U.S. GOVERNMENT PRINTING OFFICE

66–583 CC WASHINGTON : 2000

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

(

For sale by the U.S. Government Printing Office,

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ii

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

SCOTT MCINNIS, Colorado

RON LEWIS, Kentucky

MARK FOLEY, Florida

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

LLOYD DOGGETT, Texas

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON OVERSIGHT

AMO HOUGHTON, New York, Chairman

ROB PORTMAN, Ohio

JENNIFER DUNN, Washington

WES WATKINS, Oklahoma

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

J.D. HAYWORTH, Arizona

SCOTT MCINNIS, Colorado

WILLIAM J. COYNE, Pennsylvania

MICHAEL R. MCNULTY, New York

JIM MCDERMOTT, Washington

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

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.

iii

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

(1)

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:]

2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON OVERSIGHT

FOR IMMEDIATE RELEASE CONTACT: (202) 225–7601

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.

3

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/WAYSlMEANS/’.

4

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 Combegin this hearing.

mittee as noted above.

Chairman HOUGHTON. Ladies and gentlemen, I would like to

f

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 ReVerDate 20-JUL-2000 11:38 Dec 29, 2000 Jkt 060010 PO 00000 Frm 00008 Fmt 6633 Sfmt 6602 K:\HEARINGS\66583.TXT WAYS1 PsN: WAYS1
5

form 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.

f

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

6

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 firstclass, 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.

7

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,

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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.

9

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

10

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 Booz•Allen & Hamilton, Inc. and Northrop

Grumman, Inc. Booz•Allen 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.

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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.

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• 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-daysa-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

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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

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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.

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Forms By Fax

Taxpayers can receive about 100 different tax forms 7 days-a-week, 24-hours-aday 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

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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 walkin 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.

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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

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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

19

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

20

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 H

I want to ask just three questions, and then I will pass it along

OUGHTON. Thanks very much, Commissioner.

f 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

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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.

22

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

23

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,

24

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

25

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.

26

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.

27

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.

28

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.

29

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.

30

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.

31

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.

32

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.

33

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

34

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.

35

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 fulltime 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 examVerDate 20-JUL-2000 11:38 Dec 29, 2000 Jkt 060010 PO 00000 Frm 00039 Fmt 6633 Sfmt 6602 K:\HEARINGS\66583.TXT WAYS1 PsN: WAYS1
36

ple, 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.

37

1Public Law 105–206, July 22, 1998.

2Fiscal Year 2000 will be the 3rd year of funding for this 5-year initiative.

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.

• 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

38

2000 request is the net result of several increases and decreases, the most significant of which are: • 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 firstclass 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.

39

3Tax Administration: IRS’ Fiscal Year 1999 Budget Request and Fiscal Year 1998 Filing Season (GAO/T–GGD/AIMD–98–114, March 31, 1998). 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.

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.

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 DirecVerDate 20-JUL-2000 11:38 Dec 29, 2000 Jkt 060010 PO 00000 Frm 00043 Fmt 6633 Sfmt 6621 K:\HEARINGS\66583.TXT WAYS1 PsN: WAYS1
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5 IRS’ functional area include such activities as Submission Processing, Telephone and Correspondence, Examination, and Collection.

tor 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.

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.

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 conVerDate 20-JUL-2000 11:38 Dec 29, 2000 Jkt 060010 PO 00000 Frm 00044 Fmt 6633 Sfmt 6621 K:\HEARINGS\66583.TXT WAYS1 PsN: WAYS1
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6 Net tax revenue is defined to include all revenue collected (i.e. income, employment, estate

and gift, and excise taxes) less refunds. 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.

tinue 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.

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.

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

42

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. 10The $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.

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.

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 costeffective 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 CommunicaVerDate 20-JUL-2000 11:38 Dec 29, 2000 Jkt 060010 PO 00000 Frm 00046 Fmt 6633 Sfmt 6621 K:\HEARINGS\66583.TXT WAYS1 PsN: WAYS1
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11 IRS’ Year 2000 Efforts: Business Continuity and Contingency Planning Needed for Potential

Year 2000 Failures (GAO/GGD–98–138, June 15, 1998).

tions 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]

Spending category

Fiscal years

1997–2001

(March 1998

estimate)

Fiscal years

1997–2001

(March 1999

estimate)

Difference

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

aDoes 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 ac- counted 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.

Table 2 shows the CDC Project Office’s spending categories and associated dollar

amounts for fiscal year 1999 as of February 23, 1999.

44

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. 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.

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

Spending category Amount

(in 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

aThe 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. bProvides 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. cTotal 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

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.

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 estiVerDate 20-JUL-2000 11:38 Dec 29, 2000 Jkt 060010 PO 00000 Frm 00048 Fmt 6633 Sfmt 6621 K:\HEARINGS\66583.TXT WAYS1 PsN: WAYS1
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15This $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. 16Disaster 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. 17This tax processing system encompasses IRS’ automated collection function and the print

capabilities for notices to taxpayers. 18This 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.

mate 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

Year of estimatea FY 1997

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.

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.

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

46

19Tax Systems Modernization: Management and Technical Weaknesses Must Be Corrected If

Modernization Is To Succeed (GAO/AIMD–95–156, July 26, 1995). 20Tax Systems Modernization: Actions Underway But IRS Has Not Yet Corrected Management

and Technical Weaknesses (GAO/AIMD–96–106, June 7, 1996). 21Public Law 104–208, September 30, 1996. 22Tax 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).

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.

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,

47

23Public Law 105–277, October 21, 1998. 24GAO/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).

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

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.

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

48

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.

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

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

49

26For the same week in 1998, IRS reported a 91 percent level of access and a 72 percent level

of service.

Table 4.—Toll-Free Telephone Level of Access and Level of Service for the First 3 months of the 1999 and

1998 Filing Seasons—Continued

[in Millions]

1999 1998

(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 abandonedd ........................... 21% 18%

Note: Data are for January 1 through March 27, 1999, and January 1 through March 28, 1998.

aLevel 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). bLevel 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-aday, 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

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

50

27Tax Administration: IRS’ 1998 Tax Filing Season (GAO/GGD–99–21, Dec. 31, 1998). 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.

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.

Table 5.—Individual Income Tax Returns Received by IRS

[In Thousands]

Filing type 1/1/97 to

4/04/97

1/1/98 to

4/03/98

Percent

change:

1997 to

1998

1/1/99 to

4/02/99

Percent

change:

1998 to

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. bTraditional 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 tollfree 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.

51

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.

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

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.

f

Appendix I:—IRS’ Fiscal Year 2000 Budget Request Compared With Proposed Fiscal Year 1999 Operating Level

[Dollars in thousands]

FY 1999 FY 2000 Percent chang

Budget activity Dollars FTEs Dollars FTEs In dollars I

Submission Processing ............................................................................................. $884,000 15,384 $973,599 15,475 10.14 Telephone and Correspondence .............................................................................. 812,651 19,650 991,456 20,874 22,00 Document Matching ................................................................................................. 60,683 1,555 60,395 1,555 –0.47 Inspectiona ................................................................................................................ 0 0 0 0 NA Management Services .............................................................................................. 563,122 6,952 615,941 6,652 9.38 Rent and Utilities .................................................................................................... 664,322 135 671,144 135 1.03 

Subtotal: Processing, Assistance, and Management Appropriation ............. $2,984,778 43,676 $3,312,535 44,691 10.98 

Criminial Investigation ........................................................................................... 367,099 3,824 374,306 3,824 1.96 Examination ............................................................................................................. 1,717,775 23,768 1,835,346 23,588 6.84 Collection .................................................................................................................. 679,385 11,195 707,411 11,095 4.13 Employee Plans and Exempt Organizations .......................................................... 139,845 2,055 148,999 2,109 6.55 Statistics of Income .................................................................................................. 27,513 464 28,731 479 4.43 Chief Counsel ........................................................................................................... 232,572 2,582 242,045 2,582 4.07 

Subtotal: Tax Law Enforcement Appropriation ............................................. $3,164,189 43,888 $3,336,838 43,677 5.46 

Operations and Maintenance .................................................................................. 1,166,583 8,000 1,138,814 6,976 –2.38 Year 2000 .................................................................................................................. 0 0 250,426 239 NA Investments .............................................................................................................. 92,947 184 66,161 184 –28.82 

Subtotal: Information Systems Appropriation ................................................ $1,259,530 8,184 $1,455,401 7,399 15.55 

Information Technology Investmentsb .................................................................... $211,000 0 0 0 NA Year 2000 Emergency Fundc (outside caps) .......................................................... $483,300 239 0 0 NA Earned Income Credit (outside caps) ..................................................................... 143,000 1,972 $144,000 2,095 0.70 

Total ................................................................................................................... $8,245,797 97,959 $8,248,774 97,862 0.04 

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 

ing of the Prime Systems Integration Services Contract. cFor fiscal year 1999, IRS’ Year 2000 efforts were funded from a governmentwide Year 2000 fund that was established in the Omnibus Consolidated and Emergency Supplem

propriations Act for Fiscal Year 1999 (P.L. 105–277).

Source: IRS’ February 1, 1999, budget estimates for fiscal year 2000.

53

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 levels ...................... $299,369

Year 2000 conversion ...................................................................... 250,426

Organizational modernization ........................................................ 140,000

RRA98 .............................................................................................. 40,000

Customer service training .............................................................. 17,000

Increase in Earned Income Tax Credit compliance initiative ..... 1,000

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

Servicewide performance goal Performance measure

FY 1998 FY 1999 FY 2000

Actual Final plan Proposed

Service of each taxpayer Toll-free level of access .. 89.96% ...... 80–90% ....... 80–90%

Number of calls answered, includes automated (million) a.

113.3 ......... 120.3 ........... 120.3

Tax law accuracy rate

for taxpayer inquiries

(toll free).

93.8% ........ 85% ............. 85%

Customer satisfaction—

toll free.

b ................. Baseline ..... c

Number of taxpayers

served—walk in (million)a.

10.1 ........... 10.0 ............. 10.0

Customer satisfaction—

walk-in.

b ................. Baseline ..... c

Customer satisfaction—

field and office examination.

b ................. Baseline ..... c

Field collection quality .. b ................. Baseline ..... c

Field and office examination quality.

b ................. Baseline ..... c

Customer satisfaction—

field collection.

b ................. Baseline ..... c

Service to all taxpayers .. Total net revenue collected (billions) a.

$1,616.0 .... $1,725.0 ...... 1,785.0

Total enforcement revenue collected (billions) a.

$35.2 ......... $33.3 ........... 33.3

54

Table III.1.—Servicewide Performance Measures With Performance Report Based on Fiscal Year 1998 Data—

Continued

Servicewide performance goal Performance measure

FY 1998 FY 1999 FY 2000

Actual Final plan Proposed

Total enforcement revenue protected (billions) a.

$7.2 ........... $7.2 ............. 7.2

Alternative treatment

revenue.

b ................. Baseline ..... c

Productivity through a

quality work environment.

Employee satisfaction

(Servicewide).

b ................. Baseline ..... c

IRS productivity measure (placeholder).

b ................. b .................. Baseline

aWorkload projections only.

bMeasure not applicable to this period.

cTo be determined.

Source: IRS’ Fiscal Year 2000 Congressional Justification.

Table III.2.—Program Performance Measures With Performance Report Based on Fiscal Year 1998 Data

Performance measure

FY

1998

FY 1999 FY 2000

Actual Final plan Proposed

1. Total number of individual refunds

issued (millions) a.

87.9 ... 92.2 ............................. 94.2

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

through electronic returns originators (millions).

17.7 ... 20.9 ............................. 22.9

8. Number of eligible quarterly forms

(Form 941) filed through TeleFile

(thousands).

677.4 1,146.1 ........................ 1,186.0

9. Number of TeleFile returns (millions).5.96 ... 6.6 ............................... 7–7.8

10. Number of primary returns processed (millions) a.

209.8 211.9 ........................... 213.9

11. Percent of individual returns filed

electronically.

19.8% 23% ............................. 25%

12. Percent of dollars received electronically.67.7% 78% ............................. 78%

13. Automated Collection System

(ACS)—online accuracy.

b ......... Baseline ...................... c

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 taxpayer inquires (toll free).93.8% 85% ............................. 85%

18. Accounts accuracy rate for taxpayer inquires.87.9% 87.9% .......................... 88.5%

19. Toll free timeliness ....................... b ......... Baseline ...................... c

20. Toll free customer relations (tax

law and accounts).

b ......... Baseline ...................... c

21. Service Center examination—

overage inventory.

b ......... Baseline ...................... c

22. Service Center examination accuracy.

b ......... Baseline ...................... c

23. ACS level of service ...................... b ......... Baseline ...................... c

55

Table III.2.—Program Performance Measures With Performance Report Based on Fiscal Year 1998 Data—

Continued

Performance measure

FY

1998

FY 1999 FY 2000

Actual Final plan Proposed

24. Toll free—level of service ............. b ......... Baseline ...................... c

25. Toll free—adherence to scheduled

hours.

b ......... Baseline ...................... c

26. Service Center examination—volume/mix (placeholder).

b ......... b ................................... b

27. Customer satisfaction—toll free .. b ......... Baseline ...................... c

28. Customer satisfaction—ACS ........ b ......... Baseline ...................... c

29. Customer satisfaction—Service

Center examination.

b ......... Baseline ...................... c

30. Employee satisfaction—toll free .. b ......... Baseline ...................... c

31. Employee satisfaction—ACS ........ b ......... Baseline ...................... c

32. Employee satisfaction—Service

Center examination.

b ......... Baseline ...................... c

33. Taxpayer Advocate average processing time (days).37.8 ... 37.8 ............................. 37.8

34. Taxpayer Advocate quality customer service rate.80.8 ... 81.3 ............................. 81.3

35. Currency of Taxpayer Advocate

inventory (days).

91.3 ... 91.8 ............................. 91.8

36. Field and office examination—

volume/mix (placeholder).

b ......... Baseline ...................... c

37. Field and office examination

quality.

b ......... Baseline ...................... c

38. Percent of field and office examination cases overage.

b ......... Baseline ...................... c

39. Customer satisfaction—field/office

examination.

b ......... Baseline ...................... c

40. Employee satisfaction—field/office

examination.

b ......... Baseline ...................... c

41. Appeals customer satisfaction ...... b ......... Baseline ...................... c

42. Appeals employee satisfaction ..... b ......... Baseline ...................... c

43. Appeals nondocketed cycle time

(days).

210 .... 210 .............................. 210

44. Field collection—volume/mix ....... b ......... Baseline ...................... c

45. Field collection quality ................. b ......... Baseline ...................... c

46. Percentage of field collection

cases overage.

b ......... Baseline ...................... c

47. Percentage of offers-in-compromise processed within 6 months.60.5% 59.3% .......................... 59.3%

48. Customer satisfaction—field collection.

b ......... Baseline ...................... c

49. Employee satisfaction—field collection.

b ......... Baseline ...................... c

50. Employee Plans (EP) determination letter timeliness (days).118 .... 145 .............................. c

51. Exempt Organizations (EO) determination letter timeliness (days).85 ...... 85 ................................ 81

52. EP examination timeliness (days) 193 .... 200 .............................. 230

53. EO examination timeliness (days) 251 .... 259 .............................. 294

54. EO determination customer satisfaction.

b ......... Baseline ...................... c

55. EP determination customer satisfaction.

b ......... Baseline ...................... c

56. EO examination customer satisfaction.

b ......... Baseline ...................... c

57. EP examination customer satisfaction.

b ......... Baseline ...................... c

58. Employee satisfaction—EP/EO .... b ......... Baseline ...................... c

59. Percent of Statistics of Income

projects delivered on time.

100% 90% ............................. 90%

60. Quality customer service rate ...... 98% ... 90% ............................. 90%

56

Table III.2.—Program Performance Measures With Performance Report Based on Fiscal Year 1998 Data—

Continued

Performance measure

FY

1998

FY 1999 FY 2000

Actual Final plan Proposed

61. Guidance and assistance—volume/mix.

b ......... Baseline ...................... c

62. Litigation case—volume/mix ........ b ......... Baseline ...................... c

63. Chief Counsel quality ................... b ......... b ................................... Baseline

64. Chief Counsel customer satisfaction.

b ......... b ................................... Baseline

65. Chief Counsel employee satisfaction.

b ......... b ................................... Baseline

66. Master file weekend update completion times.66.0% 85.6% .......................... 97.0%

67. Corporate file on-line availability

to front line personnel.

99.7% 99.0% .......................... 99.0%

68. Integrated Data Retrieval System

real time availability to front line

personnel.

99.4% 99.0% .......................... 99.0%

aWorkload projections only.

bMeasure not applicable to this period.

cTo be determined.

Source: IRS’ Fiscal Year 2000 Congressional Justification.

Chairman H

Mr. Coyne, would you like to ask any questions?

OUGHTON. Thank you very much.

f 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.

57

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

58

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?

59

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 efiled 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.

60

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 middleand 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.

61

• 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.

62

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 computerprepared 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 apVerDate 20-JUL-2000 11:38 Dec 29, 2000 Jkt 060010 PO 00000 Frm 00066 Fmt 6633 Sfmt 6621 K:\HEARINGS\66583.TXT WAYS1 PsN: WAYS1
63

pealing 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 middleand 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

64

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 H

Mr. Harris.

OUGHTON. Thanks very much, Mr. Ernst.

f

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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

66

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.

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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 supVerDate 20-JUL-2000 11:38 Dec 29, 2000 Jkt 060010 PO 00000 Frm 00071 Fmt 6633 Sfmt 6621 K:\HEARINGS\66583.TXT WAYS1 PsN: WAYS1
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ports 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.

69

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 percentVerDate 20-JUL-2000 11:38 Dec 29, 2000 Jkt 060010 PO 00000 Frm 00073 Fmt 6633 Sfmt 6621 K:\HEARINGS\66583.TXT WAYS1 PsN: WAYS1
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age 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 H

Now, Ms. Joyner-Rodgers.

OUGHTON. Thank you very much, Mr. Harris.

f 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.

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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 adminisVerDate 20-JUL-2000 11:38 Dec 29, 2000 Jkt 060010 PO 00000 Frm 00075 Fmt 6633 Sfmt 6621 K:\HEARINGS\66583.TXT WAYS1 PsN: WAYS1
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trative 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.

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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 practitionergenerated 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.

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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 efiling 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 efilers 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.’’

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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 selfemployed, tax exempt organizations, and mid to large corporations seems to us to

be the epitome of customer service. We believe this will be tremendously userfriendly 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.

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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.

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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.

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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

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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.

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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

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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

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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

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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 kmiller@dor.state.in.us.

Sincerely,

KENNETH L. MILLER

f 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

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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 rekey 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. AddiVerDate 20-JUL-2000 11:38 Dec 29, 2000 Jkt 060010 PO 00000 Frm 00089 Fmt 6633 Sfmt 6621 K:\HEARINGS\66583.TXT WAYS1 PsN: WAYS1
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tional 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

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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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