

------------------------------------------------------------------------
                                                            Amount  (in
                    Spending category                        millions)
------------------------------------------------------------------------
Personal computers......................................           $51.0
End-to-end testinga.....................................            48.2
Labor and discretionary.................................            38.3
Program inventory and management........................            23.2
Applications and development............................            19.6
Minicomputers/file servers..............................            16.7
Telecommunications......................................            14.0
Noninformation technology...............................             9.2
Contingency fund........................................             8.8
Independent verification and validationb................             8.8
Mainframe computers.....................................             1.1
                                                         ---------------
  Total.................................................         $239.0c
------------------------------------------------------------------------
a The end-to-end test is to verify that a defined set of interrelated
  systems, which collectively support a business function, interoperate
  as intended in an operational environment. The test is to have two
  parts--the first part is scheduled from April to July 1999; the second
  part is scheduled from October to December 1999.
b Provides for an organization that is technically, managerially, and
  financially independent of the systems developers to assess, among
  other things, whether a system meets the user's requirements.
c Total does not add due to rounding.
Source: CDC budget data.

    We cannot comment on the adequacy of the amounts that IRS has 
allocated to each of these categories. However, as we would have 
expected, IRS has allocated large portions of its budget to those major 
Year 2000 activities that are to be completed in fiscal year 1999--the 
replacement effort for its personal computers and its end-to-end 
testing activities.
    To help ensure that agencies have sufficient funds for Year 2000 
activities, OMB has authority to release funds from the government-wide 
Year 2000 fund. OMB notified agencies to request funding for unforeseen 
requirements as they emerge. Accordingly, in March 1999, after 
allocating the $8.8 million in its contingency fund, IRS requested an 
additional $35 million from the OMB Year 2000 fund to cover the net 
unfunded needs for fiscal year 1999. As of March 1999, OMB had approved 
$22.3 million.\12\
---------------------------------------------------------------------------
    \12\ IRS requested funds for several activities such as contingency 
planning, telecommunications, minicomputers/file servers, and 
independent verification and validation. OMB approved funding for most 
of the areas, but reduced the amount for some areas. According to IRS 
officials, OMB approved funding for those areas in which IRS had 
demonstrated an actual need and not for anticipated needs. For example, 
an anticipated need would include any fixes that might be needed as a 
result of end-to-end testing.
---------------------------------------------------------------------------
    IRS' fiscal year 2000 budget request includes $123.4 million for 
the CDC Project Office. According to CDC Project Office budget 
documents, as of March 31, 1999, about $29 million of the $123.4 
million has been allocated, primarily for CDC Project Office labor and 
discretionary costs. The CDC Project Office has received funding 
requests for about $60 million which are still subject to approval, 
leaving a contingency amount of about $34 million. IRS officials said 
that the contingency funds are to be used for needs that may be 
identified through (1) end-to-end testing, (2) risk management 
activities,\13\ (3) Year 2000 contingency plans for IRS' core business 
processes,\14\ and (4) an independent review of IRS' application 
software and commercial off-the-shelf software Year 2000 changes.
---------------------------------------------------------------------------
    \13\ IRS' CDC Project Office outlined a risk management process 
that is to, among other things, (1) identify risks to the successful 
completion of Year 2000 goals, (2) coordinate the development of risk 
mitigation strategies, and (3) oversee the execution of these 
strategies.
    \14\ In our June 15, 1998, report, we said that IRS' Year 2000 
contingency planning efforts fell short of meeting the guidelines 
included in our Year 2000 Business Continuity and Contingency Planning 
Guide. Accordingly, we recommended that IRS take steps to broaden its 
contingency planning efforts to help ensure that it had adequately 
assessed the vulnerabilities of its core business processes to 
potential Year 2000 induced failures. In response to our 
recommendations, IRS determined that it needed to develop 37 
contingency plans to address various Year 2000 failure scenarios for 
its core business processes. IRS officials told us that 26 plans were 
done as of March 31, 1999; the remaining 11 plans are to be completed 
by May 31, 1999.

---------------------------------------------------------------------------
SCMC

    SCMC cost increases account for $167.6 million of the $345.2 
million increase in the 5-year Year 2000 cost estimate. As shown in 
table 3, IRS' March 1998 cost estimate for SCMC was $332.2 million, 
compared to its current cost estimate of $499.8 million.

                  Table 3.--Comparison of March 1998 and March 1999 SCMC 5-Year Cost Estimates
----------------------------------------------------------------------------------------------------------------
                                                       FY 1997
                  Year of estimatea                    actual   FY 1998b   FY 1999   FY 2000   FY 2001    Total
----------------------------------------------------------------------------------------------------------------
March 1998 estimate.................................      43.8     167.3      76.0      38.4       6.7   $332.2c
March 1999 estimate.................................      43.8     168.3     111.6      97.3      78.8    $499.8
  Difference........................................         0       1.0      35.6      58.9      72.1    $167.6
----------------------------------------------------------------------------------------------------------------
a Estimate includes only contractor costs, except where noted. According to IRS officials, there are $64 million
  in additional costs excluded from the estimates. As of March 1999, these costs include (1) additional IRS
  staffing costs of $32 million, (2) $20 million for maintenance costs in the seven service centers that have
  not yet had their tax processing activities moved to the computing centers, and (3) $12 million in relocation
  and training costs for fiscal years 1999, 2000, and 2001.
b According to SCMC officials, the estimates for fiscal year 1998 also include relocation, training, and IRS
  staffing costs.
c In March 1998, IRS' cost estimate for the Year 2000 portions of SCMC was $265 million. IRS no longer reports
  SCMC Year 2000 costs.
Source: SCMC expenditure and budget documents.

    When we testified in March 1998, we said that two of the factors 
that had the potential to increase SCMC costs were pending expanded 
business requirements and schedule delays. According to IRS officials, 
those two factors together with a decision to upgrade one of the tax 
processing systems, ultimately contributed to cost increases.
    According to IRS officials, IRS' fiscal year 2000 budget request of 
$100.6 million \15\ for SCMC reflects much of the costs associated with 
implementing expanded requirements and the contractor costs, staff 
relocation costs, and training costs for moving the tax processing 
activities of five service centers in fiscal year 2000. According to 
SCMC officials, cost estimates for fiscal years 2000 and 2001 could 
decrease because (1) they believe the contractor's cost estimates may 
be overstated and (2) some SCMC activities may be funded from IRS' 
Operations and Maintenance budget activity as systems are fully 
implemented.
---------------------------------------------------------------------------
    \15\ This $100.6 million includes $3.3 million in relocation and 
training costs that is not included in the March 1999 estimate for 
fiscal year 2000 shown in table 3.
---------------------------------------------------------------------------
    According to SCMC officials, expanded business requirements for 
disaster recovery \16\ and a decision to upgrade the hardware and 
software for one of its tax processing systems \17\ account for the 
vast majority of the $167.6 million increase in the 5-year cost 
estimate for SCMC. For disaster recovery, IRS plans to obtain 
contractor services and purchase hardware, software, and related 
telecommunications for its tax processing mainframe computers and 
telecommunications networks. SCMC officials said that the tax 
processing system upgrade is to (1) increase production capacity and 
disaster recovery capabilities, (2) provide the necessary systems 
architecture for IRS' planned modernization blueprint, and (3) provide 
substantial savings by reducing the hardware, software, and maintenance 
costs associated with the existing system.
---------------------------------------------------------------------------
    \16\ Disaster recovery refers to the procedures or plans for 
responding to the loss of an information system due to flood, fire, or 
computer virus. Under the original SCMC disaster recovery plan, in the 
event of a disaster, 70 percent of the computing center's processing 
capability was to be restored in 36 hours. Under the expanded 
requirements, 100 percent of the processing capability is to be 
restored in 6 hours.
    \17\ This tax processing system encompasses IRS' automated 
collection function and the print capabilities for notices to 
taxpayers.
---------------------------------------------------------------------------
    According to SCMC officials, the need to have contractor staff on 
board longer than anticipated to accommodate schedule delays accounts 
for some of the $167.6 million cost increase. Specifically, in March 
1999, IRS decided to delay moving the tax processing activities of five 
service centers, instead of completing these moves in 1999.\18\
---------------------------------------------------------------------------
    \18\ This decision represents the second significant schedule 
change for SCMC. Originally, IRS had planned to have the tax processing 
activities of the 10 service centers moved to the computing centers by 
the end of calendar year 1998. In May 1998, IRS revised the schedule 
and established two new schedules--one for the Year 2000 portion of 
SCMC and another for the tax processing activities. The Year 2000 
portion was to be completed by December 31, 1998. The schedule for tax 
processing activities called for moving the activities of five service 
centers by 1998 and the remaining five service centers in calendar year 
1999. As of January 31, 1999, IRS had completed the Year 2000 portion 
of SCMC and moved the tax processing activities of three service 
centers. In March 1999, IRS revised the schedule for moving the tax 
processing activities. Under the revised schedule, two additional moves 
are to occur in calendar year 1999, four in calendar year 2000, and one 
in early January 2001.
---------------------------------------------------------------------------
    IRS officials cited several reasons for changing the SCMC schedule. 
Specifically, IRS' business organizations had limited involvement in 
SCMC during its early stages. As their involvement increased, they 
expressed concern about the ambitious schedule and helped identify 
certain critical success factors that needed to be addressed for SCMC 
to be successful. Some of these critical success factors include (1) 
fully implementing the automated processes associated with the 
consolidations before the service centers' tax processing activities 
were moved to the computing centers, (2) providing adequate numbers and 
types of staff in the service centers and computing centers, and (3) 
developing new business procedures for operating under consolidation. 
Also, SCMC officials said that the original schedule did not 
acknowledge that new issues might surface during each move because of 
operational differences among the service centers. According to IRS 
officials, the revised schedule provides additional time for addressing 
these issues.

      Information Technology Budget: Observations and Suggestions

    Beginning in 1995, we reported on serious and pervasive information 
technology (IT) management and technical weaknesses. Since then, we 
have monitored IRS' progress in implementing our recommendations to 
correct these weaknesses and have reviewed IRS' annual budget requests 
to ensure that they are consistent with IRS' modernization capability 
and are otherwise adequately justified.
    IRS' IT budget request for fiscal year 2000 includes $1.46 billion 
and 7,399 FTEs to fund such things as operation and maintenance of 
existing systems, activities to make IRS' systems Year 2000 compliant, 
correction of IT management weaknesses, and development of systems to 
sustain IRS operations until IRS is ready to modernize. These funding 
categories for fiscal year 2000 are consistent with our prior 
recommendations and related congressional direction concerning IT 
spending.
    In addition to the $1.46 billion, IRS is requesting for fiscal year 
2001 an advance appropriation of $325 million for IRS' multiyear 
capital account for systems modernization, referred to as the 
``Information Technology Investments Account'' (ITIA). However, IRS has 
not adequately justified this ITIA request because IRS has not yet 
developed its modernization strategic plan and supporting cost-benefit 
analyses for proposed system investments. Accordingly, we suggest that 
Congress consider either denying (i.e., not funding) the $325 million 
advance request or restricting its obligation until IRS develops the 
requisite cost analyses to justify the amount requested, which IRS 
plans to do by September 30, 1999.

IRS Acting to Correct IT Management and Technical Weaknesses

    In July 1995, we reported on serious management and technical 
weaknesses with IRS' modernization and made over a dozen 
recommendations to help IRS build the capability necessary to 
successfully modernize it systems.\19\ In June 1996, we reported that 
IRS had made progress in implementing our recommendations.\20\ However, 
to minimize the risk of IRS investing in systems before the 
recommendations were fully implemented, we suggested that Congress 
limit IRS' IT spending to certain cost-effective categories. These 
spending categories were those that (1) support ongoing operations and 
maintenance; (2) correct pervasive management and technical weaknesses, 
such as a lack of requisite systems life cycle discipline; (3) are 
small, represent low technical risk, and can be delivered in a 
relatively short timeframe; or (4) involve deploying already developed 
systems that have been fully tested, are not premature given the lack 
of a complete systems architecture, and produce a proven, verifiable 
business value. The act providing IRS' fiscal year 1997 appropriations 
\21\ and the related conference report limited IRS' IT spending to 
efforts consistent with these categories.
---------------------------------------------------------------------------
    \19\ Tax Systems Modernization: Management and Technical Weaknesses 
Must Be Corrected If Modernization Is To Succeed (GAO/AIMD-95-156, July 
26, 1995).
    \20\ Tax Systems Modernization: Actions Underway But IRS Has Not 
Yet Corrected Management and Technical Weaknesses (GAO/AIMD-96-106, 
June 7, 1996).
    \21\ Public Law 104-208, September 30, 1996.
---------------------------------------------------------------------------
    In 1997, IRS continued to address our recommendations. For example, 
in May 1997, IRS issued its modernization blueprint. We briefed IRS 
appropriations and authorizing Committees on the results of our 
assessment of IRS' modernization blueprint in September 1997. In those 
briefings and in a subsequent report, we concluded that the 
modernization blueprint was a good first step that provided a solid 
foundation from which to define the level of detail and precision 
needed to effectively and efficiently build a modernized system of 
interrelated systems.\22\ However, we also noted that the blueprint was 
not yet complete and did not provide enough detail for building and 
acquiring new systems. As a result, the conference report accompanying 
IRS' fiscal year 1998 appropriations act again limited IRS' fiscal year 
spending to efforts that were consistent with the aforementioned 
spending categories. IRS' fiscal year 1999 appropriation act and 
conference report continued these spending limitations.\23\
---------------------------------------------------------------------------
    \22\ Tax Systems Modernization: Blueprint Is a Good Start But Not 
Yet Sufficiently Complete to Build or Acquire Systems (GAO/AIMD/GGD-98-
54, Feb. 24, 1998).
    \23\ Public Law 105-277, October 21, 1998.
---------------------------------------------------------------------------
    In its budget requests for fiscal years 1998 and 1999, IRS 
requested over $1 billion for ITIA. In our testimonies before this 
Subcommittee on these requests, we questioned the justification for 
these funds because (1) all or major parts of the amounts being 
requested were not based on analytical data or derived using formal 
cost estimating techniques, as required by OMB, and (2) IRS had not yet 
developed the capability to modernize.\24\ Subsequently, Congress 
provided $506 million for the account. Specifically, it appropriated 
$325 million in fiscal year 1998, of which $30 million it rescinded in 
May 1998 for urgent Year 2000 century date change requirements. 
Congress also provided $211 million in fiscal year 1999. In providing 
these sums, Congress prohibited their obligation until IRS and the 
Department of the Treasury submitted to Congress for approval an 
expenditure plan that (1) implements IRS' modernization blueprint; (2) 
meets OMB investment guidelines; (3) is reviewed and approved by OMB 
and Treasury's IRS Management Board and is reviewed by us; (4) meets 
requirements of IRS' life cycle program; and (5) is in compliance with 
acquisition rules, requirements, guidelines, and systems acquisition 
management practices of the Federal Government.
---------------------------------------------------------------------------
    \24\ GAO/T-GGD/AIMD-98-114 and Tax Administration: IRS' Fiscal Year 
1997 Spending, 1997 Filing Season, and Fiscal Year 1998 Budget Request 
(GAO/T-GGD/AIMD-97-66, Mar. 18, 1997).
---------------------------------------------------------------------------
    In December 1998, IRS awarded its Prime Systems Integration 
Services Contract (PRIME) for systems modernization. IRS is working 
with the PRIME and other support contractors to develop a strategic 
business systems plan and complete the modernization blueprint, as we 
recommended, and to account for (1) changes in system requirements and 
priorities caused by IRS' organizational modernization and (2) changes 
to accommodate new technology and to implement RRA98 requirements. IRS 
is also working with the PRIME to establish disciplined life cycle 
management processes and structures, including mature software 
development and acquisition capabilities, before IRS begins building 
modernized systems. By June 30, 1999, IRS plans to have these processes 
and structures in place and have the necessary approvals to begin using 
ITIA funds to modernize systems. By September 30, 1999, IRS also plans 
to have its strategic business systems plan for the entire 
modernization, which is to identify the systems to be modernized over 
the next 5 years, their estimated costs, business case justification, 
the sequence in which they will be developed and deployed, and the 
architecture standards governing their development.

Fiscal Year 2000 Information Systems Budget Request Is in Line With GAO 
and Congressional Spending Categories

    IRS' fiscal year 2000 request of $1.46 billion for information 
systems appears consistent with the aforementioned spending categories. 
Specifically, 78 percent of the request, or $1.14 billion, is to (1) 
operate and maintain information systems that support tax 
administration, (2) consolidate mainframe computing from 10 centers to 
2, and (3) restructure the information systems organization. Seventeen 
percent of the request, or $250 million, is for Year 2000 conversion 
activities. The remaining 5 percent, or $66 million, is for initiatives 
to correct IT management weaknesses or to develop systems to sustain 
IRS operations until it implements modernized systems. For example, 
funding from this activity is to be used to complete and implement the 
modernization blueprint, including establishing system life cycle 
management processes.

IRS Has Not Adequately Justified Its Fiscal Year 2001 ITIA Request

    Key provisions of the Clinger-Cohen Act, the government Performance 
and Results Act, and OMB Circular No. A-11 and supporting memoranda, 
require that, before requesting multiyear funding for capital asset 
acquisitions, agencies develop accurate, complete cost data and perform 
thorough analyses to justify the business need for the investment. For 
example, agencies must show that investments (1) support a critical 
agency mission; (2) are justified by life cycle cost-benefit analyses; 
and (3) have cost, schedule, and performance goals.
    IRS has not performed the requisite analyses to justify its fiscal 
year 2001 investment account request of $325 million because the 
information it needs to prepare such analyses will not be available 
until IRS completes its strategic business planning in September 1999. 
Consequently, IRS was unable to base its budget request on a clear and 
complete definition of fiscal year 2001 IT investments and did not 
justify these investments with cost-benefit analyses. Instead, IRS 
officials told us that they needed to develop an estimate for the 
fiscal year 2000 budget process in order to ensure that funds would be 
available for modernization in fiscal year 2001. These officials stated 
that if they did not have a budgetary ``placeholder'' for 
modernization, IRS faced the possibility of a funding shortfall in 
fiscal year 2001 when IRS plans to be building modernized systems. 
Consequently, IRS developed its budget request using (1) cost estimates 
from its March 1998 PRIME request for proposal (RFP) and (2) a cost 
estimate that was documented following our inquiries and using what IRS 
termed ``rough order of magnitude'' cost estimating processes. However, 
these estimates have shortcomings. First, IRS officials acknowledged 
that the RFP cost estimates are out-of-date and are for IT projects 
underway now and not planned for fiscal year 2001. Second, the ``rough 
order of magnitude'' estimate lacked verifiable analysis and supporting 
data. Finally, neither estimate was based on a specified set of fiscal 
year 2001 IT investments because these investments have yet to be 
defined.

Matter for Consideration by the Congress

    We support IRS' efforts to first strengthen its modernization 
capability and then acquire modernized systems. However, IRS' fiscal 
year 2001 request for ITIA funds is not justified in accordance with 
Federal IT investment requirements. Accordingly, we suggest that 
Congress consider either denying (i.e., not funding) the $325 million 
advance request or restricting its obligation until IRS develops the 
requisite cost analyses to justify the amount requested, which IRS 
plans to do by September 1999. Neither of these congressional actions 
should impact fiscal year 1999 and 2000 modernization efforts because 
the ITIA has enough funds to cover IRS' proposed spending in both 
years. Specifically, of the $506 million in the ITIA, IRS plans to 
spend about $361 million during fiscal years 1999 and 2000--$79 million 
and $282 million, respectively--which will leave $145 million for 
fiscal year 2001.

     Preliminary Data on the 1999 Filing Season Show Mixed Results

    At the request of this Subcommittee, we are reviewing IRS' 
performance during the 1999 tax filing season. Our preliminary work has 
shown some mixed results. Specifically, (1) taxpayers have experienced 
a significant decline in IRS' telephone service, although service has 
improved in recent weeks; (2) the number of individual income tax 
returns filed electronically has continued to increase, although the 
number filed over the telephone has decreased; (3) there appears to be 
a significant amount of confusion among taxpayers with respect to the 
new child tax credit; and (4) new computer systems for processing 
returns and remittances appear to be performing well.
Significant Decline in Telephone Service

    According to IRS' data, taxpayers who called IRS with tax questions 
during the first few weeks of the 1999 filing season had considerable 
difficulty reaching IRS on the telephone and, once they did reach IRS, 
getting an accurate answer to their questions. Although that situation 
has improved in recent weeks, IRS' performance overall has declined 
significantly compared to its level at the same point in time last 
year.
Ability of Taxpayers to Reach IRS on the Telephone has Worsened Since 
        Last Year

    Over the last few years, there has been a steady increase in the 
ability of taxpayers to reach IRS by telephone. This year, however, 
there have been serious problems. As shown in table 4, IRS data for the 
first 3 months of this filing season compared to the same period last 
year show a significant decline in IRS' performance.\25\
---------------------------------------------------------------------------
    \25\ In reporting telephone data, IRS combines data on six of its 
toll-free telephone lines--tax law assistance, Earned Income Credit/
refund inquiry, account inquiry, forms ordering, Automated Collection 
System, and the fraud hotline.

 Table 4.--Toll-Free Telephone Level of Access and Level of Service for
         the First 3 months of the 1999 and 1998 Filing Seasons
                              [in Millions]
------------------------------------------------------------------------
                                                           1999    1998
------------------------------------------------------------------------
(a) Calls answered......................................    27.9    29.6
(b) Calls abandoned.....................................     7.3     6.5
(c) Subtotal--Calls that got into IRS' system...........    35.2    36.1
                                                         ---------------
(d) Busy signals........................................    16.9     3.5
(e) Total call attempts.................................    52.1    39.6
                                                         ---------------
Level of accessa........................................     68%     91%
Level of serviceb.......................................     54%     75%
Percent of calls that received busy signalsc............     32%      9%
Percent of calls that got into IRS' system but were          21%     18%
 abandonedd.............................................
------------------------------------------------------------------------
Note: Data are for January 1 through March 27, 1999, and January 1
  through March 28, 1998.
a Level of access is the sum of the number of calls answered plus the
  number of calls abandoned divided by the total call attempts--computed
  in this table by dividing row (c) by row (e).
b Level of service is the number of calls answered divided by the total
  call attempts--computed in this table by dividing row (a) by row (e).
c Computed in this table by dividing row (d) by row (e).
d Computed in this table by dividing row (b) by row (c).
Source: GAO analysis of data in IRS' Weekly Customer Service Report.

    The significant declines in level of access (from 91 percent to 68 
percent) and level of service (from 75 percent to 54 percent) come at a 
time when IRS, in an attempt to improve service, extended its operating 
hours to 24 hours a day, 7 days a week.
    Cognizant IRS officials have mentioned several factors that they 
believe contributed to the declines in telephone access and service. 
One factor was IRS' decision to discontinue the use of a procedure that 
it had used in 1997 and 1998 to handle calls involving complex tax 
topics. Under that procedure, callers with questions in certain complex 
areas of the tax law, such as self-employment income and sale of a 
residence, were automatically connected to a voice messaging system. 
They were instructed to leave their name, address, telephone number, 
and the best time for IRS to call them back. Within 2 to 3 business 
days, an IRS employee knowledgeable in that area of the tax law was to 
return the taxpayer's call. During our review of the 1997 filing 
season, IRS told us that it decided to use this procedure after a study 
showed that calls dealing with complex topics involved 20-to 30-minute 
telephone conversations and that an assistor could answer about 5 
simpler calls in that same amount of time.
    According to cognizant officials, IRS decided to discontinue the 
use of voice messaging for complex topics because they expected to have 
sufficient staff available in 1999 to allow all calls to be directed to 
``live'' assistors. There was also some concern that IRS was not 
providing the best possible service when it asked taxpayers to leave a 
message and wait a few days for a return call. Thus, IRS started this 
filing season by attempting to answer all taxpayer calls with live 
assistors.
     Other contributing factors mentioned by IRS officials 
included
     unanticipated staffing problems associated with the 
expansion to 24 hours-a-day, 7 days-a-week service;
     startup issues associated with IRS' new call routing 
system; and
     the lack of reliable data on accessibility during the 
first weeks of the filing season.
    IRS has taken steps to address these contributing factors. For 
example, during the week of February 15, 1999, IRS reestablished the 
use of the messaging system for questions involving certain tax law 
topics. IRS' actions appear to have had a positive effect. In that 
regard, IRS' data show that telephone accessibility and service have 
improved in recent weeks. For example, IRS data on calls received 
during the week of March 21 through 27, 1999, showed an 83 percent 
level of access and a 66 percent level of service during that week--
significantly better than the cumulative percentages shown in table 
4.\26\
---------------------------------------------------------------------------
    \26\ For the same week in 1998, IRS reported a 91 percent level of 
access and a 72 percent level of service.

The Accuracy of IRS' Answers to Tax Law Questions Has Also Declined
    IRS data show that taxpayers are more likely to receive inaccurate 
responses to their tax law questions this year compared to last. IRS 
checks the quality of its telephone service by monitoring a sample of 
telephone calls. IRS' monitoring during the period October 1, 1998, 
through February 28, 1999, showed that the accuracy rate had dropped 11 
percentage points (from 80 percent to 69 percent) compared to the same 
time period a year ago. Although still well behind last year, the 69 
percent accuracy rate as of the end of February 1999 is better than the 
66-percent rate that IRS reported as of the end of January 1999.
    According to a cognizant IRS official, the decline in quality 
compared to 1998 can be attributed to many of the same factors that 
contributed to the decline in telephone accessibility. For example, the 
decision to stop using voice messaging required customer service 
representatives to handle complex topics that they were not responsible 
for last year.

Use of Electronic Filing Continues an Upward Trend
    As noted in our report on the 1998 filing season, the number of 
returns filed electronically increased about 28 percent between 1996 
and 1997 and about 28 percent again in 1998.\27\ According to IRS data, 
as shown in table 5, that growth is continuing, although at a reduced 
rate.
---------------------------------------------------------------------------
    \27\ Tax Administration: IRS' 1998 Tax Filing Season (GAO/GGD-99-
21, Dec. 31, 1998).

                             Table 5.--Individual Income Tax Returns Received by IRS
                                                 [In Thousands]
----------------------------------------------------------------------------------------------------------------
                                                                                  Percent               Percent
                                                           1/1/97 to  1/1/98 to   change:   1/1/99 to   change:
                       Filing type                           4/04/97    4/03/98   1997 to     4/02/99   1998 to
                                                                                    1998                  1999
----------------------------------------------------------------------------------------------------------------
Paper:...................................................
  Traditional............................................     45,306     42,470       -6.3     41,538       -2.2
  1040PCa................................................      4,488      3,534      -21.3      3.084      -12.7
                                                          ------------------------------------------------------
    Subtotal.............................................     49,794     46,004       -7.6     44,622       -3.0
Electronic:..............................................
  Traditionalb...........................................     13,007     16,306       25.4     20,167       23.7
  TeleFilec..............................................      4,072      5,116       25.6      4,829       -5.6
                                                          ------------------------------------------------------
    Subtotal.............................................     17,079     21,422       25.4     24,996       16.7
                                                          ------------------------------------------------------
      Total..............................................     66,873     67,426        0.8     69,618        3.3
----------------------------------------------------------------------------------------------------------------
a Under the Form 1040PC method of filing, a taxpayer or tax return preparer uses personal computer software that
  produces a paper tax return in an answer-sheet format. The Form 1040PC shows the tax return line number and
  the data for that line number. Only numbers for those lines on which the taxpayer has made an entry are
  included on the Form 1040PC.
b Traditional electronic filing involves the transmission of returns over communication lines through a third
  party, such as a tax return preparer or electronic return transmitter, to an IRS service center.
c Under TeleFile, certain taxpayers that are eligible to file a Form 1040EZ are allowed to file using a toll-
  free number on touch-tone telephones.
Source: IRS' Management Information System for Top Level Executives.

    As table 5 shows, although there has been an overall 
increase in electronic filing, there has been a decrease in one 
form of electronic filing--TeleFile. It is unclear at this 
point why the use of TeleFile has declined. It is also unclear 
whether there are any particular factors that primarily account 
for the overall increase in electronic filing.
    One factor that may be contributing to the increase in 
electronic filing this year, but which has broader implications 
for future years, is IRS' effort to find workable alternatives 
to paper signatures. Generally, taxpayers using the traditional 
form of electronic filing have to send IRS a paper signature 
form along with copies of their Forms W-2. The fact that 
electronic filing has not been completely paperless has been 
cited as a major barrier to its greater use. In that regard, 
IRS has been conducting tests this year directed at making 
electronic filing truly paperless by allowing participants to 
use electronic signatures and by waiving the need for 
participants to send their W-2s to IRS.\28\ In one test, for 
example, taxpayers are to choose a personal identification 
number to use when filing through certain tax preparers. We 
will be following up on the results of these tests as we 
continue our review of the filing season.
---------------------------------------------------------------------------
    \28\ According to a cognizant IRS official, IRS can waive the 
submission of W-2s because there is no statutory requirement that these 
forms be attached to tax returns.
---------------------------------------------------------------------------
The New Child Tax Credit Has Been the Source of Many Taxpayer 
Errors

    The individual income tax returns being filed this year 
include, for the first time, the opportunity for eligible 
taxpayers to claim a child tax credit. According to IRS data, 
of about 1.88 million error notices sent to taxpayers as of 
March 12, 1999, about 202,000 (almost 11 percent) involved 
errors with the child tax credit. Those errors generally 
involved taxpayers either (1) miscalculating the credit or (2) 
not claiming the credit even though they appear to be eligible.
    With respect to the latter, taxpayers are to indicate 
whether a dependent is a qualifying child for purposes of the 
child tax credit by checking a box on the front of the 
Individual Income Tax Return (Form 1040 or Form 1040A). They 
are then to use a worksheet included in the Form 1040/1040A 
instructions to compute the amount of their credit, if any, and 
enter that amount on the back of the form.
    According to data from IRS' Taxpayer Usage Study, which is 
a sample of filed individual income tax returns, about 36 
percent of the returns filed as of March 12, 1999, included 
dependents that the taxpayer indicated, by a checkmark on the 
front page, were qualifying children for the child tax credit. 
However, the same data show that only about 24 percent of the 
returns filed as of that date claimed the credit. Thus, about 
one-third of the taxpayers who indicated eligibility for the 
credit did not claim it. This apparent discrepancy may be an 
indicator of the complexity of the new credit or may just 
reflect taxpayer oversight. Some of the discrepancy could also 
be explained by the possibility that taxpayers, after 
completing the worksheet, found that they were ineligible for 
the credit and, therefore, did not claim it.
    Last month, IRS changed its procedure for processing 
returns when taxpayers do not claim a child tax credit even 
though they indicate on the front of the return that they have 
one or more dependents who qualify for the credit. Initially, 
IRS' procedure called for adjusting the taxpayer's return to 
include the credit if information on the return indicated that 
the taxpayer met the adjusted gross income test and certain 
other eligibility criteria. However, the procedure did not 
require verification of the qualifying child's age.\29\
---------------------------------------------------------------------------
    \29\ A qualifying child, for purposes of this credit, is a son, 
daughter, adopted child, grandchild, stepchild, or foster child who (1) 
is claimed as a dependent, (2) is a U.S. citizen or resident alien, and 
(3) was under the age of 17 at the end of the tax year.
---------------------------------------------------------------------------
    IRS modified its procedure in March by instructing service 
centers to do research to determine if the child meets the age 
criteria before adjusting the return. If the research 
determines that the taxpayer qualifies for the credit, the 
service center is to adjust the taxpayer's return and include 
the credit. If the research determines that the taxpayer does 
not qualify for the credit, the service center is to process 
the return as filed (i.e., without the credit). If the research 
is inconclusive, the service center is to process the return as 
filed but notify the taxpayers that they (1) may be eligible 
for the credit and (2) should file an amended return to claim 
the credit, if they determine that they are eligible.

Computer Systems Performing Well

    Our work to date has not identified any significant 
disruption of IRS' ability to process returns and issue refunds 
that might be indicative of computer-related problems.
    IRS has made major changes this year to the computer 
systems it uses to process returns and remittances. One major 
change involved replacement of the returns processing system at 
all 10 service centers and replacement of the remittance 
processing system at 6 centers. According to an IRS 
spokesperson for that project and processing officials at one 
service center, the transition to the new systems has gone 
well, and workloads are being processed as intended. A second 
major change involves the consolidation of mainframe service 
center computer equipment at IRS' two computing centers in 
Martinsburg, WV, and Memphis, TN. So far, three service centers 
have undergone consolidation. According to a cognizant official 
at one of those centers, the consolidation has not adversely 
affected the center's ability to process returns.
    That concludes my statement. We welcome any question that 
you may have.

                                

    Appendix I:--IRS' Fiscal Year 2000 Budget Request Compared With Proposed Fiscal Year 1999 Operating Level
                                             [Dollars in thousands]
----------------------------------------------------------------------------------------------------------------
                                             FY 1999                   FY 2000               Percent change
----------------------------------------------------------------------------------------------------------------
          Budget activity             Dollars        FTEs       Dollars        FTEs      In dollars    In FTEs
----------------------------------------------------------------------------------------------------------------
Submission Processing.............     $884,000       15,384     $973,599       15,475        10.14         0.59
Telephone and Correspondence......      812,651       19,650      991,456       20,874        22,00         6.23
Document Matching.................       60,683        1,555       60,395        1,555        -0.47         0.00
Inspectiona.......................            0            0            0            0           NA           NA
Management Services...............      563,122        6,952      615,941        6,652         9.38        -4.32
Rent and Utilities................      664,322          135      671,144          135         1.03         0.00
                                   -----------------------------------------------------------------------------
  Subtotal: Processing,              $2,984,778       43,676   $3,312,535       44,691        10.98         2.32
   Assistance, and Management
   Appropriation..................
Criminial Investigation...........      367,099        3,824      374,306        3,824         1.96         0.00
Examination.......................    1,717,775       23,768    1,835,346       23,588         6.84        -0.76
Collection........................      679,385       11,195      707,411       11,095         4.13        -0.89
Employee Plans and Exempt               139,845        2,055      148,999        2,109         6.55         2.63
 Organizations....................
Statistics of Income..............       27,513          464       28,731          479         4.43         3.23
Chief Counsel.....................      232,572        2,582      242,045        2,582         4.07         0.00
                                   -----------------------------------------------------------------------------
  Subtotal: Tax Law Enforcement      $3,164,189       43,888   $3,336,838       43,677         5.46        -0.48
   Appropriation..................
Operations and Maintenance........    1,166,583        8,000    1,138,814        6,976        -2.38       -12.80
Year 2000.........................            0            0      250,426          239           NA           NA
Investments.......................       92,947          184       66,161          184       -28.82         0.00
                                   -----------------------------------------------------------------------------
  Subtotal: Information Systems      $1,259,530        8,184   $1,455,401        7,399        15.55        -9.59
   Appropriation..................
Information Technology                 $211,000            0            0            0           NA           NA
 Investmentsb.....................
Year 2000 Emergency Fundc (outside     $483,300          239            0            0           NA           NA
 caps)............................
Earned Income Credit (outside           143,000        1,972     $144,000        2,095         0.70         6.24
 caps)............................
                                   -----------------------------------------------------------------------------
  Total...........................   $8,245,797       97,959   $8,248,774       97,862         0.04        -0.10
----------------------------------------------------------------------------------------------------------------
a In accordance with Public Law 105-206, the IRS Inspection activity was transferred to the Treasury Inspector
  General for Tax Administration on January 19, 1999.
b New funding for fiscal year 2000 is not needed since IRS will use carryover balances; however, IRS is
  requesting an advance appropriation of $325 million in fiscal year 2001 for funding of the Prime Systems
  Integration Services Contract.
c For fiscal year 1999, IRS' Year 2000 efforts were funded from a governmentwide Year 2000 fund that was
  established in the Omnibus Consolidated and Emergency Supplemental Appropriations Act for Fiscal Year 1999
  (P.L. 105-277).
Source: IRS' February 1, 1999, budget estimates for fiscal year 2000.

Appendix II: Comparison of IRS' Fiscal Year 1999 Proposed Operating 
Level and Fiscal Year 2000 Budget Request

                         [Dollars in thousands]
------------------------------------------------------------------------
                                                  Subtotal      Total
------------------------------------------------------------------------
Fiscal year 1999 proposed operating level.....                $8,245,797
Decreases for fiscal year 2000:
  IT investment (non-recur)...................     $211,000
  Year 2000 emergency fund (non-recur)........      483,300
  Absorption of mandatory non-labor costs.....       50,566
                                               -------------------------
    Subtotal--decreases.......................     $744,866
Increases for fiscal year 2000:
  Adjustments necessary to maintain current        $299,369
   levels.....................................
  Year 2000 conversion........................      250,426
  Organizational modernization................      140,000
  RRA98.......................................       40,000
  Customer service training...................       17,000
  Increase in Earned Income Tax Credit                1,000
   compliance initiative......................
                                               -------------------------
    Subtotal--increases.......................     $747,795
Fiscal year 2000 budget request...............                $8,248,726
------------------------------------------------------------------------
Source: IRS' Fiscal Year 2000 Congressional Justification.

Appendix III: IRS Performance Measures

Tables III.1 and III.2 show the Servicewide and program 
    performance measures included in IRS' February 1, 1999, 
    budget estimates for fiscal year 2000. IRS' performance 
    measures will continue to evolve as IRS continues to 
    implement is organizational modernization. Fiscal year 1999 
    represents a transition period for IS to introduce and 
    baseline (gather and analyze data) the new measurement 
    system. Performance measures with ``baseline'' noted in the 
    fiscal year 1999 or fiscal year 2000 column indicate that 
    these are new IRS measures. As shown in both tables, IRS 
    plans to establish the baselines for most of its 
    performance measures in fiscal year 1999.

      Table III.1.--Servicewide Performance Measures With Performance Report Based on Fiscal Year 1998 Data
----------------------------------------------------------------------------------------------------------------
                                                            FY 1998             FY 1999             FY 2000
  Servicewide performance goal        Performance    -----------------------------------------------------------
                                        measure             Actual            Final plan           Proposed
----------------------------------------------------------------------------------------------------------------
Service of each taxpayer........  Toll-free level of  89.96%............  80-90%............  80-90%
                                   access.
                                  Number of calls     113.3.............  120.3.............  120.3
                                   answered,
                                   includes
                                   automated
                                   (million) a.
                                  Tax law accuracy    93.8%.............  85%...............  85%
                                   rate for taxpayer
                                   inquiries (toll
                                   free).
                                  Customer            b.................  Baseline..........  c
                                   satisfaction--tol
                                   l free.
                                  Number of           10.1..............  10.0..............  10.0
                                   taxpayers served--
                                   walk in
                                   (million)a.
                                  Customer            b.................  Baseline..........  c
                                   satisfaction--wal
                                   k-in.
                                  Customer            b.................  Baseline..........  c
                                   satisfaction--fie
                                   ld and office
                                   examination.
                                  Field collection    b.................  Baseline..........  c
                                   quality.
                                  Field and office    b.................  Baseline..........  c
                                   examination
                                   quality.
                                  Customer            b.................  Baseline..........  c
                                   satisfaction--fie
                                   ld collection.
Service to all taxpayers........  Total net revenue   $1,616.0..........  $1,725.0..........  1,785.0
                                   collected
                                   (billions) a.
                                  Total enforcement   $35.2.............  $33.3.............  33.3
                                   revenue collected
                                   (billions) a.
                                  Total enforcement   $7.2..............  $7.2..............  7.2
                                   revenue protected
                                   (billions) a.
                                  Alternative         b.................  Baseline..........  c
                                   treatment revenue.
Productivity through a quality    Employee            b.................  Baseline..........  c
 work environment.                 satisfaction
                                   (Servicewide).
                                  IRS productivity    b.................  b.................  Baseline
                                   measure
                                   (placeholder).
----------------------------------------------------------------------------------------------------------------
a Workload projections only.
b Measure not applicable to this period.
c To be determined.
Source: IRS' Fiscal Year 2000 Congressional Justification.

        Table III.2.--Program Performance Measures With Performance Report Based on Fiscal Year 1998 Data
----------------------------------------------------------------------------------------------------------------
                                               FY 1998                  FY 1999                  FY 2000
         Performance measure          --------------------------------------------------------------------------
                                                Actual                 Final plan                Proposed
----------------------------------------------------------------------------------------------------------------
1. Total number of individual refunds  87.9...................  92.2...................  94.2
 issued (millions) a.
2. Refund timeliness--paper (%)......   ......................  Baseline...............  c
3. Refund timeliness--e-file (%).....  98.7%..................  98%....................  98%
4. Processing accuracy rate--paper
 filing.
  Distributed Input System...........  94.6%..................  94.6%..................  94.6%
  Code and edit......................  96.1%..................  96%....................  96%
5. Processing accuracy rate--e-file..  98.9%..................  99%....................  99%
6. Notice accuracy rate..............  98.4%..................  98.5%..................  98.5%
7. Number of individual returns filed  17.7...................  20.9...................  22.9
 through electronic returns
 originators (millions).
8. Number of eligible quarterly forms  677.4..................  1,146.1................  1,186.0
 (Form 941) filed through TeleFile
 (thousands).
9. Number of TeleFile returns          5.96...................  6.6....................  7-7.8
 (millions).
10. Number of primary returns          209.8..................  211.9..................  213.9
 processed (millions) a.
11. Percent of individual returns      19.8%..................  23%....................  25%
 filed electronically.
12. Percent of dollars received        67.7%..................  78%....................  78%
 electronically.
13. Automated Collection System        b......................  Baseline...............  c
 (ACS)--online accuracy.
14. ACS--Cycle timeliness............  b......................  Baseline...............  c
15. ACS--Customer relations..........  b......................  Baseline...............  c
16. ACS--Overage inventory...........  b......................  Baseline...............  c
17. Tax law accuracy rate for          93.8%..................  85%....................  85%
 taxpayer inquires (toll free).
18. Accounts accuracy rate for         87.9%..................  87.9%..................  88.5%
 taxpayer inquires.
19. Toll free timeliness.............  b......................  Baseline...............  c
20. Toll free customer relations (tax  b......................  Baseline...............  c
 law and accounts).
21. Service Center examination--       b......................  Baseline...............  c
 overage inventory.
22. Service Center examination         b......................  Baseline...............  c
 accuracy.
23. ACS level of service.............  b......................  Baseline...............  c
24. Toll free--level of service......  b......................  Baseline...............  c
25. Toll free--adherence to scheduled  b......................  Baseline...............  c
 hours.
26. Service Center examination--       b......................  b......................  b
 volume/mix (placeholder).
27. Customer satisfaction--toll free.  b......................  Baseline...............  c
28. Customer satisfaction--ACS.......  b......................  Baseline...............  c
29. Customer satisfaction--Service     b......................  Baseline...............  c
 Center examination.
30. Employee satisfaction--toll free.  b......................  Baseline...............  c
31. Employee satisfaction--ACS.......  b......................  Baseline...............  c
32. Employee satisfaction--Service     b......................  Baseline...............  c
 Center examination.
33. Taxpayer Advocate average          37.8...................  37.8...................  37.8
 processing time (days).
34. Taxpayer Advocate quality          80.8...................  81.3...................  81.3
 customer service rate.
35. Currency of Taxpayer Advocate      91.3...................  91.8...................  91.8
 inventory (days).
36. Field and office examination--     b......................  Baseline...............  c
 volume/mix (placeholder).
37. Field and office examination       b......................  Baseline...............  c
 quality.
38. Percent of field and office        b......................  Baseline...............  c
 examination cases overage.
39. Customer satisfaction--field/      b......................  Baseline...............  c
 office examination.
40. Employee satisfaction--field/      b......................  Baseline...............  c
 office examination.
41. Appeals customer satisfaction....  b......................  Baseline...............  c
42. Appeals employee satisfaction....  b......................  Baseline...............  c
43. Appeals nondocketed cycle time     210....................  210....................  210
 (days).
44. Field collection--volume/mix.....  b......................  Baseline...............  c
45. Field collection quality.........  b......................  Baseline...............  c
46. Percentage of field collection     b......................  Baseline...............  c
 cases overage.
47. Percentage of offers-in-           60.5%..................  59.3%..................  59.3%
 compromise processed within 6 months.
48. Customer satisfaction--field       b......................  Baseline...............  c
 collection.
49. Employee satisfaction--field       b......................  Baseline...............  c
 collection.
50. Employee Plans (EP) determination  118....................  145....................  c
 letter timeliness (days).
51. Exempt Organizations (EO)          85.....................  85.....................  81
 determination letter timeliness
 (days).
52. EP examination timeliness (days).  193....................  200....................  230
53. EO examination timeliness (days).  251....................  259....................  294
54. EO determination customer          b......................  Baseline...............  c
 satisfaction.
55. EP determination customer          b......................  Baseline...............  c
 satisfaction.
56. EO examination customer            b......................  Baseline...............  c
 satisfaction.
57. EP examination customer            b......................  Baseline...............  c
 satisfaction.
58. Employee satisfaction--EP/EO.....  b......................  Baseline...............  c
59. Percent of Statistics of Income    100%...................  90%....................  90%
 projects delivered on time.
60. Quality customer service rate....  98%....................  90%....................  90%
61. Guidance and assistance--volume/   b......................  Baseline...............  c
 mix.
62. Litigation case--volume/mix......  b......................  Baseline...............  c
63. Chief Counsel quality............  b......................  b......................  Baseline
64. Chief Counsel customer             b......................  b......................  Baseline
 satisfaction.
65. Chief Counsel employee             b......................  b......................  Baseline
 satisfaction.
66. Master file weekend update         66.0%..................  85.6%..................  97.0%
 completion times.
67. Corporate file on-line             99.7%..................  99.0%..................  99.0%
 availability to front line personnel.
68. Integrated Data Retrieval System   99.4%..................  99.0%..................  99.0%
 real time availability to front line
 personnel.
----------------------------------------------------------------------------------------------------------------
a Workload projections only.
b Measure not applicable to this period.
c To be determined.
Source: IRS' Fiscal Year 2000 Congressional Justification.

                                

    Chairman Houghton. Thank you very much.
    Mr. Coyne, would you like to ask any questions?
    Mr. Coyne. No questions, Mr. Chairman.
    Chairman Houghton. OK. Well, I would like to ask just a 
couple of general questions.
    How do you think the IRS is performing during the current 
tax filing season?
    Mr. White. I think it was a challenging filing season for 
them going in, because of the number of changes they made to 
their information systems. I think in that respect the filing 
season has gone well.
    Perhaps the biggest problem we have seen is the decrease in 
phone service, the level of service provided to taxpayers 
calling in, which the Commissioner discussed.
    Chairman Houghton. But you feel that it has picked up in 
the last couple of weeks?
    Mr. White. It has picked up in the last few weeks. It's not 
up to the level it was at the same time a year ago. But it has 
picked up.
    Chairman Houghton. So what do you make of that? Is that 
something which is a basic gap, or correctable?
    Mr. White. We hope it's correctable. If the Commissioner is 
right about some of the reasons for it, then it is correctable. 
And the restructuring that is being planned at IRS, and should 
be implemented over the next years, should also contribute to 
correcting that problem, as well as systems modernization at 
IRS.
    Chairman Houghton. I think it was your fourth point, that 
the IRS is requesting $1.46 billion for information systems, at 
the bottom of page 2. Then you said that you're questioning the 
advanced appropriation of $325 million for the capital account.
    Mr. White. Yes.
    Chairman Houghton. Sort of break that down a little bit, 
will you?
    Mr. White. Yes. The capital account is money that they are 
requesting for FY 2001, as opposed to the money they are 
requesting for FY 2000. Mr. Mountjoy can probably provide some 
more detail about the basis for our conclusion about----
    Chairman Houghton. Do you think it's too much money, or you 
don't think it's appropriate?
    Mr. Mountjoy. I think the problem, Mr. Chairman, is that we 
just don't know what exactly they're going to buy with it--and 
the IRS acknowledges that. They haven't identified the set of 
investments that they're going to make yet. They're going to 
know that in September, but as of where we stand right now, 
they do not know a definitive set of investments, the systems 
they are going to start building at that time. That's the only 
reason we're questioning whether $325 million is enough, is it 
too much, or maybe it's not enough at all. We just don't know 
at this point.
    Chairman Houghton. So if I were the Commissioner of IRS and 
I would ask you to tell me what you wanted to know, would you 
be able to tell them?
    Mr. Mountjoy. I think they already know. They have a team--
--
    Chairman Houghton. What do you want to know to make you 
feel comfortable?
    Mr. Mountjoy. I think we want to know, No. 1, the projects, 
the systems you're going to undertake, (a). And (b), I think we 
want to know what is the business case justification for those, 
and ultimately what's the cost schedule and the performance 
goals that you want to get out of those systems.
    These are things required by normal business practice. I 
mean, what exactly are you going to do with these systems? It's 
all very clear. It's laid out in Federal IT legislation and 
regulations, and I think they're working toward that. They just 
need to get there. September 30th is the date they're trying to 
come forth with that.
    Chairman Houghton. It seems to me they have a lot of issues 
to wrestle with, but one is the capital budget. Do they have 
enough money to do the things they want to do in order to try 
and at least come near their goal of electronic filing? Also, 
even for just sort of normal operations, to have more than a 1-
year budget--I mean, this is true for many departments, 
particularly the military.
    Do you think they're handling those issues well?
    Mr. Mountjoy. I don't think we know for sure, in terms of 
the electronic filing. They have a team that's working on that, 
a team made up of the new PRIME contractor and IRS, with some 
of the support contractors. It's a team working forward. 
They're trying to determine what it is they want to do and how 
that's going to fit into their overall modernization blueprint.
    That was a requirement that came out of the Reform Act, and 
it is something they have to deal with. The fact that their 
original blueprint had major portions of electronic filing 
toward the back of the blueprint, they were going to do that 
later rather than sooner.
    What has happened now is that that requirement has been 
moved up, so they need to rethink the blueprint and exactly how 
they're going to sequence all these different projects. So, 
once again, the PRIME contractor, along with IRS folks and some 
support contractors, are working on a team that is going to 
develop exactly what do we want to do with electronic filing, 
and how is it going to fit in sequence with the other projects, 
and how much is it going to cost. They're going to try to 
determine this all by September.
    Chairman Houghton. So you feel they may have too much on 
their plate already?
    Mr. Mountjoy. I wouldn't think they have too much on their 
plate. I think they're trying to contemplate what they can do 
and what they can't do, and hopefully this plan in September is 
going to lay all that out very clearly for us.
    Chairman Houghton. One final question, and this has to do 
with simplification of the tax law.
    You know, you follow these things all the time. You're 
reviewing the tax return filing season and the operations and 
all that. Are we making strides in a meaningful way toward 
simplifying the system, the point being that the person we're 
affecting is the customer out there, the citizen. We can 
internally correct our cost system, we can have greater 
capital, involve new equipment, have greater training and all 
that sort of stuff. But how does it affect the customer out 
there?
    Mr. White. In terms of simplifying----
    Chairman Houghton. Right, simplification, ease of handling.
    Mr. White. In terms of simplification, from the point of 
view of taxpayers and the work we've done in the past on this, 
it shows that there are two factors that affect the difficulty 
that taxpayers have.
    One influence, of course, is the Tax Code itself, which IRS 
doesn't control, and the other factor is IRS' administration of 
the Tax Code as it exists. I think there the point is that the 
restructuring of IRS is intended to improve the assistance that 
IRS is able to give taxpayers.
    As they restructure and split themselves up into these four 
operating divisions that are focused on different types of 
taxpayers, the intent is that they will be able to provide 
better service to those taxpayers.
    I would like to say that there are a couple of keys to this 
that we found in our work. One is developing a balanced set of 
performance measures. Those performance measures ultimately are 
what will create the incentives that affect the behavior of 
managers at IRS and the frontline staff at IRS. Without a 
balanced set of performance measures that balance both the 
compliance role and the assistance role, you may not see the 
kind of change in behavior that's desirable.
    The other thing that I think is key here is systems 
modernization. Without modern information systems, they are not 
going to be able to make significant headway in some of the 
other problem areas that we have found in the past.
    Chairman Houghton. But you feel they are making progress in 
systems modernization?
    Mr. White. Well, it's too early to see what kind of 
progress has been made.
    Chairman Houghton. They're making no progress?
    Mr. White. Well, they're in the process of planning. They 
are taking a look, as Mr. Mountjoy said, at the blueprint. They 
need to look at that in light of the plans for restructuring 
and make sure that the blueprint for systems modernization 
still makes sense, given what they're trying to do on the 
business side, in terms of their business operations.
    Chairman Houghton. Thank you very much, gentlemen. We 
really appreciate your testimony. I look forward to seeing you 
again.
    Now I would like to call the next panel, which is Mark 
Ernst, Executive vice president and chief operating officer of 
H&R Block; Roger Harris, President of Padgett Business 
Services, Athens, Georgia, and chairman of the Federal Taxation 
Committee, National Society of Accountants, Alexandria, 
Virginia; and Donna Joyner-Rodgers, president of the Rainbow 
Tax Service, Las Vegas, Nevada, and member of the government 
Relations Committee, National Association of Enrolled Agents, 
in Gaithersburg, Maryland.
    All right. Mr. Ernst.

STATEMENT OF MARK A. ERNST, EXECUTIVE VICE PRESIDENT AND CHIEF 
   OPERATING OFFICER, H&R BLOCK, INC., KANSAS CITY, MISSOURI

    Mr. Ernst. Mr. Chairman and Members of the Committee, I am 
Mark Ernst, executive vice president and chief operating 
officer of H&R Block. With me today is Bob Weinberger, our vice 
president for government Relations.
    We appreciate the opportunity to discuss the current tax 
filing season and the IRS' fiscal year 2000 budget request.
    H&R Block is the Nation's largest tax preparation firm. At 
8,900 offices throughout the United States, we handled over 15 
million individual returns--1 in 7 returns received by the IRS 
in 1998, which is about 36,000 returns per congressional 
district.
    We are leaders in electronic filing, originating over half 
of the e-filed returns that the IRS received.
    We also publish ``Kiplinger TaxCut'' tax preparation 
software, which has over 1.5 million users and through which an 
additional half million returns will be electronically filed 
this year.
    I would like to make several brief points.
    First, a word on the IRS. The IRS has undertaken a number 
of impressive initiatives to improve performance, address 
technology problems, and strengthen customer service. There is 
a new energy at the agency and a flurry of activity as new 
leaders are recruited, missions rewritten, strategies recast, 
and reorganization blueprints reviewed.
    The IRS has earned top marks for performance or effort in 
several of the areas in which we interact, especially 
electronic filing. Problem Solving Days, citizen advisory 
panels, better liaison with practitioners, and 24-hour call 
centers are all pluses.
    No bureaucracy is without its frustration. No tax 
processing system as large as ours can be error-free. Every tax 
season brings its own challenges. And the IRS has had its share 
of problems, especially in technology and enforcement. But 
progress is being made. And Congress' emphasis on reform is 
beginning to pay dividends.
    Second, this tax season has gone remarkably well. While not 
problem-free, overall IRS return processing has gone smoothly. 
Our volume is up 9.6 percent over last year, through March 15. 
Our electronic filing returns are up 21.6 percent, following 
last year's 26-percent increase.
    Let me comment on several aspects of the season.
     On electronic filing, IRS has improved promotion 
and is working well with practitioners. It has a strategy to 
address Congress' twin goals of 80 percent of all returns e-
filed by 2007 and all computer-prepared practitioner returns e-
filed by 2002.
    Three important points:
    First, while IRS is on the right track, it may fall short 
of those goals. It is only projecting 33 percent of returns 
being e-filed by 2005. Unless more Americans overcome 
apprehensions and more practitioners enlist, the goal won't be 
met.
    We recommend eight priority steps to help IRS get to the 
goals. Principal among them is a continuing focus on private 
sector cooperation and innovation. Practitioners provide over 
80 percent of the e-filed returns IRS receives. The success to 
date of electronic filing is an example of what can be done 
when the public and private sectors work together to better 
serve taxpayers.
    Second, this year we have continued to step up our own 
efforts. We have eliminated electronic filing fees for clients 
in a majority of our offices. We have offered free preparation 
and e-filing on our taxcut.com Web site to 24 million eligible 
1040EZ filers. And 7,500 of our offices participated in a 
successful test using PIN authentication numbers in place of 
burdensome paper signature forms to achieve nearly paperless 
electronic filing.
    And, finally, as relates to electronic filing, while IRS 
had a number of glitches this year, which I list, most of the 
problems were resolved quickly. Past problems with pre-refund 
examinations of earned income tax credit returns, which delayed 
refunds, have improved.
     On complexity, some taxpayers were especially 
challenged this year by the child credit and by conversions of 
regular IRAs to Roth IRAs.
    While much complexity concentrates on business taxpayers 
and the quarter of taxpayers with complex financial lives and 
multiple sources of income, it is creeping into a growing group 
of middle- and low-income tax payers.
    As we have in each of the past 2 years, we will submit for 
the record 10 of our own suggestions for simplification. We 
look forward to working with the Committee on simplification.
     On paid preparers, many people believe that 
complexity is the major reason that half of all taxpayers use 
tax preparers. While that certainly is important, many clients 
also come because of frequent changes in tax law, because of 
life changes--marriages, births, retirements, and so forth, to 
speed refunds, and for convenience. We may be capable of 
changing the oil in our car, for example, but prefer paying 
someone else to do it to allow us more time for other pursuits. 
And some clients have math anxiety or language difficulties 
that also impede their ability to prepare their own returns.
     Finally, on use of new tax provisions, the child 
credit has been a best seller and benefited about a third of 
our clients this year. But millions of low-income working 
families with children are ineligible. Education credits, the 
education IRA, and deductions of interest on student loans have 
all proved very popular. Less successful have been overly 
complex provisions for farmers and mutual fund investors who 
pay foreign taxes.
    Finally, Mr. Chairman, on the budget, we support the IRS 
getting necessary funds to do its job, especially in 
modernizing technology and implementing the 1000-plus Tax Code 
changes Congress has passed in the last 2 years.
    We look forward to working with you to improve our tax 
system. We hope lessons from this season will be learned well 
enough to enable smooth return processing next year, with 
refunds issued promptly, and the IRS continuing on the path to 
reform.
    Thank you.
    [The statement of Mark Ernst follows:]

Statement of Mark A. Ernst, Executive Vice President and Chief 
Operating Officer, H&R Block, Inc., Kansas City, Missouri

    Mr. Chairman and Members of the Subcommittee: I'm Mark Ernst, 
Executive Vice President and Chief Operating Officer of H&R Block. 
Prior to joining the company last September, I was for 12 years 
affiliated with American Express. We appreciate the opportunity to 
discuss the 1999 tax filing season and the IRS budget for Fiscal Year 
2000. With me is Robert Weinberger, our Vice President for Government 
Relations.

                            About H&R Block

    H&R Block, founded in 1955 and headquartered in Kansas City, is 
America's largest tax return preparation company. Over 120,000 
individuals take our tax training courses annually. With more than 
8,900 U.S. offices, we handled over 15 million individual returns in 
1998--which is one in seven received by the IRS and about 36,000 per 
Congressional district. We are leaders in electronic filing, 
originating over half the practitioner e-filed returns that the IRS 
receives. We also offer our clients mortgages, financial planning, and 
investment services. We are building a national accounting practice to 
expand our business services. We publish Kiplinger TaxCut tax 
preparation software, which has over 1.5 million users, and author the 
annual H&R Block Income Tax Guide. And we prepare tax returns at over 
1,200 offices in Canada, Australia, and the United Kingdom.

                               IRS Reform

    Even before passage of the landmark Internal Revenue Service 
Restructuring and Reform Act of 1998 (RRA98), Commissioner Rossotti 
began a number of initiatives to improve the agency's performance, 
address technology problems, and improve customer service. As he has 
said, those are not overnight projects. But thus far, his efforts have 
been impressive. There is new energy at the agency and a flurry of 
activity as new leaders are recruited, the mission and strategies 
recast, reorganization blueprints reviewed, and relationships with key 
constituencies strengthened. The IRS has earned gold stars for 
performance or effort in several of the areas in which we interact, 
especially electronic filing, while at the same time working on Y2K, 
reorganizing itself, integrating 1,200 tax law changes, and modernizing 
antiquated computers. Problem solving days, citizens advisory panels, 
and 24-hour phone lines all are pluses.
    No system that processes 1.2 billion tax and information returns, 
issues 85 million refunds, answers over 100 million assistance calls, 
and collects $1.8 trillion annually--much of it in a 105-day filing 
season--will ever be error-free. No government bureaucracy is without 
frustration. Every tax filing season brings its own challenges. And the 
IRS has had more than its share of problems, especially in the 
technology and enforcement areas. But progress is being made, and 
Congress' emphasis on reform is beginning to pay dividends.
    Let me comment on several benchmarks that may help evaluate the 
current filing season and then briefly comment on the IRS Fiscal Year 
2000 budget request.

                        Filing Season Benchmarks

     Volume. Overall, the 1999 filing season has gone 
remarkably well. H&R Block tax preparation, through March 15, is up 
9.6% over last year. Our e-filed returns are up 21.6%, following a 
strong season last year in which they were up 26%. Nearly 72% of our 
returns are filed electronically. Overall, IRS return processing has 
gone smoothly, but it has not been problem-free.
     Electronic Filing. As a pioneer in electronic return 
filing, H&R Block still provides over half the practitioner e-filed 
returns the IRS receives. This year, the IRS has increased its e-filing 
promotion as it works to achieve Congress' twin goals of e-filing 80% 
of all tax and information returns by 2007 and e-filing all computer-
prepared returns by 2002. The 1040 tax booklet finally stresses e-
filing. IRS public service announcements and marketing material are 
good. The agency is cooperating well with practitioners The IRS has 
targeted a 20% increase this year--through April 2 e-filed returns are 
up 16.7% with just over half the returns in. Led by Assistant 
Commissioner Bob Barr, the IRS has also published an e-filing Strategy 
for Growth, invited industry partnerships to increase e-filing, and 
launched the Electronic Tax Administration Advisory Committee required 
by RRA98.
    This year, in addition to eliminating e-filing fees for clients in 
75% of our offices, H&R Block offered free 1040EZ preparation and e-
filing on our taxcut.com Web site to 24 million eligible taxpayers. And 
7,500 of our offices were approved to participate in a test of personal 
identification numbers (PINs) in place of paper signature forms to 
authenticate e-filed returns. PINs reduce the burden of mailing and 
enable e-filing to be nearly paperless. We consider the test successful 
and hope it can be expanded. We also assisted the IRS by distributing 
500 of its excellent public service announcements promoting the child 
credit to local TV stations with whom we place our ads.
    The IRS had a number of e-filing glitches this year: improper 
reject notices, erroneous letters indicating forms were missing, 
inaccurate information given to taxpayers on the TeleTax line regarding 
the status of their refunds, delayed deposit of refunds, a review of 
more e-filed returns than planned, and backlogs caused by larger-than-
anticipated files. But most problems were resolved quickly. At one 
point, our e-filing traffic was rerouted because of processing delays 
to another service center. We found the IRS staff responsive and 
diligent. Past problems with pre-refund examinations of returns 
claiming the earned income credit, which caused poor communication, 
delayed refunds, and a failure to honor taxpayers' direct deposit 
requests, have improved.
    This year, the IRS's TeleFile program for 1040EZ returns declined 
for the first time since its inception--down 5.6% so far. Possible 
reasons include the inability of TeleFile to process some new tax 
provisions, the availability of free Internet alternatives, and reduced 
commercial e-filing fees.
     E-Filing Recommendations. The IRS is making 
extraordinarily good progress after a long history of modest success 
but more needs to be done to achieve Congress' targets. Indeed, despite 
best efforts, the IRS itself projects reaching only 33% of returns 
being e-filed by 2005, and it probably won't hit the 2002 interim 
target of e-filing all practitioner-prepared returns. Unless more 
Americans overcome apprehensions and more practitioners enlist, the IRS 
will fall short of Congress' goals.
    The IRS is on the right track. Our suggested priorities, many 
already a part of the IRS' strategy, include: (1) a continuing focus on 
private-sector cooperation, (2) expanding the IRS marketing and 
promotion, (3) universal PINs to enable paperless filing, (4) adding 
more forms and attachments that can be e-filed, (5) streamlining the 
application process to make it easier for tax practitioners to become 
an Electronic Return Originators (EROs), (6) updating old rules for the 
e-filing program, (7) revamping TeleTax so taxpayers have more accurate 
information on return and refund status, and (8) easing suspension 
rules for EROs--high ERO application standards and stringent suspension 
rules are barriers that deter participation in the program. Each of 
these will help increase electronic filing.
     PC Tax Software. Last year, 15 million returns were self-
prepared using PC software; this year more than 20 million are 
expected. Block Financial's Kiplinger TaxCut PC software 
reduces average self-preparation time to two hours from the 17-24 hours 
the IRS estimates is needed. The software interview calculates data, 
enters it on appropriate forms, and audits the return for missing 
information, missed deductions, etc. In the last two years, e-filing by 
TaxCut customers is up over 700%. We expect continued growth 
in this market as consumers find it an appealing way to save on 
preparation time and cost and help navigate complex Tax Code 
provisions.
     Internet. This year, to reduce the cost and burden of 
filing simpler returns, our Block Financial subsidiary offered a 
program of free tax preparation and e-filing for anyone qualifying to 
use the Form 1040EZ--24 million taxpayers with wage income under 
$50,000, no dependents, and no itemized deductions. Over 23,000 
visitors to our taxcut.com Web site have used the program to prepare 
and e-file their taxes. While the Internet is a hot medium and we 
expect it to attract more filers in the future, issues of privacy and 
security still concern many users.
     IRS Web Site. The IRS continues to innovate with its Web 
site. It's excellent and contains much helpful information, but it 
could be better organized. Visitors are able to ask tax law questions 
and receive e-mail answers. Our test questions received timely and 
accurate responses. The IRS uses the practitioners' corner on the site 
to alert us to problems. This has worked well. The site also contains 
hyperlinks to private-sector Web pages like our hrblock.com and 
taxcut.com to facilitate problem solving and increase e-filing. We, in 
turn, and others provide links back to the IRS' site.
     Y2K. The IRS continues to make good progress. We testified 
on the subject at the full Committee's review on February 24, 1999. H&R 
Block will be included in end-to-end testing the IRS plans later this 
year , which we appreciate.
     Complexity. The Tax Code is growing more complex. 
Complexity concentrates on about one quarter of taxpayers with complex 
financial lives and multiple sources of income. But it is becoming a 
more serious problem for a growing group of middle-and low-income 
taxpayers because of complex calculations for the child credit, IRA 
conversions and distributions, some earned-income credit computations, 
and expanding application of the alternative minimum tax (AMT).
    Over a thousand Tax Code changes in the past few years have 
challenged tax practitioners as well as the IRS and tested our trainers 
and software programmers. This has been compounded by the IRS modifying 
instructions, worksheets, and forms throughout the tax season, 
requiring rapid response. Changes in the Form 8606 for IRA conversions 
in March, for example, caused some taxpayers to overpay or underpay, 
requiring amended returns. Many taxpayers were also confused in 
determining where to record information for their child credit.
    In each of the last three years, we have sent the Ways & Means 
Committee, the Senate Finance Committee, the Treasury, and the IRS ten 
modest suggestions for Tax Code simplification, several of which have 
now been enacted. The 1999 edition is submitted for the record. We look 
forward to working with you on your efforts to simplify the tax law, 
especially as it affects average American families.
     Use of Paid Preparers. About half of all taxpayers use 
paid preparers. While complexity and accuracy are certainly major 
reasons, many clients also come for counsel because of frequent changes 
in tax law or life changes--marriages, births, moves, or retirements. 
Many also come to speed their refunds, which 70% of taxpayers receive. 
And many also come for convenience: they may be capable of changing the 
oil in their car, for example, but prefer paying a professional to 
provide more time for family or other pursuits. Some have math 
anxieties and some have language problems. The number of taxpayers 
using professional preparers has increased slightly in the past few 
years (from 47.9% in 1990 to 49.6% in 1994, 49.9% in 1995, 50% in 1996, 
and about 51.7% in 1997--the numbers aren't final.). Paid preparers 
provide over 80% of all e-filed returns. The numbers of taxpayers using 
PC tax software is increasing more dramatically.
     1040PCs. Some clients still don't trust e-filing and 
prefer paper. H&R Block assisted the IRS in developing the 1040PC in 
the early 1990s to expedite paper return processing. It condenses the 
information on a 1040 return averaging 11 pages to one or two pages. It 
was designed to be used with optical scanners, but that program was 
abandoned by the IRS and the data are now manually transcribed. The IRS 
is considering abandoning 1040PCs because it says the format is hard to 
read, the IRS' data entry has a high error rate, and e-filing is 
growing.
    Many practitioner groups, including H&R Block, prefer the 1040PC 
because it saves paper and printing costs. For our company-owned 
offices, it saves about $300,000 annually. We believe problems can be 
solved without abandoning an abbreviated form which is still a needed 
alternative to mounds of paper. We hope the IRS will invite private-
sector help in improving and using condensed forms and exploring other 
innovations to make paper work better. Indiana, for example, is 
experimenting with bar codes on paper returns to help scanning.
     IRS Forms and Publications. The IRS continues to revise 
and simplify its forms and publications. It has acknowledged errors and 
posted corrections quickly on its Web site. This is a significant 
change because, in prior years, the agency rarely acknowledged such 
errors. There are, however, still problems traced to recent Tax Code 
changes relating to information documents including W-2s for deceased 
taxpayers, 1099-Ts, MSA reporting, 1099-Rs for transfers between 
regular and Roth IRAs, and 1099-MISC for attorneys fees and legal 
settlements.
     Use of New Tax Provisions.

           Child Credit. This is the first year of the child 
        credit. It's been a best seller and made about a third of our 
        clients--and your constituents--very happy. At the same time, 
        because 48 million filers have no income tax liability, 
        millions of low-income families with children receive no 
        benefit (unless they have three or more children), and 
        calculations for some EIC recipients are very complex. 
        Thousands of our Amish and Mennonite clients found it 
        impossible to claim the child credit early in the season 
        because the law didn't allow claims for children without SSNs, 
        and some taxpayers do not use them for religious reasons. We 
        received delayed administrative help from the IRS, but Congress 
        should address the issue so it doesn't reoccur. Also, until 
        Congress enacted a one-year suspension, which we recommend be 
        permanently extended, use of nonrefundable personal credits 
        exposed many middle-income taxpayers to the AMT.
           Education. Education credits, education IRAs, and 
        deduction of interest on student loans are popular--about 1 out 
        of every 20 of our clients receives some education benefit.
           Farmers. Less successful have been provisions for 
        farmers. The operating loss carryback provision for family 
        farmers is unnecessarily complex. In our experience, income 
        averaging is confusing and not of help to most family farmers.
           Mutual Fund Investors. One reporting simplification 
        that helps taxpayers who invest in mutual funds holding foreign 
        securities--raising the amount of foreign taxes requiring 
        filing a Form 1116--has been undercut because the IRS still 
        requires taxpayers subject to the AMT to calculate their 
        foreign credit for AMT purposes by using Form 1116, even when 
        taxpayers are not required to for regular tax purposes.

     IRS Practitioner Liaison. Most IRS interaction with 
practitioner groups comes through formal advisory committees or public 
liaison meetings. Outreach and information sharing have increased 
recently. Small business groups and H&R Block are now included, which 
we appreciate. Status reports and briefings on reorganization are 
excellent. Because of our size, we also need to work directly with 
senior IRS officials to manage an ongoing agenda. We are often an 
early-warning system for the IRS, spotting problems before they 
generally appear, as with the Form 8806. But sometimes significant time 
passes before corrections are made. A designated problem-solving 
contact for large tax preparation firms could help expedite IRS 
responses. The possibility of national accounts managers, for example, 
is part of one division's plans--Electronic Tax Administration.

                             FY 2000 Budget

    The Administration asks Congress to appropriate $8.1 billion for 
the IRS for FY 2000. The funds would be for 16 budget functions 
including customer service, return processing, compliance and law 
enforcement, and modernization, among other needs. The amount is 
essentially flat from last year's appropriation.
    We support the agency getting the funds needed to do its job, 
especially in modernizing outdated technology, so that the risk of any 
system breakdown is reduced and the IRS can catch up to many private-
sector organizations in its processing abilities.

                               Conclusion

    Mr. Chairman, we look forward to working with the Subcommittee to 
improve our tax system and ensure that for most Americans the tax 
filing experience is more tolerable. While we can't guarantee that 
citizens will be any more thrilled about paying taxes in the new 
Millennium, we are working to ensure that lessons from this tax season 
will be learned well enough to enable return processing to go more 
smoothly next year, with refunds issued promptly, and with the IRS 
continuing on the path to reform and improvement.
    I'll be happy to respond to any questions.

                                

    Chairman Houghton. Thanks very much, Mr. Ernst.
    Mr. Harris.

    STATEMENT OF ROGER HARRIS, PRESIDENT, PADGETT BUSINESS 
   SERVICES, ATHENS, GEORGIA, AND CHAIRMAN, FEDERAL TAXATION 
    COMMITTEE, NATIONAL SOCIETY OF ACCOUNTANTS, ALEXANDRIA, 
                            VIRGINIA

    Mr. Harris. Thank you, Mr. Chairman. My name is Roger 
Harris, and I am pleased to be here today on behalf of the 
National Society of Accountants.
    The National Society of Accountants and its affiliated 
State organizations represent over 30,000 accounting 
practitioners serving over 6 million taxpayers and small 
business owners. In addition to that, I am representing Padgett 
Business Services where for over 30 years we have provided 
through 400 offices accounting and tax services to small 
businesses. Both of us would be pleased to comment on the 
filing season, which I agree with most of the comments that we 
have heard here today, it has been a generally smooth filing 
season. When we are not hearing complaints from our members, we 
know things must be going well, and we are hearing few 
complaints compared to the past.
    There are certainly some negatives in any filing season. I 
think we would all agree with the Taxpayer Advocate's report 
that the complexity of the tax law is the biggest contributor 
to any anxiety any of us have during tax season. Also, anytime 
we see changes in the tax law, things like the Roth IRA and the 
child care credit, certainly in the early years always creates 
difficulties as we all adjust to learning exactly what it is we 
need to know and do to comply with the new laws.
    A continuing issue revolves around the earned income tax 
credit. It is a particularly difficult issue for preparers who 
are now under a due diligence requirement where they can be 
penalized, and we have to be very careful, and we rely a great 
deal on information from clients that hopefully is accurate.
    Some of the positives of this tax filing season, again, the 
Commissioner addressed: The Problem Solving Days, the expanded 
and improved Helplines. I think there is an overall better 
attitude when you deal with the IRS now. I think that we would 
all probably agree that it is beginning to filter down to 
everyone you deal with.
    There is, however, a continued, I believe, lack of 
training, but, again, hopefully time will address that. We need 
to have not just pleasant people to deal with but intelligent 
and well trained people to deal with as well.
    And I don't think we can talk about a filing season without 
addressing, as was mentioned here earlier, the creeping in of 
the alternative minimum tax as being a bigger issue each year. 
It is a tax that is viewed by many people as misunderstood and 
unfair, and I would certainly hope that something can be done 
in that area.
    With regard to the reform of the IRS, the National Society 
of Accountants has been pleased to have been involved in this 
process since its beginning. We have supported this legislation 
and certainly would support the required funding to make sure 
that the new implementations are made. It is very difficult for 
us to comment on specific dollar amounts, but I think the 
restructuring along taxpayer lines, the technology 
improvements, certainly require proper funding.
    I think we have a unique opportunity because of the fact 
that we have Commissioner Rossotti as well as this legislation 
to make a significant change in the IRS. I had the pleasure 
this past January, along with other members of the NSA Tax 
Committee, to spend almost 3 hours with the Commissioner and 
his staff. And I can tell you, having been in those meetings in 
the past, there was a very, very different attitude from them. 
They were willing to listen. We shared ideas. I think, as I 
said, we are at a point in time where we may never have 
everything in place like we do right now, a Commissioner who, I 
believe, really does want to change and the legislation to help 
guide us.
    We do share some of the concerns. I share Congressman 
Portman's concern about the Oversight Board, which is a big 
part of the restructuring Legislation. We certainly think that 
the appointments need to take place soon.
    Electronic filing concerns us. I don't think, despite what 
we are doing right now, that the 80 percent goal is likely to 
be reached. And I think it is equally important how we get 
there as well as if we get there. And we think that there needs 
to be some changes perhaps to increase the opportunity for us 
to get to the 80 percent goal.
    There are many other issues with regard to restructuring. I 
hope that the Joint Committees of Congress will meet and make 
sure that the message to the IRS is consistent and clear and 
that they don't get conflicting messages. I think that, again, 
as I said, we have a great opportunity and we should take full 
advantage of it.
    Again, I thank you for the opportunity to be here today. I 
hope that our comments will be helpful, and we certainly look 
forward to any questions that the Committee may have.
    [The statement of Roger Harris follows:]

Statement of Roger Harris, President, Padgett Business Services, 
Athens, Georgia; and Chairman, Federal Taxation Committee, National 
Society of Accountants, Alexandria, Virginia

                              Introduction

    The National Society of Accountants is pleased to testify before 
the Ways and Means Subcommittee on Oversight and offers this statement 
concerning the IRS Restructuring and Reform Act of 1998, the 1999 tax 
filing season, and the Fiscal Year 2000 Budget for the Internal Revenue 
Service. NSA commends Chairman Houghton and the other members of the 
Committee for their attention to these substantial issues. They are all 
of great importance to our membership.
    Through our national organization, and affiliates in 54 
jurisdictions, the National Society of Accountants represents the 
interests of approximately 30,000 practicing accountants and tax 
practitioners. Generally, our members are sole practitioners or 
partners in small to medium-sized accounting firms. They provide 
accounting, tax preparations, representation before the Internal 
Revenue Service, tax planning, financial planning and managerial 
advisory services to approximately six million individuals and small 
businesses. The members of NSA are pledged to a strict code of 
professional ethics and rules of professional conduct.
    I am Roger Harris, President of Padgett Business Services of 
Athens, GA. Padgett provides accounting, tax and financial advisory 
services to the public through a network of 400 offices located 
throughout North America. I offer this testimony in my capacity as the 
Chairman of the National Society of Accountants' Federal Taxation 
Committee. NSA has been given the privilege of testifying before this 
Committee on several other occasions, and, as always, we greatly 
appreciate the invitation.

          Problems or Concerns With This Year's Filing Season

    Shortly after we were invited to testify, we requested feedback 
from NSA members in all fifty states on any problems or concerns they 
may have had with this year's filing season. We are pleased to report 
that there were a low number of complaints or concerns registered by 
our members this season. While the low number may be partially the 
result of the heavy burdens of tax season, in the past we have noted 
that our members will usually find the time to complain, so I view this 
as an indication that this year's season is proceeding quite smoothly.
    NSA maintains a very active tax hotline for its members, and I 
would like to comment on some of the issues our Tax Manager, Bernie 
Phillips, has noted from the field.
    The first issue is an issue I am sure we are all aware of, and that 
is the complexity in the tax code. On behalf of the practitioner 
community, I should probably be advocating that there be even more 
complexity, since that will mean more clients for our members. We 
recognize and appreciate the great strides this Committee and the 
Service have made in this regard, but in the interest of promoting the 
interests of the public at large, our members still believe more could 
and should be done to simplify our tax code.
    One cannot discuss the 1999 filing season without raising the issue 
of complexity. This issue has been the number one issue raised by the 
recent report of the Taxpayer Advocate, and continues to be the number 
one issue of our members. Complexity has been an ever-present trend in 
tax law. Although, complexity is warranted in taxing complex 
transactions, it is a double-edged sword. Unnecessary complexity has 
furthered the negative perception of the Service because it frequently 
leads to penalties or other enforcement mechanisms being imposed for 
understandable errors. Complexity puts the taxpayer on the defensive, 
which makes transforming the institutional culture all the more 
important.
    The second most frequent issue surrounds the Roth IRA conversion 
process. The public, and indeed many of our members, needs greater 
education and guidance on the proper methods for such conversion.
    The third issue is the Earned Income Tax Credit. Many practitioners 
are confused by the eligibility requirements, and are especially 
concerned because of the due diligence requirements and the 
repercussions of making a mistake on these calculations. For example, 
there are certain types of income which need clarification as to 
whether or not they apply for purposes of the Earned Income Tax Credit. 
In our view, the rules need to be explained more clearly, especially 
with regard to the types of income which qualify towards the tax 
credit.
    Our members note with admiration the new and improved IRS Helpline 
and greatly value the service and convenience this provides. However, 
some have claimed to have received incorrect or confusing answers from 
the Helpline. This problem should resolve itself as time goes on, but 
it indicates that training and education should remain a high priority, 
and sufficient funding should be ensured to carry out this objective.
    Some of our members seem to have encountered a certain degree of 
inexperience with regard to auditors and audits. Whether this is a 
result of new rules in effect, or insufficient training, this, of 
course, is a concern to NSA. NSA believes some of the problems could be 
resolved through additional training measures or reducing the 
complexity of the tax law.
    One cannot conclude without briefly mentioning one of the most 
frequent complaints from our members' clients, and it concerns the 
Alternative Minimum Tax (AMT). More and more of our members' clients 
have been subject to the AMT, and we have seen a good deal of protest 
about the AMT tax from these clients. The AMT was designed to prevent 
abusive use of tax shelters and prevent those circumstances where high-
income taxpayers enjoyed little or no tax liability.
    The regular income tax was indexed for inflation in 1984. This was 
designed to progressively tax only real rises in income and not cost of 
living increases. The Alternative Minimum Tax, however, is not indexed. 
Since 1986, the figure of allowable credits and deductions, which 
triggers the AMT, has increased only 12.5%. Over the same period, the 
rise in cost of living has been 43%.
    The net effect is that the AMT is being applied to an ever-
increasing percentage of American taxpayers. The Joint Committee on 
Taxation estimates that in 1997 over 600,000 taxpayers were subject to 
the AMT. The Committee projects that, given the present environment, 
this figure could grow to 12 million by 2007. Much of the growth is 
attributed to middle income Americans taking advantage of new child and 
education credits.
    Senator Richard G. Lugar (R-IN) introduced S.537 on March 4, 1999. 
His legislation would retroactively index the AMT to inflation dating 
back to 1993. NSA supports the outline of this legislation. We feel 
strongly that Congress needs to address the dramatic growth in the 
numbers of taxpayers made subject to the AMT. It was never intended to 
have such a broad application and, in our view, indexing would solve 
much of the problem.

                         IRS Restructuring Act

    The National Society of Accountants concurs with a statement 
attributed to Chairman Houghton in a pre-hearing advisory notice, that 
the IRS Restructuring and Reform Act of 1998 (H.R. 2676) represents the 
most significant tax reform effort in more than 40 years. The National 
Society of Accountants reads a sweeping legislative intent in this 
landmark legislation. We believe that, once fully implemented, the Act 
will transform the public perception of the Service from 'us against 
them' to an emphasis on serving the public and meeting the taxpayers' 
needs.
    NSA believes that full implementation of the Act's legislative 
intent will require years of vigilant oversight and may require the 
appropriation of additional funds to the Service to support their 
genuine reform efforts. This vigilance must be shared between bodies 
such as your Committee, other Committees who share oversight, the 
taxpaying public, and organizations such as NSA. While NSA is not 
prepared to support a specific dollar figure to achieve these reforms, 
NSA urges the Subcommittee to advocate sufficient resources to support 
the Service's commendable efforts to restructure and reform its 
mission.
    I would like to comment on NSA's view of the implementation of the 
IRS Restructuring and Reform Act. First, in recent meetings with 
Commissioner Rossotti, we experienced a great degree of openness and a 
new spirit of cooperation. Commissioner Rossotti and his excellent 
staff helped create an atmosphere where NSA felt comfortable sharing 
our needs, concerns, and, where appropriate our complaints. It is our 
view that Commissioner Rossotti and his staff have worked diligently 
and effectively to transform the public perception of the IRS, as well 
as made great strides in reforming the ``corporate culture'' of the IRS 
to make it more responsive to the public. They have also acted quite 
adeptly to bring the IRS more in line with modern technology, including 
upgrading their internal computer systems, easing the process of 
electronic filing, and upgrading and expanding their web site. All of 
these factors will, in our view, make the IRS more efficient and help 
the accounting practitioner better serve their clients' needs and, once 
again, NSA would fully support appropriate funding levels to ensure the 
technology modernization program proceeds at a rapid pace.
    There are two concerns with the Service's restructuring and reform 
program which we believe should be addressed. Our first concern is that 
the Service get clear and unified direction from Congress on both 
budgetary issues and strategic objectives. It appears from an 
outsider's perspective that the Service is, at times, being pulled in 
different directions by different Congressional Committees of 
jurisdiction and oversight. We therefore view it as important that the 
proposed House/Senate Joint Oversight Hearings, scheduled to take place 
by this June, help to achieve consensus on these matters.
    Second, NSA is concerned that the deadline for appointing a private 
sector advisory or oversight board for the IRS is past due, and that 
the Administration has yet to announce the appointees. This board will 
help the IRS set and maintain its objectives, including such important 
goals as modernization and improved customer service, and therefore is 
vital to the effectiveness of the future IRS.
    The IRS employs what is referred to as a voluntary taxpayer 
compliance system. It is voluntary in the sense that the Service, in 
fulfilling its mission, is dependent on volunteered information. The 
Service has historically defined its mission as collection enforcement. 
We perceive a welcome shift in this mission to encompass assisting the 
taxpayer and the practitioner in ensuring that tax returns are done 
efficiently and correctly, while reducing the threat of draconian 
enforcement penalties.
    The Service's mission remains to collect the proper tax under the 
law. The Restructuring and Reform Act of 1998 doesn't alter this basis 
dictum. The Act reforms the methods employed to carry out the mission. 
We believe a customer-oriented approach will ultimately lead to 
increases in tax collections over the long-term.
    Consider the broadest reforms contemplated by the Act; a mandated 
reorganization of IRS Divisional structure, a broader range of new 
taxpayer rights, and the creation of new agency oversight. First, the 
Service will soon become organized according to the unique needs of 
specific types or categories of taxpayers. NSA has always supported 
this concept, and, while we cannot comment on the specific budgetary 
requirements to achieve this transition, we believe the Service should 
be allocated sufficient funding to ensure a smooth and complete 
reorganization process.
    Second, the Act also establishes a broad range of new taxpayer 
rights. New taxpayer rights are enumerated which both govern IRS 
collection activities and provide new avenues of taxpayer redress in 
the case of a dispute. The Taxpayer Advocate is now the National 
Taxpayer Advocate. The change in title is accompanied by new rules that 
bolster the Advocate's independence, promote the Advocate's services, 
and require a semi-annual Advocate report to Congress. The Act also 
establishes the creation of a new Oversight Board.
    All these reforms contain a common rational thread that strikes at 
the function of the Service itself. Past Congressional reports have 
noted taxpayer frustration with the Service's lack of appropriate 
attention to their needs. A Senate Finance Committee report concluded 
that taxpayers have a right to receive the same level of service from 
the IRS that they receive from the private sector. This is what I 
referred to last Spring as the benchmark goal of `putting the customer 
first.'
    NSA recognizes the enormity of the task of reforming the IRS in the 
midst of processing over 200 million returns, issuing 92 million 
refunds and responding to over 120 million requests for assistance. NSA 
is convinced that Commissioner Rossotti is personally committed to 
seeing reforms through that over time will achieve the institutional 
transformations discussed above. Further, NSA is mindful of the fact 
that the Service has just begun the arduous reforms contemplated by the 
Act. These initial efforts demonstrate a high degree of initiative, 
which have led to improved customer service and which will continue to 
improve taxpayers' attitudes toward the Service.
    Problem Solving Days are one example of this effort. Held monthly 
around the country, Problem Solving Days give taxpayers the opportunity 
to meet face-to-face with Service personnel to work out tax problems. 
Another example is improved telephone access during extended operation 
hours. In addition, the IRS web page is an excellent resource for 
taxpayers and practitioners alike. NSA members acknowledge and 
appreciate the Service's efforts in these areas.
    NSA remains concerned that there still remains pockets of the 
``old-style'' IRS that perhaps have not received the message from the 
top. One of NSA's past Presidents, who practices in Missouri, recently 
told us of a rather extreme example of what can happen when IRS 
employees mishandle tax returns or fail to adequately correct errors 
made by the IRS itself. While one cannot generalize from one example, 
it appears that the problem might have been resolved simply by taking 
the time to listen to the taxpayer. With the new openness and desire to 
improve service, we hope and expect these types of problems will be few 
and far between.
    Taxpayer rights will continue to be a primary goal of NSA and its 
members. We are greatly encouraged by several new initiatives in this 
regard, specifically the relief for innocent spouses who filed joint 
tax returns, and newly announced rights for taxpayers faced with 
collection activities, such as requiring pre-levy notices. Yet another 
encouraging part of the restructuring program is the development of new 
performance measures which take into consideration how the IRS employee 
treats taxpayers. We eagerly await the implementation of these new 
performance measures, although we recognize that ``corporate culture'' 
cannot change overnight. However, in time I believe we can all expect 
to see a much more customer-oriented approach to collection activities.

                Electronic Filing Goals Remain a Concern

    The IRS Restructuring and Reform Act of 1998 includes a number of 
positive provisions designed to encourage more tax professionals and 
taxpayers to utilize electronic filing. To the credit of the Service, 
the electronic filing of tax returns has continued to surge in 
popularity among taxpayers during the 1999 tax-filing season.
    As of March 12th, the IRS reported receiving 17.2 million returns 
filed electronically, a 16.5% increase over last year. The vast 
majority, 15.8 million, were filed by tax professionals. The IRS also 
reports receiving 1.4 million returns from home computers, a 160 
percent increase. However, a recent survey published by Jupiter 
Communications suggests that the taxpaying public is hesitant to trust 
e-filing for such an important transaction, citing security, privacy 
and reliability concerns. As an example, Jupiter surveyed 2,100 
Internet users and found that only 1.4% would file via the net, while 
approximately one-third said they would hire an accountant, one third 
were using non-internet software to prepare their return, and a third 
would prepare their returns by hand. The report concluded by noting 
that consumer behavior does not change as quickly as some assume, 
especially with highly sensitive, low frequency activities such as tax 
filings.
    In NSA's recent meeting with Commissioner Rossotti and his staff, 
we took the time to discuss the IRS goal of the percentage of returns 
electronically filed, which, by 2007, is a goal presently set at 80% of 
all returns. I believe the current percentage of e-filed returns is 
stands at approximately 20-25%, so much work lies ahead to reach this 
ambitious objective. I believe the only way to approach this goal is to 
keep in mind the needs of the accounting practitioner. With over 50% of 
all returns prepared by a professional tax preparer or accountant, we 
need to make the process of electronic filing more advantageous and 
less complicated for the practitioner. I propose two ways of achieving 
this; first, there have been several complaints from our members that 
they have had problems having their e-filed returns accepted by the 
IRS. Whether this is a result of computer glitches, or simply a result 
of the IRS not presently being capable of accepting all forms, it is 
understandable that many practitioners would find it simpler to print 
the more complex returns and file them by mail.
    Second, it is our view that the IRS could encourage e-filing by 
improving incentives, and reducing the disincentives for e-filing. This 
Committee has heard numerous times about these disincentives, so I 
won't repeat them here. NSA remains concerned that Congressional goals 
of an 80% e-filing by 2007 may not be achieved without continual 
dialogue between the IRS with organizations such as NSA, as well as 
ongoing refinements and improvements on the part of the IRS. While we 
are pleased to note the increase in e-filings, we cannot remain 
complacent with this achievement. Suffice it to say, we should continue 
to explore the underlying reasons for the failure of many taxpayers and 
practitioners to e-file their returns, and NSA, for its part, is eager 
to continue discussions on this matter with the Congress and the 
Service.
    I would like to conclude by thanking the Committee and Chairman 
Houghton for their leadership and attention to these issues which, if 
adequately addressed, will help America achieve a more effective, 
efficient, customer friendly, and progressive tax collection 
environment. NSA, for its part, is pleased to remain an active part of 
the process in helping the IRS achieve its modernization and reform 
objectives, and is greatly encouraged by the achievements made thus 
far. Thank you.

                                

    Chairman Houghton. Thank you very much, Mr. Harris.
    Now, Ms. Joyner-Rodgers.

STATEMENT OF DONNA JOYNER-RODGERS, MEMBER, GOVERNMENT RELATIONS 
      COMMITTEE, NATIONAL ASSOCIATION OF ENROLLED AGENTS, 
                     GAITHERSBURG, MARYLAND

    Ms. Joyner-Rodgers. My name is Donna Joyner-Rodgers, Mr. 
Chairman, Members, staff. I am in private practice in Las 
Vegas, Nevada. I have been an Enrolled Agent since 1987. Our 
firm prepares approximately 4,000 tax returns in a filing 
season. Of these, we probably send 70 percent electronically. 
This year I have prepared over 500 myself.
    As a member of the Government Relations Committee of the 
National Association of Enrolled Agents, I am very proud to be 
here to have a chance to give testimony. We have 35,000 
enrolled agents in the country, of whom about 10,000 are 
members of our Association of Enrolled Agents.
    You have my written testimony, which I submit for the 
record. I would like to summarize my testimony.
    I had originally planned to save the electronic filing for 
last, but since there has been such an interest in it I have 
reordered my comments. And I would like to address those now.
    I do believe electronic filing is the way of the future. We 
have been filing electronically in our firm for 10 years. I 
think the taxpayers like the convenience of it. They like the 
fact that they can get a refund quickly. There are, however, 
some hurdles to getting the tax professionals to buy into 
electronically filing, and one is not a new story. I know it 
has been heard and said before, and that is, there are many 
forms that cannot be accepted electronically. This may come in 
with what Commissioner Rossotti was talking about, the 
modernization. These forms keep many people from electronically 
filing when they truly would like to buy into the system.
    This is usually some of the more complex forms. If you take 
that one step further and consider the fact that the more 
complex forms can also cause errors when they are data-entered 
at the Service Center, it would make good sense to make these 
forms accepted electronically.
    Another problem I see for the practitioners is the 
electronic return originators facing the strict procedures. I 
agree the procedures do have to be strict in order to make sure 
there is no fraud. We buy into that 100 percent. However, often 
the punishment for making a small error, which is the 
revocation of the license to electronically file, is overly 
harsh. Tax professionals who file by paper do not face this 
harsh sanction. Therefore, if there was some other procedure, a 
warning or perhaps some appeal procedure, then you might be 
able to get them more into the idea of filing electronically.
    Once you do have people buying into the procedure of 
electronic filing, there is a great resource for the electronic 
filing originators, and that is the help desk at the Service 
Center where you do your electronic filing. I personally have 
had quite a lot of interaction with the help desk up at Ogden 
Service Center, headed by John Young. His people are very 
responsive. They are receptive, very helpful when it comes to a 
problem of a return that got sent and that we can't seem to 
work out the problem. They get right back to you. So once you 
have gotten online and you are doing the electronic filing, 
they do a lot to help you make it go smoother.
    Those are my comments on the electronic filing right now I 
would like to address. As an overview, we also from our members 
have gotten feedback that it has been a very smooth filing 
season, much smoother than the nightmare of 1995. The IRS is to 
be commended in some of their systems they have put into place. 
I particularly have been very pleased with the Problem Solving 
Days. They have made them available throughout the filing 
season, and the Problem Solving Days are a great way to help 
people get down to a problem that systemically has not been 
able to be solved. In addition to the Problem Solving Days, 
there are 250 walk-in sites. Everything has been a big help.
    Thank you very much for letting me address you.
    [The prepared statement follows:]

Statement of Donna Joyner-Rodgers, Member, Government Relations 
Committee, National Association of Enrolled Agents

    Mr. Chairman, Members, staff and guests, my name is Donna Joyner-
Rodgers and I am an Enrolled Agent engaged in private practice in Las 
Vegas, Nevada. I have been an Enrolled Agent for more than a dozen 
years. Each year, my firm handles approximately 4,000 individual and 
small business tax returns. Sixty-nine percent of these returns are 
filed electronically.
    As a member of the Government Relations Committee of the National 
Association of Enrolled Agents, I am very pleased to have this 
opportunity to present testimony on behalf of the Enrolled Agents, all 
of whom are tax professionals and the majority of whom are also small 
business owners.
    As you know, Enrolled Agents are licensed by the U.S. Department of 
the Treasury to represent taxpayers before the Internal Revenue 
Service. Enrolled Agents, along with attorneys and CPAs, are governed 
by Treasury Circular 230 in our practice before the IRS. Enrolled 
Agents were created by legislation signed into law by President Chester 
Arthur in 1884 to remedy problems arising from claims brought to the 
Treasury after the Civil War. Today, we represent taxpayers at all 
administrative levels of the IRS and provide tax preparation assistance 
as well, thereby affording us a front-line perspective on the 
administration of our nation's tax laws. There are approximately 35,000 
Enrolled Agents, about 10,000 of whom are members of NAEA.
    On behalf of my Enrolled Agent colleagues, I would like to express 
appreciation to the Oversight Subcommittee Chair, to the Members and 
staff for your annual review and evaluation of filing season and the 
IRS budget and operations. We believe you are making an invaluable 
contribution to improving our system of tax administration by regularly 
scheduling these hearings. They offer an opportunity for the 
practitioner community to share its views, an occasion for the IRS to 
provide information on its needs, and it sets an annual benchmark 
against which we can measure accomplishments, highlight problems and 
seek remedies.

              1999 Filing Season Report Card: An Overview

    As we have done in the past, NAEA has kept in touch throughout 
filing season with its members. Through our online communications and 
surveys, we gained insights to what Enrolled Agents, as front-line 
practitioners, are seeing. Our members have told us that this has been 
a very smooth filing season so far as IRS operations are concerned. 
Although there have been a few glitches, which will be described later, 
the overall impression is that--compared with the 1995 filing season 
from hell--this one has been a piece of cake.
    In terms of IRS operations, there are several successes we would 
like to bring to your attention. First, the IRS web site has been 
greatly expanded and continues to provide valuable information to both 
taxpayers and practitioners. Forms, instructions and publications are 
easily accessible--to be read online or downloaded. The site even 
includes a place at which problems internal to the agency are listed 
and provides information on how to deal with a specific problem--for 
example, a misprinted form or a processing delay. Another spectacular 
feature is a free tax law research site. You enter your question under 
one of several headings and e-mail it to IRS for a reply. Early in the 
filing season, the turnaround time was 12 hours. It has since 
lengthened, but our experience is that it has not been more than 48 
hours.
    We have not had practitioners complaining about IRS service as we 
have had in previous years. We attribute this to the 250 walk-in sites 
with longer hours of operation as well as the 24 hour, 7 day a week 
telephone helpline. The investment in these improvements has helped put 
the Service back in IRS and greatly diminished taxpayer and tax 
practitioner frustrations.
    Having a variety of locations and means by which taxpayers and tax 
practitioners can acquire needed information to complete a tax return 
has greatly improved the ability of tax professionals to keep America's 
taxpayers in compliance. We have been eagerly looking forward to the 
small business corner which has recently been added to the IRS home 
page. It provides essential information to small businesses and is 
accessible to everyone, whether they're in a rural area or a big city.
    We commend the IRS for continuing to hold Problem Solving Days, 
even during filing season. This has substantially contributed to the 
public perception that IRS is refocusing its mission on customer 
service. At NAEA we are receiving far fewer calls about long-standing, 
unresolved problems. Taxpayers seem to be getting their problems 
resolved at Problem Solving Days where IRS employees with appropriate 
experience and authority can make decisions. Even if a decision 
favorable to the taxpayer is not received, taxpayers and their 
representatives seem to find discussions with knowledgeable, 
experienced IRS personnel to be very helpful in moving toward a 
resolution. If every IRS employee had the knowledge, technical tools 
and authority and were rewarded for solving taxpayers' problems in one 
sitting, there would be no need for Problem Solving Days.
    In 1999, more taxpayers than ever turned to paid preparers to 
assist them in the completion of their tax returns. This is largely due 
to the many tax law changes of the past two years, combined with 
varying effective dates and phase-outs. Our members report increases in 
business of 10%, 20% and more as taxpayers, confused by so many new 
provisions, decide that it's better to let an Enrolled Agent handle it.
    A month ago, Ann Landers, the Chicago-based nationally syndicated 
columnist, ran a letter about Enrolled Agents and included NAEA's toll 
free referral number. We received so many calls that it crashed our 
system. A month later, we are still receiving more than 200 calls a day 
from taxpayers seeking a professional to assist them in completing 
their returns. While we certainly appreciate the extra business, we 
recommend Congress revisit the issue of tax simplification as soon as 
possible. We doubt the intent of recent tax law changes was to confuse 
taxpayers and add to the incomes of tax practitioners.

                              The Glitches

1. IRS Refund Hotline/Treasury Offset Program

    The IRS refund hotline is an excellent customer service idea. It is 
designed to provide taxpayers with information on when their refund can 
be expected. However, for the second year in a row it has not provided 
taxpayers with timely information. When a taxpayer calls, is told the 
refund is in the bank and it isn't, the tax practitioner is the one who 
feels the taxpayer's wrath.
    This year, Treasury was authorized to debit nontax debts from 
refunds. These nontax debts include delinquent student loans and child 
support payments. However, the Treasury offset program was completely 
separate from the IRS refund line. To the surprise of our Members, 
Treasury did not accept the IRS' Power of Attorney, but instead 
required a separate POA--FMS Form 13. For a time, we could not find a 
Treasury helpline to which inquiries could be directed. You may be 
surprised to hear this, but practitioners complained that Treasury was 
not as ``customer friendly'' as the IRS!
    Furthermore, the two programs--refund hotline and Treasury offset 
program--were not coordinated. We then had the unfortunate situation 
where a taxpayer was told the refund had been sent out without being 
informed that Treasury would be debiting other payments. We hope this 
can be resolved so that next year taxpayers will get the right answer.

2. Electronic paralysis

    There are two filing season crunches: one in early February when 
taxpayers with relatively simple returns--W-2 income and few 
investments--come forward in need of assistance. Usually they are due a 
refund and would like to receive it quickly. The second crunch time 
comes in mid March to April 15, when taxpayers with more complicated 
returns involving, for example, investment income show up.
    Early in 1999, tax practitioners experienced problems with e-filing 
at the Andover Service Center. Apparently demand exceeded capacity. 
This could be considered a fortuitous circumstance. However, to tax 
practitioners trying to meet clients' expectations, it was very 
frustrating. It was fixed within a few days but it came at a critical 
time for practitioners. We were told of similar problems at the 
Cincinnati Service Center.
    Also, due to human error, tax returns involving Earned Income Tax 
Credits--many of which are e-filed--were held up in Atlanta for 
additional review. While some review for revenue protection purposes 
had been anticipated, the numbers involved far exceeded expectations 
and there were delays for taxpayers who are often in need of the EITC 
to pay rent, medical bills, auto repair bills, etc. The IRS did 
acknowledge this problem on their web site and explained how the 
situation would be remedied. As practitioners, we very much appreciated 
having this information to share with our clients. It is another sign 
of the cultural shift at the new IRS.

3. Continued inability to e-file all forms and schedules

    For the second year in a row, we bring to your attention the 
problem of tax practitioners who would be willing to convert their 
operation to e-filing but who are still finding that too many forms 
cannot be filed electronically. NAEA readily understands the priority 
the IRS must give to ensuring its systems are Y2K compatible. However, 
if IRS is to meet its target of 80% of returns filed electronically, it 
must pick up a very substantial percentage--perhaps as much as 95%--of 
practitioner-generated returns.
    As I mentioned at the beginning of my testimony, roughly 70% of the 
returns my firm handles are e-filed. We would do more, if only the 
forms could be filed. Unfortunately, those returns which cannot be e-
filed are those which are more complex. At the Service Center, they 
must be keyed in by hand which is where data entry errors can occur.
    There are other impediments to e-filing: If a taxpayer has more 
than 50% of his or her pension withheld for tax purposes, the return 
will not qualify for e-filing. Or if a taxpayer uses more than 4 day 
care providers in a year, the return will not qualify for e-filing. Yet 
there are times when children whose parents both work will send them to 
the YMCA camp, then basketball camp, soccer camp and Scout camp over 
the summer. These are not unusual circumstances but apparently for 
revenue protection purposes, willing taxpayers are being turned away 
from e-filing.
    There is also a disconnect between reaching a goal of 80% of 
returns e-filed and requiring original signatures on forms. During 
meetings with IRS Electronic Tax Administration officials, NAEA had 
proposed that forms which cannot be electronically filed be retained by 
practitioners as work papers. We suggested a pilot program involving 
Circular 230 practitioners--Enrolled Agents, CPAs, and attorneys who 
are regulated by the IRS' Director of Practice--but were turned down by 
Chief Counsel's office. We were advised that the legal statutes are an 
impediment to e-filing and only Congress can change the statutes. 
However, the IRS Reform and Restructuring Act, Title II, Section 2003 
permits alternatives to original signatures.
    As it stands now, the burden placed on practitioners to maintain a 
two-track system--paper and e-file--is a major obstacle to practitioner 
acceptance of electronic filing. To quote from one of our Members who 
responded to our online survey,
    ``Electronic filing really worked well in the technical sense. It 
remains, however, nightmarishly complex to administratively keep track 
of the electronic returns going out, acknowledgments received, 
acknowledgments pending, lost returns (yes, there were several), lost 
acknowledgments (again, several), filing of the paper Form 8453 and 
sending out the Form 9325 to the clients.
    Ditto that for the state returns. It all requires a separate 
administration system that MUST be kept up to date at least daily and 
sometimes hour by hour.''
    We would argue that the current e-file system in its complexity is 
a disincentive to practitioners who are attempting to modernize their 
practices and who would be disposed to do so if there were not so much 
red tape.
    IRS' statistics show that the number of e-filed returns overall is 
up 15% over last year and the number of returns filed to date is up 3%. 
Clearly, we are going to need more initiatives aimed at practitioners 
in order to get to that 80% benchmark, otherwise we are going to fall 
far short of that target.
    There are other systemic issues which require attention. We would 
note that Electronic Return Originators (EROs) face strict procedures. 
Breaking even one, can result in suspension from the electronic filing 
system. In order to combat fraud, the measures are tough. And we would 
agree with the need for supervision. However, often the punishment--
revocation of a license to e-file--is overly harsh. A tax practitioner 
who files paper returns does not face the same harsh sanctions, so the 
system provides plenty of incentives for practitioners to stay with 
paper.
    On the other hand, in its efforts to reach out to taxpayers and 
increase e-filing, the IRS has, at times, undermined both the stature 
of the tax professional and its own insistence on doing things by the 
book. Attachment A is a copy of an advertisement which ran in the 
Washington Post. The furniture company suggests that taxpayers bring in 
their W-2s and 1099 forms to obtain quick cash and offers a refund 
loan. One wonders about the due diligence requirements imposed on that 
particular Electronic Return Originator. The IRS web site offers 
taxpayers access to local e-filers by zip code, including a liquor 
store in St. Petersburg, Florida.
    The recently established Electronic Tax Administration Advisory 
Committee or ETAAC could be an excellent way to find out what tax 
professionals need in order to convert to e-filing and to stay with the 
system. We endorse this kind of outreach, emblematic of the new IRS, 
which we believe can make a difference in eliminating institutional 
obstacles to practitioner use of e-filing.

4. Impact of Earned Income Credit (EIC) Due Diligence Requirements

    The Earned Income Credit continues to provoke anxiety among our 
members. As we noted last year, the due diligence requirement 
significantly increased prep time and paperwork. You cannot wring the 
fraud and abuse out of this program on the backs of the tax 
practitioner community. And failing to do so, has had its own 
unanticipated results. As one of our members states:
    ``I have stopped taking any client who may be due the Earned Income 
Tax Credit. I returned their papers and requested they go elsewhere to 
get their tax return done. The reasons? The risks of penalty in 
erroneously designating a child as ``qualified'' when the parent(s) is/
are divorced, legally separated, living apart, cohabiting with someone 
other than the spouse (or whatever) make the determination too risky. 
Add to this that the taxpayer could have been previously excluded from 
the EITC and I might forget to ask, or he/she might not tell me or 
might falsely advise me or not know themselves that they were excluded. 
Add to this the requirement to ask a client to sign an EITC statement 
that is incoherent to any average American reader and make me keep that 
statement on file is all just too much. I have opted out of EITC all 
together.''

               IRS Budget Priorities for Fiscal Year 2000

    We would commend the current management of the IRS for its 
thoughtful, deliberate approach to setting out its budget priorities 
for FY 2000. There is little to disagree with in terms of program 
emphasis and direction. Clearly, the Service is attempting to meet 
critical needs such as Y2K compliance which Commissioner Rossotti has 
likened to changing a jet engine while the plane is in the air. 
Simultaneously, IRS must fulfill its Congressional mandate to 
reorganize, implement additional taxpayer safeguards, and upgrade its 
computer system. Taken individually, these are significant challenges 
for any organization. IRS is to be applauded for not only taking on 
these challenges but, from our perspective, making strong headway in 
achieving them.

                Reorganization into Four Business Units

    The vision of four customer-focused business units is one of the 
most appealing aspects of the reorganization plan which we have seen 
only in outline form at this time. To finally have one-stop shopping 
for individuals, small businesses, the self-employed, tax exempt 
organizations, and mid to large corporations seems to us to be the 
epitome of customer service. We believe this will be tremendously user-
friendly and end much confusion among taxpayers. We are particularly 
receptive to the emphasis on taxpayer education because we strongly 
believe that most taxpayers want to comply with the law but some may 
not know how to do so.
    While endorsing the concepts we have seen so far, we do have a few 
unanswered questions which we hope will be clarified once the 
reorganization plan is unveiled April 15. These include:
    1. What role will various advisory committees such as the 
Electronic Tax Administration Advisory Committee (ETAAC), the 
Information Reporting Program Advisory Committee (IRPAC), and the 
Internal Revenue Service Advisory Committee (IRSAC) continue to play in 
the newly reorganized structure? One of the most important things IRS 
has done in recent years is to provide opportunities for tax 
practitioners, taxpayers, academicians, and industry representatives to 
gather to share information and insights on tax administration. We 
would be highly disappointed if these cross-cutting opportunities were 
lost.
    2. One of the best things IRS management has ever done was to 
create the Office of Public Liaison at the National Office about 4 
years ago. Finally, there was a way to communicate with IRS in a 
regular, coordinated manner for tax practitioners, small business, 
various industry groups, and association representatives. We would hope 
that so successful an effort would be continued at the highest levels 
of the Service as a focal point for discussion of issues and 
dissemination of information. As part of the Public Liaison outreach, 
we have had regular updates on the modernization effort so as 
practitioners, we can be part of the process. This is very much in 
keeping with the new way of doing business at the IRS.
    3. Accountability is an integral part of the reorganization. We 
commend IRS management for recognition of the fact that without 
accountability you can have all the vision in the world but it won't 
mean the organization will change in meaningful ways. We do, however, 
have concern about the operation of the Chief Counsel's Office. Our 
experience is that if any component of the IRS poses a threat to 
reform, this is it.
    Taxpayers and practitioners deserve timely guidance if they are to 
comply with the law. Yet our experience is that frequently, Chief 
Counsel's office is oblivious to the practical demands of the business 
world. To give one example, the Taxpayer Relief Act of 1997 included a 
provision requiring tax practitioners to perform due diligence when a 
client requested an Earned Income Credit. Discussions with appropriate 
personnel in Chief Counsel's office began in July 1997, prior to 
enactment of the new law. Further discussions were held in mid-
September. Practitioners representatives were advised that guidance 
would be available by the end of the year. There was no comprehension 
of the fact that tax practitioners would be preparing themselves and 
their staff for filing season in October and November. One comment was, 
``You'll have something by December 31. That should be good enough.'' 
On the Wednesday before Thanksgiving, NAEA representatives paid a 
courtesy call to the newly appointed Commissioner. He asked if we had 
any particular concerns and NAEA advised that if guidance on due 
diligence for EIC wasn't forthcoming, penalties would have to be 
waived. It was unfair to expect practitioners or taxpayers to 
understand a complex new law without some type of guidance. A few days 
after the Thanksgiving weekend, guidance was released. Clearly, it 
looks to us as if intervention by the Commissioner himself was 
necessary to get Chief Counsel focused on the need for critical 
taxpayer information.
    In our discussions with other practitioner groups, our view is 
repeatedly validated. Chief Counsel's office must be made accountable. 
Lists of regulatory and guidance projects are a good beginning. 
However, we hope that through Congressional oversight, that office will 
be made to put out guidance in timely fashion.
    4. Proper placement of taxpayers in business units is beginning to 
become a concern to our Members. Our society is very complex and some 
businesses may not fit neatly into a particular unit. What will happen 
to--and this is a real example--the taxpayer who heads up a $2 million-
$3 million corporation with 2 employees? Will he fall into the mid to 
large corporation unit because he is incorporated? Or will he be 
considered a small business? If he has employee tax issues, to whom 
will he address them--the small business unit or the mid to large 
corporations unit?
    5. Information reporting, including the issuance of Forms W-2, is 
one of the most critical elements in tax administration. Amounts that 
are accurately reported on information returns are significantly more 
likely to be reported properly on the recipients' individual tax 
returns. It is estimated that over 97 percent of the wages reported by 
employers on Forms W-2 appears on the individual returns of the 
employees. Thus, the IRS has a strong vested interest in ensuring 
employer compliance and cooperation with the information reporting 
rules.
    It is our understanding that the Office of Employment Tax 
Administration and Compliance will be placed in the small business 
operating unit. The following are a number of issues concerning the 
reorganization which have been raised by the Information Reporting 
Program Advisory Committee (IRPAC), chaired this year by Judith Akin, 
EA who is a colleague in NAEA:
     How will this office effectively communicate with the 
other operating units to solve the needs of other employers and their 
employees?
     To whom will the Director of OETAC report?
     Where will businesses go in order to resolve employment 
tax issues and questions as they arise and relate to information 
reporting?
     Will one business unit be able to address the employment 
tax issues arising from employers and employees under the jurisdiction 
of all four units? If so, what procedures would be put in place to 
implement this task?
     How will the IRS spread its limited existing employment 
tax resources across the four business units?
     How will the IRS ensure that the small business operating 
unit will dedicate appropriate resources to employment tax issues that 
do not directly impact small business employers?
     How will the close coordination between Form W-2 and Form 
1099 processing and information reporting be continued to enable the 
IRS to quickly resolve problems as they arise?
     How will the IRS ensure that employment tax issue are 
consistently applied to employers in all of the business units?
     Which branches within Chief Counsel's office will have 
responsibility for the regulations, revenue procedures and rulings on 
information reporting, withholding and the related penalties for each 
of the four broad areas and how will the branches coordinate among 
themselves: (a) Domestic--information reporting on Forms 1099 (other 
than Form 1099-R) and section 3406 back up withholding and related 
penalties; (b) Employment taxes--information reporting on Form W-2, 
withholding on wages and related penalties; (c) Qualified plans--
information reporting on Forms 1090-R and 5498 and section 3405 
withholding; (d) International--information reporting on Forms 1042-S, 
withholding payments on nonresident aliens and the related penalties?
     Will the IRS Forms and Publications division remain a 
centralized function at the national level?
     Will the reorganized IRS maintain a centralized call site 
at Martinsburg Computing Center to answer questions regarding the 
filing of information returns with the IRS for payors, withholding 
agents and employers?
     Will the IRS reinstate the centralized employment tax call 
site that was a pilot project last year?
     Will the IRS have a national director of the Information 
Reporting Program with sole responsibility for payor compliance with 
reporting and withholding rules?
    Many of these questions may be answered with the unveiling of the 
April 15 reorganization plan or in details to be issued soon after. 
However, we believe they are so important and so integral to the 
functioning of our tax administration system, that they must be raised 
here as well as at the highest levels of the Service.

                               Conclusion

    It is our hope that our comments have provided some idea of the 
status of filing season and IRS operations. Commissioner Rossotti, IRS' 
senior management, and IRS employees throughout the nation deserve high 
praise for their earnest response to Congressional mandates for reform. 
It takes more than words to turn around an agency the size and scope of 
the IRS, but the work is well underway. We thank you again for the 
opportunity to share our views.
[GRAPHIC] [TIFF OMITTED] T6583.001

                                

    Chairman Houghton. Thank you very much, Ms. Joyner.
    Would you like to ask questions?
    Mr. Coyne. Yes.
    Chairman Houghton. OK. Mr. Coyne is going to ask questions.
    Mr. Coyne. Thank you, Mr. Chairman.
    I would just like to generally ask the panel: Congress 
passed last year the Taxpayer Bill of Rights 3 as part of the 
Restructuring and Reform Act of 1998. I was wondering if you 
could comment on what effect TBOR3 has had, at least up until 
this point in the filing season.
    Mr. Harris. I would say at this point, really, it has not 
had a significant impact on anything that we have seen this 
year. I think a lot of the things, the rights, until you are in 
a position when you need to exercise them, will not be 
important to you. It is just I think, too early for us to make 
a judgment.
    I think when we have the opportunity to explain the new 
rights to taxpayers, they are very happy that they have them. 
But, fortunately, we have not had to use a lot of them at this 
early stage.
    Mr. Coyne. Are there any additional safeguards that you 
would recommend that Congress consider enacting?
    Mr. Harris. From a taxpayer rights standpoint at this 
point?
    Mr. Coyne. Yes.
    Mr. Harris. I think that we are going to need to have some 
of the things clarified. I think, for example, exactly what 
privilege we have now as preparers or representatives is still 
a little unclear to us in terms of what kind of communication 
is privileged, what types of communications, written and oral. 
So I think clarification may be more important right now than 
additional ones, and I think, again, time may solve all those.
    Mr. Ernst. Just to add to that comment, one of the things 
that we are seeing is the dual role of the tax practitioner. 
Our role as an advocate or support for the taxpayer often gets 
muddied with our dual obligation to also ensure that the return 
is done accurately and that the information that we are getting 
from our clients is correct. So I would concur that 
clarification on what specifically our role is and where our 
role starts and stops would be very useful.
    Mr. Coyne. Getting back to complexity, I wonder if you 
could comment on what are the three most common problems that 
face practitioners and taxpayers during this current filing 
season.
    Mr. Ernst. Well, we have clearly seen that the child credit 
has created a fair amount of concern, and I would say that it 
is primarily because it is something new. It is something that 
people have to understand how it interacts with the other 
aspects of their tax return. So that is probably No. 1.
    Education credits have been both well received but also a 
source of confusion, and probably the most significant thing 
that we are now dealing with are Roth IRA conversions, and 
specifically the rules around Roth IRAs.
    Mr. Harris. I would agree that I think most of the new 
things that came into play this year were the ones that were 
probably the most complex. Fortunately, for most taxpayers, it 
meant that their refund was higher, so they were happy to find 
out that this complexity was there.
    Again, the only other thing that I would mention is this 
creeping in of alternative minimum tax as being a bigger and 
bigger issue. I think if we don't address that issue in the 
future, we may find that to be a major problem in a few years.
    Mr. Coyne. Thank you very much.
    Chairman Houghton. All right. Would you like to ask a 
question, Mr. Portman?
    Mr. Portman. Thank you, Mr. Chairman.
    Let me start by thanking you all for all the work you have 
put into this over the last few years in terms of getting the 
IRS Restructuring and Reform Act enacted, first passed and then 
now being implemented, and we do applaud the work you have 
done. I just read through your testimony quickly, Mr. Harris, 
and you were involved in this for the last few years, helping 
us put together something that made sense. But as you say, it 
is going to take time, effort, and continued vigilance by this 
Subcommittee and others, and I know we are committed to do 
that.
    Mr. Coyne was on the Commission. Mr. Houghton who has been 
Ranking Member of this Subcommittee with Jake Pickle for years, 
understands the problem, and I think we are well positioned to 
be able to follow it.
    I guess my question to you would be along the lines of what 
Mr. Coyne asked. You know, what are the aspects of the 
Restructuring Act that are going to need work. I will just ask 
you about one specific one, and that is electronic filing.
    We put in the bill, the goal of 80 percent electronic 
filing by the year 2007. We put a lot of time and effort into 
coming up with that number. We are now told by the IRS that may 
be unrealistic.
    I think that virtually all tax preparers would have to file 
electronically for us to meet that target. I don't know if you 
agree with that assessment. I would like to know what you think 
about that.
    I also think, though, that all tax preparers are using 
computers, so why not? In other words, it is an ambitious goal, 
but I think it is one that is attainable so long as we can come 
up with the proper incentives and the lack of barriers to be 
able to convince people to file electronically rather than 
printing and mailing.
    So I guess my first question is: Do you agree with my 
assessment? And, second, what percentage of the returns 
currently among your members--and this would include H&R Block 
and the enrolled agents and the accountants. What percentage of 
returns would you say that are prepared by your members are 
filed electronically now? And what are some of the impediments 
you still see?
    Mr. Harris. Well, percentage-wise, obviously this season I 
can't tell you exactly , but it is probably close to the 
average, maybe even slightly below, because a lot of our 
clients are small businesses who file more complex returns 
which cannot be filed electronically today.
    Second, we don't have a great demand in the small business 
community for electronic filing. They typically don't get 
refunds. And electronic filing I think right now is perceived 
as a benefit to people with refunds.
    I have heard the Commissioner's comments about accuracy and 
all these sorts of things. People expect accuracy for the most 
part, and we are going to have to find other ways to bring the 
small business community to customers who demand this service. 
And right now they don't. They see no benefit in it to them, 
and, in fact, they see more disincentives than incentives.
    Mr. Portman. What would be the disincentive?
    Mr. Harris. Well, I think one that is obvious--and I have 
talked to a few people about this--is that they are told that 
they can file electronically, and even though they have a 
balance due, it will not be taken from their bank account until 
April 15.
    What I think is not being understood is that some of these 
people, because they mail their return on April 15, have 3 or 4 
critical days to raise the money, and it is actually a 
disincentive to take it from their account on April 15. Their 
paper check will not be processed that day. So they lose some 
control, and to a small business owner, those 3 days to a week 
can be critical.
    So perhaps if you could put an incentive in that if you 
electronically file the return the money comes out at a later 
date, you would have, I think, a lot of small business owners 
demanding it.
    Mr. Portman. I see Mr. Ernst nodding his head in agreement. 
As you know, I was supportive of having a 30-day extension and 
pushed it hard and wasn't able to prevail in that. But if that 
is a big difference, we ought to try to evaluate that in a more 
systemic way, try to get those statistics, and we would love 
your help in that.
    Mr. Ernst and Ms. Rodgers, any other comments on how we can 
get electronic filing up and whether the current goal is 
realistic?
    Ms. Joyner-Rodgers. I don't know if the goals are 
realistic. We are doing our part to meet the goals. We do file 
balance-due returns. We have filed balance-due returns for 
years. The filing of the balance-due returns does not 
automatically mean the money is taken out of your checking 
account. If you file a balance-due return, you can mail in a 
check with a voucher, just like someone who mails a paper 
return in. So there is no difference in when they get the money 
if you use that voucher to mail your check in.
    Mr. Portman. But then you are having to electronically file 
and post it. You are having to send it in as well.
    Ms. Joyner-Rodgers. That is correct. When you send in a 
return that is a balance-due return, the system is set up now 
that you mail the return into one location; you mail the 
voucher into another area with your check. The same thing can 
also be done electronically. You can electronically file your 
return and mail your check in with the voucher to the lock box.
    Mr. Portman. That is great. Well, the Enrolled Agents, 
again, were critical to this whole reform effort, and you all 
spent a lot of time on this. So your specific input to this 
Subcommittee would be helpful.
    Mr. Ernst, do you have any final words before my time is 
up?
    Mr. Ernst. I will just comment. Nearly 72 percent of our 
returns were filed electronically as of March 15. We will 
electronically file something in excess of 10-million returns 
this year at H&R Block, and that will be primarily from clients 
who have refunds. We do not charge, for the most part, for 
electronic filing as an additional service, and we find that 
many of our clients are quick to take our advice on the 
benefits of electronic filing.
    However, we see very little incentive for most of our 
clients in electronically filing a return where there is a 
balance due. We think that more cooperation and work between 
the IRS and the private sector to look at innovative ways in 
which people can benefit and use a carrot to encourage 
electronic filing is certainly called for.
    Mr. Portman. Well, again, it is up 17.5 percent this year, 
which is a good sign. But if you look at the projections from 
now until 2007, given that marginal increases are more 
difficult to obtain, we may need to look at some of these 
additional incentives or carrots.
    Mr. Chairman, just to make sure it is on the record, 
electronic filing does save the Federal Government an awful lot 
of money. It does save the taxpayers an awful lot of money and 
hassle. And it is certainly something that from a public policy 
point of view we ought to be encouraging.
    Thank you, Mr. Chairman.
    Chairman Houghton. Thank you, Mr. Portman.
    I have just got one basic question, but before that, I am 
fascinated, Mr. Harris, with your talk about the alternative 
minimum tax, because that really is a big, big problem. Would 
you want to expand on that a bit?
    Mr. Harris. Sure. It is becoming a bigger problem every 
year. I think that one of the big problems with it is it is 
perceived so poorly. You get a deduction under the regular tax, 
and all of a sudden you have to compute a second layer of tax, 
and now it is taken away from you. So it is perceived as a very 
unfair tax.
    I think when you look at the reason the alternative minimum 
tax was created, it is no longer serving that purpose. We don't 
have the tax shelters that we used to have. It is also a very 
complex area of the code. Let's take depreciation, for example. 
You have to calculate the depreciation on the asset one way for 
regular tax and a second way for alternative minimum tax and 
then decide if you have enough tax preference items to owe a 
second layer of tax. So it is very complex, it requires a lot 
of paperwork, and it is viewed as unfair.
    I think a more honest approach is needed. If the revenue is 
the issue, we should adjust something so that we are collecting 
the same revenue, but we do it in a way that people are not 
feeling like they are getting backhanded with a second tax that 
they knew nothing about.
    Chairman Houghton. I have got a couple of other questions. 
Mr. Ernst, you mentioned the fact--and I think I quoted this--
that in the IRS planning report they figured by the year 2005 
they would have 33 percent on electronic filing and that by the 
year 2007, 70 percent or 80 percent. And then the Commissioner 
said in the year 2005 we are thinking about 40 or 50 percent.
    Have you heard any contradiction of those numbers?
    Mr. Ernst. Let me address that. What the Service has done 
is in several different cases they have quoted ranges about 
what they would expect in terms of electronic filing. And what 
Commissioner Rossotti quoted this morning was, I believe, 
between 44.5 and 61.6 million returns would be filed 
electronically by 2005, from IRS' Electronic Tax Administration 
Strategy for Growth (p. 51).
    In a separate Statistics of Income Bulletin for Winter 
1998-1999 (p. 185), they have used the low end of that range, 
or 44.5 million returns, which, if calculated based upon the 
135.2 million returns that are expected to be filed in 2005, is 
approximately 33 percent. That is how the math works.
    Chairman Houghton. Right. OK.
    Now, Ms. Rodgers, that is a fascinating ad that you had, 
``Free Fast Tax Refund Loan: Bring in your W-2 and your 1099 
forms to obtain quick cash.'' If I understand it correctly, if 
you do this, somebody goes over your forms with a fine-tooth 
comb and then anticipates the type of return you are going to 
get and, therefore, will give you a loan on that? Is that the 
process?
    Ms. Joyner-Rodgers. This ad comes from the local area, I 
believe, from one of our members that submitted it. And we 
weren't quite sure what this ad meant, either, because it did 
give us concern. They said bring in your W-2s, bring in your 
1099s, and we will electronically file your return.
    It doesn't say anywhere they are preparing your return, but 
that leads you to believe that somebody has to be preparing the 
return. So this was a concern of ours.
    Chairman Houghton. I wonder whether it is legal.
    Ms. Joyner-Rodgers. I don't know. It was just brought in as 
a concern.
    Chairman Houghton. All right. Well, look, I guess the final 
question, really, is: If you had one specific suggestion to 
make to the IRS with your knowledge and your background, maybe 
each of you would like to tell us now. How would you start, Mr. 
Ernst?
    Mr. Ernst. I would encourage the IRS to continue to work to 
reach out to the practitioner community to help them achieve 
their objectives. And I believe that is particularly relevant 
when it comes to objectives like electronic filing.
    Chairman Houghton. How about you, Mr. Harris?
    Mr. Harris. I think the one suggestion I would give to the 
IRS is continue to emphasize training, to understand their 
customer as well as they need to, understand the perspective 
from which they come. I think practitioner groups can be very 
valuable in that, but I think if you don't understand the 
issues that are being dealt with on the other side, it is very 
hard for you to provide service that that person is going to 
feel is of high quality.
    So I think training is going to be a key component. I think 
the divisions within the restructuring bill hopefully will lead 
to better training and understanding the customers that they 
will need to deal with. So I would say training is always the 
No. 1 thing I would advocate.
    Chairman Houghton. All right. Ms. Rodgers?
    Ms. Joyner-Rodgers. I agree that training is very 
important. I go along with that. Along those same lines, I 
think the attitude change, the shift of being more receptive, 
to listen to practitioners, taxpayers, willing to dialog with 
them. It is very, very important to keep the channels of 
communication open.
    Chairman Houghton. So what I hear is, with the possible 
exception of the training function, that internally they are 
doing a pretty good job, but the goal really is to have greater 
merchandising and outreach to the customers.
    All right. Fine. Thank you so much for being with us. We 
really appreciate it.
    The meeting is adjourned.
    [Whereupon, at 3:25 p.m., the hearing was adjourned.]

    [A submission for the record follows:]
                              Indiana Department of Revenue
                                     Indianapolis, IN 46204
                                                     April 21, 1999

A. L. Singleton
Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
    Dear Mr. Singleton:

    Please accept the attached report for inclusion in the 
printed record of the hearing on the 1999 Tax Return Filing 
Season and the IRS Budget for Fiscal Year 2000.
    We believe the Indiana Department of Revenue has developed 
a very unique processing technique that has potential 
applications in other tax agencies. The use of two-dimensional 
barcodes on tax returns provides the accuracy and efficiency of 
electronic filing while providing customers with the filing 
method of their choice. It builds the bridge from paper to 
electronic filing.
    The attached report includes a description of the program, 
its strengths and weaknesses, and processing statistics through 
today with 81% of all Indiana returns logged into our Returns 
Processing System for the 1999 filing season.
    Any questions or requests for further information on the 
two-dimensional barcoding program can be directed to me by 
phone at (317) 232-8039, fax at (317) 232-2103 or e-mail at 
[email protected].
            Sincerely,
                                          Kenneth L. Miller
                                                       Commissioner

                                

Indiana Department of Revenue: Two-Dimensional Barcoding of 
Tax Returns

                              Introduction

    Electronically filed (paperless) tax returns are the goal of all 
tax agencies around the world. By eliminating paper, tax information 
can be processed faster, more accurately and at lower cost, but the 
simple fact is taxpayers are not moving in that direction fast enough.
    The Indiana Department of Revenue processes 2.8 million individual 
income tax returns each year. Returns can be filed electronically with 
Indiana through the Federal/State Joint Electronic Filing Program, 
Federal/State Joint TeleFile Program, Federal/State On-Line Filing 
Program, and via the IT-40 Express, our direct Internet filing program; 
allowing taxpayers to file the way they want. However, each year about 
2.2 million returns are filed on paper. Since more than half of those 
paper returns are computer-generated, the ability to put a two-
dimensional barcode on them would allow for faster processing of that 
paper.
    With less than a $50,000 investment, the Department of Revenue has 
been able to add barcodes to tax returns and process them in a fraction 
of the time it takes with traditional paper. This new procedure will be 
the bridge from paper tax filings to paperless electronic filings.

                         Description of Project

    Indiana receives over 2.8 million individual income tax forms each 
year, half of which are received in the two weeks surrounding April 
15th. Use of electronic filing has replaced about 500,000 of these 
paper documents, and is growing every year, but unfortunately, not fast 
enough. Many Indiana taxpayers are still more comfortable filing a 
paper document through the mail. While this reluctance to filing 
electronically exists, other means are necessary for a smooth 
transition from paper filing to electronic filing. Since more than half 
the paper forms received by the Department are computer-generated, they 
are available in electronic format at some point. By using that 
electronic format to produce a two-dimensional (2D) barcode, we 
eliminate the need for the Department to prepare paper for data entry 
and re-key the form information. We can treat barcoded paper like an 
electronic return.
    The use of a 2D barcode on the tax return is a new and exciting use 
of existing technology. When the Department receives a tax return 
containing a 2D barcode, the return will be scanned into the system and 
eliminate the need to re-enter the return. Currently, a number of 
states are using expensive imaging applications to scan returns into 
their processing systems, but they must prepare the documents, scan 
them, and then reattach any W-2 forms and additional information. They 
also have to review entries that the processing system could not read 
during the scanning process and fix any miscalculations or other errors 
the taxpayer may have made while preparing the return. Because the 
barcode is produced by tax preparation software, the computations for 
the tax return have been verified, eliminating the common errors in 
manually completed tax returns. This allows the Department to scan 
correct information into the system and saves on error correction time. 
The scanning further eliminates the errors introduced by manual data 
entry when the return is re-keyed into the processing system.
    Discussions with Symbol Technology and Andersen Consulting to 
implement 2D barcode technology on Indiana's tax returns began in July 
1998. By August, the Department of Revenue was ready to begin 
discussions with tax preparation software developers about 
incorporating this technology into their existing Indiana tax packages. 
At the National Association of Computerized Tax Processors (NACTP) 
Conference in Milwaukee, an initial request was made for ``any company 
to pilot the program.'' H&R Block stepped forward. The Department also 
asked Access Indiana Information Network, the State of Indiana's 
Internet service provider, to include the barcode in the Internet 
filing program they were developing.
    The Department provided the tax preparation software vendors with 
the piece of software (DLL) they needed to print the 2D barcode as they 
print a completed tax form. The tax preparation software is then used 
by individuals and paid preparers to complete tax forms (including 
schedules and W-2s). When the user decides to print, the completed tax 
form is printed with a 2D barcode in the upper right-hand corner. This 
barcode contains all of the information from the form, schedules, and 
as many as 10 W-2s. The tax forms, schedules, and W-2s are then signed 
and mailed as usual by the taxpayer.
    When received by the Department, the barcoded returns and 
associated payments are scanned directly into Indiana's integrated tax 
system for processing. The integrated tax system contains the software 
necessary to decode and decompress the data contained in the 2D 
barcode. These returns are then validated for compliance, and posted as 
any other return.
    H&R Block was able to complete testing in December, allowing them 
to install software that would generate paper Indiana tax returns in 
all their outlets. Access Indiana completed testing on the barcode 
portion of its program in January 1999; its program went live on the 
Internet on February 5, 1999. Less than six months was needed to 
implement barcoding in Indiana from initial discussions to final 
product rollout.

                            Scope of Program

    For the 1999 filing season, Indiana piloted the use of barcoded IT-
40s, full-year resident individual income tax returns. This form was 
chosen because of the large volume of non-electronic returns, the 
narrow processing time requirement, and the large amount of data that 
needs to be captured.
    The trend in filing within Indiana is for approximately 1 million 
of the 2.8 million individual income tax filers to wait until April 15 
to file their returns. Electronic filers traditionally file early in 
the season then trail off toward the filing deadline. The influx of 
paper on April 15 and 16 at our Returns Processing Center creates a 
traffic jam of paper which needs to be processed within 90 days after 
April 15 per state law to avoid additional expense for the state.
    Additional manpower is needed for the paper preparation and manual 
data entry on those returns. Paper returns are placed in batch files of 
90 for processing purposes. A batch of regular paper returns takes over 
four hours of manual paper preparation and data entry. The equivalent 
steps for a batch of barcoded returns can be completed in less than 15 
minutes.
    The error rate for regular paper returns received and keyed is 
approximately 12%-14%. Those errors may be caused by any combination of 
taxpayer errors, such as transposed numbers, math errors, illegible 
writing, and incomplete returns. Additional errors can be added during 
the manual data entry process. Barcoded returns, on the other hand, 
have an error rate of less than two percent. The error rate is reduced 
by the computer validations in the software programs and the 
elimination of manual data entry.

                        Strengths and Weaknesses

    The Department started receiving barcoded IT-40 tax returns at its 
Returns Processing Center in late January. As of April 21, 1999, nearly 
92,891 barcoded returns have been processed. Based on the percentage of 
computer-generated paper returns received in past years, we anticipate 
well over 100,000 barcoded returns being processed during 1999.
     A batch containing 90 regular paper tax returns takes 
approximately four and one-half hours of manual handling for paper 
preparation and data entry while a batch containing 90 barcoded returns 
takes less than 15 minutes of manual handling.
     Barcoded returns have more than a 99% ``read rate'' 
meaning fewer than 1% have to go through regular paper preparation and 
data entry procedures.
     Returns containing errors are suspended in the processing 
system and reviewed by tax analysts. The 10% reduction in errors 
(10,000 suspended transactions) translates into additional savings of 
330 man-hours.
    The end result for the taxpayers is a faster refund for them and 
more accurate processing at a reduced cost to the state. Faster, more 
accurate refunds also mean fewer telephone calls from taxpayers 
checking on the status of their checks.
    An aspect of the 2D barcode program that professional tax 
practitioners appreciate is the response of their clients. Taxpayers, 
who have been reluctant to accept electronic filing or forms designed 
specifically for automated processing, feel comfortable with barcodes. 
Barcodes have become commonplace in today's society from supermarkets 
to department stores so their addition to the tax form is a natural 
evolution.
    Any 2D barcode program does require support from software 
developers, that is why the Department approached the NACTP in August 
of 1998. Software companies who develop Indiana tax preparation 
software packages and want to include barcodes on their paper forms, 
have to install the DLL file to generate the barcode, they also have 
pass testing with the Department of Revenue to make sure that barcode 
is working properly.
    Some software companies have expressed concerns about the barcoding 
program and how it may affect their software development schedules. 
Issues such as the size of the DLL, the size of the resulting barcode 
image, what printers can print the barcode, and what platforms are 
supported, are common. The Department issued a new revision of our 
specification package for barcoded IT-40 returns in mid-April, 1999.
    At this point in time there are three approved companies to produce 
barcoded Indiana returns:
     Access Indiana is an Internet filing provider,
     H& R Block is producing barcodes in their individual 
outlets nationwide, and
     CSI (Creative Solutions), who only completed testing in 
March 1999, has a tax preparation package that is primarily distributed 
to individual tax professionals.
    Each of the approved vendors has vastly different target audiences 
and distribution methods for its products. These differences show how 
the barcode can be successfully incorporated into a variety of 
programming situations.

                             Final Analysis

    When viewed as a ``bridge to the paperless world, 2D barcodes on 
tax returns has definite benefits in both cost savings and customer 
service. The following statistics are based on barcode processing 
through April 21 of this year, or 92,891 barcoded returns.
     The cost of scanning a barcoded refund return is $.04. The 
cost of scanning a barcoded remit return is $.07.
     The cost of data entry for a regular paper refund return 
is $.73. The cost of data entry for a regular paper remit return is 
$.86.
    Taxpayers who file barcoded returns during the 1999 filing season 
are getting refunds in a fraction of the time it takes to for those who 
filed regular paper returns. The Department has received H & R Block 
barcoded returns from Indiana taxpayers in 48 states plus Guam and the 
District of Columbia.
    The project cost approximately $35,000 in scanning equipment and 
took 200 workdays to complete; the grand total invested by the Indiana 
Department of Revenue was less than $50,000. Additional forms will be 
added at little cost, and with less effort than the pilot program. The 
software already provided to software vendors can be reused for 
additional forms within the Indiana Integrated Tax system.
    The goal for this filing season was to process 100,000 barcoded 
returns. With that goal realized, the reduction in data entry cost and 
in error correction cost will mean that this new system has already 
paid for itself.
    The Indiana Department of Revenue wants to increase voluntary 
compliance by redefining revenue agency customer service. By allowing 
customers to interact with the agency on their own terms, by selecting 
the filing method of their choice, voluntary compliance is encouraged. 
There are currently four true electronic filing options to Indiana 
taxpayers: Federal/State Joint Electronic Filing Program, Federal/State 
Joint TeleFile Program, Federal/State On-Line Filing Program, and IT-40 
Express, the direct Internet filing program. But as long as 2.2 million 
taxpayers want to hold on to paper, attention needs to be focused on 
how that paper is processed.

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