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90–816 2003

2003 TAX RETURN FILING SEASON AND THE IRS

BUDGET FOR FISCAL YEAR 2004

HEARING

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

APRIL 8, 2003

Serial No. 108–20

Printed for the use of the Committee on Ways and Means

(

ii

COMMITTEE ON WAYS AND MEANS

BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois 

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 

PHIL ENGLISH, Pennsylvania 

J.D. HAYWORTH, Arizona 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

SCOTT MCINNIS, Colorado 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

ROBERT T. MATSUI, California 

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 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

MAX SANDLIN, Texas 

STEPHANIE TUBBS JONES, Ohio 

Allison H. Giles, Chief of Staff 

Janice Mays, Minority Chief Counsel

SUBCOMMITTEE ON OVERSIGHT

AMO HOUGHTON, New York, Chairman

ROB PORTMAN, Ohio 

JERRY WELLER, Illinois 

SCOTT MCINNIS, Colorado 

MARK FOLEY, Florida 

SAM JOHNSON, Texas 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

EARL POMEROY, North Dakota 

GERALD D. KLECZKA, Wisconsin 

MICHAEL R. MCNULTY, New York 

JOHN S. TANNER, Tennessee 

MAX SANDLIN, Texas

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 1, 2003, announcing the hearing .............................................. 2

WITNESSES 

Internal Revenue Service, Hon. Robert E. Wenzel, Acting Commissioner, accompanied by John Dalrymple, Commissioner of the Wage and Investment 

Division, and Todd Grams, Chief Financial Officer .......................................... 6

U.S. General Accounting Office, James R. White, Director of Tax Issues .......... 46

Internal Revenue Service Oversight Board, Hon. Karen Hastie Williams, 

Member ................................................................................................................. 58

American Bar Association Section on Taxation, Robert E. McKenzie ................ 73

National Association of Enrolled Agents, Claudia Hill ........................................ 97

National Society of Accountants, and National Tax Consultants, William Stevenson ................................................................................................................... 93

Tax Executives Institute, Inc., J.A. (Drew) Glennie, as presented by Timothy 

McCormally ........................................................................................................... 83

SUBMISSIONS FOR THE RECORD 

American Institute of Certified Public Accounts, Robert A. Zarzar, letter ......... 112

Scorse, Gerald E., New York, NY, statement and attachment ............................ 116

(1)

2003 TAX RETURN FILING SEASON AND THE 

IRS BUDGET FOR FISCAL YEAR 2004

TUESDAY, APRIL 8, 2003

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON OVERSIGHT, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:05 a.m., in room 

B–318, Rayburn 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 01, 2003

No. OV–3

Houghton Announces Hearing on

2003 Tax Return Filing Season and

the IRS Budget for Fiscal Year 2004

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 2003 tax return filing season and the Internal Revenue Service (IRS) budget for fiscal year 2004. The hearing will take place on Tuesday, 

April 8, 2003, in the main Committee hearing room, 1100 Longworth House 

Office Building, beginning at 9:00 a.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 Acting Commissioner Robert Wenzel, U.S. General Accounting Office Director of Tax Issues 

James White, and IRS Oversight Board Chairwoman Nancy Killefer. 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 2003 tax return filing season refers to the period from January 1 to April 15 

when U.S. taxpayers will file more than 175 million tax returns, including more 

than 50 million e-filed returns. During this period the IRS is expected to issue more 

than 104 million tax refunds, answer nearly 90 million telephone calls from taxpayers asking for assistance, and its homepage is projected to receive more than 3 

billion hits. 

The Administration’s budget requests $10.4 billion to fund the IRS for fiscal year 

2004. This level of funding will support approximately 100,043 employees who will 

collect about $1.74 trillion in taxes (net of refunds), according to Administration estimates. Beyond supporting the traditional activities of the filing season, the fiscal 

year 2004 budget request addresses the Administration’s key strategic goals for the 

IRS. 

In announcing the hearing, Chairman Houghton stated, ‘‘Every indication says 

that this year’s filing season has progressed well and without serious problems, but 

that does not mean Congress can afford to be complacent, of course, about tax administration. The IRS has done a great job in the manner which it continues to handle the massive volume of tax returns. Our goal now is to work to improve the IRS’s 

interaction with taxpayers and its core business systems.’’

FOCUS OF THE HEARING: 

The hearing will focus on the 2003 tax return filing season and the IRS budget 

for fiscal year 2004. 

3

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Due to the change in House mail policy, any person or organization 

wishing to submit a written statement for the printed record of the hearing should 

send it electronically to hearingclerks.waysandmeans@mail.house.gov, along with a 

fax copy to (202) 225–2610, by the close of business, Tuesday, April 22, 2003. Those 

filing written statements who wish to have their statements distributed to the press 

and interested public at the hearing should deliver their 200 copies to the Subcommittee on Oversight in room 1136 Longworth House Office Building, in an open 

and searchable package 48 hours before the hearing. The U.S. Capitol Police will 

refuse sealed-packaged deliveries to all House Office Buildings. 

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. Due to the change in House mail policy, all statements and any accompanying exhibits for 

printing must be submitted electronically to hearingclerks.waysandmeans@mail.house.gov, along 

with a fax copy to (202) 225–2610, in Word Perfect or MS Word format and MUST 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. Any statements must include a list of all clients, persons, or organizations on whose behalf 

the witness appears. A supplemental sheet must accompany each statement listing the name, 

company, address, telephone and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226–

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above.

you very much, everybody, for being here this morning, a good 

Chairman HOUGHTON. The hearing will come to order. Thank 

f early start. 

I am pleased to have before us today the Acting Commissioner, 

Robert Wenzel, who continues his dedicated service to our Nation, 

and I understand that you have delayed your retirement and are 

going to retire in 2050, is that right, Robert? 

[Laughter.] 

I hope so. By all accounts, this year’s tax filing season is progressing smoothly, but that does not mean that Congress can afford 

to be complacent, of course, about tax administration. The Internal 

Revenue Service (IRS) has done an outstanding job in the manner 

in which it continues to handle the massive volume of tax returns. 

Yet taxpayers and professionals continue to report difficulty in 

communicating with the IRS, and the multi-billion-dollar business 

systems modernization program has yet to fully deliver on its 

promises. 

4

Now, our goals are to oversee the IRS, and yet also to challenge 

it to improve its interaction with taxpayers and its core business 

systems. One obvious way to improve the interaction with the IRS 

is to continue to encourage electronic filing of tax returns. As the 

Subcommittee heard in February, the IRS had entered into an innovative agreement with a consortium of software companies to 

provide free online electronic filing of tax returns for up to 60 percent of taxpayers. This partnership so far has been a success. 

The IRS, however, is still not on track to meet the 80 percent 

electronic filing goal by 2007, and it is well understood that taxpayers, particularly those with a balance due in April, need a 

greater incentive to abandon the habit of filing on paper. The Administration’s proposal to give electronic filers a few extra days in 

which to file their returns is one way to provide such an incentive, 

and I am pleased that the Committee on Ways and Means was able 

to report legislation including this proposal to the U.S. House of 

Representatives on Thursday. 

Another area that deserves our attention is the multi-billion-dollar program to overhaul the computer systems of the IRS. The IRS 

has faltered in this area before, and although there are signs of 

progress behind the scenes, taxpayers are not yet experiencing the 

fruits of modernization. This year and next will be critical in determining whether the modernization effort will succeed. Many systems that have been under development for years, such as the new 

IRS database of tax records, are entering the final stages of development. We will hear an evaluation of the IRS’ efforts to date from 

the U.S. General Accounting Office (GAO), from the IRS Oversight 

Board, and from the panel of tax practitioners who have generously 

volunteered their time to be here today. 

So, I am pleased now to yield to the Ranking Member, Mr. Pomeroy. 

[The opening statement of Chairman Houghton follows:]

Opening Statement of The Honorable Amo Houghton, Chairman, and a 

Representative in Congress from the State of New York 

Good morning. I am pleased to have before us today Acting Commissioner Robert 

Wenzel, who continues his dedicated service to our Nation. 

By all accounts, this year’s tax filing season is progressing smoothly, but that does 

not mean Congress can afford to be complacent, of course, about tax administration. 

The IRS has done a great job in the manner which it continues to handle the massive volume of tax returns, but taxpayers and tax professionals continue to report 

difficulty in communicating with the IRS, and the multi-billion dollar business systems modernization program has yet to deliver fully on its promises. Our goals now 

must be to challenge the IRS to improve its interaction with taxpayers and its core 

business systems. 

One way to improve the interaction with the IRS is to continue to encourage electronic filing of tax returns. As this Subcommittee heard in February, the IRS has 

entered into an innovative agreement with a consortium of tax software companies 

to provide free online electronic filing of tax returns to up to sixty-percent of taxpayers. This partnership has so far been a success. 

Nevertheless, the IRS is still not on track to meet the 80% electronic filing goal 

by 2007, and it is well understood that taxpayers—particularly those with a balance 

due in April—need a greater incentive to abandon the habit of filing on paper. The 

Administration’s proposal to give electronic filers a few extra days in which to file 

their returns is one way to provide such an incentive, and I am pleased that the 

Ways and Means Committee was able to report legislation including this proposal 

to the House of Representatives on Thursday. 

Another area that deserves our attention is the multi-billion dollar program to 

overhaul the IRS’s computer systems. The IRS has faltered in this area before, and, 

5

although there are signs of progress behind the scenes, taxpayers are not yet experiencing the fruits of modernization. This year and next will be critical to determining 

whether the modernization effort will succeed. Many systems that have been under 

development for years—such as the new IRS database of tax records—are entering 

the final stages of development. We will hear an evaluation of the IRS’s efforts to 

date from the General Accounting Office, from the IRS Oversight Board, and from 

the panel of tax practitioners who have generously volunteered their time to be here 

today. 

hearing. We are well into the tax filing season, about 7 days reI am pleased to yield to our ranking Democrat, Mr. Pomeroy.

Mr. POMEROY. Mr. Chairman, thank you for convening this 

f maining, an estimated 175 million tax returns to be filed through 

the 2003 tax season. During this filing season, the IRS will issue 

over 100 million tax refunds and answer nearly 100 million telephone calls from taxpayers seeking assistance. 

Now, the reports we have been getting show that, so far, so good 

this tax season. I would be interested to hear from the Acting Commissioner in terms of how that continues to proceed. 

Of particular interest to the Subcommittee is the proposed budget for the next year, including an increase of 5 percent over that 

enacted for 2003. While I think this is a much more positive indication that—this bipartisan agreement that the IRS needs to have 

the competencies to do its job effectively, and that takes budget dollars. 

I was interested that the Oversight Board recommended an additional $287 million as required in order to keep up to the very important tasks you have been charged to perform, so I will be interested in your comments on that. 

I have also had called to my attention some concerns regarding 

the process, the speed, and the outcome of the pre-certification 

form being designed for those wishing to claim the Earned Income 

Tax Credit (EITC). I will be interested this morning in hearing and 

getting more information on that, as well. 

I think that we have turned an important corner in terms of 

Congressional interaction with the IRS. Just a few years ago, they 

were talking about pulling the tax code out by the roots and attacking the IRS as a way to achieve that objective. Obviously, let us 

debate tax reform, but let us not take it out on the professional 

men and women charged to answer those 100 million phone calls, 

get those 100 million refunds out the door, and discharge the responsibilities they have been tasked to perform under the Federal 

Code. 

So, I commend you for your long public service. I echo the Chairman’s appreciation that you have continued to play a guiding hand 

during this interim and after the new Commissioner is on board. 

It is our pleasure to hear from you again. Thank you, Mr. Chairman. 

[The opening statement of Mr. Pomeroy follows:]

Opening Statement of The Honorable Earl Pomeroy, a Representative in 

Congress from the State of North Dakota 

Once again this year, the Subcommittee on Oversight is holding a hearing on the 

current tax return filing season and pending IRS budget. I thank Subcommittee 

6

Chairman Houghton for conducting this important annual oversight review of the 

Internal Revenue Service. 

More than 175 million tax returns will be filed during the 2003 tax return filing 

season which ends in seven days. During the filing season, the IRS will issue over 

100 million tax refunds and answer nearly 100 million telephone calls from taxpayers seeking assistance. 

Reports indicate that the 2003 tax return filing season is progressing smoothly. 

I want to commend all IRS employees for a job well-done. 

Of particular interest to this Subcommittee is the proposed IRS budget for fiscal year 2004 of $10.4 billion. (This is an increase of 5% over the enacted fiscal year 

2003 budget level of $9.9 billion.) Importantly, the IRS Oversight Board recommends $287 million more than the Administration requested for fiscal year 2004. 

I look forward to the witnesses’ discussion of whether the proposed amount is sufficient and how such resources can be used to provide a fair and balanced approach 

to administering our tax laws. 

We are honored to have once again Robert E. Wenzel, who is the 

Thank you.

Chairman HOUGHTON. Thank you very much, Mr. Pomeroy. 

f Acting Commissioner of the IRS. Mr. Wenzel? 

STATEMENT OF THE HONORABLE ROBERT E. WENZEL, ACTING COMMISSIONER, INTERNAL REVENUE SERVICE; ACCOMPANIED BY JOHN DALRYMPLE, COMMISSIONER, WAGE AND 

INVESTMENT DIVISION, INTERNAL REVENUE SERVICE; AND 

TODD GRAMS, CHIEF FINANCIAL OFFICER, INTERNAL REVENUE SERVICE 

Mr. WENZEL. Mr. Chairman, thank you for this opportunity to 

testify on the 2003 tax filing system, our 2004 budget request, and 

some of the other initiatives we are undertaking on behalf of America’s taxpayers. 

Accompanying me today are Mr. John Dalrymple, the Commissioner of our Wage and Investment Division, and Mr. Todd Grams, 

the IRS’s Chief Financial Officer. Mr. Dalrymple, as I mentioned, 

is the Commissioner of the Wage and Investment Division and has 

principal lead responsibility inside the IRS for the filing season and 

a number of the other programs that you have already stated that 

you have an interest in. 

Mr. Chairman, the 2003 tax filing season has been smooth. Returns are being processed on time, electronic filing is still increasing, and our telephone service is more accessible and accurate. Projected net collections for calendar year 2003 will be approximately 

$1.74 trillion. We also project we will receive 175 million returns 

during the calendar year, which will include over 132 million individual returns, and we expect to issue over 104 million individual 

refunds. As of March 28, the average dollar amount per refund, 

$2010, is up a little over 2 percent from last year. 

Mr. Chairman, e-file continues to be the preferred method of filing for a growing number of taxpayers. This filing season, all individual e-file is up by 10 percent and e-filing online has grown by 

27 percent. E-filing now approaches 41 percent of individual returns filed. 

Part of the recent surge can be attributed to the innovative Free 

File program. As of March 26, the Free File Alliance Members have 

processed and transmitted more than 2.1 million Free File tax returns. This represents approximately 22 percent of the total online 

7

e-file returns. I would urge passage of legislation that extends to 

April 30 the deadline for e-file returns. This incentive could further 

prompt e-file growth. 

The IRS website continues to be extremely popular with taxpayers. For fiscal year 2003 through March 30, there were 2.4 billion website hits, up 24.5 percent over the same period last year. 

Our telephone service is also improving. Through March 22, approximately 83.8 percent of taxpayers who wanted to talk to a customer service representative got through, which compares to 69.4 

percent last year. 

Once connected, taxpayers must get prompt, accurate, and courteous answers to their account and tax questions. The telephone 

correct response rates for tax law and tax account questions are 

about even with last year. 

Taxpayers needing face-to-face help solving individual or business tax problems can get it every day at IRS’s Taxpayer Assistance Centers. For this filing season, through March 22, we served 

over 3.15 million taxpayers at all of our centers. The customer satisfaction rate was 88 percent satisfied and 7 percent dissatisfied, 

which is right on schedule as it relates to our 2003 performance 

plan. 

Mr. Chairman, let me very briefly describe the President’s 2004 

budget request. Simply put, it keeps us on track. The funding provided will help us to build on the improvements we have made in 

enforcement, in service, and productivity while continuing to make 

longer term investments in our business systems modernization 

program. 

The principal strategic focus of the budget is strengthening our 

enforcement activities. The additional funding will help us carry 

out our new strategy that focuses on key areas of noncompliance, 

such as offshore credit card users and the promoters of abusive 

schemes and scams. 

The second focus of the proposed budget is reinvestments. By reinvesting $166 million, primarily from increased productivity, we 

will be able to deliver increases in the performance of key tax administration programs. Now, these are significantly higher than 

the additional dollar and manpower increases requested in the 

budget. 

The third and final focus is business systems modernization. Increased funding is requested for the coming fiscal year, and over 

the course of the business systems modernization program, these 

investments will benefit the IRS and taxpayers by reducing operating cost, increasing cost avoidance, reducing taxpayer burden, 

and boosting tax receipts. 

Mr. Chairman, in conclusion, we are producing yet another successful filing season and trends in customer service and compliance 

are pointing us in the right direction. The President’s budget will 

help us to maintain this upward course to succeed in achieving our 

mission. Thank you. 

[The prepared statement of Mr. Wenzel follows:]

8

Statement of The Honorable Robert E. Wenzel, Acting Commissioner, 

Internal Revenue Service 

INTRODUCTION 

Mr. Chairman, thank you for this opportunity to testify before the Subcommittee 

on the 2003 tax filing season, our FY 2004 budget request and some of the initiatives we are undertaking on behalf of America’s taxpayers. 

Let me also thank you for your continued leadership and guidance as we work 

to provide quality service to America’s taxpayers, ensure compliance with the tax 

laws and seek greater efficiencies throughout the agency. 

Mr. Chairman, I am pleased to report that we are gradually improving our performance across the board. As demonstrated by the 2003 filing season results, we 

are seeing further improvements in key areas, such as e-filing growth and telephone 

service.

2003 FILING SEASON

Mr. Chairman, the 2003 tax filing season has been smooth, with returns being 

processed on time, electronic filing increasing, and improved accessibility and accuracy of telephone service. It continues to demonstrate how we can build on positive 

trends, especially as our major technology and organizational initiatives take effect. 

Projected net collections for CY 2003 will be approximately $1.74 trillion. During 

CY 2003, we also project to receive 175 million returns, including over 132 million 

individual returns, and expect to issue over 104 million individual refunds. As of 

March 28, 2003, the average dollar amount per refund is up almost 2.33% over last 

year, and the average refund is $2,010.

Electronic Tax Administration

E-file continues to be the preferred method of filing for a growing number of taxpayers. Faster refunds, positive acknowledgement of receipt and fewer errors are 

key benefits. Indeed, the American Customer Satisfaction Index shows a very high 

satisfaction rate among electronic filers. For 2002, it was 78 points (out of 100), compared with a mark of 53 for individual paper tax filers. 

In 2002, more than 46.7 million taxpayers (36 percent) filed electronically—a 

16.4% rise over the previous year. This filing season, all individual e-file is up by 

10% and e-filing online has grown by 27%. It is projected for CY 2003 that e-filing 

will constitute approximately 41% of individual returns filed. Part of the recent 

surge can be attributed to the innovative Free File program that was the subject 

of the Subcommittee’s February 13, 2003 hearing. 

Free File reports are most encouraging. As of March 19, Alliance members have 

processed and transmitted more than 2.1 million tax returns. This represents approximately 22% of the total 9.2 million online e-filed returns.

Key Statistics

The following are key 2003 filing season e-file statistics that provide greater detail 

about individual e-file components and programs. All are through April 3, 2003, unless noted.

• Nearly 31 million taxpayers have e-filed their tax returns electronically through 

an IRS-authorized Electronic Return Originator (ERO), a 8.51% increase over 

the same period last year. 

• Approximately 9.2 million taxpayers have filed their tax returns on-line via 

their home computer through a third party transmitter. Online filing is running 

27 percent ahead of last year and is near the 2002 total volume of 9.4 million. 

• Almost 27 million individual taxpayers have chosen to use the Personal Identification Numbers (PINS) in lieu of a written statement when e-filing on-line. 

• Over 3.4 million taxpayers have filed their returns over the telephone using the 

TeleFile system. 

• Nearly 30 million taxpayers have chosen direct deposit of their federal tax refund, a 12.6% increase from the year before. 

• Over 18 million taxpayers have chosen to file both their federal and state tax 

returns simultaneously in a single electronic transmission, up 16% from last 

year’s 16.2 million.

9

New And Popular Options Help Spur E-File Growth For Individual Taxpayers

The enormous popularity of e-file and its continued growth can be attributed to 

both its value to taxpayers and our efforts to make it simpler, more attractive and 

available to more taxpayers. 

Since its modest beginnings as a pilot in 1986, we have added more options each 

year, ranging from payment by credit card, direct deposit of refunds, self-select PINs 

to adding more forms and joint filing of federal and state returns. Free File is a 

natural outgrowth of this approach. For the 2003 filing season, we kept many of the 

options popular with taxpayers and added some new ones. 

Seven New Forms for 2003

For 2003, taxpayers are able to electronically file seven new forms related to their 

Individual Income Tax Returns:

• Form 970—Application to Use LIFO Inventory Method 

• Form W–2G—Guam Wage and Tax Statement 

• Form 1099–G—Certain Government and Qualified State Tuition Program Payments 

• Form 1310—Statement of Person Claiming Refund Due to a Deceased Taxpayer 

• Form 8594—Asset Allocation Statement Under Sections 338 and 1060

• Form 8880—Credit for Qualified Retirement Savings Contributions 

• Form 8885—Health Insurance Credit for Eligible Recipients 

Check Your Refund Status Electronically 

Taxpayers have several options for checking on the status of a refund, including 

a new Internet-based service available on the IRS web site, called ‘‘Where’s My Refund?’’ Taxpayers can get the information they need quickly, efficiently and safely. 

For FY 2003, we expect 15 million uses of ‘‘Where’s My Refund?’’

Simple online instructions guide taxpayers through a process that checks the status of their refund after they provide identifying information shown on their tax return. Once the information is processed, results can include one of several responses, including:

• That a return was received and is in processing; 

• The mailing date or direct deposit date of the taxpayer’s refund; or 

• Whether a refund has been returned to the IRS because it could not be delivered.

The results also include links to customized information that is based on the taxpayer’s specific situation. The links guide taxpayers through the next steps needed 

to resolve any issues that may be affecting their refund. 

Mr. Chairman, the ‘‘Where’s My Refund?’’ service meets stringent IRS security 

and privacy certifications. Taxpayers enter identifying information that includes 

their Social Security Number, filing status and the exact amount of their refund. 

The information must be entered exactly as it appears on the tax return filed with 

the IRS, especially the expected refund amount. The exact information verifies that 

the person is authorized to access that account and avoids an unsuccessful response. 

As of April 2, 2003, the volume for ‘‘Where’s My Refund?’’ is 10.6 million. 

‘‘Where’s My Refund?’’ is accessible to visually impaired taxpayers with the Job 

Access with Speech (JAWS) screen reader used with a Braille display and is compatible with different JAWS modes. 

Taxpayers without access to the Internet can check the status of their refund by 

calling the toll-free IRS TeleTax System at 1–800–829–4477. It must be approximately four weeks (3 weeks for e-file and 6 weeks for paper, on average) since a 

return was filed for the information to be on the system. If the refund information 

is not available, the taxpayer is prompted to wait at least six weeks. The taxpayer 

is told to call a different number the following week where he or she can speak to 

a Customer Service Representative about the refund. Taxpayers must provide the 

first Social Security number shown on the return, filing status and the amount of 

the refund. If the IRS has processed the return, the system will state the date the 

refund will be sent. TeleTax’s refund information is updated each weekend. 

In FY 2002, more than 27 million taxpayers used TeleTax to check on the 

issuance of their refund checks. As of March 22, 2003, the number stands at over 

15.2 million—down 3.9 million from this time last year. 

Another option is the IRS Refund Hotline. This service is available to Form 1040-

type Individual and Joint Filers who want to check the status of their current year 

10

refund. It offers Automated Refund Self-Service Interactive Applications. The tollfree hotline number is 1–800–829–1954. 

E–Payment Options For 2003

Taxpayers can pay taxes electronically by authorizing an electronic funds withdrawal from a checking or savings account, or by using a credit card. E-payments 

can be used to: (1) pay taxes owed on a 2002 income tax return; (2) pay projected 

tax due when requesting an automatic extension of time to file; (3) pay estimated 

taxes for Tax Year 2003; and (4) make a credit card payment on an active installment agreement for past due tax owed for years 1999 and after. 

The IRS entered into partnerships with private industry, including credit card 

processors and tax preparation software developers, to make these electronic payment options available. 

Electronic funds withdrawal is free and the taxpayer decides when the tax payment is withdrawn from the bank account. Electronic funds withdrawal is only 

available to those who e-file, either by computer or by phone. A taxpayer may file 

early and, at the same time, schedule the withdrawal as late as April 15, 2003. For 

returns filed after April 15, the payment is effective on the filing date. 

A 2003 estimated tax payment can be made through electronic funds withdrawal 

only when filing a 2002 tax return via computer, whether or not there is a balance 

due on the return. The estimated tax payment may be the one due in April, June 

or September. Only one estimated tax payment can be made through electronic 

funds withdrawal. This payment cannot be made by phone. 

Last calendar year, 454,278 taxpayers paid their taxes through electronic funds 

withdrawal, an increase of 24% over the prior year. So far this filing season, 207,688 

taxpayers have used this option, a 48.7% increase over the same period in 2002. 

Taxpayers can also make credit card payments whether they file electronically or 

file a paper return. Credit card payments can be submitted via the tax software 

when filing electronically. Credit card payments can also be made over the telephone. Last year, 313,385 taxpayers paid by credit card, an increase of 10 percent 

over the prior year. This filing season, 116,810 taxpayers have used this option. 

The IRS does not set or collect any fees for credit card payments, but the private 

sector companies the IRS authorized to process these payments do impose convenience fees. The tax payment sent to the U.S. Treasury and the convenience fee are 

listed separately on the cardholder’s credit card statement. 

Some tax software developers offer integrated e-file and e-pay combinations for 

those who want to pay a balance due with a credit card. The software accepts both 

the electronic tax return and the credit card information. Subsequently, the tax return and tax payment data are forwarded to the IRS and the credit card data is 

forwarded to the payment processor. 

For the 2003 filing season, the IRS awarded contracts to two companies to accept 

credit card charges from both electronic and paper filers. Each company has its own 

fee schedule and each offers both phone and Internet payment services. The two 

companies are:

• Official Payments Corporation, 1–800 2PAY–TAX (1–800–272–9829) 1–877–

754–4413 (Customer Service) www.officialpayments.com, and • Link2Gov Corporation, 1–888–PAY–1040 (1–888–729–1040) 1–888–658 5465 

(Customer Service) www.PAY1040.com.

Anyone may use these services to charge taxes to an American Express Card, Discover Card, MasterCard or VISA account. VISA joined the IRS credit card program 

in March 2002. 

Electronic Signatures—Personal Identification Numbers (Pins) 

For the 2003 filing season, taxpayers are able to select one of two options for signing their e-filed return. The Self-Select PIN and Practitioner PIN methods allow 

taxpayers to electronically sign their e-filed return by entering a five-digit PIN. The 

five-digit PIN can be any five numbers except all zeros. Receipt of the taxpayer’s 

PIN eliminates the requirement for Form 8453 (U.S. Individual Income Tax Declaration for an IRS e-file Return). The Self-Select PIN method requires the entry 

of each taxpayer’s date of birth and prior year original Adjusted Gross Income 

(AGI), which are used to authenticate the taxpayer. By contrast, the Practitioner 

PIN method does not require the entry of the taxpayer’s date of birth or prior year 

AGI. 

Paperless filing is available to those who prepare their own returns using tax 

preparation software or those who use a tax professional. On a joint return, two 

PINs are required, acting as electronic signatures for both people. 

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The Self-Select PIN Program began in 2001, and by 2002, PINs were used to efile 9.8 million returns. For 2003, certain taxpayers under the age of 16, and those 

who are filing on behalf of a deceased taxpayer, can sign the return using a SelfSelect PIN. 

The Practitioner PIN is an additional electronic signature option for taxpayers 

who use an Electronic Return Originator. Those using the Practitioner PIN method 

are required to complete Parts I and II of Form 8879, IRS e-file Signature Authorization, which the ERO retains. In 2002, Practitioner PINs were used in e-filing 14.9 

million returns. So far this filing season, the number stands at 18.4 million. 

For 2003, the Practitioner PIN is open to all electronic return originators (no 

agreement required). First time filers and taxpayers under the age of 16 are eligible 

to use the Practitioner PIN method. 

Web-Based Help 

The IRS web site at www.irs.gov continues to be extremely popular with taxpayers. For the week ending March 15, 2003, our web site was listed as Number 

2 in the Lycos Top 50 searches. In FY 2002, it posted 3.11 billion hits with more 

than 437 million forms and publications downloaded. For FY 2003 through March 

30, there were 2.4 billion web site hits, up 24.5% over the same period last year. 

A user-friendly format allows even novice users to quickly find the information 

they need. For 2003, taxpayers will notice improvements in the ‘‘Search’’ features 

and capabilities. The embedded thesaurus within the search engine has been expanded to contain an updated repository of the most-frequently searched words, 

phrases, and variations. 

With the help of the site’s interactive features, taxpayers can also calculate proper 

withholding amounts. There is also information about if the interest they pay is 

fully deductible or determine whether they are eligible to claim the child and dependent care credit. 

In addition, the site provides instructions for obtaining copies of prior-year tax returns and has a useful tax event calendar. Taxpayers can even get help with a particular tax question.

ETA Also Easing Business Taxpayer Burden

A strong ETA program may be even more important for reducing burden for businesses than for individual taxpayers. In addition to their annual income tax returns, 

businesses also have to file various employment tax returns and information returns. Businesses also make a lot of payments to the Federal Government, such as 

withholding and unemployment taxes. In fact, payments are a business’ most frequent transaction with the IRS. 

We want to convert all of these transactions to fast, accurate, paper-free electronic 

methods. And we are making progress on a number of fronts. 

During FY 2002, over 3.2 million taxpayers made $1.5 trillion in electronic tax 

payments through the Electronic Federal Tax Payment System (EFTPS), which now 

includes an online option. For 2003, IRS expects more than 4 million taxpayers to 

pay their taxes using the EFTPS System. 

In FY 2002, we also received more than 2.5 million 941 e-file program returns 

(Employer’s Quarterly Federal Tax Return) and 855,000 returns for 941 TeleFile 

and On-Line Filing Programs. In CY 2002, over 320,000 businesses used the 940 

e-file Program (Employers Annual Federal Unemployment Tax Return), and more 

than 24,000 partnerships chose 1065 e-file (U.S. Return of Partnership Income) in 

FY 2002. 

In 2003, the IRS plans to make even further progress serving business’ electronic 

tax administration needs. For example, tax professionals are able to file employment 

taxes for business clients for the first time as part of a new Employment Tax e-filing 

System. 

We also expect that coming e-file upgrades will continue to reduce the paperwork 

burden on small businesses. The enhanced e-file system is part of an ongoing effort 

to reduce small business burden and barriers to electronic filing. This e-file option 

will replace outdated technology that was a burden to both businesses and the IRS. 

Key benefits of the new system are:

• More flexible filing—Forms 941 and 940 can be filed in a single transmission; 

• More specific error conditions—New error conditions pinpoint the location of the 

error and provide complete information for each error identified; 

• Faster acknowledgements—Transmissions are now processed upon receipt and 

acknowledgments are returned in near real-time; and 

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• Integrated payment options—Eligible filers may submit a required payment 

along with their return, subject to limitations imposed by the Federal Tax Deposit Rules.

Businesses will also soon be able to apply for an employer identification number 

(EIN) by using our new on-line EIN Application at irs.gov. When a business applies, 

its EIN will display on the SS–4 for printing and record keeping and they will receive their formal validation letter within 7 days.

New E-Services for Practitioners

We must make it not only technologically possible, but also attractive to both 

practitioners and taxpayers to make a permanent change from paper to electronic 

filing. To build practitioner interest, the IRS will offer later this year a suite of electronic services, such as disclosure authorization, transcript delivery and account resolution, to tax practitioners who file a certain number of returns electronically. 

E-Services are web-based products for third parties to use over the Internet. Third 

parties include electronic return originators, software developers, transmitters, reporting agents, service providers, tax practitioners, payers, and states. There are 

two releases related to e-Services.

• Release 1 includes, Registration, Preparer Tax Identification Number (PTIN) 

Application and Interactive Taxpayer Identification Number (TIN) Matching. 

(Scheduled to be released in the Spring 2003) 

• Release 2 includes, e-file Application, Disclosure Authorization, Electronic Account Resolution, Transcript Delivery System and Bulk TIN Matching. Disclosure Authorization, Electronic Account Resolution and Transcript Delivery System are incentives available for authorized e-file providers who e-filed 100 or 

more individual returns. (Scheduled to be released in the Summer 2003)

The following are the processes and key components of the e-Services program:

• Registration—the first online process a tax professional completes to begin conducting business with the IRS electronically. All tax professionals must register 

as individuals. Transacting business over the Internet allows practitioners to 

complete applications 24 hours a day/ seven days a week. Furthermore, an onscreen acknowledgment confirms that the firm has successfully completed the 

application. Registration is free and easy to use and also enables subsequent 

access to e-Services products in Release 2 with approved application. 

• PTIN Application—the online alternative to the paper Form W–7P, Application 

for Preparer Tax Identification Number. This automated system enables a preparer to request a new or replacement PTIN card and is quick, convenient, and 

easy to use. 

• TIN Matching (For Payers Only)—a pre-filing service offered to payers of income subject to backup withholding. Payers can match the payee’s TIN and 

name combinations against the IRS records prior to submitting an information 

return for up to 25 TINs and name combinations per session. TINs include Social Security number, employer identification number, adoption taxpayer number, and individual taxpayer identification number. Results are provided during 

the session, within 5 seconds. 

• On-Line e-File Application—the new online, integrated application to complete 

for participation in both individual and business IRS e-file programs. This online process permits users to update their records and supplements the paper 

Form 8633 and Form 9041. Applications are acknowledged via e-mail. This application also offers a delegation of authority feature that allows principals and/

or responsible officials of the firm/organization to delegate e-services (Disclosure 

Authorization, Electronic Account Resolution and Transcript Delivery System) 

access to their employees. 

• Disclosure Authorization—allows for the electronic transmission of most Forms 

2848, Power of Attorney (POA) and Declaration of Representatives, and Form 

8821, Tax Information Authorizations (TIA) to the Centralized Authorization 

File. This transmission also provides the capability for authorized, authenticated, and registered users to create, update, revoke, inquire and delete POA 

and TIA records via the Internet. 

• Electronic Account Resolution—a new method for improving the process of receiving and responding to account related-inquiries from practitioners over the 

Internet, e.g., account problem, complex refunds, installment agreement, notice 

and payment tracers). Practitioners are provided with immediate confirmation 

of receipt of inquiry and have the capability to make follow-up requests. Responses are provided within 3 business days. 

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• Transcript Delivery System—will provide secure, online transmission of return 

and return information (e.g., account transcripts, return transcripts, records of 

account, wage and income documents and verification of non-filing letters) in 

professional, standardized formats to authorized users, such as a tax practitioner. • Bulk Taxpayer Identification Number (TIN) Matching—a new service to payers 

that allows for the matching of up to 100,000 TIN and name combinations. 

TINs include Social Security number, employer identification number, adoption 

taxpayer number, and individual taxpayer identification number. Results provided electronically within 24 hours. Responses are sent to requestor’s secure 

electronic mailbox address. 

Telephone Assistance 

The IRS provides various services through its toll-free telephone lines. Taxpayers 

can call the IRS Tax Help Line for Individuals, 1–800–829–1040, to get answers to 

their federal tax law and account questions. They can also order tax forms, instructions and publications by calling 1–800 TAX–FORM, and listen to pre-recorded tax 

information on over 100 topics by calling our TeleTax number at 1–800–829–4477. 

Help for small businesses, corporations, partnerships and trusts who need information or help preparing business returns is also available at the Business and Specialty Tax Line at 1–800–829–4933. Customers calling this number can apply for 

a new EIN and receive help on employment, partnership, corporation, estate, gift, 

trust and excise taxes,as well as issues related to Federal Tax Deposits. 

These toll-free numbers are available from 7:00 a.m. to 10:00 p.m. (local time) 

weekdays. In addition, the 1–800–829–1040 customer service line is available from 

10:00 a.m. to 3:00 p.m. (local time) on Saturdays from January 25 though April 12 

and on Sunday, April 13. 

Telephone service is improving. Through March 22, 2003 approximately 83.8% of 

taxpayers who wanted to talk to a customer service representative got through, compared to 69.4% percent last year. We set a goal of 72% for FY 2003. 

We are also providing better service by identifying taxpayers’ needs through our 

tax law screening and then getting them to the right person to answer their question. Our process has reduced the abandoned rate from 13.8% to 7.8%. In addition, 

the transfer rate was reduced from 21.6% to 17.5%. These two indicators illustrate 

that a higher percentage of taxpayers are reaching the right Customer Service Representative (CSR) without being transferred and/or having to call back while waiting 

to speak to a CSR. 

Once connected, taxpayers must get prompt, accurate and courteous answers to 

their account and tax questions. The telephone correct response rates for tax law 

and tax account questions are about even with last year—81.1% and 87.9% respectively—as compared to 83.5% and 88.4% over the same period last year. 

In addition, 26.7 million taxpayers (includes ‘‘Where’s My Refund’’ through 3/22) 

used our automated services to get information, including refund status, a 5.5% increase since last year, and the upward trend continues. 

Taxpayer Assistance Centers 

Taxpayers needing face-to-face help solving individual or business tax problems 

can get it every business day at every IRS Taxpayer Assistance Center (TAC). Taxpayers can receive assistance with issues such as, IRS notices, payment plans, federal tax liens and levies, innocent spouse claims and offers in compromise. For the 

fiscal period beginning October 01, 2002 through March 22, 2003, we served over 

4.53 million taxpayers at all TACs. For the 2003 filing season beginning January 

01, 2003 through March 22, 2003 we served over 3.15 million taxpayers in all TACs. 

The customer satisfaction rate is 88% satisfied and 7% dissatisfied, which is on target for our FY 2003 performance plan. 

At many sites, walk-in service is being offered on 12 Saturdays through April 12. 

The Saturday Service sites were selected based on their weekend accessibility, yearround operational status, and high traffic volume. They include non-traditional locations, such as shopping malls, community centers and post offices. 

We encourage taxpayers to call ahead for appointments at their convenience or 

to hear a recorded message with office hours and locations. Local phone numbers 

for TACs are available in telephone directories and are posted on the IRS web site 

under ‘‘The Newsroom’’ and other pages. Look for ‘‘Contact My Local Office’’ under 

the ‘‘Resources’’ section. 

Individual taxpayers with incomes of $35,000 or less can also receive free income 

tax return preparation and e-file help at our TACs. We extend this courtesy return 

preparation service to all taxpayers qualifying for the Earned Income Tax Credit, 

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without placing the government in competition with private industry. All of these 

returns are e-filed; we do not deal with paper individual returns. 

Free tax preparation and e-file are also available in many communities through 

the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly 

(TCE) programs. Volunteers help prepare basic tax returns for low-income taxpayers, persons with disabilities, the elderly, and non-English speaking people. This 

filing season through March 22, 2003, return preparation at VITA and TCE sites 

has increased approximately 28% over the same period on 2002. Taxpayers can call 

1–800–829–1040 to find their nearest VITA or TCE site. They may also call AARP—

the largest TCE participant—at 1–877–227–7669 to see if there is a Tax Aide site 

in their community. 

To better serve low-income taxpayers, the IRS’s Stakeholder Partnership, Education and Communication (SPEC) organization is establishing extensive partnerships with external groups such as local governments, non-profit organizations, private for-profit businesses, and others to create community coalitions. We are focusing our limited resources on providing technical expertise and training while encouraging the community partners to supply resources such as volunteers, space and 

computer equipment. This business model has rapidly gained national recognition 

and acceptance. 

Our goal is to make our partners as self-sufficient as possible and to identify those 

organizations that could make available needed resources. This new approach allows 

the IRS to expand access to low-income taxpayers, provide greater free tax return 

preparation and filing, and sustain these services over time. 

Tax Materials And Assistance In Spanish

(Ayuda en Espan ̃ ol) 

Taxpayers needing federal tax information in Spanish can find it in the form of 

our recorded tax topics, free tax publications and toll-free telephone assistance. 

TeleTax, the toll-free automated service, is also offered in Spanish, providing helpful tax topics and refund information. 

Free Spanish publications are available by calling toll free 1–800–TAX–FORM (1–

800–829–3676) or on the IRS Web site, www.irs.gov, under ‘‘Forms and Publications.’’ Some of the more popular ones are:

• Publication 1SP, ‘‘Derechos del Contribuyente’’ (Your Rights as a Taxpayer) 

• Publication 579SP, ‘‘Como Preparar la Declaracio ́n de Impuesto,’’ which explains who has to file a federal tax return and other important topics, such as 

which form to file, who are dependents, what income is taxable and nontaxable, 

and what some of the more common tax credits are 

• Publication 596SP, ‘‘Cre ́ditoporIngreso del Trabajo,’’ which provides details on 

the Earned Income Tax Credit

Taxpayers can also talk with a Spanish-speaking IRS representative by calling 

toll free 1–800–829–1040 between the hours of 7:00 a.m. and 10:00 p.m. on weekdays and 10:00 a.m. and 3:00 p.m. (local time) on Saturdays through April 13. Spanish-speaking taxpayers can also go to a special Spanish section on our web site. 

Spanish and English services are available too at all IRS kiosks, as well as Russian, 

Korean and Chinese at our Flushing, NY kiosk in the Queens Public Library. 

In addition, we offer Spanish language services in areas with high-density Spanish-speaking populations and include employees recruited from these same communities. We offer this in-person service as a matter of routine. 

In these and at all other offices, we also have contract telephone interpreter services available to help us to provide service to any customers who do not speak 

English. These interpreter services include Spanish as well as almost every other 

common language in the world. 

To improve outreach and service to Spanish-language taxpayers, the IRS also 

joined with the nationwide Spanish-language Telemundo Network to host a special, 

one-hour tax program on March 8. The program, called ‘‘Los Impuestos y Usted’’ focused on practical tips for claiming tax credits, preparing the federal income tax return, free electronic filing and other helpful topics. 

CD-ROMs 

Joining our small catalogue of taxpayer CD-ROMs, the Small Business/Self Employed Electronic Marketing Card is an exciting and innovative product designed to 

help the Small Business owner and the Self-Employed taxpayer learn more about 

the IRS Small Business/Self Employed Division. The CD-ROM is the size of a business card and contains our mission, interactive information on outreach products, 

15

e-filing and e-paying, stakeholder groups, contacts, and live links to our web site. 

Taxpayers may order the CD-ROM by visiting www.irs.gov/smallbiz and ordering 

Publication 4115. 

Braille Tax Material 

A variety of Braille material may be ordered at no charge by calling the IRS at 

1–800–TAX–FORM (1–800–829–3676). This can also be downloaded from the ‘‘Accessibility’’ portion of the IRS Web site at IRS.gov. The Braille print files are in .brf 

format and can be sent directly to an embosser for high-quality Braille output. 

Included in this offering of accessible materials are 50 of the most popular individual tax forms in accessible PDF format. Also called ‘‘Talking Tax Forms,’’ these 

files may be opened, filled-in, and printed for filing purposes by blind taxpayers 

using screen readers. The Alternative Media Center prepares accessible versions of 

IRS tax materials for disabled employees and taxpayers alike. Inquiries regarding 

accessible IRS documents and materials may be sent via email to altmc@irs.gov.

MODIFICATIONS TO THE IRS RESTRUCTURING 

AND REFORM ACT OF 1998 (RRA 98)

Mr. Chairman, in the FY 2004 budget submission, the Administration again proposed modifications to RRA 98. Last year, the House passed legislation that contained five of these proposals; the Senate did not act before adjourning. We commend the House for its actions and believe that these modifications preserve the intent of the Act while allowing us to administer it more efficiently and effectively. 

We urge the Congress to take similar action this year. 

There are six parts to the Administration’s proposed modifications. The first modifies infractions subject to Section 1203 of RRA 98 and permits a broader range of 

available penalties. Our ability to efficiently administer the tax code is currently 

hampered by a strong fear among our employees that they will be subject to unfounded 1203 allegations, and perhaps lose their jobs as a result. This proposal will 

reduce employee anxiety resulting from unduly harsh discipline or unfounded allegations. 

The second part adopts measures to curb the large number of frivolous submissions and filings that are made to impede or delay tax administration. 

The third permits the IRS to enter into installment agreements with taxpayers 

that do not guarantee full payment of liability over the life of the agreement. It allows the IRS to enter agreements with taxpayers who desire to resolve their tax obligations but cannot make payments large enough to satisfy their entire liability and 

for whom an offer in compromise is not a viable alternative. 

The fourth allows the IRS to terminate installment agreements when taxpayers 

fail to make timely tax deposits and file tax returns on current liabilities. 

The fifth streamlines jurisdiction over collection due process cases in the Tax 

Court, thereby reducing the cycle time for certain collection due process cases. 

The sixth and last provision would eliminate the monetary threshold for IRS 

Chief Counsel reviews of offers in compromise. 

The Administration also has two proposals to improve IRS efficiency and performance from current resources. The first would modify the way that Financial Management Services (FMS) recovers its transaction fees for processing IRS levies by permitting FMS to retain a portion of the amount collected before transmitting the balance to the IRS, thereby reducing government transaction costs. The offset amount 

would be included as part of the 15-percent limit on levies against income and 

would also be credited against the taxpayer’s liability. 

The second proposal would encourage growth in electronic filing by extending 

from April 15 to April 30 the return filing and payment date for the filing of individual income tax returns, if the return is filed electronically and any balance due 

is paid electronically.

FY 2004 RESOURCE REQUEST

For FY 2004, the IRS is requesting resources totaling $10.437 billion and 100,043 

FTE (full time equivalent). This represents an increase of $521 million (5%) over 

the President’s FY 2003 request. 

Mr. Chairman, the FY 2004 budget request can be best viewed through its three 

strategic drivers that are derived from the IRS performance-based budgeting process. 

First is Compliance. The principal strategic focus of the President’s FY 2004 IRS 

budget is strengthening compliance activities, especially in the area of high-income, 

high-risk taxpayers and businesses, and abusive tax avoidance schemes and offshore 

trusts. A legislative proposal would also authorize the IRS to contract with privateVerDate jul 14 2003 21:37 Dec 31, 2003 Jkt 090816 PO 00000 Frm 00019 Fmt 6633 Sfmt 6621 E:\HR\OC\90816.XXX 90816
16

sector collection agencies to supplement current IRS tax collection efforts. The budget further includes a major initiative to reduce erroneous payments in the Earned 

Income Tax Credit (EITC) Program. 

Second is Reinvestments. We are committed to better utilizing the resources the IRS already has by ‘‘reinvesting’’ base resources. By reinvesting $166 million, primarily from increased productivity within the base budget, the IRS will be able to 

deliver increases in the performance of key tax administration programs that are 

significantly higher than the additional dollar and FTE increases requested in the 

budget. 

Third is Business Systems Modernization. Investments in modernization through the BSM program would continue with a total request of $429 million, an increase 

of $65 million above the FY 2003 appropriation. Over the course of the BSM program, these investments will benefit the IRS and taxpayers by reducing operating 

costs, increasing cost avoidance, reducing taxpayer burden and increasing tax receipts. 

Mr. Chairman, I also want to draw the subcommittee’s attention to a new task 

that was added to the IRS’s traditional tax administration duties and operations. 

In August 2002, the President signed Public Law 107–210, the Trade Adjustment 

Assistance Act of 2002. Title II of this statute provides a refundable tax credit for 

the cost of health insurance for certain individuals who receive a trade readjustment 

allowance or a benefit from the Pension Benefit Guaranty Corporation (PBGC). The 

tax credit is equal to 65% of the health insurance premium paid by eligible persons 

to cover them and qualifying family members. The IRS must implement the Health 

Coverage Tax Credit provisions. We are requesting $35 million for Health Insurance Tax Credit Administration. The amount provided in the Consolidated Appropriations Resolution, 2003 ($70 million) will be used to provide software, hardware, and contract services to develop 

the system mandated by Public Law. The IRS will oversee the contractor’s work. 

Let me now provide the highlights of our proposed FY 2004 budget. 

Compliance

Additional Funds Requested to Strengthen Tax Administration Compliance 

(+$133M and +1,700 FTE) 

The Internal Revenue Service is realigning its audit resources to focus on key 

areas of noncompliance with the tax laws. The strategy represents a new direction 

for the agency’s compliance effort. Following months of research and planning, the 

new approach is focusing on high-risk areas of noncompliance: (1) the promotion of 

abusive tax schemes; (2) the misuse of devices such as offshore accounts to hide or 

improperly reduce income; (3) the use of abusive corporate tax avoidance transactions; (4) the underreporting of income by higher-income individuals; (5) non-filing 

by higher-income individuals; and (6) the Earned Income Tax Credit program. 

Our effort will generally focus first on promoters and then on participants in these 

various schemes. The initiative will feature new and enhanced efforts on these most 

serious compliance problem areas. 

Our Small Business/Self-Employed (SB/SE) Operating Division will handle the 

new effort in these key areas affecting individuals and businesses. Compliance efforts will continue in other parts of the agency, such as the tax shelter initiative 

in the Large and Mid-Sized Business (LMSB) Division. 

To strengthen compliance programs across the board, the IRS budget request includes $133 million to fund numerous compliance initiatives. Key examples of these 

initiatives are: 

Address Complex Enforcement Issues of Small Business/Self Employed Taxpayers

(+$56M and 887 FTE): Additional staff will be provided to all major compliance programs in SB/SE and new workload selection systems and case building techniques 

will be employed. New revenue agents (exam work) and revenue officers (collections 

work) will be applied in the field to address offshore credit cards, abusive trusts and 

shelters, high-risk/high-income taxpayers, and other priority work. Additional staff 

at call sites will be employed to specialize in out-going calls and offset levies. Greater resources in the Automated Substitute for Return (ASFR) program will allow us 

to focus on high-income taxpayers who do not file returns. Also, staff devoted to frivolous returns and frivolous refund claims will be increased to counteract recent 

growth and aggressiveness by promoters in this area. 

Address Passthrough Entities and Abusive Trusts of Large Business Taxpayers

(+$22M and 258 FTE): This increase will allow the IRS to apply the most experienced revenue agents to the highly complex and technical issues of passthrough entities—such as partnerships, trusts and S-corporations—and abusive corporate tax 

shelters while maintaining minimum coverage of other priority exam work. 

17

Counterterrorism (+$6M and 24 FTE): The IRS is heavily involved in the fight 

against both global and domestic terrorism. Demand for the financial investigative 

skills of Criminal Investigation (CI) special agents remains high. After September 

11, 2001, over 273 FTE in FY 02 and 206 FTE projected in FY 03 were redirected 

from CI tax enforcement activities to counterterrorism related activities. CI is working on counterterrorism with the Treasury Executive Office of Terrorism Financing 

and Financial Crimes and is an integral part of the nation’s war on terrorism.

Use of Private Sector Contractors for Collection of Taxes Due

There is a significant and growing backlog of cases involving individual taxpayers 

who are aware of their tax liabilities but are not paying them. We believe that many 

of these individuals are capable of paying their outstanding tax liabilities. This is 

unfair to every hard-working American who pays his or her fair share of taxes. To 

address this problem, the President’s budget proposes to support the IRS’s collection 

efforts with private collection agencies (PCAs) that will engage in specific, limited 

activities, allowing the IRS to concentrate its resources on more complex cases and 

issues. 

By eliciting the assistance of PCAs, the IRS expects to be able to address this important part of the existing backlog of collection cases. Over time, the IRS expects 

that PCAs would assist the IRS in handling more collection cases at an earlier stage 

in the process—before the accounts become stale and uncollectible. PCAs have proven successful with over 40 states and have been used for many years with other 

federal programs. PCAs would hold no enforcement power and their employees 

would be subject to the same rules that apply to the IRS governing taxpayer rights 

and confidentiality. Consequently, taxpayer protections would be unaffected. The 

IRS would be required to closely monitor the activities and performance of the PCAs 

to ensure these rules are followed.

Reduce Inappropriate Payments in EITC Program (+$100m and +650 FTE)

The EITC program benefits millions of low-income workers. The EITC lifts nearly 

4 million people, especially single mothers, out of poverty each year. However, the 

current error rate for the EITC program is too high. In 1999, between 27 and 32 

percent of EITC claims—or between $8.5 billion and $9.9 billion—were paid in 

error. EITC has been consistently listed among high-risk federal programs. Congress has recognized this by providing a separate appropriation that has been used 

for EITC compliance enforcement. 

The FY 2004 Budget requests an additional $100 million to begin a new strategy 

for improving the EITC program. This approach, suggested by the Department of 

Treasury EITC Task Force, concludes that the IRS must obtain additional information on certain EITC eligibility criteria before payment of the EITC-portion of refunds. A major portion of the request will be used to invest in suitable information 

technology and develop business processes. 

The IRS will begin to use an integrated approach to address potential erroneous 

claims by identifying cases that have the highest likelihood of error before they are 

accepted for processing and before any EITC benefits are paid. 

A key part of this strategy is to begin certifying taxpayers who claim qualifying 

children on the relationship and residency requirements. In addition, the IRS will 

use limited additional taxpayer information, in combination with taxpayer-specific 

IRS historical data, third party data and error detection systems to detect and 

freeze the EITC-portion of refunds that pose a high risk or filing status errors or 

income misreporting. The IRS will seek to minimize the burdens on taxpayers by 

using existing databases and other sources of information to verify eligibility in advance. This integrated approach is designed to provide far greater assurance that 

EITC payments go to the individuals who qualify for the credit, without sacrificing 

the goals of the EITC program. 

Reinvestments

Resources Freed-Up within the Base Budget for Reinvestment (Ø$166 

million and Ø2,145 FTE) 

The President’s budget submission states, ‘‘In FY 2004, the IRS will improve performance primarily through better management and fundamental reengineering of 

business processes, and secondarily by increases in resources.’’

Through the IRS’s Strategic Planning and Budget process, the agency’s senior 

managers identified significant potential for the more effective and efficient use of 

current resources. A total of $166 million and 2,145 FTE were identified for reallocation within the base budget in FY 2004. Examples of sources for reallocations include:

18

Submissions Processing/Electronic Filing (¥$13.5M and ¥366 FTE): IRS’s continued success with electronic filing provides a great opportunity to reduce and reallocate resources from submission processing to strengthen compliance and improve 

customer service. The FY 2004 budget reflects the first-ever closing of a submissions 

processing pipeline (Brookhaven, NY) as the labor-intensive processing of paper filings decreases across the system. 

Compliance Support Reengineering (¥$26M and ¥394 FTE): Reengineering of 

the compliance program in SB/SE will improve operational efficiency and workload 

selection, and reduce taxpayer burden. Business process improvements and centralization of the Compliance Support Organization will generate FTE that can be 

reapplied in front-line activities. 

Remittance Transaction Research (¥$9M and ¥199 FTE): Creating a central data 

repository (taxpayer payment data and related images) for all individual taxpayer 

payment documents will increase efficiency, improve accuracy of posting payments, 

and reduce the time it takes to resolve payment issues. 

Information Technology (¥$46M and ¥39 FTE): Efficiencies through reengineering and other efforts will reduce expenditures in end-user support, computing center support, and network operations and maintenance.

Reinvestment of Reallocated Funds within the Base Budget (+$166 million 

and +649 FTE):

Resources reallocated within the base budget would be used to improve Customer 

Service and strengthen Compliance programs. The specific initiatives include:

Reduce Compliance Staff Support of Filing Season (+$13M and +154 FTE): Due 

to lower-than-needed staff levels in Field Assistance Programs for individual taxpayers, the IRS must detail compliance staff from SB/SE to field assistance during 

the filing season to meet taxpayer demand. Under this initiative, we would hire additional staff in field assistance so that the level of service in assistance is maintained while the number of compliance details can be reduced, and compliance staff 

can devote more time to compliance activities. 

Improve Telephone Service to Small Business/Self Employed Taxpayers (+$11M 

and +184 FTE): Additional resources are needed to assist SB/SE taxpayers in Accounts Management phone services. These staff members assist taxpayers with a 

broad range of issues concerning taxpayers’ accounts. 

Information Technology (+$33M and 0 FTE): IT investments will expand web 

services to taxpayers, replace aging servers, purchase needed software, and expand 

high speed and secure access for revenue agents at remote sites. 

Continued Investment in Business Systems Modernization

(+65 million and 0 FTE)

The BSM program request totals $429 million, an increase of $65 million over the 

current FY 2003 level. The BSM account provides for modernizing IRS-wide business practices and acquiring new technology. 

We use a formal methodology to prioritize, approve, fund and evaluate our portfolio of BSM investments. This methodology enforces a documented, repeatable and 

measurable process for managing investments throughout their life cycle. The IRS 

Core Business System Executive Steering Committee, chaired by the Commissioner, 

approves investment decisions. This executive-level oversight ensures that products 

and projects delivered under the BSM program are fully integrated into IRS Business Units. 

Highlights in BSM for FY 2004 include: (1) modernized e-File will provide electronic filing for large and small businesses; (2) implementation of the Integrated Financial System will replace the current antiquated administrative core accounting 

system; (3) the first release of the Custodial Accounting Project will put individual 

taxpayer data in a data warehouse for easier access and analysis; and (4) the Customer Account Data Engine and Internet Refund Fact of Filing will be revised for 

tax law changes to support the 2004 filing season. Given the changes in the FY 2003 

and FY 2004 BSM funding totals, we are currently reviewing the FY 2004 allocation 

project-by-project to determine the optimum plan. They are discussed in greater detail below.

Achievements and Benefits

In FY 2002, the BSM Program provided real benefits, including a secure online 

system and system management capability and the aforementioned Internet Refund/

Fact of Filing pilot program. In FY 2003 and FY 2004, additional supporting infrastructure services will be added, and an increasing number of business and internal 

19

applications will be delivered, creating benefits for taxpayers and practitioners and 

enabling internal efficiencies. 

The FY 2003 delivery plan will move the BSM Program into a wide spectrum of 

critical new areas:

• Customer Account Data Engine (CADE) R1. In July 2003, CADE will begin 

processing single 1040EZ filers (both electronic and paper). Taxpayers covered 

under CADE will receive their refunds about 40% faster than under Master File 

processing, if they use direct deposit. More importantly, we will have taken the 

first of many steps to replace the 40-year-old Master Files. 

• Custodial Accounting Project (CAP). We will continue development and testing 

of CAP Release 1 scheduled for deployment in the first quarter of FY 2004. CAP 

will create a repository for modernized Individual Master File data and will address documented financial material weaknesses. 

• Enterprise Architecture (EA) and Tax Administration Vision and Strategy 

(TAVS). TAVS focuses on creating a long-term vision of how the agency should 

work in the future. Delivery and acceptance of EA Release 2.0 was a significant 

achievement. We also conducted a planning effort called ‘‘TAVS Refresh’’ to 

identify gaps and outdated information in TAVS which we plan to address in 

FY 2003. 

• e-Services. e-Services sub-releases will provide: registration of electronic return 

originators, Taxpayer Identification Number (TIN) matching, initial partner relationship management capabilities, electronic account resolution, transcript delivery, secure e-mail, and bulk TIN matching. 

• Infrastructure (STIR and Infrastructure Shared Services [ISS]). This project 

provides the basic secure infrastructure necessary to support the modernization 

effort including e-Services R1, IR/FoF, Internet Employer Identification Number 

(EIN), and subsequent FY 2003 releases. 

• Integrated Tax Administration Business Solutions (ITABS). Projects to ensure 

we understand requirements and select COTS (commercial off-the-shelf) solutions that can effectively integrate business processes in IRS functions. 

• Internet EIN. This application will automate Employer Identification Number 

(EIN) requests over the Internet. Currently, the EIN request process is cumbersome and people-intensive, often resulting in unacceptable delays for those 

starting new businesses. 

• Integrated Financial System (IFS). Although the first release of the new financial system will not go live until October 1, 2003 (therefore, an FY 2004 delivery 

project), it is likely to be our most work-intensive project during FY 2003. 

• Modernized e-file. The Modernized e-file project will be in pre-deployment testing for all of FY 2003, with initial deployment in early CY 2004, with Forms 

1120 and 990 e-file capabilities.

BSM benefits delivered in FY 2004 will include:

• Modernized e-file will provide electronic filing for large and medium-sized businesses (Forms 1120 and 990), as well as a new Tax Return Data Base, which 

will greatly improve customer service and issue resolution. 

• e-Services will provide support for the 2004 Filing Season as well as implement 

support structures for modernized e-file planned for implementation later in the 

fiscal year. 

• IFS will develop the detailed functional requirements to support internal management requirements for financial and management planning, execution and 

reporting. 

• CAP will provide an integrated enterprise data warehouse to support organizational data needs, performance measurement, and tax operations process improvements. 

• CADE will allow for electronic processing of selected Form 1040 Wage & Investment returns with additional taxpayer segments that have increasingly more 

complex tax returns and/or balance due returns. 

• ISS will establish a program whose goal is to deliver a fully integrated shared 

information technology infrastructure to include hardware, software, shared applications and data, telecommunications, security and an enterprise approach to 

systems and operations management. This approach results in overall reductions in time and dollars to develop, deploy, and maintain the infrastructure 

and the business applications that use the infrastructure.

20

IMPACT OF UNFORESEEN COSTS ON STAFFING LEVELS

Although staffing increases were supported in recent budgets, they could not be 

realized because of unexpected cost increases. The IRS is labor intensive; salaries 

and benefits make up 71% of our Operations Budget. Therefore, any unexpected 

major cost that the agency must absorb will have a negative effect on staffing levels, 

despite efforts to reduce non-labor costs. 

For FY 2003, the President proposed a budget for the IRS that included 98,727 

FTE (less EITC). However, the total FTE for FY 2003 (less EITC) is currently expected to be 96,802, which is 1,925 FTE less than the President’s request. The following are examples of what drove projected FY 2003 FTE down below the President’s request by 1,925.

• The unfunded increase in the FY 2002 annual pay raise from the President’s 

3.6% request to the 4.6% enacted level (Cost: $43 million). 

• Postage increases above initial budget projections (Cost: $22 million). 

• Unfunded increase in security costs after 9/11 (Cost: $20 million).

Let me put the staffing problem in even greater perspective. Over time, the current FY 2003 FTE projection is 1,249 FTE less than what was requested in the 

President’s FY 2001 Budget. It is also important to note that the FY 2003 appropriation bill created a $68 million unfunded pay increase and an across-the-board 

cut of $64 million. These actions will further reduce our staffing levels and directly 

affect our ability to deliver on performance projections included in the FY 2003 

budget request.

CONCLUSION

Mr. Chairman, in conclusion, we are making progress. Although there is great 

room for improvement, we are providing better service to taxpayers and are hitting 

more of our performance goals. The President’s proposed FY 2004 budget for the 

IRS keeps us on track and will allow us to provide both the short-term and longerterm benefits to taxpayers, which has been the hallmark of our modernization program from its inception. Once again, I thank the President and his Administration 

for their continued support of our program and their confidence that we can get the 

job done, and at the least cost to America’s taxpayers.

question or two, and then we will pass it along here. I think the 

Chairman HOUGHTON. Thanks very much. Let me just ask a 

f 2007 year and 80 percent was sort of an arbitrary figure, as far as 

a goal. Are we anywhere near on track to reaching that figure or 

is this more of a generational problem? 

Mr. WENZEL. As you mention, it was a goal that was set by 

Congress in the Internal Revenue Service Restructuring and Reform Act of 1998 (P.L. 105–206), that 80 percent of all individual 

and business returns would be filed electronically by the year 2007, 

and we set out to achieve that goal. As I mentioned, we have had 

considerable initial success in the individual income tax return 

area, but some additional progress needs to be made in the business tax returns area. Right now, it doesn’t look like we will 

achieve the 80 percent goal. 

We proposed new ideas to achieve this goal. For example, this 

year, the Free File that I mentioned was an example of trying to 

get us to the 80 percent goal. Free File fits in with the President’s 

management agenda. 

We also need to make sure that we come up with other incentives. The April 30 date is an example of an incentive that will encourage taxpayers to opt to use electronic filing. This is where we 

extend the filing date by 2 weeks, from April 15 to April 30, to offer 

to individuals to file their return electronically, so there will be a 

number of individuals that have used the paper form of filing in 

the past that will now opt to use the electronic filing date. 

21

Chairman HOUGHTON. You have stated this before and Commissioner Rossotti stated it before also, that the 80 percent in 2007 

is not particularly realistic. So, what do you do, keep pushing for 

this and just say, somehow, some way, we are going to make it? 

Do you reduce the percentage figure? Do you increase the year figure? What do you do in order for us to have some sort of a realistic 

guide? 

Mr. WENZEL. Our goal is to keep pushing to try to achieve the 

80 percent. While there is only——

Chairman HOUGHTON. So, are people going to be hung by the 

thumbs if you don’t reach that? 

Mr. WENZEL. I hope not. I hope that we will demonstrate along 

the way that we have tried everything we possibly could as an 

agency to reach that goal, because this is so critical in terms of 

moving the IRS forward. A substantial amount of our resources are 

required to process the paper returns in the 10, soon to be 9, processing centers that we have around the country. There is an enormous amount of full-time equivalent (FTE) positions, that need to 

go into processing that paper. We hope that every FTE position 

that we could save in that regard could be used somewhere else in 

our service and in our enforcement programs. 

Chairman HOUGHTON. Thank you. Mr. Pomeroy? 

Mr. POMEROY. Thank you, Mr. Chairman. I want to again 

begin my questioning by just saying I think that staff at the IRS 

is real top-flight professionals. They don’t get the public acclaim 

that they probably ought to have, and I hope they understand how 

much we appreciate their dedicated and competent service. 

I understand that the IRS has entered into discussions since our 

last hearing regarding the private sector partners on the Free File 

e-filing as to coming up with some evaluation or standards as to 

the products that they might be offering to taxpayers, is that correct? 

Mr. WENZEL. Yes. Just to go back a little bit on the Free File, 

about a year or so ago, we entered discussions with the private sector about Free File, what we refer to as the Free File Alliance. We 

reached agreements with 17 different providers. 

In terms of the agreement that we entered into to start the 2003 

filing season, which is the first time effort, we entered into an 

agreement that they would be able to come into our site with the 

understanding that when they brought up their particular site, 

they would be able to have some pop-up screens to show the products and services that they have to offer. 

As I mentioned, we have had considerable success. Over 2 million 

returns have been filed. We have our own survey for individuals 

who want to give us some feedback after they are done using these 

sites. To date, we have had a little over 9,000 responses back from 

the over 2 million returns that have been filed. We would be very 

happy to give you the specifics on that and share that with the 

Committee. We have also heard from external groups, particularly 

some of the consumer groups, that they have some concerns. We 

have already scheduled a session with the Free File Alliance for 

the end of this month, Congressman, just to review this first-time 

effort in terms of the results and to listen to the feedback from all 

sources that we received so that we can build on the first year’s 

22

experience and go forward and effect anything that needs to be 

done here in the way of improvements. 

Mr. POMEROY. I commend you for that and think that your 

leadership, the IRS’s participation in discussion with the private 

sector partners regarding the identification of the range of products 

and certain quality dimensions of them that are acceptable and 

others that may not be acceptable is important. 

Now, for the trade association to do it on themselves, that might 

run afoul of their antitrust issues, and so as long as I believe the 

IRS is directing the discussion and participating in it, then there 

are State actions sufficient to make antitrust not apply. Therefore, 

your active leadership here is really important. 

I believe that many of the well-known name brand partners don’t 

want to be associated with an endeavor that has inferior products 

coming onto the marketplace. Your efforts there will, I think, preempt any necessary legislative effort that we would—you ought to 

take care of it, not us, and so I am happy that you are looking after 

it. The other point I would like——

Mr. WENZEL. Congressman, I just want to say you have my personal assurance, our personal assurance that that will be exact on 

how we would proceed on this. 

Mr. POMEROY. Thank you very much. The issues of concern 

raised regarding the pre-certification don’t go as to whether precertification of EITC claimants is appropriate, but rather has sufficient care been made in developing the format so that we are starting with a document that is appropriate, eliciting the material 

needed for purposes of determining whether they qualify or not but 

not imposing a hurdle or a barrier that would discourage people 

who are qualified and, frankly, need this credit but otherwise 

wouldn’t be allowed to pursue it. 

Just for an example, your third party verification that the children have lived for 6 months with the household is more stringent 

than that used for food stamps and places a barrier, again, on this 

population that may be difficult. 

Second issue, for some claiming step-parent status, marriage certificates are required, and I don’t know that you have checked or 

not, but some States, California is reporting on their web page a 

2- and 3-year backlog in the issuance of marriage certificates. 

Can you tell us that all care has been given to make certain that 

this does not represent a barrier, and would you be inclined to 

think it might be helpful to have the GAO look at the form to determine whether or not it will serve its intended role in the marketplace? 

Mr. WENZEL. We would welcome GAO’s involvement. They 

have, over the years, been very, very beneficial in providing this 

kind of oversight. 

Let me just say, on the pre-certification issue, the last thing we 

want to do, is put additional burden on individuals. Our intent 

with pre-certification is that rather than examining the return on 

the back end, we are trying to go to the front end and resolve any 

concern that we might have so that once that individual is pre-certified, then it stays that way. 

Over a period of many months, we put together what we thought 

was the best approach to this issue, and we invited external groups 

23

into the IRS that have a very special interest and are well aware 

of the taxpayers that we would be working with in terms of the 

pre-certification. 

There have been two meetings that have been called by our national Taxpayer Advocate. She took the lead on this and invited 

these groups in and is engaging people from the wage and investment organization. I am briefed on it regularly myself in terms of 

how those sessions have gone. As far as the input, we have received information from those groups that we are now looking at 

ourselves to make sure that we are not going to create this kind 

of burden. 

It was interesting that you mentioned California. I was aware of 

that, and I think that is striking that it is going to take them that 

long. My understanding is it may be due to some budget problems 

they have. That is an unreasonably long period of time. This precertification effort should be done as quickly as possible. 

In a situation like that, we have what we call Federal and State 

agreements between the States and the IRS. There may be some 

opportunities to work out arrangements with a State that those extended delays don’t occur when we need information for the precertification program. 

We are, as I mentioned, working with the groups, getting additional input, so all of this is being seriously considered right now 

to come up with the right answer that doesn’t place undue burden 

on that whole process. 

Mr. POMEROY. I appreciate your response. I may have some additional questions for you in writing, but I see that my time has 

expired. Thank you, Mr. Chairman. 

Chairman HOUGHTON. Thank you very much, Mr. Portman? 

Mr. PORTMAN. Thank you, Mr. Chairman, and Mr. Wenzel, 

thank you for being here again. I want to commend you for your 

stewardship of the IRS during this interim period after Mr. 

Rossotti’s departure and before the new Commissioner is confirmed. I understand Mr. Everson is on his way toward confirmation, having made it through the gauntlet of the Senate Finance 

Committee and maybe we will get a vote even as soon as this week 

in the full Senate. I know you are very eager for him to come on 

board. 

Mr. WENZEL. We look forward to Mr. Everson joining us as our 

Commissioner. 

Mr. PORTMAN. Well, again, your testimony today is an example 

of the kind of leadership you provided, and we appreciate it very 

much. 

On e-filing, just if I could quickly, and then I want to talk about 

EITC. The enormous diversion of resources you talked about that 

could otherwise be used for taxpayer service or enforcement is obviously a huge concern of the IRS. Just one other point to make is 

that there is also an enormous cost to the taxpayer because of the 

error rate, both caused by the taxpayer and by the IRS. We are 

told it is as high as 10 or 11 percent on each side, so 20 to 22 percent error rate, which causes enormous downstream costs to you 

but also to the taxpayer, and a lot of that, I understand, is simply 

in transposing the numbers. That is why the Congress has been so 

determined to get that electronic filing number up, as you have, 

24

and I think we need to do everything we can, even take some 

chances. That is why I commend you for what you are doing in 

terms of giving people access to e-filing on a low-cost or no-cost 

basis. Forty-one percent of individual returns are now filed, or will 

be this year, by electronic. What is the business number? 

Mr. WENZEL. The business number, in terms of percentage? 

Mr. PORTMAN. Yes. 

Mr. WENZEL. It is about half that. I will get the exact figure 

for you. 

Mr. PORTMAN. Roughly 20 percent? 

Mr. WENZEL. Yes. 

Mr. PORTMAN. This is why we are putting in the legislation, 

which will come to the floor this week, this IRS recommendation 

of extending the filing deadline for those who file electronically, 

just to try to do everything we can because it is good for the IRS 

and good for the taxpayer to encourage electronic filing, and based 

on your surveys, we know that particularly people who have 

amounts due very much appreciate having that additional time and 

that will be an incentive, is that accurate? 

Mr. WENZEL. Yes. 

Mr. PORTMAN. We have gotten some criticism on this proposal 

from Members of the Committee on both sides of the aisle and also 

from tax preparers. Could you respond just briefly to the criticism 

that has been raised by tax practitioners about the problems of 

moving away from the sacred date of April 15? 

Mr. WENZEL. Certainly. April 15 has been there for, it seems 

like forever. I often commented to IRS and some practitioners along 

the way that if there was—if Congress ever wanted to establish another national holiday, maybe April 15 would be appropriate—but 

that is coming from a tax administrator. So, I can appreciate the 

practitioners’ concern about that. 

Our obvious intent there is to make sure that we have a very, 

very active awareness campaign, investing the right amount of resources so that individuals realize who qualifies for the April 30 

date, and what it takes to qualify for that date. 

Mr. PORTMAN. I think that is very important, to keep the April 

15 date out there and encourage folks to electronically file by indicating this is an exception to the April 15 rule, not that the date 

has changed. Again, I am willing to take that risk and push it as 

hard as we can because I think that electronic filing goal is so important and appreciate the Chairman’s support and Mr. Pomeroy’s 

support, too. This Subcommittee has taken a lead on that, and we 

will continue to help you in every way we can. 

Quickly, on the 10 deadly sins, are you happy with the way the 

legislation is drafted that is coming to the floor this week to reform 

the 10 deadly sins, so-called? 

Mr. WENZEL. Yes. 

Mr. PORTMAN. Okay. Any thoughts you have on that, we need 

to hear from you because after it passes this chamber, which I 

think it will, of course, we will be in negotiations with the Senate 

and trying to do something on the Senate side. 

With regard to electronic filing, you have got a study from 2002, 

a U.S. Department of the Treasury study showing, again, a large 

improper payment rate. The study shows that as many as 31.7 perVerDate jul 14 2003 21:37 Dec 31, 2003 Jkt 090816 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 E:\HR\OC\90816.XXX 90816
25

cent of claims amounting to $9.9 billion are improper, and I think 

we have gotten to the point here where we once again need to look 

carefully at the EITC and come up with some better ways to encourage compliance. I commend you for doing that. 

One of my questions, as you know, all along has been should the 

EITC be an IRS program? Is this an appropriate thing for the IRS 

to do? My experience with the IRS is that I am more for tax reform 

than ever because of the IRS problems it has administering this 

code, not because I believe the IRS is at fault, and I think the 

EITC is the classic example. 

If you could just quickly tell us whether this program is supported by the Taxpayer Advocate, the compliance program you 

have come up with. 

Mr. WENZEL. In terms of the program that we are proposing, 

the Taxpayer Advocate has been very much involved in all of the 

sessions and all of the procedures that we have now drafted to this 

point. She has provided us with valuable insight in terms of where 

we thought we might go in one direction, but she brought us back 

into another procedure that was, in terms of fairness and application. 

So, I can’t speak for Ms. Olson, but I do know that she has been 

actively engaged, and when she had some disagreement with the 

direction that we were headed in, she was right there and stayed 

with it and we listened to her and made the changes. So, at this 

point in time, I would think that she is fully with us in terms of 

where we are with the effort. 

Mr. PORTMAN. I think it is important the person who is responsible for looking out for the taxpayer be involved in it, and my understanding is she is supporting it and I think that is an important 

point. 

Mr. WENZEL. Again, I——

Mr. PORTMAN. I will ask additional questions in writing because my time is up, but if you could comment at some point today 

about the different error rates. Mr. Pomeroy raised a good question 

about whether what you are asking for in terms of certification is 

in addition to what we ask for in other programs, like the U.S. Department of Housing and Urban Development (HUD) programs or 

the food stamp program or Supplemental Security Income or other 

programs, and I think the compliance rate differences need to be 

pointed out at some point, as well. Thank you. 

Chairman HOUGHTON. Mr. Foley. 

Mr. FOLEY. Thank you very much, Mr. Chairman, and I do welcome you here today and I would echo in the comments of my colleague, Mr. Pomeroy, relative to the IRS and its employees taking 

an unusual burden of criticism due to the fact we here on this 

Committee oftentimes change the Code every other hour. So, it is 

difficult for you all to figure out all of the various rules and laws 

we are passing on you. 

He did also open up another opportunity, though, when he mentioned our effort to pull the tax code up by its roots, something we 

have all talked about, and I wondered if you had a chance at all 

to do an analysis internally relative to the implementation of a flat 

tax or a sales tax, and what it would do to the IRS itself. 

26

Mr. WENZEL. We have not done that, Mr. Foley. That kind of 

review would be something that would be done at the Department 

of the Treasury. The IRS on those two specific areas, the sales tax 

and flat tax, I am not aware of anything that we have done in the 

IRS. 

Mr. FOLEY. Would it be fair to assume a simplification of that 

sort would be much easier to not only implement, but obviously to 

monitor? 

Mr. WENZEL. We have heard about the need for simplification 

from taxpayers over the years. It is one of the critical issues. The 

issue is, keep it simple. Simplify the tax code. Make it more understandable, easier to prepare returns. 

More and more, every year, there is an increase in third party 

preparers that need to help individuals and businesses prepare individual and business tax returns because of the complexity. The 

issue, of course, universally is simplification. 

Mr. FOLEY. You raised another important point. I think complexity is probably the underlying word that bothers most Americans. It is not that they do not want to meet their obligations, but 

on our panel alone, my colleague from Florida, Representative E. 

Clay Shaw (R–FL), is a certified public accountant (CPA) and a 

lawyer. He is uniquely double-degreed, if you will, and he has a 

person prepare his return for fear of making a mistake. That seems 

to be, in his particular situation, somebody quite capable of doing 

a 1040 form. 

You look at most Americans who are struggling just to work 

their 40-, 60-, or 80-hour week, then gather all the receipts necessary in order to make certain their return is properly filed. It is 

daunting and intimidating. How are we providing——

Mr. WENZEL. Congressman, if I could just say——

Mr. FOLEY. Please. 

Mr. WENZEL. Our own employees have that issue, too, in terms 

of trying to provide the correct answers through a telephone or 

through one of our field assistance centers because they are dealing 

with the same tax code that is in two volumes already. So, we are 

always challenged in terms of our accuracy rate in trying to keep 

up with those changes. 

Mr. FOLEY. It does beg the need for reform of some kind, and 

I think simplification, not necessarily just changing rates. I think 

it needs to be dramatically changed. How are we doing for your 

agency relative to technology funding and providing you the infrastructure necessary? 

Mr. WENZEL. We feel that the funding that the Congress has 

given us to date has been fully supportive of our effort. During the 

current fiscal year, we actually slowed down our effort in terms of 

business systems modernization a little bit because we were evaluating where we were with our prime contractor and decided that 

we were taking a lot of projects on at once. We decided it is time 

for us just to pull back a little bit and do a reassessment. 

This calendar year, before the end of December, there are a number of significant projects that should come online. Specifically to 

your question, the business assistance modernization funding has 

been adequate for us. 

27

Mr. FOLEY. In conclusion, I did want to again compliment you. 

I visited some of your service centers in my area. I found the employees to be readily able to help people. The phone lines are being 

answered. They are very accommodating. Their assistance has been 

very, very good. So, I just want to take a moment to commend you, 

your agency and its employees. 

Mr. WENZEL. Thank you, Congressman. We will share that with 

our people. I am sure you have done that already, but I will pass 

that back. 

Chairman HOUGHTON. Thanks very much. Mr. Ryan? 

Mr. RYAN. Thank you, Mr. Chairman. I am encouraged to hear 

from my colleague from Florida that he still has service centers up 

and running to help his constituents, and that is really what I 

want to direct my questioning to, Mr. Wenzel. 

As you know, these service centers are very helpful, these Taxpayer Assistance Service Centers. People coming off the street, they 

get the forms they need. They get quick answers to some pretty 

simple questions they have. 

Unfortunately, what happened in Wisconsin was every Taxpayer 

Assistance Service Center was shut down except for Milwaukee. 

We have a very large State, and so when you shut down the Appleton, Waukesha, Janesville, and Racine Service Centers, obviously, 

a lot of people are upset about that, and that is the decision that 

the agency made. 

I would like to ask you for, and I don’t know if you can give me 

this right now, but if you could do so in writing, for the justification 

of those decisions. It is also my understanding that the local IRS 

offices are still open. They still exist in those places, the same number of staff is still there, only that there can be no taxpayer assistance provided at those offices. No forms can be picked up at those 

offices. No questions can be answered at those offices. So, if a person wants to speak to a person, wants to go get a form, they will 

have to drive anywhere—like a couple hundred miles to Milwaukee 

to get that and stand in line at one office in our State. 

So, our entire Congressional delegation has written you and Mr. 

Rossotti prior to this about this, and I would like to get your response on that. Are you saving money by doing this, because it 

doesn’t seem like you are saving money by consolidating it into the 

Milwaukee office because you are not reducing any FTE numbers. 

So, it seems like it has brought forth a lot of frustration, it has reduced the service of the IRS to our constituents, and it doesn’t 

seem like you gained much efficiency in doing so. So, if you could 

give me a good response to that, I don’t know if you can do it fully 

here, but in writing, I would appreciate that. 

Mr. WENZEL. Let me just comment, Congressman Ryan, and I 

will ask Mr. Dalrymple to respond to that. I don’t know the specifics around the offices in Wisconsin, but I assure you we will respond to you in detail as to the rationale. We have 795 offices in 

the continental United States and just under 500 of them offer call 

assistance. 

Mr. RYAN. Right. 

Mr. WENZEL. To your point, the offices that you mentioned, we 

don’t offer that assistance to date. We have applied a criteria 

across the country in terms of where an office would provide assistVerDate jul 14 2003 21:37 Dec 31, 2003 Jkt 090816 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 E:\HR\OC\90816.XXX 90816
28

ance, and it sounds like the offices that you mentioned did not 

meet that criteria, but I would ask Mr. Dalrymple just to add to 

that. 

Mr. RYAN. Just before he does, but what that criteria meant for 

the State of Wisconsin is only one office in the metropolitan center 

of the State has these services. No other office in the entire State 

has these services. So, what does that do to people in the rural 

areas? Nothing. Just not providing the forms that people need in 

these local offices doesn’t seem to me to be an incredible expense, 

now that you are not providing that service, you all of a sudden 

save a lot of money. That decision, I have a hard time coming to 

grips with, but please, go ahead. 

Mr. DALRYMPLE. I am not specifically familiar with Wisconsin, 

so we will definitely get you the written response that you have 

asked for. We have embarked on a strategy, actually, to make our 

telephone service tremendously better so that people who have the 

kinds of questions that you have talked about can get that service 

through our telephone services. 

Also, forms and questions are available to be answered or 

downloaded through our Internet sites. We have had over, as Mr. 

Wenzel had mentioned earlier, 3 billion hits so far this year, hundreds of millions of forms and publications downloaded. 

Fundamentally, we do expect to be able to serve rural areas, and 

in many instances where we have had to reduce service in some locations, we then had mobile units that have visited specific locations on a rotational basis, have specific places like senior centers 

where we go 2 days a week where we have had to close an office. 

So, we are trying to provide those kind of services in other ways. 

I will specifically look into Wisconsin to make sure that we haven’t 

overlooked a need there, and we will get back with you. 

Mr. RYAN. In your response, because obviously you identified 

the seniors as being part of the problem, what you do when you 

sort of bring the services into the metropolitan area and not into 

the rural area is it is really the retirees who don’t download things 

from the web, who don’t really know the right questions to ask on 

the phone, who are the people who have been disproportionately 

benefiting from the local offices. So, that is really who loses out on 

this. In your response, if you can give me more details about your 

mobile office plan, because that is something that we can coordinate to ship around, give me more details about that, if you could, 

in your response. 

Mr. DALRYMPLE. We will do that. 

Mr. RYAN. All right. Thank you. 

[The information follows:]

The IRS currently operates several TAC offices in Wisconsin. We have offices in 

Milwaukee, Madison, Green Bay, Mosinee, Eau Clair, Appleton, and La Crosse. 

These offices are placed to provide taxpayer assistance to the majority of Wisconsin 

residents. The TAC offices continue to provide the needed services to the surrounding communities and we have no plans to suspend these important services. 

Several convenient options are available for taxpayers to obtain the service they 

need, when they need it most, without visiting a local office. Taxpayers may contact 

IRS customer service representatives toll-free at 1–800–829–1040. Recorded tax information on hundreds of tax topics is available toll-free at 1–800–829–4477. Forms 

and publications can be ordered at 1–800–829–3676 or available over the Internet. 

The IRS Internet site can be accessed at www.irs.gov. Practitioners needing assistance have access to the Practitioner Priority Service toll-free by calling 1–866–860–

29

4259. This accounts-related service created exclusively for tax practitioners nationwide should be the practitioner’s first point of contact for assistance regarding taxpayers’ account-related issues. Employees answering these calls are specially 

trained in handling practitioner issues. 

If preferred, taxpayers can schedule appointments in advance to resolve any tax 

problems, thereby ensuring that an employee will be available and ready to assist 

them at the TAC nearest to them. Local telephone numbers for Taxpayer Assistance 

Centers are available from directory assistance and will appear in all new telephone 

directories, and are also available on the IRS Web site. In addition to scheduling 

appointments, taxpayers can call the number for advance information about the 

nearest office location and hours of service. 

With regard to your specific concern about the Racine office, I want to provide you 

with an update. This is a matter on which we corresponded with your office late 

last year. The IRS office in Racine remains open, but we have relocated the Field 

Assistance employee who worked in the TAC office there, on a part-time basis, to 

Milwaukee, which is less than 30 miles away. 

In addition, we have closed the Waukesha and Janesville TACs, both of which 

were only open part time. There was no Field Assistance employee in the Janesville 

location. The services previously offered in the Janesville TAC were provided on a 

limited basis by employees assigned to Compliance activities. The Waukesha TAC, 

like Racine, had only one Field Assistance employee, who has been voluntarily reassigned to Milwaukee, just 15 miles away. 

We initiated these actions to provide quality customer service for taxpayers and 

practitioners within the commuting distance of Milwaukee and reduce the impact 

on compliance resources needed to support lesser TACs. These TACs, with few employees, place a burden on employees at other locations who are required to manage 

these centers when TAC employees are necessarily absent. The Milwaukee office 

has a much higher demand for service, yet is not staffed as fully as such service 

is required. The voluntary assignment of the Racine and Waukesha employees to 

Milwaukee will ensure much more efficient and effective use of our resources and 

allow us to better serve higher numbers of taxpayers. In addition, enhanced security 

will be provided for these employees. 

I trust this information is helpful in responding to your concerns.

Chairman HOUGHTON. Thank you. Mr. Weller? 

Mr. WELLER. Thank you, Mr. Chairman, and Mr. Wenzel, welf come. It is good to have you before the Committee, and thank you 

for this opportunity to spend some time with you and your staff 

today. 

I would like to focus on the IRS collection programs, particularly 

the new initiative that the Administration has included in your 

budget here, and let me begin with sharing some what I consider 

to be pretty disturbing statistics, and that is regarding IRS collection programs. 

It is estimated that the IRS collects approximately 9 percent of 

assessments, leaving 91 percent of tax assessments uncollected for 

the duration of the 10-year statute of limitations. Between 1996 

and 2001, the number of tax liens fell 43 percent, tax levies on 

property fell 73 percent, and seizures fell 98 percent. 

These statistics indicate that the IRS has not been very aggressive or very effective in collecting tax assessments. Of course, the 

Administration has decided to do something that other agencies 

have been doing for some time, and that is that there is a legislative proposal to allow the use of private collection agencies to collect outstanding tax obligations. Chairman Houghton of this Subcommittee has introduced legislation. I, like others, have joined 

with him as a cosponsor. 

I would like to hear from you, of course, as the Acting Commissioner, what are the advantages of this proposal that you have inVerDate jul 14 2003 21:37 Dec 31, 2003 Jkt 090816 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 E:\HR\OC\90816.XXX 90816
30

cluded in the Administration’s budget request to assist you in collecting outstanding tax assessments. 

Mr. WENZEL. We support the legislation and look forward to its 

passage. As you pointed out there is a significant amount of what 

we call potentially collectible inventory that we are not devoting 

any resources to, and we see the possibility of private collection 

agencies coming in. The proposal is that the compensation for the 

effort the private collection agencies would put into the effort 

would come out of the proceeds that they are able to collect 

through their efforts. So, there isn’t any loss of positions inside the 

IRS for this effort. 

Having been in the collection function in the IRS, as Assistant 

Commissioner of Collection at one time in my career, I advocated 

that we needed to do something to support the IRS’s effort as relates to its collection initiatives by supplementing it with private 

collection agencies. 

Right now, there is a significant number of dollars that go uncollected each year because the 10-year statute has expired. There is 

a significant number, it is well over $200 billion, that is often 

pointed to as the amount of money sitting there that is currently 

uncollectible and no efforts are being made to collect it. A lot of 

that is corporations that have gone out of business, individuals that 

are deceased, individuals where there are hardships, where it is inappropriate to collect any additional taxes from them, and so forth. 

After you eliminate all of that, you still have a significant 

amount of money left, and our own review of that inventory to date 

demonstrates that if private collection agencies were able to come 

in, there is at least $13 billion that we feel is——

Mr. WELLER. Thirteen billion dollars? 

Mr. WENZEL. At least $13 billion, potentially even more, that 

through additional efforts on the part of these companies that 

would be collected that would go into the Department of the Treasury. 

Mr. WELLER. Do you have some examples of States that have 

used private debt collection services? 

Mr. WENZEL. Actually, it is a significant number of States. It 

is somewhere in the neighborhood of 40 States that have gone into 

this for a period of years, and even in the executive branch, the 

U.S. Department of Education has used these companies, and also 

Financial Management Services, which is part of the Department 

of the Treasury. One of their principal roles is to collect delinquent 

debt throughout the executive branch. 

So, this is not a new effort in the executive branch. There is a 

lot of experience already in the executive branch, and particularly 

at the State level. Many of us in the IRS have actually traveled to 

some States and firsthand sat down with the State tax administrators to learn about their feedback as it relates to their satisfaction 

levels. 

In one in particular, Michigan, I will give you an example, that 

I visited a number of years ago, they have been in that at least 

probably about 10 years already, and other States along the same 

line have used private collection agencies to their advantage in 

terms of going after tax debt, and——

31

Mr. WELLER. Commissioner, I realize my time is pretty well 

utilized. I was just going to, just in closing, I have been an advocate of this for some time and I appreciate your support for this 

initiative. The question I have is, we have had earlier proposals. 

How has this proposal been refined and improved upon from the 

earlier ones we have been looking at? 

Mr. WENZEL. There was a pilot, as we call it, that was conducted in the 1996–1997 time frame, and there were different reports that were prepared as a result of that effort. What we 

learned from that is, and we have applied it to this particular effort, was that we turned over accounts to the private collection 

agencies for that effort that were really, really old accounts. They 

were in the period of time that 5 or 6 years. The best that we ever 

did at the IRS, maybe once a year, we would send out a notice, at 

best. So, there was a real challenge because of just the age of the 

accounts. 

The obvious thing is that once a debt is incurred, you don’t let 

it sit there for too long before you start to do your follow-up and 

make sure that it is collected in a reasonable period of time, and 

the longer it takes and the older it gets, the more difficult it becomes to collect. 

So, what we have learned from that study, and that is just one 

example, is that we need to make sure that we give inventory—and 

we have it, believe me, at all stages as it relates to the age, from 

less than 1 year all the way out to the last year. If this proposal 

is passed, we intend to make sure we give a fair mix of inventory 

to these companies so they have an opportunity, and we have an 

opportunity. 

There is an oversight role, by the way, of the IRS. We just don’t 

let those companies go about doing their business. We actually will 

have an IRS employee on premise, I call it, kind of like quality assurance to make sure that everything they do is what we would expect of our own employees as far as their employees in terms of the 

effort at hand. So, that is one example that we benefited from that 

previous pilot. 

Mr. WELLER. Thank you, Commissioner, and Mr. Chairman, 

thank you. 

Chairman HOUGHTON. Thank you. Now we are going to have 

another fast round of second questions. 

Mr. POMEROY. This will be so fast, Mr. Chairman, I will just 

basically tee it up, and you don’t have to answer. I will ask for a 

written response. 

I have been informed that www.irs.com is not the IRS site. That 

is a private site. We have had that problem with other government 

names that have—where the domain name has been purchased, especially on the dot-com one. Obviously, www.treas.irs.gov, a lot of 

people aren’t ever going to find their way there. 

Now, I understand also that the search engines that people 

might enlist to help get them there directs to the commercial site, 

and so I would be interested in learning from the IRS what activities you are doing, including outreach to the search engine firms, 

to make certain that inquiries for the IRS go to the more cumbersome www.treasury.irs.gov site, not www.irs.com. Thank you, 

Mr. Chairman. I yield back. I will write to you more about this. 

32

[The information from Mr. Wenzel follows:]

At the time that IRS developed its own website, they were not allowed to have 

their own URL/Domain. IRS partnered with the Department of Treasury to use the 

following URLs/domain names:

www.irs.treas.gov 

www.irs.ustreas.gov

Since then, IRS has been issued authority to establish their own URL and domain 

name. Taxpayers as well as search engines were provided with IRS new URL—

www.irs.gov—that provides a direct linkage to the IRS’s website. The old URLs 

automatically redirect the public to the current URL. 

In a survey performed of the top search engines (according to our internal Web 

Trends reports), using different search terms as ‘‘IRS’’, ‘‘tax’’ and ‘‘tax forms’’, the 

IRS current URL was displayed as the number one or two search result in several 

searches, but in all but one search was always on the first page of search results. 

Based on these results, we do not believe that additional guidance to the search engines is needed. 

In addition, IRS has also pursued the usage of IRS.com for private use. While we 

do not want a private company to use those URLs, we do not have the authority 

to enforce non-use.

Chairman HOUGHTON. Thanks very much. Mr. Portman? 

Mr. PORTMAN. Thank you, Mr. Chairman. Just quickly on elecf tronic filing, one idea that has been thought about, as you know, 

perhaps, is to insist on the April 15 date for all tax returns, but 

for those people who have an amount due who, based on your own 

surveys and common sense, are motivated by the idea of electronic 

filing, if they get a little more time to make their financial commitment, that those folks who electronically file would be able to send 

their check in late. In other words, the April 30 deadline, the 15 

days later, would apply to the check but not to the return. How do 

you respond to that? 

Mr. WENZEL. Do you want to answer that, John? 

Mr. PORTMAN. Does that create administrative problems for 

you that are——

Mr. DALRYMPLE. Well, we have done some research and we 

feel that we would actually—if we could extend the due date of the 

tax return and the payment date, that we could increase filings in 

the first year by almost 2 million electronic filers, and it is an important group of filers, also, because it is the most difficult group 

that we have in terms of penetration. It is more complicated tax 

returns and it is people who owe tax generally who would take advantage of this, and that has been the place where we have had 

the most difficult time penetrating that market segment. 

All of our marketing experts that we have used to help us with 

our marketing have told us that at a particular point, it is going 

to get more and more and more difficult to continue to grow at the 

rate we have grown electronic filing, and that we will have to have 

incentives if we are going to continue to make inroads. I actually 

believe that is one of the more important incentives. 

Mr. PORTMAN. John, you think one of the incentives has to be 

the return itself, not just the check? 

Mr. DALRYMPLE. I do, and I think the reason for that is that 

I think that there will be a tremendous amount of confusion if you 

separate the due date of the payment from the due date of the return. 

33

Mr. PORTMAN. Another opportunity for an error. 

Mr. DALRYMPLE. Exactly. 

Mr. PORTMAN. Mr. Wenzel, this may be your last time before 

this Subcommittee as Acting Commissioner, and if you could sit 

back and be reflective and philosophical for a moment and be totally candid with the Subcommittee, I would love to hear your view 

on three things quickly. I know we are going to hear from GAO in 

a moment on the business systems modernization, but is it on track 

or not, and what should we be doing with regard to business systems modernization other than more money, which we are asking 

for? 

Mr. WENZEL. This last year, we really have looked at business 

systems modernization, and did a serious critique as to where we 

are. As I mentioned earlier, we decided to slow down a number of 

the projects, eliminate some, and concentrate on a few. The expectation is here. 

There are two critical projects that are due later this fall during 

the August-September time frame. One is what we call the Customer Account Data Engine, and that is the start—that is a critical 

project because even though it will only handle a 1040–EZ form, it 

is the really complete overhaul of our master file, which is every 

account for individuals and businesses. The other one is what we 

call our Integrated Financial System, which is a more in-house effort that is also due to come online. 

We meet regularly with the prime contracts in terms of their 

leadership. For example, I have another meeting with them this 

afternoon again in terms of status reports. We have sat down with 

them and they have beefed up their leadership in terms of the key 

positions from the prime and brought some more experienced senior executives into their role and responsibility as it relates to their 

deliverables and our expectations of our deliverables. We have sat 

down with them and said, in terms of the cost of the projects to 

date, that the prime has to make sure that—and they have agreed 

to do this—that some of this would be as it relates to a fixed price 

to a specific project and other examples where that cost, once we 

agree on that, won’t continue to increase. 

Mr. PORTMAN. We are going to hear about some of the cost 

overruns and some of the delays from GAO, and again, my question 

to you would be—I appreciate that response, but are you leaving 

it in a situation where you think it can recover, get back on its feet, 

and do you think we are on track to get this done? 

Mr. WENZEL. I really think that we really haven’t gotten off 

track, Congressman. These efforts, and Commissioner Rossotti, 

with all his years of experience, and others have come in——

Mr. PORTMAN. Very complex. 

Mr. WENZEL. It is a huge undertaking. You know that, and others know that. That is not a reason to say that we can’t get this 

done. 

Mr. PORTMAN. This will be a critical year, from what you have 

said. The two other things I would love to have you respond to in 

writing, if you could, to the Committee would be great, would be 

the Oversight Board, whether that is working, in your view or not. 

Again, as you depart, we would love to have your comments, and 

we are going to hear from the Oversight Board in a moment, and 

34

finally, EITC, and I would love to know what you think about not 

just some of these reforms we have talked about, and the reasons 

for them, I think, are clear, but whether there is a way for the IRS 

to do this in an efficient way, or whether it should be a different 

kind of a program. I appreciate your leadership, and thank you, 

Mr. Chairman. 

Mr. WENZEL. I look forward to providing my response, Congressman. 

Chairman HOUGHTON. Mr. Foley? 

Mr. FOLEY. No thank you, Mr. Chairman. 

Chairman HOUGHTON. Mr. Ryan? 

Mr. RYAN. No questions. 

Chairman HOUGHTON. Mr. Weller? 

Mr. WELLER. I just have one question here, Mr. Chairman, just 

to follow up on. Earlier in the hearing when we were talking about 

the EITC compliance, Mr. Commissioner, and it has been noted 

from IRS review and other review of the EITC program, there is 

about a 30 percent error rate, about $8.5 to $10 billion worth of 

fraud, according to the last estimate in 1999 is the figure I have. 

I was wondering, how does this error rate compare with the error 

rate for other types of low-income assistance programs? 

Mr. DALRYMPLE. Actually, I have that data here, if I can find 

it in front of me. Basically, the error rates for things like HUD and 

other programs are in the 6 to 8 percent range. Our error claim 

rate, as you said, is just about 30 percent, so that is a fair comparison, I believe. 

Mr. WENZEL. We can provide you the specifics of the comparisons, and we have that available, as Mr. Dalrymple mentioned. 

This 30 percent has continued to grow and grow, and that is why 

we needed to come in with this proposal for fiscal year 2004 to try 

to make sure we stem that, actually reverse it, bring it back down, 

and try to eliminate it. 

Mr. WELLER. Well, Commissioner, if you could provide those 

statistics and similar means-tested programs and then also explain 

what you define as the error rate so that we are comparing apples 

to apples and not apples to oranges. Thank you, Mr. Chairman. 

Mr. POMEROY. Would the gentlemen yield just for a moment? 

Mr. WELLER. Sure. 

Mr. POMEROY. The question that I would have in follow-up, we 

passed in 2001 some reforms and hope that this 30 percent figure 

would refer to the pre-2001 reforms in EITC. Are you telling us, 

Commissioner, that the reforms have had no effect and the problem 

continues to grow? 

Mr. WENZEL. Yes. We have the breakdown by year, but truly, 

this is, in terms of the amount, where it is almost 30 percent or 

so, roughly $9 billion, that that figure continues to grow each year, 

yes. 

Mr. POMEROY. So, the reforms have had no effect, or have you 

measured the post-2001 reforms from the pre-2001 period? 

Mr. DALRYMPLE. Actually, the latest data we have is from the 

1999 research study, which we have projected out. So, in that 

sense, we have not done another research study. We are doing one 

now as part of our national research program which will allow us 

35

to have some measurements here which we will be able to report 

back to the Committee on what that is. 

Let me just say that we expect that the over-claim rate will be 

significant. Whether it has gone up or down at this point in time, 

because we haven’t done a research study since 1999, I can’t say 

with any specificity. 

Mr. POMEROY. I certainly don’t want to carry water for anybody that is abusing this very important program, but I think I 

would caution the IRS about using 1999 data when we have passed 

a law to tighten up the error rate and to try and reduce noncompliance if you haven’t had any evaluation of whether or not the error 

rate is lower in light of the changed legislative landscape. I yield 

back. 

Chairman HOUGHTON. Mr. Portman? 

Mr. PORTMAN. Thanks, Mr. Chairman. If you could give us the 

timing on that new research that you are doing, what will that 

study timing——

Mr. DALRYMPLE. We are in the middle of our national research 

project right now. There is a bridge study that is being done in 

order for us to be able to measure the EITC compliance as part of 

that, as part of the national research project that is measuring 

compliance overall. 

Mr. WELLER. When will that be available? 

Mr. DALRYMPLE. I don’t have a time frame right now Congressman, but we will get back to the Committee with that and tell 

you exactly when the data for the EITC portion will be available. 

Chairman HOUGHTON. Well, I have got a couple of questions 

I won’t ask you now, I will send them to you. I want to thank you 

so much. This will probably be the last time that you will be in 

front of us as the Acting Commissioner. You represent the finest 

in what civil service is, and we are enormously grateful, and thank 

you very much for it. 

[Applause.] 

[Additional written questions submitted by Chairman Houghton, 

Representative Pomeroy, Representative Weller, and Representative Portman to Mr. Wenzel, and his responses follow:]

1. The Administration’s budget requests $10.4 billion to fund the IRS for fiscal year 2004. This is about the same as last year. What would the IRS do 

with an additional $287 million in resources in fiscal year 2004, as recommended by the IRS Oversight Board?

The President’s FY 2004 budget request represents what the Agency has the capacity to manage. This request is a thoughtful representation of what the IRS requires to provide effective customer service and also maintain efficient tax administration. 

Under the Oversight Board recommendations, additional funds would be placed 

in our system modernization efforts and would also be used to increase customer 

service. 

The IRS has announced that it will request an independent review of the CADE 

project. Funding the system modernization effort to the Oversight Board recommended level would not be the most effective use of our appropriated funds. After 

the independent review is completed, the IRS will be better positioned to work with 

the Oversight Board to produce a budget that will cover our system requirements 

and our management capacity. 

The IRS has just finished a successful filing season. It’s shown improvement in 

all aspects of customer service. The President’s budget request represents the right 

level of funding for the IRS to meet its mission without exceeding its capacity to 

manage.

36

What new benefits will taxpayers see this coming year?

Because of concerns in ensuring that all taxpayers pay their fair share of the tax 

burden, our budget request includes increased funding needs to enhance compliance 

particularly for high risk, high-income taxpayers, businesses, and abusive tax 

schemes. 

The Service is also requesting funds for the Earned Income Tax Credit Compliance Initiative to ensure that only eligible applicants receive the credit. While the 

current initiative prevents $1 billion in erroneous payments annually, it fails to reduce the EITC noncompliance rate to acceptable levels. A new approach, based on 

recommendations of the Treasury EITC Task Force, will require that further information be provided to the IRS by certain EITC claimants in order to validate eligibility before payment. 

Also, in order to enhance compliance efforts, the President’s FY 2004 Budget proposes legislation that would allow the IRS to use Private Collection Agencies (PCAs) 

to support IRS collection efforts in specific, limited areas. The use of PCAs would 

enable the Government to obtain payment from delinquent taxpayers while simultaneously allowing the IRS to focus its own limited enforcement resources on more 

complex cases.

2. What is the percentage of business returns filed electronically?

In Calendar Year 2002, 6,251,572 business returns were filed electronically. This 

represents 18% of those returns which could have been e-filed and 14% of all business returns filed. For reference, the term business returns includes:

• fiduciary returns (Form 1041); 

• partnership returns (Form 1065); 

• corporation returns (Form 1120 series); 

• estate tax returns (Form 706 and 706NA); 

• gift tax returns (Form 709); 

• employment tax returns (Form 940 series, Form 941 series, Form 943 series, 

Form 945, and Form CT–1); and 

• corporate extensions (Form 7004); 

• exempt organization returns, Federal Tax Deposits, Form 1040 returns, with attached Schedules C, E, and F, excise tax returns, and Forms K–1 are not included.

3. The IRS compiles data on the ‘‘most common errors’’ identified on returns prepared by taxpayers and professional preparers. Generally, the 

error types have been the same for the past decade, and the errors made 

by taxpayers are the same as those made by tax professionals (e.g., math 

calculations, filing status, and Social Security numbers). What are the most 

common errors made by taxpayers?

1. Earned income tax credit was figured or entered incorrectly. 

2. Taxpayer identification numbers or names for dependents did not match IRS 

or SSA records. We did not allow the exemptions. 

3. Refund amount or the amount owed was figured incorrectly. 

4. Tax amount was not the correct amount from the tax table for the taxable income. 

5. Taxable amount of Social Security benefits for page 1 was figured incorrectly. 

6. Tax was figured or entered incorrectly. 

7. Child(ren)’s age exceeded the limit. Child tax credit was reduced or removed. 

8. Taxpayer identification numbers or names for dependents did not match IRS 

or SSA records. All or part of Child Tax Credit not allowed. 

9. Earned income credit was not allowed. Must be at least 25, but less than 65, 

years old within the tax year. 

10. Child tax credit was figured incorrectly.

What are the most common errors made by tax professionals?

1. Taxpayer identification numbers or names for dependents did not match IRS 

or SSA records. We did not allow the exemptions. 

2. Rate Reduction Credit was not claimed. We computed it. 

3. Taxpayer identification numbers or names for dependents did not match IRS 

or SSA records. All or part of Child Tax Credit not allowed. 

4. Earned income tax credit was figured or entered incorrectly. 

5. SSN for child(ren) who qualify taxpayer for earned income credit did not match 

SSA records. Earned income credit was changed. 

6. Child(ren)’s age exceeded the limit. Child tax credit was reduced or removed. 

37

7. Spouse’s SSN was either missing or did not match SSA records. Spouse’s personal exemption was not allowed. 

8. Additional child tax credit was figured incorrectly on Form 8812. 

9. Based on information reported, we refigured the tax using the filing status for 

a single person. 

10. Taxable amount of Social Security benefits for page 1 was figured incorrectly

How do these errors compare to earlier years?

Statistics show that the same types of errors occur each year. There may be a 

reorder of the top ten but basically the same type of errors occur each year. Filing 

seasons that occur after there is significant change in the tax code, may show a 

spike of errors relating to the new provision. An example of this is the computation 

of the Child care tax credit. These errors usually show a significant drop in succeeding years.

What needs to be done?

The number one cause of filing errors is the complexity of the tax code. Taxpayers 

are often confused and frustrated by the intricate calculations required to formulate 

the proper tax. 

There is a significant drop in the volume of errors when returns are electronically 

filed. The IRS is dedicated to increasing taxpayers’ use of electronic filing. Fewer 

errors, positive acknowledgement of receipt and faster refunds are the main reasons 

to file electronically. The Congress set a goal that 80% of all individual returns be 

file electronically by 2007. This will be a difficult goal to achieve but the IRS will 

continue to work towards having as many returns electronically filed as possible.

4. Describe the background for the EITC program and any conflicts or 

problems this program presents to the IRS. Does the IRS believe this type 

of program can be effectively administrated or should their objectives be 

achieved in a different kind of program?

The IRS TY 1999 EITC Compliance Study estimated that between 45% and 49% 

of all EITC returns contained an over claim (i.e., the claimant was either not entitled to EITC at all or was not entitled to EITC in the amount claimed). Thus, according to the study, in TY99 there were approximately 9 million EITC returns with 

over claims. Likewise, in TY 2000, the IRS detected over 13 million potentially erroneous EITC returns and estimated that approximately 9 million represented actual 

errors. Although the IRS already detects a high number of erroneous claims, it cannot actually prevent payment on those claims unless it can confirm or refute facts 

about a taxpayer’s personal circumstances (e.g., residency of claimant and children, 

marital status or household composition) prior to payment. Under the current structure, the IRS can only verify such factual information after a return is filed. The 

IRS currently is able to work only about 4% of erroneous EITC returns. The task 

force recommendations attempt to address this structural flaw that is inherent in 

administering a social benefits program through the tax code. Although compliance 

objectives cannot be achieved using the current ‘‘tax administration’’ paradigm, the 

IRS believes that it can achieve those compliance objectives with minimal additional 

burden to claimants under the integrated approach recommended by the joint 

Treasury/IRS EITC task force, which represents a shift towards a ‘‘social benefits 

program administration’’ paradigm.

5. Concerning EITC errors:

Please provide the specific comparisons discussed at the hearing for 

error rates in HUD and other federal programs.

HUD Housing Assistance: 10%; USDA Food Stamps: 7%; SSA Supplement Security Income: 6%

Please provide the error rate for all non-EITC taxpayer groups (however 

small) that exceed 30%, such as for certain small businesses, self-employed, 

etc.

Based on the Tax Year 1988 Individual Income Tax TCMP (Taxpayer Compliance 

Measurement Program), we estimated that the Net Misreporting Percentage (basically the proportion of income not accurately reported) was between 31.3% and 

32.3% for Nonfarm Proprietor Income, between 31.3% and 32.3% for Farm Income, 

and about 81% for Informal Supplier Income. The ‘‘Informal Supplier’’ category consists of sole proprietors who operate in an informal business style, i.e., cash basis 

with few or no books and records. Examples of Informal Suppliers are street vendors, door-to-door salesman, and individuals who moonlight to augment their wage 

38

income. Please note that this data is 15 years old. Inferences should be drawn with 

considerable caution because much in the tax system and the economy has changed 

during that time. The ongoing National Research Program (NRP) should allow us 

to develop better estimates of non-compliance for specific subpopulations of individual taxpayers, but these will not be available until sometime late in 2004.

Please outline the legislative and administrative reforms put into place 

since the 1999 EITC compliance study, and describe its effectiveness in improving compliance.

The IRS will not have definitive answers about changes in the EITC non-compliance rate until the completion of the NRP in late 2004, which will provide data for 

the 2001 tax year. The joint Treasury/IRS EITC task force estimated that the cumulative impact of the legislative and administrative changes effective subsequent to 

TY 1999 would have reduced the TY99 over claims from between $8.4–$9.9 billion 

to between $6.4–$7.9 billion. The biggest legislative change since TY99 was the 

modification of rules relating to a claimant’s Adjusted Gross Income contained in 

the Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub. L. 107–16), 

and effective TYs beginning after 12/31/01. Previously, it was the TP with the higher modified AGI. Now the TPs can choose which of them will claim the credit using 

the child. This increases EITC claimants because some were prohibited from claiming the credit because the other TP had the higher modified AGI—often too high 

to claim the credit. This provision also includes tie-breaker rules, which are applied 

by the Service when two or more taxpayers actually claim the credit using the same 

child.

6. What are the plans at the IRS for beginning EITC pre-certifications?

Commissioner Everson is currently independently reviewing the EITC task force 

proposals. Once the Commissioner has completed his review, the IRS will issue an 

announcement seeking public comment on aspects of the verification initiative. Responses to this formal request for comments, in addition to the extensive comments 

the IRS has been receiving during the course of briefing stakeholders (see below) 

and feedback from focus groups will be used to refine the verification process and 

forms. During late summer, the IRS intends to contact 45,000 EITC claimants who 

will be randomly selected for processing using the verification proposal. The IRS will 

refine the verification program in response to information gained from the 

verification pilot.

Has the IRS done a ‘‘due diligence’’ assessment in planning to insure that 

the documents to be required of EITC beneficiaries can be feasibly obtained and will be useful to the IRS in enforcing the law?

The IRS has a team working on the documentation requirements for the preverification process. This team is carefully considering what documentation will be 

acceptable for verifying qualifying child relationship and residency eligibility to ensure that the requirements reduce erroneous claims. Taxpayer burden and the participation rate are key considerations. Outside stakeholder comments are being solicited.

Please provide a description and analysis of the existing EITC correspondence examination program and EITC re-certification program.

The correspondence examination program is primarily an automated process that 

operates in a pre-refund environment. Returns are selected based on a set of business rules, which are established using internal and external data. If a return is 

identified based on the selection process, the entire refund is frozen and the taxpayer is notified that his or her return is under review. The IRS may release the 

refund after this review without any further action by the taxpayer. If additional 

information is needed to validate the claim for the EITC, a letter and report are 

automatically generated and sent to the taxpayer requesting the information. A correspondence examination considers all issues related to dependency and support and 

requires documentation to support more than the EITC eligibility claim. After review of taxpayer documentation, or if taxpayers fail to provide requested documentation, returns determined not to meet eligibility requirements have EITC disallowed through Statutory Notice of Deficiency procedures. For returns where EITC 

is determined to be allowable and all questioned items are substantiated, the refunds are released and the examination closed ‘‘no change.’’ If disallowed, the taxpayer is provided information on their appeal rights to refute the IRS’s determination. 

In response to legislation passed in 1997, the IRS implemented the EITC Re-certification Program in January 1999. When the IRS denies the EITC during an exVerDate jul 14 2003 21:37 Dec 31, 2003 Jkt 090816 PO 00000 Frm 00042 Fmt 6633 Sfmt 6621 E:\HR\OC\90816.XXX 90816
39

amination, a re-certification indicator is placed on the taxpayer’s account preventing 

the taxpayer from receiving EITC unless the IRS and/or the taxpayer take appropriate actions. 

In a subsequent year, if taxpayers believe they are qualified to receive EITC, they 

attach Form 8862, Information to Claim Earned Income Credit after Disallowance, 

to that tax return. Upon receipt of this form, the IRS freezes the refund and then 

determines whether or not the return should be selected for audit. IRS examiners 

are to select the returns for examination unless the taxpayer is no longer claiming 

the EITC child or children previously disallowed and is not claiming a new EITC 

child. If the return is selected for audit, essentially the same examination procedures are followed for correspondence examinations to determine EITC eligibility. 

If not, the EITC is issued.

Please describe how the planned EITC pre-certification program would be 

similar to, and different, these two existing IRS programs both in terms of 

how the IRS will handle the cases and the information to be requested of 

taxpayers.

Each of the programs is similar in that claimants are required to submit certain 

documentation that demonstrates eligibility for the credit. But the programs differ 

in significant ways. Unlike the qualifying child verification program and the re-certification program, a correspondence examination requires documentation to support 

all issues included in the examination of a return and does not limit focus to the 

EITC qualifying child eligibility issue. The verification program also differs from the 

correspondence examination and re-certification programs in that taxpayers will be 

given the opportunity to show EITC eligibility prior to filing their returns to allow 

claimants to avoid any refund delays. Moreover, under the new verification approach, if a claimant’s return is selected for further review, only the EITC-portion 

of the refund will be frozen and any remaining refund will be released to the claimant. In contrast, the current examination and re-certification programs require 

freezing the entire refund until a determination is made on the eligibility of the taxpayer to receive the EITC. Under the verification proposal, taxpayers with re-certification indicators would be instructed to participate in the pre-verification program. 

Additionally, under the verification proposal, a dedicated staff will specialize in 

qualifying child verification issues. This staff will review documentation, handle correspondence and answer phone inquiries about the verification process and acceptable documentation. This will help ensure equal application of rules, while at the 

same time providing greater assistance to those taxpayers having difficulty understanding or providing standard documentation. In addition, the qualifying child 

verification approach proposes a single-issue inquiry worked by these issue specialists and will be designed to move large volumes quickly by focusing only on qualifying child eligibility. In contrast, correspondence examination can include other 

issues and credits related to dependency and support, which add time and complexity to the process.

Please describe how various EITC pre-certification issues need to be resolved to prevent unnecessary barriers for EITC recipients (including obtaining birth/marriage certificates and third-party verification of household living arrangements).

The key issue surrounding the relationship verification is how to verify attenuated 

relationships without unduly burdening taxpayers for this one-time verification. 

Verification of household living arrangements is part of establishing the residency 

requirement. Under the qualifying child verification proposal, claimants will be 

given multiple ways and multiple sources to prove that they meet this requirement. 

The IRS is continuing to seek outside stakeholder feedback, including through taxpayer and practitioner focus groups to provide suggestions for other credible sources 

of verification. Moreover, the instructions to the verification forms include a dedicated toll-free number for claimants and preparers to call to receive assistance if 

they believe they cannot obtain the listed documentation. Thus, the IRS believes 

that legitimate claimants will be able to obtain necessary documentation. Finally, 

the IRS is continuing to review stakeholder input and compliance data to determine 

possible additional ways to minimize burden.

Please give us an estimate of the error rate and amount of EITC overpayments. How does the error rate for this program compare with the error 

rate for other types of low-income assistance programs?

The IRS TY 1999 EITC Compliance Study estimates an unrecovered overclaim 

rate of between 27% and 32% and between $8.4 billion and $9.9 billion, as set forth 

in the answer to question 5, the error rates for other programs are as follows: HUD 

40

Housing Assistance—10%; USDA food stamps—7%; and SSA Supplement Security 

Income—6%.

What documentation is currently required for individuals to receive the 

EITC and are all forms that are used for verification finalized or are you 

still working out the details? Would you agree that we need to take some 

steps to verify eligibility for the EITC?

Currently, an EITC claimant is not required to file any documentation to receive 

the EITC (beyond filing a tax return that includes a schedule EIC). If an EITC 

claimant’s return is selected for examination, the EITC issue is worked in conjunction with all related issues as explained above. Documentation is requested to establish all requirements for EITC and related issues using document request forms specifically for qualifying child, filing status and dependency issues. The documentation 

requirements and the forms for the qualifying child verification initiative are still 

in draft form pending additional stakeholder input and focus group testing. 

The joint Treasury/IRS EITC task force concluded that the IRS cannot appreciably reduce the overclaim rate without verifying EITC qualifying child eligibility 

before payment of the refund. The IRS agrees with this assessment. The IRS will 

use all its available resources to establish a claimant’s eligibility without action on 

the part of the claimant, but it must obtain documentation from selected claimants 

about their eligibility when the IRS data is insufficient.

Some are saying that the documentation requirements (both a birth and 

marriage certificate) will be too difficult to produce and that some states 

take 2–3 years to provide marriage certificates. Is this true?

The IRS generally believes that the documentation will not be too difficult to 

produce. The documents described in this question (birth certificate, marriage certificate) are associated with proving the EITC relationship requirement, which is a 

one-time requirement. A birth certificate and marriage certificate are not required 

in most situations. For example, the IRS can establish close relationships, such as 

parental, for about 80% of EITC claimants using available databases without requiring any documentation from a taxpayer. Other close relationships such as grandchild, niece, and nephew can be established if the taxpayer can provide just the SSN 

of the parent of the qualifying child so we can systemically verify the relationship. 

The birth certificate of the parent of the child is another choice that a claimant may 

use to substantiate their qualifying child relationship eligibility. Although there 

have been some claims that certain states may take 2–3 years to provide marriage 

certificates, we believe this claim overstates the difficulty in obtaining marriage certificates. (For example, while a State of California Web site states that ‘‘due to 

budgetary constraints, our processing time can take up to 2–3 years,’’ that 

same site directs individuals to the California county recorder’s offices, 

which generally issue marriage certificates in much shorter time periods.) 

Nonetheless, the IRS takes seriously concerns about claimant burden, and is currently working with its stakeholders to ensure that any documentation required is 

as minimally burdensome as possible.

Is the EITC compliance program supported by the Taxpayer Advocate?

Yes. The National Taxpayer Advocate was a Member of the EITC task force Executive Steering Committee that approved the task force administrative proposals, including the qualifying child verification proposal. In addition, a Member of her staff 

was on the EITC task force working group. The National Taxpayer Advocate has 

been extensively, personally involved in briefing and working with stakeholders to 

ensure that these proposals can be implemented with the least possible burden to 

eligible claimants.

Has the IRS met with stakeholders to get their views on this new compliance initiative?

The IRS and the National Taxpayer Advocate have been extensively briefing our 

stakeholders, including Low Income Taxpayer Clinics, other advocacy groups, practitioners, and the Internal Revenue Service Advisory Committee, since March. The 

IRS has been meeting with many of the groups on a regular basis to receive their 

input on the compliance initiatives and suggestions for improving both the process 

and the draft forms. In addition, the IRS is conducting focus groups in June to get 

additional feedback. Finally, as noted above, once Commissioner Everson has completed his review, the IRS will issue an announcement seeking public comment on 

certain aspects of the qualifying child verification initiative.

41

7. The IRS is developing a new audit program, the National Research Program, which will provide for an updated means of selecting tax returns for 

examination. When will this new audit selection process begin?

In April 2000, the Internal Revenue Service (IRS) established the National Research Program (NRP). The purpose of this effort is to address the shortfall in data 

about taxpayer compliance that is required to run the IRS effectively and efficiently. 

The NRP is a comprehensive effort to measure payment, filing, and reporting compliance for different types of taxes and taxpayers. NRP’s current and most public 

effort is a study of reporting compliance with the Federal income tax by individuals. 

One goal of this effort is to gather high-quality information about taxpayer compliance behavior that will allow the IRS to better allocate its resources to enforcement and other activities. A second goal recognizes the deterioration of the workload 

selection formulas in use today, due to the reliance on data generated for Tax Year 

1988. In recent years the percentage of audits closed with no tax change has been 

increasing rather steadily. The rate means that the IRS is devoting resources to unproductive examinations and that compliant taxpayers are being unnecessarily burdened. A third goal of the reporting compliance study is to collect data that will provide insight into the causes of reporting errors that may aid in providing taxpayer 

service. If examinations turn up systemic compliance errors on particular items for 

otherwise compliant taxpayers, the IRS may be able to address the source of these 

errors through redesigned forms, better communications, improved taxpayer education, or perhaps through recommending legislative changes. A fourth goal is to develop data that can be used to update IRS estimates of the tax gap, since most of 

the estimates for individual tax gap components are based on old data and studies. 

The program of examining 46,860 returns is well underway. The IRS has assembled case files for virtually all the returns in the sample, and we already reviewed 

more than 86% of them to identify issues for examination and the level of taxpayer 

contact to verify information on the returns (the returns are either accepted as 

filed—perhaps with adjustments made, sent to a correspondence examination facility, or sent to a field office for a face-to-face examination). These actions occurred 

in the first months of the current NRP reporting compliance study. The bulk of examinations will take place in fiscal years 2003 and 2004, with the more complicated 

returns generally being examined later in the process (since these often are filed 

after receiving an extension of the due date and often require extensive case-building). 

Preliminary data from the NRP reporting compliance study should be available 

within the IRS late in fiscal year 2004 with more thorough analysis and use of the 

data occurring in 2005.

What will be the overall audit rate for individuals and for corporations as 

a result of the new program?

The current reporting compliance study does not include corporations so there will 

be no direct impact on their audit rate. In general, the NRP audits substitute for 

other examinations of individual tax returns, so there will be little effect on the 

overall audit rate for these taxpayers while the NRP examinations are taking place. 

As we are in the early examination phase, the current study cannot yet provide data 

to determine the levels of compliance among individual taxpayers and projections 

of what the audit rates for individuals should be.

Will large corporations and small businesses be selected for audit at the 

same rate as low-income individuals?

The current study focuses only on individual income tax returns (taxpayers filing 

Form 1040). As such, the current study will have no impact on the audit rates of 

large corporations. Individual taxpayers with high and low incomes, individuals 

with only wage and salary income, and individuals who file a Schedule C or Schedule F to account for their business operations all will be part of the NRP reporting 

compliance sample. In general, NRP audits substitute for other examinations of individual returns, so there should be little effect on the overall audit rate for these 

taxpayers while the NRP examinations are taking place. Changes in future audit 

rates for these groups of taxpayers may result from the levels of compliance discovered during this study.

8. The April 7, 2002 New York Times article titled ‘‘Affluent Avoid Scrutiny 

On Taxes Even As IRS Warns Of Cheating’’ raises many questions about 

IRS’s ability to address non-compliance by high-income taxpayers and businesses. Is it true that 1 in 45 working poor will be subjected to an IRS audit 

while 1 in 145 high-income taxpayers will be audited?

42

No. Based on our FY 2001 accomplishments (cases closed in FY 2001), 1 in 120 

taxpayers with income less than $25K were audited (0.83% coverage), as compared 

to 1 in 145 with income over $100K (0.70% coverage). However, the ‘‘income less 

than $25K’’ coverage includes the EITC mandated returns which are not part of the 

examination plan targeted priorities. If the EITC cases are removed from the low 

income category, then only 1 in 565 taxpayers with income less than $25K were audited in FY 2001 (0.18% coverage). 

For FY 2002, only 1 in 130 taxpayers with income less than $25K were audited 

(0.78% coverage) versus 1 in 120 for those with income over $100K (0.86% coverage). 

After removing the mandated EITC cases, only 1 in 580 taxpayers with income less 

than $25K were audited in FY 2002 (0.17% coverage).

Is it true that tax losses on partnership/K–1 income is in the range of $9-

$64 billion annually?

The IRS is compiling the data for this answer. The response will be delivered to 

the Committee no later than June 1, 2004

What types of taxpayers are filing the ‘‘high-risk’’ returns that the Treasury 

Department announced IRS will focus on for audit this year?

In 1988 the Service changed the definition of a high income return to include 

those returns with Total Positive Income (TPI) of $100,000 or more. At that time, 

these taxpayers accounted for approximately 2 percent of all individual returns 

filed. For examination workload planning, execution, and monitoring purposes this 

definition remains in effect today. However, the number of returns in this category 

has grown to approximately 10 percent of the individual filing population. 

To ensure adequate examination coverage for high income returns, we created a 

new sub-category for FY 2003 and the future with emphasis on returns with TPI 

of $1million or more. These returns represent 0.2 percent of all returns filed during 

processing year 2001. 

For FY 2003 and 2004, we have realigned our compliance resources to focus on 

the areas of greatest compliance risk. To a large extent, much of the non-compliance 

in these areas involves the use of multi-tiered entities/K–1s (partnerships, 1120S, 

trusts) to improperly reduce income and tax liabilities. Taxpayers filing these high 

risk returns generally have incomes in excess of $100K or more and they come from 

all walks of life. They include various types of professionals, business owners, executives, consultants, and so forth. 

Our strategies to deal with these high risk taxpayers include the following:

• Promoter Investigations An initiative focused on identifying and investigating promoters (which may include return preparers, financial planners, 

professionals or others) who sell or distribute any plan, arrangement or transaction designed or structured for the purpose of circumventing tax laws or evading tax obligations. 

• Abusive Offshore Financial Transactions An initiative aimed at bringing 

back into compliance with tax laws, taxpayers who used ‘‘offshore’’ payment 

cards or other offshore financial arrangements to mask or shelter their income. 

• Abusive Tax Avoidance Transactions A program designed to bring taxpayers, who have used an abusive scheme to circumvent tax laws or evade tax 

obligations, back into compliance. 

• High Income Taxpayers (TPI > $1Million) A initiative directed at taxpayers 

with Total Positive Income (TPI) income of $1million or more who are involved 

in structured financial transactions in order to lower their taxable income. 

• UI DIF (Returns with a high probability of unreported income) A strategy to identify self-employed taxpayers filing Form 1040 returns with potential 

unreported income, especially those with Total Gross Receipts of $100,000 or 

more and a Schedule C or F. 

• High Income Non-Filers (Income > $100,000) An initiative focused on those 

taxpayers with Information Reporting Program (IRP) income, i.e., income reported by third parties on Forms W–2, 1099, and so forth., of $100,000 or more 

in 1 year who have not filed a return.

Is the IRS still focusing on wage earners’ returns because they are more 

non-compliant than other individual business filers or corporate filers because IRS computer systems are targeted to get audit wage earners (generally through correspondence audits—even for the most minor infractions) because they are ‘‘easy pickings?’’

43

The IRS is not focusing its’ audits or their enforcement resources on wage earners’ 

returns. The IRS is focusing enforcement resources in each Operating Division on 

a variety of programs designed for the type of taxpayer they serve. 

Correspondence audits are the primary enforcement tool of the Wage & Investment Business Division. These audits are quicker to complete, and far less complicated than the traditional face-to-face audits. Correspondence audits represent a 

valuable enforcement tool and were not put in place because the effected taxpayers 

were ‘‘easy pickings.’’

9. Concerning Free Filing, please provide the results of IRS’s survey (9,000 

+ responses), feedback from external groups, results of April 2003 Free File 

Alliance session.

Since Free File was launched on January 16, 2003, Members of the Free File Alliance have prepared and transmitted to the IRS over 2.73 million returns (as of April 

20, 2003). The overwhelming majority (95%) of the Free File comments received by 

the IRS were submitted through the IRS.gov Help Desk (See chart below). This volume represents a small fraction (.001%) of the total number of taxpayers (5.6 million) who visited the Free File homepage. E-mail was the dominant method of contacting IRS. Calls and chats were also used. It is important to note that 83% of the 

5800 e-mails received during the weeks of January 27, February 3 and February 

10, and almost 60% of the e-mails overall, were related to technical difficulties with 

the IRS.gov Web site—not issues related to Free File Alliance products. Immediately 

after the Web site issues were resolved (February 10), the number of emails received 

steadily declined. This correction had the same impact on the number of calls and 

chats received during the same period indicating that the types of comments submitted through these channels were similar to those submitted through e-mail.

Free File Comments 

IRS.gov Help Desk 

Week Starting Number of 

Comments % of Total 

January 16, 2003 84 0.82%

January 20, 2003 310 3.04%

January 27, 2003 2,750 26.93%

February 3, 2003 3,100 30.36%

February 10, 2003 1,606 15.73%

February 17, 2003 806 7.89%

February 24, 2003 297 2.91%

March 3, 2003 207 2.03%

March 10, 2003 172 1.68%

March 17, 2003 185 1.81%

March 24, 2003 162 1.59%

March 31, 2003 172 1.68%

April 7, 2003 180 1.76%

April 14, 2003 180 1.76%

Total 10,211 100.00%

% of Total 100.00% 0.01%

The remaining 5% of comments were received through several other sources within IRS including e-mails submitted through the Electronic Tax Law Assistance 

(ETLA) system (the second most common vehicle for contacting IRS) and through 

44

the IRS Customer Service Representatives (CSRs). Using the Inquiry Referral process, IRS’s CSRs informed the responsible program office of the various taxpayer 

comments mostly relating to the following: level of company customer service and 

software design, site design problems that led taxpayers to believe they had to pay 

for something such as a state return, company web site operational problems, and 

error reject problems. 

All Comments and concerns received through these vehicles were immediately addressed by IRS personnel (through the use of formatted responses where appropriate) or were reviewed by IRS staff for validation and/or resolution, if necessary. 

For example, when a number of comments were received regarding the performance 

of a particular Free File Alliance member’s tax software program, the IRS provided 

constructive feedback to the representatives of the company for purposes of improving their program. In every instance, the feedback was received positively and was 

used to improve the company’s product. 

The success of the Free File program for its inaugural year cannot be overlooked. 

The IRS exceeded their original Free File volume projections. However, the IRS and 

the Free File Alliance recognize that based on the results and feedback of this past 

filing season, more improvements will be made to the program. In fact, discussions 

between the IRS and industry have already begun on plans for next year’s release 

of the program.

10. Concerning private IRS debt collection:

Of the $13 billion in potentially collectible tax debts, how does this number 

breakdown in terms of income level, amount of tax due, age of case, and 

type of taxpayer?

All the information in the following table relates to Forms 1040.

45

Percentage

Representation 

% of balance due under 2 years old 26%

% of balance due 4 years old 21%

% of balance due 6 years old 22%

% of balance due 8 years old 17%

% of balance due more than 8 years old 14%

% of balance due with AGI less than $20,000 15%

% of balance due with AGI between $20,000 and $40,000 14%

% of balance due with AGI between 40,000 and $75,000 12%

% of balance due with AGI between 75,000 and $100,000 4%

% of balance due with AGI between 100,000 and $250,000 4%

% of balance due with AGI more than 250,000 1%

% of balance due with AGI of Blank 50%

Note: Blank means no AGI for Tax Year 2001 

% of balance due less than $250 0.03%

% of balance due >$250 to $500 0.11%

% of balance due >$500 to $1,000 0.76%

% of balance due >$1,000 to $2,500 6.38%

% of balance due >$2,500 to $5,000 11.03%

% of balance due >$5,000 to $10,000 14.04%

% of balance due >$10,000 to $25,000 21.81%

% of balance due >$25,000 to $50,000 18.91%

% of balance due >$50,000 to $100,000 12.31%

% of balance due >$100,000 to $250,000 5.95%

% of balance due more than $250,000 8.67%

How much of the $13 billion is attributable to taxes less than 2 years old?

Of the $13 billion, 26% ($3.4 billion) is attributable to cases with eight or more 

years until statute expiration, i.e., less than 2 years has run on the statute.

How much does it cost the IRS to send the typical series of collection notices to a taxpayer?

The IRS is compiling the data for this answer. The response will be delivered to 

the Committee no later than June 1, 2004.

How much in the average telephone collection IRS employee get paid in 

salary and how much (as an estimate) does this employee collect in taxes?

46

The IRS is compiling the data for this answer. The response will be delivered to 

the Committee no later than June 1, 2004.

11. Is the Oversight Board providing an effective review of IRS activities? 

Does it perform the role expected by the 1998 Restructuring Act and is it 

giving useful feedback to the IRS?

Shortly after the Board was constituted, it began to establish its procedures for 

working with the IRS. As the Board continued to mature, it became a valuable part 

of the IRS oversight process. Along with the Taxpayer Advocate, General Accounting 

Office, and the Treasury Inspector General for Tax Administration, the Oversight 

Board provides another informed but independent view of the IRS’s operations. Past 

history shows that the IRS needs strong, independent oversight.

the Honorable Karen Hastie Williams, Member of the IRS OverWe welcome James R. White, Director of Tax Issues, GAO, and 

f sight Board. Mr. White and Ms. Williams, thank you very much for 

being here. Mr. White, would you please give us your testimony. 

STATEMENT OF JAMES R. WHITE, DIRECTOR OF TAX ISSUES, 

U.S. GENERAL ACCOUNTING OFFICE 

Mr. WHITE. Mr. Chairman and Members of the Subcommittee, 

we are pleased to participate in the Subcommittee’s annual hearing 

and provide our assessment of IRS’s budget request and filing season performance to date. 

This year, IRS expects to process about 130 million individual 

tax returns as we have heard, issue about 100 million refunds, and 

receive tens of millions of phone calls. Many of these contacts with 

Americans occur during the filing season. 

Let me start with the budget. For fiscal year 2004, IRS is requesting $10.4 billion and 100,000 FTE employees. In dollar terms, 

this is a 5.2-percent increase over last year’s request. The 2004 

budget request is one of a series that over the last several years 

have identified compliance as a top priority for receiving additional 

resources, that is, increased staffing. However, actual compliance 

staffing for these same years has declined. For example, between 

2001 and 2003, it declined by over 7 percent. Thus, recent history 

raises questions about whether IRS will be able to satisfy the priority needs identified in the 2004 budget. 

Let me explain. One reason for the inability to allocate more resources to compliance work is unfunded cost increases, costs, such 

as Federal salary increases larger than those anticipated in the 

budget. The IRS has dealt with such unbudgeted costs by cutting 

back on compliance rather than, for example, cutting staff issuing 

refunds or answering taxpayer questions. 

A second reason is the difficulty of realizing internally generated 

savings. Like last year, this year’s IRS budget includes investments 

in priority areas like compliance that would be funded in part out 

of a budget increase and in part out of internal savings. The graph 

on the easel, which is also shown on page 3 of my statement, helps 

illustrate. Of $454 million in new priority spending, what IRS calls 

program enhancements, $288 million would come from the budget 

increase. The rest, $166 million, is funded from internal savings 

such as an initiative to improve the efficiency of handling payments and returns that would save over 200 staff years. 

47

As we did last year, we commend IRS for identifying such savings opportunities. However, it now appears that IRS will not be 

able to realize all of the savings identified in last year’s budget, in 

some cases, for example, because new computer systems have been 

delayed. This history raises the question of whether the 2004 budget is optimistic. 

I will return to this issue, but want to make two other points 

first. One is that the budget justification for information technology, another IRS priority with over $2 billion in the budget request, still needs improvement. Specifically, the information systems budget for operations and maintenance is not formulated 

using practices followed by leading organizations. The IRS is working to implement recommendations we made last year. 

The request for capital funds, called business systems modernization, is adequate. We support it, and IRS has improved its ability 

to manage the funds. However, IRS has acknowledged some remaining weaknesses and has initiatives planned or underway to 

correct them, as well. 

Now, I will discuss the filing season. The IRS’s filing season performance to date has improved compared to recent years. For example, telephone access has improved while accuracy has remained 

generally stable and IRS’s website has seen increased use, which 

decreases the number of labor-intensive phone calls. 

Electronic filing continues to grow, and although more than half 

of returns are still filed on paper, the number of paper returns is 

declining. In fact, paper returns have decreased so much that IRS 

is closing one of the paper return processing centers, an action that 

is going smoothly. 

Mr. Chairman, as the examples of improved telephone access and 

the processing center closing show, IRS is beginning to realize payoffs from the ongoing systems modernization investments and 

wider management improvements. Although IRS has not succeeded 

in reallocating staff to one of its priority needs, compliance, there 

will likely be increased potential for such reallocation as modernization proceeds. 

This will present Congress, in both its oversight and appropriation roles, with significant opportunities to weigh in on IRS’s overall strategy for better accomplishing its mission. Specifically, Congress will have opportunities to help IRS establish strategic priorities and make decisions about the resources needed for those priorities. 

Mr. Chairman, this concludes my statement. I would be happy 

to answer any questions. 

[The prepared statement of Mr. White follows:]

Statement of James R. White, Director of Tax Issues, U.S. General 

Accounting Office 

Mr. Chairman and Members of the Subcommittee: 

We are pleased to participate in the Subcommittee’s inquiry into Internal Revenue 

Service’s (IRS) fiscal year 2004 budget request and 2003 tax filing season performance. 

With its mission to ‘‘provide America’s taxpayers with top quality service by helping them understand and meet their tax responsibilities and by applying the tax law 

with integrity and fairness to all,’’ IRS is responsible for collecting most of the funds 

that pay for the Federal Government. To carry out its mission, IRS has a budget 

of about $10 billion and staff of about 100,000 full time equivalents (FTE). For 2003, 

48

[1]These offices use IRS-trained volunteers to help prepare basic tax returns for taxpayers 

with special needs. 

IRS expects to process 130 million individual income tax returns, issue 99 million 

refunds, receive 100 million telephone calls, and assist 4 million taxpayers face-toface at IRS and volunteer [1] offices. 

As you requested, our statement discusses both IRS’s 2004 budget request and its 

2003 filing season performance. With respect to the budget, we assessed the likelihood that IRS will be able to allocate more resources to one of its key priorities, 

compliance, and whether the proposed spending on some computer systems is justified. With respect to the filing season, we assessed IRS’s performance in processing 

returns and providing assistance to taxpayers. 

Our assessment of the budget request is based on a comparative analysis of IRS’s 

fiscal year 2003 and 2004 budget requests, supporting documentation, and interviews with IRS officials. Our assessment of the filing season is based on a comparison of IRS’s performance this year to last, site visits to IRS processing centers and 

walk-in sites, and interviews with IRS and Treasury Inspector General for Tax Administration (TIGTA) officials, tax preparers, and other external stakeholders. We 

also reviewed IRS’s Web site for usability and accessibility. 

In summary, our assessment of IRS’s 2004 budget request shows that:

• IRS is requesting 100,043 FTEs and $10.4 billion, an increase of about 5 percent over its fiscal year 2003 request. The 2004 budget request is one of many 

that have identified compliance activities as among IRS’s top priorities for receiving additional resources. These additional resources were to be funded from 

budget increases, internally generated savings, or both. Savings projections 

have been revised downward since the 2004 budget request was prepared, 

which raises questions about IRS’s ability to achieve all the savings and shift 

resources to compliance as planned. Further, IRS’s recent history shows that it 

has been unable to increase resources in compliance, despite having made it a 

priority in budget requests. In fact, for the most recent three full fiscal years—

2000, 2001 and 2002—compliance resources have declined slightly. Reasons for 

this include unfunded expenses consuming budget increases. 

• Another priority area for IRS is Information Technology (IT). IRS is requesting 

about $2.1 billion and 7,986 staff years in information technology resources for 

fiscal year 2004. This includes (1) $429 million for the agency’s multiyear capital account that funds contractor costs for the BSM program and (2) about 

$1.67 billion and 7,735 staff years for information systems, of which $1.62 billion is for operations and maintenance. In preparing its fiscal year 2004 budget 

request for the operations and maintenance of information systems, IRS began 

to implement an information technology portfolio management process patterned after the one used for the BSM program. However, until IRS fully implements planned process improvements, its ability to develop supportable information systems budget requests will remain limited.

Our assessment of the 2003 filing season to date shows that: 

IRS’s 2003 filing season performance has improved over last year, based on the 

data we reviewed in key filing season activities—paper and electronic processing, 

telephone assistance, IRS’s Web site, and walk-in assistance. In particular, access 

to IRS’s telephone assistors has improved and Web site usage has increased. While 

we cannot quantify the connection between these results and IRS’s ongoing systems 

modernization efforts, the improvement in filing season performance, in part, represents a payoff from systems modernization.

IRS’s Fiscal year 2004 Budget Request Includes Compliance, Taxpayer 

Service, and Information Systems as Priorities

For fiscal year 2004, IRS is requesting $10.4 billion, an increase of 5.3 percent 

over fiscal year 2003 requested levels, and 100,043 FTEs. IRS’s 2004 budget request 

is its second in a row to propose increased spending for higher priority areas that 

would be funded, in part, with internal savings redirected from other areas. Specifically, IRS proposes to devote an additional $454 million and 3,033 more FTEs to 

enhance programs, primarily in compliance and some customer service areas. As 

shown in figure 1, $166 million of the enhancements would be funded from internal 

savings with the remainder funded from the budget increase.

49

Figure 1: IRS’s Proposed Funding for Program Enhancements

Source: IRS data. 

As we did in last year’s testimony on IRS’s 2003 budget request, we commend IRS 

for identifying savings to be reinvested in operations to improve IRS performance. 

This approach implements a key principal of IRS’s long-term modernization effort. 

Under this approach, the reengineering of IRS’s work processes—much of which is 

dependent on investments in computer modernization—would automate or eliminate 

work, improve productivity, and free staff time that could then be redirected to 

higher priority customer service and compliance activities. 

We provide some context for understanding the 2004 budget request in figures 2 

and 3 as shown in appendix I. In those figures, we illustrate how IRS allocated expenditures and staff resources in fiscal year 2002, the most recently completed year.

Current Projections and Recent History Raise Questions 

About Whether IRS Will Realize Some Priority Resource Reallocations

Revised projections developed since the 2004 budget request was prepared raise 

questions about IRS’s ability to achieve all the savings projected and shift resources 

to compliance as planned. In addition, some projected savings are based on reengineering efforts that are not well defined. Further, IRS’s recent history also 

shows that it has been unable to increase resources in the compliance area despite 

having made it a priority in past budget requests. In fact, for the most recent 3 full 

fiscal years—2000, 2001, and 2002—compliance resources have declined slightly. 

Reasons for this decline include unfunded expenses consuming budget increases and 

workload increases in other essential operations.

IRS Has Revised Some Savings Shown 

in Its 2004 Budget Request

IRS has revised the savings associated with several reengineering efforts identified in the 2004 budget request. Revisions this far in advance of the start of the 

fiscal year are not a surprise. They do indicate that there is some uncertainty associated with the budget request’s savings projections. 

Four of the seven most significant reengineering efforts—in terms of FTEs and 

dollars to be saved—will not achieve all of their projected savings because the efforts were based on assumptions that will not be realized, according to IRS data and 

officials. IRS now projects that the seven most significant efforts will save 1,073 

FTEs and $60.5 million, down from original projections of 1,356 FTEs and $77.7 

million. 

IRS provided different reasons for why all savings will not be achieved for the following individual efforts.

• IRS’s effort to improve the efficiency of compliance support activities—the single 

most significant effort—was partially dependent on IRS implementing individual compliance savings projects in 2003. This effort was projected to save 394 

FTEs and almost $26 million. However, due in part to delays until 2004 to 

allow for additional testing, this effort is now expected to save about 30 percent 

of the original projections through the end of fiscal year 2004. 

• IRS’s effort to improve the efficiency of personnel services—the second most significant effort—depended in part on the functions of a new computer system to 

achieve most of its savings. This effort was originally projected to save 222 

FTEs and $14.6 million. According to IRS officials, these functions will not be 


Insert offset folio 90816a.001
50

[2]Treasury Inspector General for Tax Administration, Trends in Compliance Activities 

through Fiscal Year 2002, Reference No. 2003–30–078, Washington D.C.: March 2002. The compliance staff figures include revenue officers, revenue agents, and tax auditors. 

delivered on time due to schedule delays. IRS officials have not determined the 

impact of this delay and are currently assessing other potential approaches to 

achieve savings in this area.

IRS officials said the remaining three of the seven most significant efforts will 

achieve all or more of their projected savings. For example, the effort to improve 

the efficiency of handling payments and returns, originally projected to save 121 

FTEs and $4.6 million, is now expected to have more than double the savings, or 

235 FTEs and $11.9 million, due to greater than expected productivity. However, 

according to IRS officials, even when their savings are combined, these three efforts 

will not save enough to offset the reduced savings from the other four. 

Reengineering efforts may not achieve all of their savings goals, in part, because 

of the long time lag between when IRS begins developing its budget request and 

when the fiscal year begins. As with most other federal agencies, IRS usually begins 

formulating its budget request about 18 months before the start of the fiscal year 

and about 10 months before the President submits his budget to Congress. With 

planning beginning so far ahead of the budget’s actual execution, there are inevitably intervening events, such as implementation delays with computer systems, 

that make the assumptions upon which projections are based no longer realistic.

Some 2004 Reengineering 

Efforts Are Not Well Defined

Some of the reengineering efforts listed in the 2004 budget request are not well 

defined, thus raising questions about whether they will achieve their savings goals. 

For example:

• IRS still is reviewing its procedures to identify ways to make tax return processing more efficient. Although IRS projected this effort to save 203 FTEs and 

$6.9 million, it has not yet identified the operational areas that will be reengineered. IRS officials said that the projected savings are based on a 2 percent 

efficiency increase, but they are currently determining how to achieve that goal. 

• The effort to improve the efficiency of personnel services noted above also included numerous competitive outsourcing assessments affecting several program areas that, according to the budget request, would result in a significant 

reduction of staffing. However, in response to our request for more information, 

IRS was unable to provide details on the type or number of specific assessments, program areas that would be affected, how this effort would lead to reduced staffing, or the amount of net savings expected.

According to IRS budget officials, IRS uses its budget formulation process to establish productivity goals, although the responsible business units may not know 

specifically how savings will be achieved. Officials said that this approach encourages innovation in meeting performance goals while identifying ways to save FTEs 

and budget dollars.

In Recent Years, Compliance Staffing Declined

Since 2001, IRS’s budget requests have made increasing compliance staff one of 

several key priorities. For example, in its 2001 budget request IRS asked for funding for the Staffing Tax Administration for Balance and Equity (STABLE) initiative, 

which was designed to provide additional staffing for examination, collections, and 

the new Tax Exempt and Government Entities Division. However, TIGTA recently 

reported data that showed an over 7 percent decline in compliance staff between 

2000 and 2002.[2]

There are several reasons for the decline, including increased workload and unfunded costs. In September 2002, the Commissioner attributed the decline in compliance staffing to increases in workload in other essential operations such as processing returns, issuing refunds, and answering taxpayer mail. In the most recently 

completed fiscal year, 2002, IRS faced unbudgeted cost increases, such as rent and 

pay increases, in the amount of about $106 million. As a result, IRS had to delay 

hiring revenue agents and officers, tax compliance officers, and tax specialists. As 

shown in appendix I, in 2002 figure 2 shows about 69 percent of IRS’s spending was 

for labor costs. IRS noted in its budget request that any major negative changes in 

the agency’s financial posture, such as unfunded salary increases, will have a negative effect on staffing levels.

51

[3]P.L. 104–106. [4]P.L. 103–62. [5]See, for example, OMB Circular No. A–11: Preparing, Submitting, and Executing the Budget 

(Washington, D.C.: June 27, 2002). 

IRS’s Experience in 2003 Illustrates the Difficulty of Projecting Savings and 

Investments

IRS’s experience with last year’s budget request illustrates the difficulty of projecting and realizing savings and investing resources in higher priority areas. As 

part of its 2003 budget request, IRS identified internal savings of almost $197 million and 2,287 FTEs to be accomplished through various reengineering efforts and 

workload decreases. IRS planned to reinvest those savings in higher priority areas—

compliance and customer service program enhancements, including efforts to stabilize audit rates, improve telephone assistance level of service, and target highest 

priority collection cases. However, IRS now estimates that about $75 million, or 38 

percent, of the dollar savings and about 1,280, or 56 percent, of the FTE savings 

will be achieved by the specific reengineering efforts and workload decreases as 

identified in the 2003 budget request. IRS officials provided several reasons why 

some savings for these particular reengineering efforts will not be realized, including delays in modernization projects and less-than-anticipated workload decreases. 

For example, IRS received more innocent spouse cases than anticipated, and the 

cases received were more complex, causing the hours spent per case to increase. 

While savings associated with a particular effort listed in the 2003 budget request 

may not materialize, IRS officials said that business unit managers have identified 

other ways to increase productivity and did more work with fewer staff—therefore 

achieving productivity increases through efforts not identified in the 2003 budget request. As an example, officials provided an analysis showing increased telephone 

collections cases closed with significantly fewer staff than in the previous year. 

While GAO did not verify these savings, however, IRS officials were confident that 

this and other similar productivity increases were being achieved. Furthermore, IRS 

budget officials said the results of productivity increases not listed in the 2003 budget request should be included in any tally of IRS’s savings. 

We agreed that productivity increases generate savings. IRS was unable to quantify the gains from productivity increases in time for this hearing. IRS officials also 

said that most of the savings generated by the productivity increases would be used 

to handle workload increases in the same area where savings were generated. They 

said the savings would not be available for reallocation to other areas. 

As was the case in 2002, cost increases not included in the 2003 budget request 

are also limiting IRS’s ability to fund new investments. According to IRS officials, 

IRS will need to fund a total of about $388 million out of existing resources, including about $128 million for pay increases.

Information Technology Budget Formulation

Process Still Needs Improvement

IRS is requesting about $2.1 billion and 7,986 staff years in information technology (IT) resources for fiscal year 2004. This includes (1) $429 million for the 

agency’s multiyear capital account that funds contractor costs for the BSM program 

and (2) about $1.67 billion and 7,735 staff years for information systems, of which 

$1.62 billion is for operations and maintenance. In preparing its fiscal year 2004 

budget request for the operations and maintenance of information systems, IRS 

began to implement an information technology portfolio management process patterned after the one used for the BSM program. However, until IRS fully implements planned process improvements, its ability to develop supportable information 

systems budget requests will remain limited.

Fiscal Year 2004 BSM Request Developed 

in Accordance with Federal Guidance

Consistent with the Clinger-Cohen Act of 1996,[3] the Government Performance 

and Results Act of 1993,[4] OMB guidance on budget preparation and submission [5]

require that, before requesting multiyear funding for capital asset acquisitions, 

agencies develop sufficient justification for these investments. This justification 

should reasonably demonstrate how proposed investments support agency missions 

and operations, and provide positive business value in terms of expected costs, benefits, and risks. 

52

[6]See U.S. General Accounting Office, Tax Administration: IRS’s Fiscal Year 1997 Spending, 

1997 Filing Season, and Fiscal Year 1998 Budget Request, GAO–T–GGD/AIMD–97–66 (Washington, D.C.: Mar. 18, 1997); Tax Systems Modernization: Blueprint is a Good Start But Not Yet 

Sufficiently Complete to Build or Acquire Systems, GAO/AIMD/GGD–98–54 (Washington, D.C.: 

Feb. 24, 1998); and Tax Administration: IRS’s 2000 Tax Filing Season and Fiscal Year 2001 

Budget Request, GAO/T–GGD/AIMD–00–133 (Washington, D.C.: Mar. 28, 2000). [7] An enterprise architecture provides an institutional ‘‘blueprint’’ for defining how an organization operates today (baseline environment) in both business and technological terms, and how 

it wants to operate in the future (target environment). It also includes a sequencing plan that 

provides a road map for transitioning between these environments. [8] Consolidated Appropriations Resolution, 2003 (P.L.108–7). [9] IRS’s BSM expenditure plans are required to (1) meet OMB capital planning and investment control review requirements, (2) comply with IRS’s enterprise architecture, (3) conform 

with IRS’s enterprise life cycle methodology, (4) be approved by IRS, Treasury, and OMB, (5) 

be reviewed by GAO, and (6) comply with the acquisition rules, requirements, guidelines, and 

systems acquisition management practices of the Federal Government. 

Since the BSM appropriation was established in fiscal year 1998, we recommended [6] that IRS put in place an enterprise architecture (modernization blueprint) to guide and constrain its business system investments.[7] Use of such a blueprint is a practice of leading public and private sector organizations. Simply stated, 

this architecture provides a high-level road map for business and technological 

change from which agencies can logically and justifiably derive their budget requests and capital investment plans. In response to our recommendations, IRS developed an enterprise architecture. In March 2002, IRS approved a new version of 

this architecture (version 2.0), which describes IRS’s current and target business 

and technology environments. In December 2002, IRS completed the associated 

high-level transition strategy that identifies and conceptually justifies needed investments to guide the agency’s transition over many years from its current to its 

target architectural state. 

IRS’s $429 million request for the BSM account for fiscal year 2004 is based on 

its enterprise architecture as well as its related life cycle methodology and investment management process. Thus, this request is based on analyses that meet the 

statutory and regulatory requirements for requesting multiyear capital investment 

funding.

BSM Program Management Capability 

Improved, But Risks Remain

Pursuant to statute,[8] funds from the BSM account are not available for obligation until IRS submits to the congressional appropriations committees for approval 

an expenditure plan that meets certain conditions.[9] In November 2002, IRS submitted an expenditure plan seeking approval to obligate funds from the BSM account for its planned fiscal year 2003 projects and program-level initiatives. In 

March 2003, IRS submitted a revised plan that reduced the initial request by shifting funding for two BSM projects to the information systems account and reducing 

the amount requested for the core infrastructure projects and program-level initiatives. 

In briefings to the staff of the relevant appropriations subcommittees and IRS on 

the results of our review of IRS’s November 2002 expenditure plan, we reported that 

IRS has progressed significantly in improving its modernization management controls and capabilities, and has taken steps to better balance the pace of the BSM 

program with its management capability. We also reported that, although important 

progress has been made, certain management controls and capabilities, related to 

configuration management, human capital management, and cost and schedule estimate validation, have not yet been fully implemented. Our analysis has shown that 

weaknesses in these controls and capabilities contributed to BSM project cost, 

schedule, and performance shortfalls during fiscal year 2002. In approving the release of a portion of the fiscal year 2003 BSM funding, the appropriations subcommittees directed IRS to, among other things, fully establish and implement all 

management processes and controls needed to effectively manage the BSM program. 

IRS has acknowledged these weaknesses and has initiatives planned or underway 

to address them. 

Despite the progress made during the past year, IRS’s BSM program faces heightened risks because (1) several key projects are entering their later stages of development and deployment, (2) some of these projects provide the foundational infrastructure upon which later projects depend, (3) an increasing number of project milestones are experiencing cost increases and schedule delays, and (4) IRS plans to 

start more projects. While IRS is better prepared to manage risk and meet the challenges ahead, sustained top management involvement, improved management capaVerDate jul 14 2003 21:37 Dec 31, 2003 Jkt 090816 PO 00000 Frm 00056 Fmt 6633 Sfmt 6621 E:\HR\OC\90816.XXX 90816
53

[10]See, for example, U.S. General Accounting Office, Information Technology Investment Management: A Framework for Assessing and Improving Process Maturity, Exposure Draft, GAO/

AIMD–10.1.23 (Washington, D.C.: May 2000, Version 1). [11] U.S. General Accounting Office, Internal Revenue Service: Assessment of Budget Request for 

Fiscal Year 2003 and Interim Results of 2002 Tax Filing Season, GAO–02–580T (Washington, 

D.C.: Apr. 9, 2002) and Internal Revenue Service: Improving Adequacy of Information Systems 

Budget Justification, GAO–02–704 (Washington, D.C.: June 28, 2002). [12]See GAO–02–580T and GAO–02–704. [13]Office of Management and Budget, OMB Circular No. A–11. 

bilities, and consistent oversight, are critical to the successful implementation of the 

BSM program.

Although Progress Made, Information Systems Budget 

Request Development Process Needs Additional Improvements

Leading private- and public-sector organizations have taken a project- or systemcentric approach to managing not only new investments but also the operations and 

maintenance of existing systems. As such, these organizations

• identify operations and maintenance projects and systems for inclusion in budget requests; 

• assess these projects or systems on the basis of expected costs, 

• benefits, and risks to the organization; 

• analyze these projects as a portfolio of competing funding options; and 

• use this information to develop and support budget requests.

This focus on projects, their outcomes, and risks as the basic elements of analysis 

and decision-making is incorporated in the IT investment management approach 

that is recommended by the OMB and GAO.[10] By using these proven investment 

management approaches for budget formulation, agencies have a systematic method, on the basis of risk and return on investment, to justify what are typically very 

substantial budget requests for the operations and maintenance of information systems. These approaches also provide a way to hold IT managers accountable for operations and maintenance spending and the ongoing efficiency and efficacy of existing systems. 

In our assessment of IRS’s fiscal year 2003 budget request, we reported [11] that 

IRS did not develop its information systems operations and maintenance request in 

accordance with the investment management approach used by leading organizations. For example, in developing the request, IRS had not identified and assessed 

the relative costs, benefits, and risks of specific operations and maintenance systems 

and projects. Instead, according to IRS officials, they developed the request by beginning with the fiscal year 2002 expenditures and simply adding amounts to fund 

cost-of-living and salary increases. IRS officials attributed this gap between IRS’s 

practices and those followed by leading organizations to the lack of an adequate cost 

accounting system, cultural resistance to change, and a previous lack of management priority. We recommended [12] that IRS prepare its fiscal year 2004 information systems budget request in accordance with the investment management approach used by leading organizations. IRS agreed and initiated actions to address 

our recommendation. 

IRS has made progress in incorporating investment management practices into 

the formulation of its fiscal year 2004 information systems budget request. For example, IRS created information technology portfolios for its operations and maintenance systems in accordance with revised OMB budget guidance.[13] According to 

IRS officials, these portfolios were used to assist managers and staff involved with 

information technology planning and investment decision-making to (1) assess initiatives in terms of their cost, risks, and expected returns and (2) determine and 

maintain the appropriate mix of investments. They also indicated that they are 

working with Treasury and OMB to improve the information technology investment 

portfolio development process. IRS’s emphasis on portfolio development demonstrates an increased effort to ensure its information systems operations and maintenance requests are supported. 

Despite this progress, IRS has not yet completed its planned actions to implement 

our recommendation. As of April 2003, IRS has not developed an activity-based cost 

accounting system to enable it to account for the full costs of operations and maintenance projects and determine how effectively IRS projects are achieving program 

goals and mission needs. IRS officials stated that they are developing an activitybased cost model in conjunction with the Integrated Financial System modernization project, but this model will not be fully implemented until December 2003. Furthermore, IRS officials stated that data from this model will not be available for use 

54

until the fiscal year 2006 budget formulation cycle. In addition, IRS has still not 

completed its capital planning guidance, and thus did not use it in preparing its fiscal year 2004 information systems budget submission. According to IRS officials, the 

agency has developed a draft Capital Planning and Investment Control guide that 

is undergoing internal review, but it will not be completed and implemented until 

late October 2003. Until IRS incorporates the cost model and capital planning and 

investment control guidance into the preparation of its information systems budget 

request, IRS will not be able to ensure that the information systems operations and 

maintenance request is adequately supported.

Interim Results of IRS’s 2003 Filing Season 

Show Improvement Over Previous Years 

IRS’s filing season performance through mid-March has improved compared to recent years, based on data we reviewed in five key filing season activities—paper and 

electronic processing, telephone assistance, IRS’s Web site, and walk-in assistance. 

For example, telephone access has improved, and IRS’s Web site has seen increased 

use. While we cannot quantify the connection between these results and IRS’s ongoing systems modernization efforts, the improvement in filing season performance, in 

part, represents a payoff from systems modernization.

IRS’s Paper and Electronic Processing Operations Have Gone Smoothly This Year

Through March 28, IRS has smoothly processed about 67 million individual income tax returns. According to IRS data and to officials and tax preparers we spoke 

with, IRS has not experienced any significant processing or computer problems. IRS 

officials attribute this year’s smooth processing, in part, to the relatively insignificant tax law changes compared to last year. 

Electronic filing continues to grow, although at a slower rate than projected. Of 

the approximate 67 million returns, about 26 million individual income tax returns 

were filed on paper and 41 million returns were filed electronically, as of March 28, 

as shown in table 1. This represents an increase in electronic filing of 10.4 percent 

over the same time period last year. Whether IRS will achieve its goal of 54 million 

tax returns filed electronically in 2003 is uncertain. Last year at this time, IRS was 

also below its goal, but made up the difference late in the filing season.

Table 1: IRS Performance in the First Weeks of the 2003 and 2002 Filing Seasons 

Volume in thousands 2002 2003

Actual returns processeda

Paper ................................................................................................... 29,014 26,289

Electronic ............................................................................................ 37,035 40,870

Telephone assistance

Total callsb .......................................................................................... 60,674 38,213

Answered by assistors ........................................................................ 9,540 9,938

Answered by automation ................................................................... 28,130 19,860

Not answered ...................................................................................... 23,004 8,415

Customer service representative level of serviceb ............................ 69% 84%

Average speed of answerb .................................................................. 216 seconds 155 seconds

Accounts customer accuracy ratec ..................................................... 88% +/¥

1% 

88% +/¥

1%

Tax law customer accuracy ratec ...................................................... 84% +/¥

1% 

81% +/¥

1%

Internet assistance

Forms and publications downloadedd ............................................... 213,000 283,000

55

Table 1: IRS Performance in the First Weeks of the 2003 and 2002 Filing Seasons—

Continued

Volume in thousands 2002 2003

Refund status inquiriese .................................................................... N/A 10,200

Walk-in assistance

Returns prepared at IRS walk-in sitesf ............................................ 436 291

Returns prepared at volunteer sitesg ................................................ 466 594

Source: IRS data. 

aFrom January 1 to March 29, 2002, and January 1 to March 28, 2003. 

b Based on actual counts from January 1 to March 23, 2002, and January 1 to March 22, 2003. 

c Based on a representative sample estimated at the 90 percent confidence level from January 

to February 2002 and 2003. dFrom January 1 to March, 31 2002 and 2003. 

eFrom January 1 to March 28, 2003. 

fFrom January 1 to March 16, 2002, and January 1 to March 15, 2003. 

gFrom January 1 to March 9, 2002, and January 1 to March 8, 2003. 

Growth in electronic filing is a key part of IRS’s modernization strategy. Electronic filing allows IRS to control costs and improve customer service, by reducing 

labor intensive processing of paper returns. This year, to help increase electronic filing, IRS entered into an agreement with the Free File Alliance, a consortium of 17 

tax preparation companies, to offer free online tax preparation and filing services 

for at least 60 percent of all taxpayers via the IRS Web site. IRS data shows that 

as of March 26, about 2.1 million returns were filed through the consortium, close 

to the goal of 2.5 million. While there have been some complaints about pop-up ads, 

taxpayers reported in IRS surveys that they were generally pleased with the service. 

Because of the growth in electronic filing, the number of paper returns has declined in recent years. As a result, IRS is closing processing operations at the 

Brookhaven Submission Processing Center, one of its eight processing centers for individual income tax returns filed on paper. This closing represents a significant consolidation of IRS’s processing operations. Based on processing data to date, the consolidation has not disrupted the filing season.

Telephone Access Improved over Last Year, While Accuracy Generally Remained

Stable

Access to IRS’s toll-free telephone lines improved over last year. As table 1 shows, 

as of March 22, the percentage of taxpayers that attempted to reach an assistor and 

actually got through and received service—referred to as the Customer Service Representative level of service—increased 15 percentage points over the same period 

last year, for the approximately 10 million calls served. In addition, taxpayers have 

waited 61 seconds less, on average, to speak to an assistor so far this filing season 

as compared to last year. According to IRS officials, the increase in the level of service is largely due to lower than expected call demand and more effective routing of 

calls to qualified assistors. Part of the reason for the decrease in demand is that 

some taxpayers are using the new refund status check feature on IRS’s Web site 

rather than calling. 

Accuracy was relatively stable this year as compared to last year. As shown in 

table 1, taxpayers who called about their accounts received correct information an 

estimated 88 percent of the time. IRS officials said that accounts accuracy rates remained stable, because many simple refund inquiries were diverted to the new refund feature on IRS’s Web site, leaving assistors to handle more complex calls. 

Table 1 also shows taxpayers who called with tax law questions received correct information an estimated 81 percent of the time, slightly down from last year. According to IRS officials, because many assistors had difficulty in adapting to a change 

in the guide used to query callers.

Web Site Is Seeing Increased Use and Has New Features, although Concerns About

Usability Still Exist

IRS’s Web site use has increased over last year. About 283 million forms and publications have been downloaded—a 29 percent increase over the same period last 

year. In addition, an independent study reported that IRS’s Web site had ranked 

in the top 10 out of 40 government web sites and that users were able to access 

56

IRS’s site in less than one second during the January 20 through February 28 test 

period. 

IRS added a new feature to its Web site for use this filing season: the refund status check, (‘‘Where’s My Refund?’’). This feature enables taxpayers to find out if the 

IRS received their returns and whether their refunds were processed. IRS intended 

this feature to divert some simple telephone calls from assistors. Data shows that 

as of March 28, about 10.3 million taxpayers have used this feature to check the 

status of their refund. 

While some of the problems we identified in previous years appear to have been 

remedied, we continue to have concerns about the search function on IRS’s Web site. 

Our informal testing of IRS’s Web site showed that it is more user friendly than 

last year. We found it to be more accessible, easier to navigate, and data was more 

current. However, the search functions still do not always make the most pertinent 

information readily available. For example, when we typed ‘‘earned income tax credit’’ into the forms and publication search function, Publication 596—the primary 

publication on the earned income tax credit—was the 70th item on the list, and we 

had to scroll through seven pages to find it. According to IRS officials, an independent contractor is currently looking at ways to improve the search functions, and 

the contractor expects to issue its report in mid-April of this year.

Walk-in Assistance Improved and Community Based Coalitions Expanded over Last

Year

The quality of assistance at IRS’s walk-in sites has improved this year over last, 

and service to taxpayers through community based coalitions has increased. At congressional direction, the TIGTA has been responsible for measuring the quality of 

assistance at IRS’s walk-in sites. According to TIGTA officials, the accuracy of tax 

law assistance provided at IRS’s walk-in sites increased as of February this year to 

about 73 percent—an increase of 27 percentage points over the same period last 

year. TIGTA also found that the rate at which IRS employees referred taxpayers 

to a publication instead of answering tax law questions—which had been an issue 

last year—declined by about 85 percent. 

According to TIGTA officials, the increased accuracy rates resulted from various 

steps taken by IRS, including revising to the guidelines used by walk-in staff, certifying staff proficiency, conducting monthly reviews of tax law accuracy, and taking 

immediate action to address review information relating to any incorrect answers 

or improper referrals found during IRS or TIGTA quality reviews. 

As table 1 shows, more taxpayers had their returns prepared by community-based 

coalitions and other organizations that provide free tax return-preparation assistance as part of IRS’s Volunteer Income Tax Assistance and Tax Counseling for the 

Elderly programs. These programs use IRS-trained volunteers to help prepare basic 

tax returns for taxpayers with special needs—including those with a low to fixed 

income, non-English speaking people, and the elderly.

Concluding Observations

As the examples of improved telephone access and the Brookhaven Submission 

Processing Center closing show, IRS is beginning to realize payoffs from the ongoing 

systems modernization investments and wider management improvements. Although IRS has not succeeded in reallocating staff to one of its priority needs, compliance, there will likely be increased potential for such reallocation as modernization proceeds. This will present Congress, in its oversight and appropriations roles, 

with significant opportunities to weigh in on IRS’s overall strategy for better accomplishing its mission. Specifically, Congress will have opportunities to help IRS establish strategic priorities and make decisions about the resources needed to meet 

those priorities. 

Mr. Chairman, this concludes my prepared statement, and I would be pleased to 

respond to any questions. 

Appendix I 

How IRS Allocated Expenditures and

Staff Resources in Fiscal Year 2002

To provide some context for understanding the 2004 budget request, figures 2 and 

3 illustrate how the Internal Revenue Service (IRS) allocated expenditures and staff 

resources in fiscal year 2002, the most recently completed year. Figure 2 shows 

IRS’s fiscal year 2002 actual expenditures in several categories, including about 69 

57

[14] IRS’s annual expenditures may exceed its current year appropriations, because IRS has additional budgetary resources available to it and also incurs certain costs that were funded in 

prior years. During fiscal year 2002, IRS’s total budgetary resources included its fiscal year 2002 

appropriation of $9.437 billion as well as unobligated balances available from prior years, spending authority from offsetting collections, and recoveries of prior year obligations.

percent that was spent on labor. Figure 3 shows how IRS allocated its labor across 

functional areas, including ensuring compliance such as auditing and collecting delinquent taxes (45 percent), providing taxpayer services such as telephone assistance 

(21 percent), and processing tax returns (15 percent). However, the boundaries between categories may not be as well defined as the figures indicate. For example, 

in figure 3, staff categorized as maintaining information systems could also be considered under support for processing, taxpayer service or compliance. Therefore, the 

figures are meant to provide a summary of how IRS uses its resources and should 

be interpreted with caution.

Figure 2: IRS’s Expenditures in Fiscal Year 2002 [14]

Figure 3: How IRS Spent Its 99,180 Staff Years in Fiscal Year 2002


Insert offset folio 90816b.001
58

Chairman HOUGHTON. Ms. Williams? 

f STATEMENT OF THE HONORABLE KAREN HASTIE WILLIAMS, 

MEMBER, INTERNAL REVENUE SERVICE OVERSIGHT BOARD 

Ms. WILLIAMS. Good morning, Mr. Chairman and Members of 

the Subcommittee. Thank you for holding this hearing and inviting 

me to testify. It is an honor for me to be here this morning and 


Insert offset folio 90816c.001
59

appear before the Subcommittee on behalf of the IRS Oversight 

Board. I have submitted written remarks and ask that they be included within the record. 

My remarks today will focus primarily on the Oversight Board’s 

recommendation for the IRS fiscal year 2004 budget. I would like 

to address the Oversight Board’s view of the IRS budget from two 

perspectives. First, I will discuss the challenge the IRS must face 

as it continues to modernize in accordance with its strategic plan. 

The IRS’s ability to meet these challenges will be affected by resource availability. Second, I want to present the Oversight Board’s 

fiscal year 2004 budget recommendations, and why we have made 

these recommendations. 

The IRS is 5 years into a process that will transform it into a 

modern financial institution. During this period, the IRS has refocused, redefined, and rebuilt itself with dramatic changes in its 

mission, organization, management processes, and governance. It 

remains, however, the essential engine of finance in the Federal 

Government. 

As the transformation continues, the IRS continues to face difficult challenges. Each will require an investment of resources over 

multiple years if the IRS is to continue the following transformation processes. 

First, closing a compliance gap that is unfair to honest taxpayers. 

Second, continuing and implementing the business systems modernization program that will modernize its business processes and 

information technology. Third, replacing its human capital. Fourth, 

modernize its facilities. Let me highlight several specific issues. 

On enforcement, the IRS faces many examination and collection 

issues, but the sheer number of identified cases that it cannot pursue because of the lack of resources seems to me like a serious failure to treat all taxpayers fairly. Our system of voluntary compliance is based on the premise the taxpayers believe that everyone 

is paying what they legally owe. While this situation cannot be 

fixed in a single year, the IRS Oversight Board believes that the 

IRS needs about a 2 percent real growth each year for the next 5 

years. This is a practical and necessary approach to the problem. 

Moreover, if you look at the survey results on page 3 of my submitted testimony, taxpayers expect it. 

With respect to business systems modernization, let me emphasize one simple fact. The IRS will never become modernized unless 

it replaces its current information systems. The Legacy systems, 

many of them over 40 years old, prevent the IRS employees from 

obtaining timely and accurate information about taxpayers’ accounts and must be modernized. 

Although the Oversight Board has been disappointed in the performance of this critical program, which is still plagued with delays 

and schedule and cost overruns, these facts remain. The modernization program is a major long-term investment that will require significant ongoing and growing investment. Modernization 

should be implemented as quickly as possible in order to lower the 

program’s ultimate cost and serious risks. Funding reductions, 

while seemingly attractive in the short term, have long-range negative consequences which outweigh any short-term savings. 

60

Human capital is a very important and vital element in modernizing the IRS. During the past 5 years, the IRS has devoted energy 

and resources toward its structural realignment in its business systems and technology modernization, but it has placed less attention 

on strategic human capital planning. This must change. 

During the next 5 years, the IRS must cope with an aging work 

force that is increasingly retirement eligible, as is true in many 

government departments, build new skills for the more complex 

work in a modernized environment, develop an agency-wide approach to training, use modernized technology so it can deliver 

high-quality services to taxpayers, and improve internal communications. 

The facilities of the IRS are aging and are no longer capable of 

supporting the modernized IRS. As it modernizes its processes and 

technologies, the facilities must be capable of supporting this modernized environment. Today’s buildings do not provide the 

functionality needed to house modern office workers who use information technology extensively in their jobs. Upgrading facilities 

will challenge the budget in the next 5 years. 

With respect to the IRS budget, the Oversight Board has looked 

carefully at issues of fiscal constraint. We have, in my view, however, indicated that the government, in order to collect the revenue 

that is due—and the taxpayers insist that this be done—needs additional resources. The Oversight Board’s budget recommendations 

are detailed in my written statement. 

We recommend a budget of $10.724 billion. Our recommended 

budget is $287 million higher than the Administration’s. We believe this is necessary for several reasons. We believe that this additional funding is the first step in a 5-year plan to close the compliance gap. It provides for additional FTE levels for the IRS so 

that it can rebuild its human capital needs. It provides full funding 

for the IRS efforts to modernize its processes and information technology and it provides for increased level of telephone service to the 

taxpayers, additional taxpayer outreach and pre-filing assistance to 

help taxpayers file correctly, prevent problems before they occur. 

This budget will also provide funding for counterterrorism. 

We believe that modernization still has a way to go. There are 

new systems that are scheduled to come online, including the customer account system that Acting Commissioner Wenzel referred 

to, and that will be critically important in providing services to taxpayers. If the IRS is not able to demonstrate in the year ahead that 

the modernization program is moving forward, then I think we will 

have to reconsider the additional funding. 

In conclusion, Mr. Chairman, let me say that the Oversight 

Board supports the extension of the filing deadline to April 30, both 

with respect to filing the returns and making payments electronically. We believe this will help move toward the goal that the Congress has established to increase e-filing both for individual filers 

as well as for businesses. 

With that, I will conclude my formal remarks and will be happy 

to entertain your questions. 

[The prepared statement of Ms. Williams follows:]

61

Statement of The Honorable Karen Hastie Williams, Member, Internal 

Revenue Service Oversight Board 

Mr. Chairman, and members of the Subcommittee, thank you for holding this 

hearing and inviting me to testify. It is an honor for me to appear before your committee today on behalf of the IRS Oversight Board. My remarks today will be focused primarily on the Oversight Board’s recommendation for the IRS FY2004 budget. 

Let me preface my remarks by saying that the IRS Restructuring and Reform Act 

(RRA 98) gives the Oversight Board specific responsibilities to review and approve 

the budget request of the IRS prepared by the Commissioner, and submit this request to the Treasury Department. RRA 98 also provides that the President shall 

submit the Oversight Board’s budget recommendation to the Congress, without revision, together with his own budget request, and gives the Oversight Board the responsibility to ensure that the budget request supports the annual and long-range 

strategic plans. 

I would like to address the Oversight Board’s view of the IRS budget from two 

perspectives. First, I will discuss the challenges the IRS must face as it continues 

to modernize in accordance with its strategic plan. The IRS’s ability to meet these 

challenges will be affected by resource availability. In a world of scares resources, 

the Administration, Congress, and Oversight Board must be conscious of the competitive balance between resources and performance. The Oversight Board wants to 

alert IRS stakeholders, especially the Congress, of the strategic needs the IRS must 

face in the next five years, and the budgetary demands that meeting these needs 

will entail. 

Secondly, I want to present the Oversight Board’s FY2004 budget recommendations, and why we made these recommendations. Funding the IRS presents difficult 

choices, and these decisions should be made in full consideration of the performance 

levels that various funding alternatives deliver to the public.

Strategic Challenges Over the Next Five Years

RRA 98 set the IRS on a process to transform itself into a modern financial institution that could meet the needs of taxpayers. Five years into that process, the IRS 

finds itself at a crossroads. It has made enormous progress in setting the stage to 

provide better service and ensure fair treatment under the law for taxpayers. During this period, the IRS has refocused, redefined, and rebuilt itself, with dramatic 

changes in its mission, organization, management processes, and governance. 

Yet the tax system is still plagued with two long-term conflicting trends: an increased demand on the tax administration system, and a steady decline in IRS resources due to budget constraints. In the past decade, the IRS workload has increased steadily. The number of tax returns continue to grow; particularly complex 

returns, such as those filed by individuals earning more than $100,000 each year 

and small corporations. 

As the transformation continues, the IRS continues to face challenges, some of 

which may be more difficult than the ones it has overcome in the last five years. 

The Oversight Board believes that the following issues present enormous challenges 

to the IRS, and each will require an investment of resources over multiple years 

if the IRS is to continue the transformation process:

• Closing a compliance gap that is unfair to honest taxpayers 

• Continuing and implementing the Business Systems Modernization program 

that will modernize its business processes and information technology 

• Replenishing its human capital 

• Modernizing its facilitiesClosing the Compliance Gap

Closing the Compliance Gap

There is mounting evidence that some taxpayers are not reporting and paying 

what they legally owe. The amount of assessed but uncollected taxes, analogous to 

receivables, is almost $280 billion and growing. The Administration has asked Congress to authorize the IRS to use private collection agencies to help reduce uncollected taxes. The number of promoted abusive tax shelters also is on the rise, and 

the IRS has developed programs to do more to counter this problem. Both of these 

issues are serious, but particularly vexing to the Oversight Board is the number of 

potential examination and collection cases the IRS has identified but cannot pursue 

due to lack of resources. For many of these cases, the IRS is only assigning resources to approximately 20 to 30 percent of the cases it has identified. In the view 

of the Oversight Board, IRS’s lack of resources to pursue this many known cases 

is a serious failure of the IRS to meet taxpayers’ needs. Our system of voluntary 

62

compliance is based on the premise that taxpayers believe that everyone is paying 

what they legally owe. 

The Oversight Board recognizes the IRS cannot add the resources in a single year 

to work all identified cases. Adding this many new employees would be impractical, 

ineffective, and inappropriate. A more practical approach is to add a manageable 

number of new employees on a steady basis over a long period of time. This is the 

approach that former Commissioner Rossotti suggested to the Oversight Board in 

his End-of-Term Report, recommending a steady but slow growth in staff in the 

range of 2 percent per year for the next five years combined with a 3 percent increase in productivity. The Oversight Board believes that an investment of this 

scope is what is needed to close the compliance gap. 

Not only does the large workload gap represent a significant revenue shortfall to 

the government, taxpayers expect the IRS to enforce the law. Honest taxpayers recognize that they bear the burden for under-enforcement by the IRS. The IRS Oversight Board conducted a public survey in July 2002, in which taxpayers’ opinions 

about the IRS’s role in enforcement was questioned. Ninety-three percent of taxpayers said that it was very important or somewhat important to them that the IRS 

ensures that high income taxpayers, corporations, and small business are honestly 

paying what they owe. More detailed survey results are in the table below.

How important is it to you, as a taxpayer, that the IRS does each of the following to 

ensure that all taxpayers honestly pay what they owe? 

Very Important Somewhat 

Important 

Not Very 

Important 

Not at All 

Important 

Don’t 

Know 

1. Ensures low income 

taxpayers are reporting and paying 

their taxes honestly 56 28 8 5 3

2. Ensures small businesses are reporting 

and paying their 

taxes honestly 68 25 3 3 2

3. Ensures high income taxpayers are 

reporting and paying their taxes honestly 77 16 1 3 2

4. Ensures corporations are reporting 

and paying their 

taxes honestly 83 10 1 3 3

Continuing and Implementing the BSM Program

The Business Systems Modernization (BSM) program is a second strategic area 

that will require a long-term investment if the IRS is to become a modern financial 

institution. Much has been written about the state of the IRS’s computers, but the 

sad fact is that no private sector company could remain competitive with computer 

systems similar to those used by the IRS. These systems prevent IRS employees 

from obtaining timely and accurate information about taxpayers’ accounts and must 

be modernized. 

The BSM program is essential to the transformation of the IRS. Without modern 

processes and information technology, the IRS cannot meet taxpayers’ needs. The 

Oversight Board, however, has been disappointed in the performance of this critical 

program, which is still plagued with delays in schedule and cost overruns. 

Not only does some of the most difficult development work lie ahead, but the approach to modernization requires that legacy and modernized systems operate in 

parallel for extended periods of time, possibly five years. These parallel operations 

will represent an additional cost to the IRS that it is not experiencing today in a 

major way. The Oversight Board estimates that the IRS has spent approximately 

$60 million in FY2002 from its operational information systems budget to support 

the BSM program, and will spend $75 million in FY2003 and approximately $120 

million in FY2004 supporting this program. Additionally, modernized systems will 

63

have a major impact on business operations, and transitioning to modernized systems will require a major investment in developing modernized processes and training of IRS employees. Managing change must become a way of life for the IRS, and 

implementing change will present additional cost challenges. 

The Oversight Board wants to emphasize two important points about the BSM 

program:

• The BSM program is a major long-term investment that will require significant 

ongoing and growing investment 

• BSM should be implemented as quickly as possible in order to lower the program’s ultimate cost and risk. Funding reductions, while seemingly attractive 

in the short term, have long-range consequences, which outweigh any shortterm savings.

Replenishing Human Capital

As the IRS transforms itself by modernizing its organizational structure and its 

business and technology systems, it is also important for the IRS to assess its 

human capital needs. In a modernized environment, people will remain an important enabler of agency performance and will continue to be the IRS’s most important 

asset. Both the Government Accounting Office (GAO) and Treasury Inspector General for Tax Administration (TIGTA) have identified human capital issues among 

the major challenges facing IRS management. 

During the past five years, the IRS has devoted energy and resources towards its 

structural realignment and its business systems and technology modernization programs, but has placed less attention on strategic human capital planning. During 

the next five years, the IRS must cope with an aging workforce that is increasingly 

retirement eligible, build new skills for more complex work in a modernized environment, develop an agency-wide approach to training using modernized technology so 

it can deliver high quality services to taxpayers, and improve internal communications. 

Ensuring that IRS employees are engaged in their new organizations and new positions still represents a major challenge for the IRS. Moreover, the reorganization 

is only the first of many changes the IRS must manage. The introduction of modernized technology has barely begun, and this change will require the IRS to address 

employees’ needs in the modernized environment. 

The investment needed to improve the IRS’s human capital is not separately identified like the BSM program; it is embedded in all its budget accounts. Historically, 

budget for human capital improvements such as training are often cut first when 

the need to reduce expenditures occurs. It is important to that human capital investments be given the attention they deserve, and be more explicitly identified so 

that decisions on human capital needs be made on an informed basis. Addressing 

these needs over the next five years will be critical to continuing IRS transformation 

to a modern financial institution.

Modernizing its facilities

Much like its information technology, the IRS is presently dependent on aging facilities to process paper returns. Commonly known as ‘‘pipelines’’, they are co-located with ten central sites referred to as campuses at which the IRS performs a 

multitude of centralized tax administration functions. With the level of electronic filing now rising, the IRS is planning to close its first pipeline, located at its 

Brookhaven campus. 

The Brookhaven pipeline closing only represents the start of a program to re-align 

IRS campus facilities to its new workforce needs. In 2005, the IRS plans to close 

its pipeline at Kansas City, and in 2007 plans to close the pipeline at its Philadelphia campus. 

The IRS has partnered with the General Services Administration to develop a 

long-term strategic plan to modernize all its campus facilities by the year 2017. The 

plan includes 83 buildings at 10 campuses, encompassing approximately 9.8 million 

square feet of space, at a capital cost estimated at $2 billion. 

Although one goal of the plan is to replace aging facilities with flexible, modern 

facilities that align with the IRS new organization, the plan will achieve other objectives as well. The existing facilities average over 35 years in age, and are generally 

in need of substantial repair. As the IRS modernizes its processes and technology, 

its facilities must be capable of supporting the modernized environment. Today’s 

buildings do not provide the functionality needed to house modern office workers 

who use information technology extensively in their jobs. 

The plan has not yet been approved, but the Oversight Board has no doubt that 

the need to upgrade IRS facilities over the next 15 years will add an additional 

64

strain on already scarce budget resources. The plan’s first step is to provide new 

facilities in Kansas City and Philadelphia. The IRS requested the Board’s support 

to include $72 million in FY2005 budget for these facilities. The Board recognizes 

the condition of some of the IRS’s campuses, but noted that budget restraints will 

require trade-offs in the future, and that decisions must be placed in this context.

Oversight Board’s FY2004 IRS Budget Recommendations

I would now like to present the Oversight Board’s FY2004 budget recommendations in the context of the long-range budget challenges just discussed. The FY2004 

budget is the first step. It provides for steady improvements in IRS performance, 

and establishes a level of investment necessary for addressing these challenges. 

The Oversight Board is cognizant that the present war on terrorism and the 

present budget deficit increase the need to ensure that all federal spending be thoroughly justified and deliver value to taxpayers. Nonetheless, the Oversight Board 

has statutory responsibilities for IRS governance and must ensure that it makes an 

honest and independent assessment of the performance levels the IRS must deliver 

to taxpayers and the budgetary implications of those needs. The Oversight Board 

worked closely with the IRS, as well as with Treasury and the Office of Management and Budget (OMB) in producing its budget recommendation. The Oversight 

Board believes that its budget recommendation supports the annual and long-range 

strategic plans of the IRS, as required by RRA 98. 

Moreover, especially in this difficult budgetary time, the Oversight Board believes 

that there is great value in having the government collect the revenue it is due by 

ensuring that all taxpayers pay what they honestly owe. Taxpayers expect that this 

be done, and fairness dictates it. 

Table 1 shows the Oversight Board’s FY2004 budget recommendations for each 

account compared to the FY2003 IRS budget and the Office of Management and 

Budget (OMB) recommendations.

Table 1. Comparison of IRS’s FY2003 Budget with Administration Request and Oversight 

Board Recommendations for FY2004 (All $ in 000s) 

Account 

FY2003 

IRS Appropriation1

Administration 

FY2004 

Budget 

Request 

Oversight 

Board 

FY2004 

Budget 

Recommendation 

Difference 

between 

Administration 

and Oversight 

PAM ..................................................... $3,930 $4,075 $4,247 $172

TLE ...................................................... $3,705 $3,976 $4,021 $44

IS ......................................................... $1,621 $1,670 $1,670 Ø

BSM ..................................................... $364 2 $429 $500 $71

EITC .................................................... $145 $251 $251 Ø

HITC .................................................... $70 $35 $35 Ø

Total ............................................. $9,835 $10,437 $10,724 $287

1.FY2003 actual appropriation. Administration FY2003 request was $9,916 million. 2.The original FY2003 budget request was $450 million, which was subsequently reduced to $380 million. 

Overall, the Oversight Board’s recommendation is $889 million higher than the 

FY2003 IRS appropriation, of which approximately $273 million is due to inflation 

and $616 million is attributed to growth. This growth includes approximately $100 

million for an expanded EITC program and $35 million for the HITC program. 

The Oversight Board’s recommended budget is $287 million higher than the Administration’s recommended IRS budget of $10,437 million. Without the 650 FTEs 

proposed for the EITC Reform Initiative, which is common to both budgets, the 

Oversight Board recommends an additional 2,120 FTEs over FY2003 levels compared with the Administration request of 238 additional FTEs. 

The Oversight Board’s budget recommendation provides for:

• A first step in a five year plan to close the compliance gap; 

65

• An adequate FTE level for the IRS so it can rebuild its human capital to meet 

its future needs • Full funding for the IRS’s efforts to modernize its processes and information 

technology; • Increased level of telephone service to taxpayers; • Additional taxpayer outreach and pre-filing assistance to help taxpayers file correctly and prevent problems before they occur, and • Additional funding for counterterrorism activities.

The Oversight Board has recommended this budget for several reasons. First, and 

most importantly, it is consistent with the Oversight Board’s goal of achieving two 

percent in real growth for a five year period, which it believes is necessary for the 

IRS to close the workload gap in compliance. The IRS requires this level of funding 

if it is to successfully continue its transformation. 

Secondly, it provides for additional investment in the BSM program, which the 

Oversight Board believes is essential to the transformation of the IRS. Unfortunately, the Oversight Board believes the Administration request will result in the 

delay of delivery of important benefits to taxpayers. 

Third, it restores resources for customer service and enforcement that have been 

lost in recent years. Unexpected cost increases have caused the IRS to realize a 

number of Full Time Equivalents (FTEs) that was significantly below the Administration’s request. For example, the Administration request for FTEs in FY2002 and 

FY2003, and the FTE level achieved by the IRS, are:

Fiscal Year 

Administration

FTErequest

(less EITC) 

FTEs Achieved

by the IRS Difference 

FY2002 ............................................... 99,116 96,714 ¥2,402

FY2003 ............................................... 98,727 96,802 

(projected) 

¥1,925

The FY2003 FTE level will likely be lower when the effects of the $64 million 

across the board cut in the FY2003 appropriation are calculated. 

The Oversight Board is concerned that these same problems will be experienced 

in FY2004. In the FY2004 budget, the Administration proposed a 2 percent raise 

for civil service employees and a 4.1 percent raise for military personnel. If past 

years are any indication, Congress will again agree to provide pay parity to military 

and civilian personnel. Furthermore, both the House and Senate versions of the 

FY2004 budget resolution contain a ‘sense of the Congress’ provision supporting 

military-civilian pay parity for federal employees. 

The Board’s FY 2004 budget proposal, as does the Administration’s, assumes a 2% 

pay increase. The Board urges that Congress provide the necessary funds to fully 

fund any pay raise it may pass in the coming year. Otherwise, as in previous years, 

the IRS will be forced to cut employee training programs, telephone service to taxpayers and freeze future hiring initiatives. 

For three of the six IRS appropriation accounts, there is no difference between 

the Administration and the Oversight Board recommendations. For Tax Law Enforcement, the difference is small, only about 1 percent. Both the Administration 

and Oversight Board are recommending significant increases to this account. In two 

accounts, PAM and BSM, the differences are larger. I will only address the difference in these two accounts.

Processing, Assistance, and Management

The Oversight Board’s recommendation for the Processing, Assistance, and Man- agement Account is $172 million higher than the Administration’s proposed budget. 

A common feature of both recommendations is that this account should be the 

source of significant savings resulting from improvements in systems and work processes. Much of the work accomplished in this account relates to assisting taxpayers, 

processing of tax returns, and management, and the IRS has saved 1,427 FTEs 

through reengineering in this account. 

Although enforcement issues have captured the public’s attention, customer service issues are still important, and in many ways can prevent future non-compliance. 

The demand for customer service grows each year; so too does the complexity of the 

tax code. Yet only seven out of ten taxpayers can get help from the IRS over the 

telephone. 

The Oversight Board’s recommended budget also contains the savings resulting 

from reengineering, but also recommends an additional $172 million for taxpayer 

assistance that the Board believes is needed to help taxpayers. For example, the 

66

Oversight Board’s budget provides an additional $45.6 million to improve telephone 

services to small businesses as well as individual taxpayers who have questions or 

concerns regarding their taxes, as well as an additional $38 million in pre-filing 

services to determine the needs and values of taxpayers, identifying whether current 

or innovative methods are working, and providing education and assistance to taxpayers. Overall, the Oversight Board’s additional budget will provide for the following pre-filing and account services:

• Provide a higher level of assistor service (76 percent v. 73 percent), which will 

result in IRS assistors answering an additional 1,700,000 phone calls from 

small business owners and other taxpayers who have questions regarding their 

tax obligation; 

• Provide face-to-face assistance to an additional 492,000 taxpayers through outreach programs and pre-filing compliance alternative treatment initiatives; 

• Provide indirect assistance to an additional 138,000 taxpayers through established partnerships with practitioner groups as well as the Volunteer Income 

Tax Assistance program; 

• Provide an additional 38 staff-years of education and out-reach services.

Business Systems Modernization

The Oversight Board’s recommendation for the Business Systems Modernization 

account is $136 million higher than the FY2003 appropriation of $364 million and 

$71 million higher than the Administration’s proposed budget of $429 million. 

Considering the essential nature of the BSM program, the Oversight Board is concerned with the FY 2003 appropriation for the BSM account, and the implications 

of these actions for future appropriations. The Administration’s original FY 2003 

budget request included $450 million for the BSM account, which was approved by 

both the House of Representatives and the Senate Appropriations Committee. However, in September 2002 the IRS was assigned responsibility for implementing a 

new tax credit, the Health Insurance Tax Credit (HITC), which was passed as part 

of the 2002 Trade Adjustment Act. In response to this new requirement, the Administration supported a transfer of $70 million from the BSM account to implement 

the HITC program, creating a separate HITC account and reducing the BSM request to $380 million. This transfer was in lieu of a request for additional funding 

to cover the costs of the HITC program. 

Ultimately, the FY2003 appropriation for BSM was $364 million, $28 million less 

than the FY 2002 appropriation of $392 million. The Oversight Board is disappointed that funds to meet the requirements of the new HITC requirement were 

taken from such an important strategic program as BSM. Admittedly the BSM program had disappointing results in FY2002, but underfunding the program in the 

long term only delays the delivery of benefits to taxpayers. 

Clearly the program execution needs improvement, and the Oversight Board believes that approval of expenditures must be consistent with the IRS’s ability to 

manage and implement the program. The Oversight Board believes that the current 

process of having Congress approve the BSM expenditure plan provides safeguards 

against spending funds on projects the IRS cannot manage. 

The Board believes the IRS is beginning to improve its ability to manage the BSM 

program. If the IRS can demonstrate its ability to manage the program, the funding 

to move the program forward must be available. On the other hand, if the IRS cannot demonstrate its ability to manage the BSM program in an acceptable manner, 

additional changes must be made prior to starting any new projects. Poor performance is not acceptable.

Extension of Filing Deadline for Electronic Filers

One last topic that I would like to address is the proposed extension of the filing 

deadline to April 30th for taxpayers who file and pay electronically. 

I commend this subcommittee for its strong interest in electronic filing. E-filing 

delivers benefits to taxpayers and is now starting to simplify IRS operations as well. 

The number of paper returns has now decreased to the point where the IRS is planning to close one of its ten paper processing pipelines in 2004, and is planning to 

close a second one in 2005. 

Last year, in its electronic filing report to Congress, the Oversight Board supported the extension of the filing deadline to April 30th for taxpayers that file electronically. Recently, in response to questions raised at the Oversight Board’s public 

meeting in January, the Board revisited this issue to ensure that this continues to 

be a sound recommendation. Based on surveys the IRS has made of taxpayers, the 

Board believes that the proposed due date change would be effective in attracting 

67

additional electronically filed returns, and continues to support the proposed extension. 

quick question. I may be misidentifying the numbers here, but you 

That concludes my statement. I will be pleased to answer any questions.

Chairman HOUGHTON. Thank you very much. I just have a 

f were asking for $200 million more than the original request, but 

my Lord, you are able to put the service back into compliance, you 

are able to upgrade the people, you are able to modernize the new 

technology and to institute a program for counterterrorism. That is 

all within that $200 million? 

Ms. WILLIAMS. Mr. Chairman, the $200 million goes toward 

those objectives. We are not saying that it will complete that process. We are also mindful of the savings that the agency presumes 

that it will be able to make in terms of savings from their past 

budget. So, both of those elements are part of what we anticipate 

the higher budget can satisfy. 

Chairman HOUGHTON. Thank you very much. Mr. Pomeroy? 

Mr. POMEROY. I want to thank the panel, and especially Ms. 

Williams for participating in the Advisory Oversight Committee. I 

think that is a terrific additional resource that has come online to 

help us from a third party, credible vantage point evaluate whether 

the IRS has this capacity it needs. 

As to Mr. White, the GAO, I would like, and I think the Chairman and I will get a formal request together, a GAO evaluation of 

this whole business of the preparation of the pre-certification on 

the EITC. I would like an evaluation in terms of whether or not 

sufficient care has been put into the process by which the proposed 

prototype certifications are going to be market friendly or would 

represent potentially a barrier to people that otherwise need those 

benefits. 

We want screening. We want to get that error rate down. We 

want to stop cheating, but we don’t want, on the other hand, to 

prevent some of the most vulnerable aspects of our population from 

accessing a benefit that we have determined they are entitled to 

have and, in fact, need. 

So, there is substantial concern now in terms of whether or not 

this thing has been developed too quickly, with too little input, not 

sufficiently linked to other pre-certification processes other agencies might use that have substantial marketplace experience in 

terms of whether or not they are user friendly or not. So, that is 

one component of what we would like you to look at. 

The second component involves basically an evaluation as this 

first set comes in. It is going to be 45,000 the first year, 2 million 

the second year, 5 million the third year, and there is a concern 

as to whether or not on this time line there is sufficient opportunity to really evaluate what we are seeing by way of results from 

the first year’s experiment. I think the GAO evaluation, for example, the first 1,000 sent out and responded, or in any event, a very 

careful evaluation of this first 45,000 block would assist the IRS 

greatly in evaluating whether or not this is just prepared to ramp 

up to the next 2 million or whether or not we need to do some important form revision. 

68

So, that is what I am interested in. Is this thing ready to go to 

the first 45,000 in your evaluation there, and then, second, what 

are we getting as returns start to come in? I think GAO could play 

a very important role for us in making certain that we have a market-appropriate product as we initiate pre-certification. Is GAO 

equipped to do something of that nature? 

Mr. WHITE. Mr. Pomeroy, those are two very good questions. 

What I would like to do is talk to either you or your staff about 

the details of the proposed study. 

Mr. POMEROY. I expect that the Chairman and I will be of one 

mind on this and be able to tee something up with a little more 

specificity than my utterances from the dais, but you get what I 

mean. 

Mr. WHITE. Yes. Yes. We will work with you and your staff. 

Mr. POMEROY. That is the kind of thing you can do? 

Mr. WHITE. Yes, sir. 

Mr. POMEROY. Thank you. I yield back. 

Chairman HOUGHTON. Thanks very much. Mr. Portman? 

Mr. PORTMAN. Thank you, Mr. Chairman, and Mr. White, 

thanks for staying on top of the business systems modernization 

program. We have had some cost overruns and delays, and as the 

Acting Commissioner said, it is a very difficult and complex project, 

but we depend on you to provide us with accurate third-party analysis and to keep everyone’s feet to the fire because it is so important. 

Ms. Williams, thank you very much for your service on the Oversight Board. I know this is sometimes a thankless task which you 

do in addition to your full-time job, and yet your expertise and the 

expertise of your colleagues has been, I think, very, very helpful. 

Commissioner Rossotti thought so, and I still believe the Oversight 

Board plays a very important function, partly on the budget side, 

and that is one question I want to ask you about. You do ask for actually over $200 million more than the IRS has 

asked for. I am not sure if it is that different than the IRS initial 

discussions with the Office of Management and Budget (OMB), but 

in terms of where we have ended up. As I look at it, what I really 

see is that you are asking for additional funding in the enforcement 

area, which is obviously very important, and we have talked about 

some of the problems with enforcement right now, but you are also 

asking for additional funding in other areas, too, including taxpayer service and, of course, including the modernization effort as 

we just talked about. 

I guess my question to you is this. Traditionally, the IRS has 

been accused of kind of having a pendulum swing. It is either a 

focus on enforcement, and sometimes that enforcement mentality 

has dominated over the years, I would say particularly in the years 

prior to the Commission’s work where there were a lot of concerns 

raised, and then perhaps the pendulum swings the other way toward focusing on service and having less focus on the enforcement 

side. We talked about the impact of the 10 deadly sins, for instance, on the enforcement attitude, and so on. 

Are you fearful, looking at this with some perspective now, that 

we may be seeing that pendulum swinging again, in other words, 

now that we have identified this problem in terms of compliance 

69

and enforcement, are we in danger of the pendulum swinging, or 

do we have more of a balance now where we are able to move forward, understanding that by providing service, in the end, we do 

get better enforcement? 

Ms. WILLIAMS. Mr. Portman, our view is that enforcement and 

service are not opposite sides of the coin. We think both are critically important to the success of the IRS, and our budget recommendations are in both of those areas, as you observed, in customer service as well as in the enforcement area. Indeed, we feel 

that by providing additional services, we can accelerate the compliance process by providing accurate and complete information to 

taxpayer inquiries. 

So, I think the two of them have to be looked at in tandem, and 

I don’t think that we have a pendulum effect. I think we have 

sometimes in the past considered a stop and start in terms of emphasis. We hope to see both elements going forward, and that is a 

particular reason behind our recommendations for the budget. 

Mr. PORTMAN. Well, thank you, and again, your job is in part 

to oversee that and make sure that we continue to have a balance, 

and I couldn’t agree with you more. I think every service business 

in America has learned that almost in a revolution in the service 

industry, that by providing better information, by having better 

service, in a sense, you have better compliance and better enforcement and they are not inconsistent, and I hope you will continue 

to work on that. 

The Oversight Board, as you know, has been the subject of some 

controversy since its establishment, and it was initially established 

in 1998. Then it took a while to get the Oversight Board Members 

there. With Steve Nichols’ departure recently, we have heard again 

some questions about the independence of the Oversight Board. 

I would appreciate it if you could comment on that. How independent is the Oversight Board? Is it continuing to serve the function envisioned by the Commission and by the Restructuring and 

Reform Act of 1998? How do you feel about the Oversight Board, 

and its relationship with the IRS? 

Ms. WILLIAMS. I think the Oversight Board is clearly very independent. I think that the Oversight Board sees as its focus the concerns of taxpayers. Our concern is for the taxpayers, just as on a 

corporate board, a good board of directors is focused on its shareholders. 

From this perspective, we look very closely at the IRS. We look 

at its budget. We look at its personnel. We have had a series of 

public hearings over the years to get public input. Members of the 

Oversight Board and staff have attended tax forums every year 

that we have been in existence where more than 2,000 practitioners are present. We make ourselves available in small groups 

to talk with them, to get their concerns and to put that into our 

thinking as we look at the budget. 

So, I think that the Oversight Board as envisioned by this Committee and the Congress as a whole has served an important independent role. Certainly, we talk with the IRS management. The 

Commissioner and the Secretary of the Department of the Treasury, as you know, are statutory Members of the Oversight Board 

and have participated in our meetings on a regular basis. 

70

We think that this combination of interaction with management, 

with the public, with the practitioners who work with the IRS, provide us with an independent basis to make recommendations with 

respect to budget as well as to management initiatives. 

Mr. PORTMAN. Thank you, Ms. Williams. 

Chairman HOUGHTON. Mr. Weller. 

Mr. WELLER. Thank you, Mr. Chairman, and Ms. Williams. Mr. 

White, thank you for participating today in today’s panel. I would 

like to direct my question to GAO, if I could, this morning. Earlier, 

I had asked the Acting Commissioner regarding the Administration’s proposal for use of private debt collection services to collect 

outstanding tax assessments, and I was wondering, Mr. White, the 

statistics that I shared at that time, less than a dime on the dollar 

was being collected between 1996 and the year 2001 in outstanding 

tax assessments. I was just wondering from the perspective of the 

GAO, from your analysis, what are the primary reasons why the 

IRS was unable or ineffective in collecting outstanding tax assessments? 

Mr. WHITE. I would make a couple of points. One is not all of 

that debt, not all of those outstanding tax assessments are collectible. There is a significant proportion of that that is debt owed by 

bankrupt businesses, mainly small businesses, but bankrupt businesses, so there is no chance of collecting a significant portion of 

that debt. 

At the same time, there is tax debt that has collection potential 

that IRS is unable to work. We have done work in the past. The 

IRS simply is unable to work all of the cases, so they will make 

an assessment. It goes into their collections queue and they are unable to work all of those cases. 

Mr. WELLER. Why are they unable to work all of those cases? 

Mr. WHITE. Well, part of it is due to staffing declines in the 

compliance area. Over the last—you can go back almost any number of years and what you see is a steady, but over years when you 

add it up, a fairly significant decline in compliance staff. We talked 

about it in our statement, that IRS has over the last several budgets proposed increasing resources devoted to compliance, and they 

have been unable to do that. 

Mr. WELLER. Now, the Administration has proposed and Mr. 

Houghton has introduced legislation which would provide for the 

use of private debt collection agencies to help collect what is collectible for tax assessments. Have you reviewed that proposal? Has the 

GAO reviewed that proposal? 

Mr. WHITE. We have not reviewed the current proposal. We reviewed the experience in 1996 and 1997 when IRS did their pilot 

then, and I guess there are kind of two levels of issues here. One 

is the policy judgment about whether this is a good approach to 

take in general, and I think because of the concern about the uncollected debt with collection potential that IRS is able to work, that 

there may be some benefits to this sort of approach. 

Then a second level issue, though, is the IRS’s capability to manage this sort of process. Back in 1996 and 1997, they did not have 

the capability in their information systems to identify the kinds of 

cases that the private debt collectors could most productively work. 

They had agreed with the contractors up front to deliver certain 

71

kinds of cases to those contractors. They were unable, using the 

systems they had at that time, to actually pick those cases out and 

get them to the contractors. So, after the first pilot, the effort was 

stopped. 

Mr. WELLER. The Commissioner noted that over 40 States use 

private collection services, and I was wondering, has the GAO ever 

studied how the States have utilized these services and see whether there have been successes or weaknesses in the State program? 

Mr. WHITE. As I said, we have not looked at the current proposal. We have not looked at what the States have done since 1996 

or 1997. We have not looked at whether IRS’s systems now, with 

the improvements that they have been making as a result of the 

modernization investments, now give them improved capability for 

delivering cases to contractors. 

Mr. WELLER. Thank you, Mr. White. Ms. Williams, do you have 

any thoughts from the Oversight Board’s perspective on this? 

Ms. WILLIAMS. Yes, Congressman Weller. I would be happy to 

respond. We believe that this is a very positive initiative. Over 

$280 billion in uncollected funds stand on the books and, unfortunately, is growing. We think that the IRS has learned from the earlier pilot experience, has looked at the problems that arose there, 

and is prepared to launch a new effort with the support of the Congress. 

The Oversight Board will stay on top of the situation. One of the 

things we have talked to the IRS about is being sure that as they 

initiate this process, there are good controls in place, there are performance measures that they can use to evaluate the performance, 

that the cases that are selected are cases that have a reasonably 

high degree of collection to avoid some of the problems that Mr. 

White identified, and that there is an appropriate fee structure. 

As you are certainly aware, other agencies of the Federal Government, such as the Department of Education, already use outside 

collection agencies and have done that successfully. So, we think 

that this is an important initiative, and we fully support it. 

Mr. WELLER. Thank you. Thank you, Mr. Chairman. I see my 

time is expired. 

Chairman HOUGHTON. Thank you very much. I have just got 

one additional question, but I want to thank you very much, so 

much, Mr. White, for being here and we will be in touch with you 

on this evaluation of the pre-certification. Ms. Williams, thank you 

very much for your participation. 

I would like to ask you both a broad question. We never seem 

to quite have the funds to do what we want, and everything is 

being squeezed. You have got the compliance issue, you have got 

the equipment issue for analysis and administration and electronic 

filing. You have got service. Then on top of that, Ms. Williams, you 

say that the facilities really are inadequate and also our human 

capital planning is not adequate. Those are going to take additional 

dollars. Are we going to be able to do all of that within the confines 

of these sort of projected budgets? 

Ms. WILLIAMS. Mr. Chairman, I think we will be able to begin 

the process or to continue from where we are now. We are not 

going to have 100 percent success, but we think it is important that 

the IRS focus on all of these issues. 

72

From the perspective of the Oversight Board, we represent the 

taxpayers. We think the taxpayers need service; they need modernization; they need enforcement. I think with the leadership of 

the Oversight Board, the IRS focused on these three key areas. I 

think we can make significant progress and use the dollars appropriated by the Congress effectively toward this end. 

It is a long-term process. It is not going to happen on a 1-year 

basis. That is why in the past, the Oversight Board has recommended multi-year funding, particularly for the modernization 

program, because it is very difficult to have stop-and-start funding 

and have an effective, smooth delivery of these major system 

changes that are underway. 

So, I think it is a long-term process. It is a multi-year process. 

We believe that the budget that has been recommended by the 

Oversight Board, which, as I think you recognized, was not that 

different from what the IRS originally recommended to the Department of the Treasury before it went through the OMB review process, is a number that will get us clearly down the path that we 

need to go. 

Mr. WHITE. Mr. Chairman, one way to judge an agency’s budget 

is by looking at the resources they are given and then comparing 

that to the results that the agency is able to achieve with those resources, and I think in the IRS case, there is some good news 

there. 

Over the last several years, Congress has fully funded, or essentially fully funded IRS’s budget request, and over that same period, 

IRS has had two priorities. One was to improve service to taxpayers. One was to improve their compliance processes. 

On the service to taxpayers side of the coin, we are seeing some 

visible improvements now. Telephone service is considerably higher 

than it was several years ago when you look at access rates and 

accuracy rates. 

The example of the paper return service center closing is another 

example of a payoff, where IRS is improving efficiency through increased electronic filing. This is enabling them to close a service 

center, which is a very labor intensive process for handling paper 

returns, and ultimately ought to be able to shift those resources 

then into other areas. 

At the same time, on the compliance side, they have not been 

able to increase resources there the way that they have intended 

in the last several budgets, where they have made that a priority 

but have not been able to shift the resources into that area. 

Chairman HOUGHTON. Thank you very much again. I certainly 

appreciate your time and all the information and wisdom you share 

with us. Thank you. 

Now, I would like to call the next panel, which is Robert 

McKenzie, attorney, of Arnstein and Lehr from Chicago, on behalf 

of the American Bar Association (ABA); Timothy McCormally, Executive Director of Tax Executives Institute (TEI); William Stevenson, Chairman of the Federal Taxation Committee of the National 

Society of Accountants in Alexandria; and Claudia Hill, a Member 

of the National Association of Enrolled Agents (NAEA). If you 

would come to the desk, I would appreciate it. All right, ladies and 

73

gentlemen. Thank you very much for being with us. Mr. McKenzie, 

would you start your testimony? 

STATEMENT OF ROBERT E. MCKENZIE, AMERICAN BAR 

ASSOCIATION SECTION OF TAXATION 

Mr. MCKENZIE. Mr. Chairman, Ranking Member Pomeroy, and 

other Members of the Subcommittee, I am Bob McKenzie. I am 

from Chicago, Illinois. I am here on behalf of the ABA. One disclaimer. The testimony to be presented is on behalf of the section 

of Taxation and represents the views of our individual Members 

and does not represent the view of the entire ABA. With that disclaimer, let us move to a few points. 

Chairman HOUGHTON. That lets you off the hook. You can say 

anything you want. 

[Laughter.] 

Mr. MCKENZIE. Let me move to just a few important points 

made in our written testimony, and I would submit that for your 

review, but I would like to first go to the problems with the collection due process (CDP). We found that it is a wonderful program. 

It adds protections for taxpayers, but the problem we have is that 

the tax protester community is using it to abuse and delay the system. We have serious reservations about the abuse of these new 

rights by this community, and we believe that there has to be legislation to reduce the impact of the tax protesters’ abuse of the CDP 

system. 

There is legislation currently pending which would permit the 

IRS to treat portions of the CDP hearing request based on frivolous 

positions without having a full hearing, and we believe that that 

is appropriate. We also believe that even though the courts have 

sanctioned some of these protesters when they have gone to Tax 

Court, that may not be sufficient. 

For those people who continually abuse the system, we believe 

that consideration should be given to even more serious sanctions, 

including the right to enjoin further actions in Tax Court by the 

U.S. Tax Court, and perhaps criminal penalties for those who continually abuse the system, because some of the tax protesters 

aren’t getting the word. They enjoy abusing the system, and our 

view is for those taxpayers we represent who are legitimately protesting through the CDP system, they are not getting their cases 

heard because of the abuses of the system by a minority whose only 

goal is to thwart the tax system. 

So, we do hope, though, if there is any such penalty imposed, 

that consideration be given that this be based upon a reasonable 

basis test, which is a test that is already established within Internal Revenue Code 6662 in respect to penalties when we look to penalizing people abusing the CDP process. 

The second issue I would like to speak to goes to Congressman 

Weller’s question with respect to collection outsourcing, and we believe this is something that certainly deserves review, but we 

would like to have this panel look in balance to the issue of section 

1204 of the Restructuring and Reform Act 1998, which specifically 

prevented the IRS from using collection statistics in evaluations. 

One of the problems we have with outsourcing is how can we 

protect the taxpayer in the same manner, when in the past, we had 

74

civil service employees being paid a salary and not being rewarded 

in a monetary bounty system for collection and we had abuses. 

Now, we are moving to a system proposed which would give a monetary reward to outside collection agencies for each collection. So, 

we would ask that any outsourcing look to balancing both the 

needs of the taxpayers for protection and the intent of this body 

with section 1204 in protecting those rights with the need to get 

the revenue. So, we certainly believe it is something that warrants 

looking at, but we have great reservations about the protection of 

taxpayer rights, and we would also note that many of our Members 

have noted that not all State agencies have fully protected people’s 

rights with outside collection activities. 

The last matter I would like to discuss is the failure of the IRS’s 

new offer and compromise system. Congress passed new laws in 

1998 to liberalize the offer and compromise process. The IRS has 

not effectively implemented it. They have not applied the individual facts and circumstances test that was required in addition 

to the IRS standards, and their new system adopted in 2001 in reaction to a large backlog has, in fact, resulted in a much lower acceptance rate of offers and compromise, and we have to consider 

that. Thank you. 

[The prepared statement of Mr. McKenzie follows:]

Statement of Robert E. McKenzie, American Bar Association Section of 

Taxation 

Good morning. My name is Robert E. McKenzie. I practice tax law in Chicago, 

and currently serve as the Division Coordinator for the American Bar Association 

Section of Taxation to the IRS Wage and Investment Division. This testimony is 

presented on behalf of the Section of Taxation. It has not been approved by the 

House of Delegates or the Board of Governors of the American Bar Association. Accordingly, it should not be construed as representing the policy of the Association. 

I. Introduction

The Section of Taxation is comprised of more than 20,000 tax lawyers. As the 

country’s largest and broadest-based professional organization of tax lawyers, one of 

our primary goals is to make the tax system fairer, simpler and easier to administer. Our members include attorneys who work in law firms, corporations and other 

business entities, government, non-profit organizations, academia, accounting firms 

and other multidisciplinary organizations. We advise on virtually every substantive 

and procedural area of the tax laws, and interface regularly with the Internal Revenue Service (‘‘IRS’’) and other government agencies and offices responsible for administering and enforcing such laws. Many of our members have served in staff and 

executive-level positions at the IRS, the Treasury Department, the Tax Division of 

the Department of Justice, and the congressional tax-writing committees. 

We very much appreciate the opportunity to provide input to the Subcommittee 

regarding ways in which the IRS might more efficiently and effectively administer 

the internal revenue laws. There are, of course, numerous aspects to this enormous 

task. My testimony today focuses on what we believe to be an especially important 

administrative objective: effective collection of federal income taxes. In that regard 

I will focus my comments principally on the offer in compromise program and how 

it has been implemented. I will also address briefly a number of other issues affecting tax collection. 

II. Offers in Compromise

Section 7122 of the Internal Revenue Code grants the IRS the authority to compromise tax obligations. The offer-in-compromise (‘‘OIC’’) program is intended to 

bring taxpayers, who are sincerely trying to fulfill their obligations, back into compliance. In order to accomplish this objective more effectively Congress and the 

Treasury Department have gradually liberalized the OIC program in recent years—

both by expanding the grounds on which compromise may be granted and by estabVerDate jul 14 2003 21:37 Dec 31, 2003 Jkt 090816 PO 00000 Frm 00078 Fmt 6633 Sfmt 6621 E:\HR\OC\90816.XXX 90816
75

lishing allowable expense guidelines that permit taxpayers entering into compromises to provide for basic living expenses in light of their particular facts and 

circumstances. Notwithstanding Congressional and Treasury initiatives, we as tax 

practitioners have found that in practice the statutory and regulatory objectives of 

the OIC program are not being met. In fact, the effectiveness of the OIC program 

is being severely undermined in certain cases by the manner in which it is being 

implemented. 

Traditionally, compromise was permitted on two grounds: doubt as to collectibility 

(i.e., the taxpayer conceded the amount due, but was unable to pay it) or doubt as 

to liability (i.e., the taxpayer contended that he or she did not owe the underlying 

liability and was able to show that the issue had not adequately been heard earlier 

in the administrative process). In 1998, Congress expanded the scope of the program 

by directing the IRS to implement a third ground for compromise: ‘‘effective tax administration.’’

While the aim of the OIC program is to collect the maximum, reasonably collectable amount from the taxpayer, while still encouraging future compliance—both in 

terms of filing returns and paying tax—the IRS in recent years has tended to process OICs restrictively with the result that taxpayers are not only left with tax debts 

that they are not reasonably able to pay but also are strained to meet their current 

tax obligations. 

How has this occurred? In the summer of 2001, the IRS created a new centralized 

processing system for offers in compromise. The centralized processing system was 

designed to reduce the backlog created by the increasing number of offers in compromise submitted each year. Unfortunately, in some cases, the backlog is being reduced simply by the return of offer packets that have only minor omissions in documentation. For example, documentation sometimes is simply lost. Lost documentation is treated the same as documentation that was never submitted. Failure by the 

taxpayer to provide the missing documentation in a short time-frame results in the 

offer not being processed at all. This strict ‘‘gatekeeper’’ approach is not consistent 

with recent Congressional efforts to liberalize the OIC program and to encourage 

reasonable collection alternatives. 

Similarly, many IRS employees below the Appeals level who process offers in compromise refuse, in direct contravention of the amendments to IRC § 7122 enacted 

in the Restructuring and Reform Act of 1998, to consider individual facts and circumstances when applying allowable expense standards for offers in compromise. 

While Appeals generally observes the IRC § 7122 requirements, the OIC program is 

not benefiting all taxpayers it is intended to reach if fair consideration of an offer 

can only be obtained at the Appeals level. 

In addition, the IRS has taken the position that if a taxpayer can pay the tax 

debt, based on his current monthly income and expense extrapolated over the entire 

remaining statute of limitations for collection, an OIC will not be available. In fact, 

as a condition of approving an offer, some Area offices have insisted that the statute 

of limitations be extended up to five additional years, both for purposes of determining the acceptable offer amount and the term for its payment. While it is obvious that some baseline period is necessary to determine collectibility, these are unrealistic measurement standards. 

Finally, although compromise based upon effective tax administration (‘‘ETA’’) 

grounds is still relatively new, and final regulations on ETA were only issued in 

July of 2002, the ability of taxpayers to compromise on these grounds is being frustrated by a lack of clear policies concerning the processing of ETA offers. The final 

ETA regulations did not provide a meaningful indication of what kinds of cases have 

a chance of succeeding on ETA grounds. 

In the long run, the desire to collect the maximum amount of tax possible must 

be weighed against disincentives to future compliance that are being created by current restrictive OIC policies. To realize the objectives of the OIC program more effectively, we recommend the following:

• Return to a local system of processing offers in compromise, or streamline centralized processing by permitting offers to be submitted for initial consideration 

with only the amount of documentation essential to make a reasoned decision. 

• Direct IRS employees who are processing offers in compromise to exercise more 

discretion when evaluating the sufficiency of documentation submitted with an 

offer. 

• Assign experienced Revenue Officers to review each incoming OIC. 

• Ensure that IRS employees are properly trained to follow statutory directives 

to consider individual facts and circumstances when applying allowable expenses. 

76

1 Internal Revenue Manual 5.15.1.3.2.2.2.

• Support legislative efforts to develop additional guidelines on processing ETA 

offers. 

III. Allowable Expense Standards

A. Background

In August, 1995, the IRS adopted guidelines with respect to taxpayer expenses 

that would be taken into account when considering installment agreements and offers in compromise. The guidelines on national and local allowances published by 

the IRS are designed to enable taxpayers entering into offers in compromise to settle their tax liabilities while still providing for basic living expenses. 

To introduce additional flexibility into the OIC program and, in particular, ‘‘make 

it easier for taxpayers to enter into OIC agreements,’’ Congress, in 1998, directed 

the IRS to continue the practice of prescribing guidelines for allowable expenses. In 

addition, Congress expressly directed that the allowable expense guidelines be expanded to provide that IRS employees consider the facts and circumstances of each 

individual taxpayer before ultimately determining the appropriate amount of allowable expenses for such taxpayer. In particular, the legislative history anticipates 

that the IRS would ‘‘take into account factors such as equity, hardship, and public 

policy’’ in making individual determinations. Unfortunately, practice has shown that 

IRS employees rarely deviate from the published expense tables. Additionally, allowable expenses guidelines are often administered unfairly and inconsistently. 

The IRS created two categories of expenses to guide examiners in their decisionmaking: Necessary Expenses and Conditional Expenses. The IRS has charts for national and local standards setting forth its view of necessary living expenses. Necessary Expenses are based on national and local standards tables, which are usually 

less than the taxpayer’s actual expenses. Conditional Expenses are those expenses 

that the IRS does not consider meeting the Necessary Expense tests, but which it 

might allow if the taxpayer can pay the outstanding taxes pursuant to an installment agreement within five years. If the taxpayer could not pay within five years, 

she is allowed one year to eliminate her Conditional Expenses.

B. Necessary Expenses

The IRS procedures provide that a Necessary Expense will be allowable if ‘‘it 

provide[s] for a taxpayer’s and his or her family’s health and welfare and/or the production of income.’’ The IRS requires that Necessary Expenses be in an amount that 

reflects the minimum on which the taxpayer and his or her family can live based 

on prescribed national, local or other applicable administrative standards: 

1. National Standards: These provisions establish reasonable amounts standards for five types of Necessary Expenses: food, housekeeping supplies, apparel and 

services, and personal care products and services. The first four standards come 

from the Bureau of Labor Statistics (‘‘BLS’’) Consumer Expenditure Survey 1999–

2000. The last standard has been established by the IRS. Any amount above the 

national standards may be considered excessive. Alaska and Hawaii have been allowed some upward adjustment because of their high cost of living. However, it is 

interesting to note that the IRS adjusts Hawaii expense upward by 10% yet its employees receive a 25% cost of living adjustment. It is also interesting to note that 

the same standards are applied everywhere in the continental United States despite 

the fact that personal living expenses vary widely. For example, contrast the personal living expenses of a New York City resident with those of a Des Moines resident. It is clear that the New Yorker would face significantly higher costs yet the 

tables do not reflect any differential. 

2. Local Standards: Local standards have been established for housing and 

transportation. The IRS has established a housing category for each county in the 

United States. Housing standards, which include utilities, are extremely parsimonious. However, when applying the local housing standards, the IRS employee 

is allowed to consider other factors that might justify an expense in excess of the 

local housing standard including, for example:

1. The increased cost of transportation to work and school which would result 

from moving to lower cost housing; 

2. The tax consequences that would result from selling a home; 

3. The tax consequences which would result from moving from an owned home 

to a rented home, and 

4. The cost of moving to a new residence.1

77

2 Internal Revenue Manual 5.15.1.3.2.2. 

3 Internal Revenue Manual 5.15.1.3. 

4 (1) In addition to those listed under the National and Local Standards, certain other expenses are usually considered to be necessary. 

(a) taxes, 

(b) health care, 

(c) court-ordered payments, 

(d) involuntary deductions, 

(e) accounting and legal fees for representing a taxpayer before the IRS, 

(f) secured or legally perfected debts (minimum payments), and 

(g) accounting and legal fees other than those for representing a taxpayer before the IRS 

which meet the necessary expense test of health and welfare and/or production of income. 

(2) Depending upon individual circumstances, other expenses may meet the necessary expense 

test: health and welfare and/or production of income. 

(3) A taxpayer may be required to substantiate the amounts and justify these expenses as 

necessary. Unless the tax liability will be fully paid, including projected accruals, within five 

years, expenses must be reasonable in amount. Expenses include, but are not limited to: 

(a) childcare, 

(b) dependent care: elderly, invalid, or disabled, 

(c) secured or legally perfected debts, 

(d) life insurance, 

(e) charitable contributions, 

(f) education, 

(g) disability insurance for a self-employed individual, 

(h) union dues, 

(i) professional association dues; 

(j) accounting and legal fees other than those for representing a taxpayer before the IRS 

which meet the necessary expense test of health and welfare and/or production of income, and 

(k) optional telephone services (call waiting, caller identification, etc.) or long distance calls, 

if they meet the necessary expense test of health and welfare and/or production of income. 

(4) The last two listed expenses are frequently encountered: charitable contributions and education. 

(a) Charitable contributions. These expenses include donations to tax exempt organizations 

such as civic organizations, religious organizations (tithing and educational), and medical services or associations. To be necessary, charitable contributions have to provide for a taxpayer’s 

or his or her family’s health and welfare or be a condition of employment. Otherwise, they are 

Continued

In practice, it is rare that IRS employees will deviate from the tables. The tables 

impose particular hardships on young families because they are based upon averages and include homeowners whose homes were acquired years ago and have low 

mortgage payments. 

Transportation standards are established for regions with additional amounts allowed for particular metropolitan areas. The IRS Tables set the standards for 

amounts to be allowed for car purchase and lease, repairs, insurance, maintenance 

and fuel.2 These amounts are inadequate. For example, in the Washington, D. C. 

area the IRS allows $55 per month for a second vehicle. A family with teenage drivers would have insurance costs alone that would exceed $55 per month. 

3. Reasonableness Standards: IRS collection employees may allow other expenses if believed to be necessary and reasonable in amount. Because there are no 

national or locally established standards for determining reasonable amounts, the 

IRS employee is given discretion to determine whether an expense is necessary and 

the amount is reasonable.3

None of the standards provides properly for the economic needs of the average 

family. Taxpayers are essentially told to live below a subsistence level. Moreover, 

because the standards are based on data for periods a year or more before the time 

of negotiation, they invariably fail to reflect current average costs.

C. Conditional Expenses

Conditional Expenses, which include excessive Necessary Expenses, are taken into 

account if the taxpayer has the ability to pay the tax liability, including projected 

accruals, within five years. In addition, the taxpayer has up to one year to modify 

or eliminate unallowable Conditional Expenses if the tax liability, including projected accruals, cannot be fully paid within five years. By way of example, if a taxpayer’s car payment exceeded the standards by $100, that expense would have to 

be eliminated within one year. In practice, most taxpayers have many expenses that 

exceed the tables and reducing all of them is usually not possible.

D. Other Necessary Expenses

The IRS standards for Other Necessary Expenses are quite strict and lack flexibility.4

78

conditional and allowable only if the tax liability, including projected accruals, can be paid within three years. 

(b) Education. To be a necessary expense, a taxpayer must demonstrate that: 

1. the education is for a physically or mentally handicapped dependent and must demonstrate that such education is not otherwise provided by public schools: or 

2. the education is a condition of employment. [IRM 5.15.1.3.2.3] 

(5) The expenses listed in IRM 5.15.1.3 do not exhaust the category of necessary expenses. 

Other expenses may be considered if they meet the necessary expense test: health and welfare 

and/or the production of income. 

(6) If other expenses are determined to be necessary and, therefore, allowable, the case history 

must be documented providing the reasons for the decision. 5 Internal Revenue Manual 5.15.1.3.2.2. 

6 Internal Revenue Manual 5.15.1.3.3.1.4.

7 IRS 2002 Data Book 

8 IRC § 7122(c) Standards for evaluation of offers.

(1) In general. 

The Secretary shall prescribe guidelines for officers and employees of the Internal Revenue Service to determine whether an offer-in-compromise is adequate and should be accepted 

to resolve a dispute. 

(2) Allowances for basic living expenses. 

E. Unsecured Debts

The taxpayer’s payment of unsecured debts generally does not qualify as a Necessary Expense unless the expense is necessary for the production of income or is 

in settlement of a credit enforcement action. The IRS standards have forced many 

taxpayers to file for Chapter 13 bankruptcy protection in order to secure reasonable 

repayment terms.

F. Excessive Necessary and Conditional Expenses Incurred after Assessment of Tax Liability

The IRS takes the position that it will not take into account any Conditional Expense or Excessive Necessary Expense incurred after the assessment of a tax liability. IRS employees are instructed that in such instances consideration of enforcement against the post-assessment assets or not allowing the expenses in an installment agreement may be appropriate. The IRS employee has the authority, however, 

to make exceptions to the five-year rule 5 and in unusual situations the IRS can 

choose to allow Conditional Expenses even if the liability, including projected accruals, cannot be paid within five years. In practice, very few IRS employees have seen 

fit to exercise this authority to vary from the five-year rule.6

G. Results of IRS Policies

As a result of the restrictive allowable expense standards and the inflexible application of these standards by the IRS, taxpayers are forced to make difficult decisions 

that undermine the effectiveness of the OIC program. 

A clear indicator of the failure of the IRS to follow the legislative mandate to liberalize the offer program are the following statistics on accepted offers:

2001 2002

Number of offers in compromise received (thousands) 125 124

Number of offers in compromise accepted (thousands) 39 29

Amount of offers in compromise accepted (thousand dollars) 340,778 7300,296

The IRS revised offer program introduced in 2001 has resulted in over a 25% reduction in accepted offers. Notwithstanding IRS denials to the contrary it has established a program which results in the denial of many appropriate offers. 

The IRS should revisit its standards in order to have a more realistic approach 

to family needs. The standards for personal expenses should provide for regional 

variances in expenses. Taxpayers should be allowed to account for legal obligations 

in their budgets. IRS personnel should exhibit more flexibility in applying the standards. 

In the case of offers in compromise, IRC § 7122(c)(2)(B) now provides that, in applying its standards, the IRS ‘‘shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules—is appropriate and 

shall not use the schedules to the extent such use would result in the taxpayer not 

having adequate means to provide for basic living expenses.’’ 8 In practice, the IRS 

79

(A) In general. In prescribing guidelines under paragraph (1), the Secretary shall develop 

and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses. 9 I.R.C. §§ 6320 and 6330. 10See ‘‘Bogged Down With Collection Cases, IRS Appeals Is Hot on Fast Track,’’ 2002 TNT 

211–2 (Oct. 31, 2002) (summarizing comments of IRS Appeals Chief David S. Robison made at 

AICPA’s Fall Tax Division Meeting in Washington, D.C.). 11 I.R.C. §§ 6320 and 6330; Treas. Reg. § 301.6330–1(d). 12 I.R.M. § 8.7.2.3.3 (11–13–2001). 13Treas. Reg. §§ 301.6330–1(d), Q–D7; I.R.M. § 8.7.2.3.3 (11–13–2001) (making an exception 

only for potentially dangerous taxpayers). 14See, e.g., Pierson v. Commissioner, 115 T.C. 576 (2001); Davidson v. Commissioner, 84 TCM 

156 (2002); Lemieux v. United States, 2002–2 USTC ¶ 50,220 (D.C. Nevada 2002). 15See, e.g., JCS–2-02, Joint Review of the Strategic Plans and Budget of the Internal Revenue 

Service, as Required by the Internal Revenue Service Restructuring and Reform Act of 1998, 

(May 8, 2001) (containing a statement by Commissioner Charles O. Rossotti that he would like 

the collection provisions of RRA 1998 to be changed). 

rarely deviates from its schedules. The IRS should be directed to comply with the 

provisions of IRC § 7122(c) and rely more extensively on the application of individual 

facts and circumstances. A more flexible policy in this regard would result in more 

successful offers in compromise and, thus, increase collection revenues. 

We also propose that IRC § 6159 be amended to adopt language similar to 

§ 7122(c) for installment agreements. The IRS should be required to review the facts 

and circumstances of each taxpayer when considering an installment agreement. 

The current application of the standards has caused adverse results, including 

forced bankruptcies, increased default rates on installment agreements and hardships to taxpayers attempting to pay their tax debts. We believe that greater IRS 

flexibility in this regard will increase collection rates for delinquent taxes. 

V. Other Problem Areas

A. Abuse of Collection Due Process by Tax Protestors

The 1998 Reform Act granted new rights to taxpayers with respect to IRS collection procedures. Specifically, taxpayers now have the right to request a hearing before levy action is taken against the taxpayer.9 Taxpayers are also provided with 

a hearing after a federal tax lien is placed on their property. These collection due 

process (‘‘CDP’’) hearings are designed to ensure that the collection actions proposed 

to be taken against the taxpayer are reasonable, and that the IRS has fully complied with all statutory and procedural collection requirements. 

While CDP hearings have helped to usher in a new era in IRS-taxpayer relations, 

and are designed to promote a higher quality of service, they have also contributed 

to a decline in collection expediency because (i) they have placed greater demands 

on decreased IRS staff, and (ii) some taxpayers have intentionally used them as 

tools to delay collection frivolously. Current statutory and/or administrative provisions should be amended to decrease the number of unnecessary and frivolous CDP 

hearings. 

CDP hearings are conducted by the IRS Appeals Division. This past year, approximately 30,000 new CDP cases reached Appeals, and collection cases now account for 

half of Appeals’ workload.10 Under the existing statute, the IRS must grant a CDP 

hearing if the taxpayer submits a timely written request for a hearing.11 This 

means that a taxpayer cannot be denied a hearing based on issues that he or she 

intends to raise—even frivolous arguments challenging the Federal Government’s 

authority to levy and collect income taxes (i.e., ‘‘tax protestors’’). The IRS currently 

instructs its Appeals employees that it is not appropriate to deny a CDP qualified 

taxpayer a hearing because the only issues they raise are frivolous or otherwise do 

not qualify for consideration.12 Moreover, Appeals must grant a face-to-face hearing, 

even to a tax protestor, if one is requested.13

Because Appeals does not have any discretion to deny CDP hearings, it is forced 

to process tax protestor cases that serve only to frustrate IRS collection efforts and 

to delay other taxpayers’ cases. Invariably, tax protestors seek judicial review of Appeals’ determination of their case. Although courts have willingly upheld the imposition of penalties in response to such frivolous arguments, they have not been able 

to prevent tax protestors from misusing and bogging down the judicial process.14

Reducing the impact of the frivolous use of collection due process has been a strategic goal of the IRS for more than a year.15 Accordingly, legislation should be 

passed that would provide statutory authority to deny requests for CDP hearings 

that are based on frivolous arguments. Legislation is currently pending which would 

permit the IRS to treat portions of CDP hearing requests based on frivolous posiVerDate jul 14 2003 21:37 Dec 31, 2003 Jkt 090816 PO 00000 Frm 00083 Fmt 6633 Sfmt 6621 E:\HR\OC\90816.XXX 90816
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16See Tax Administration Reform Act of 2002, H.R. 5728, 107th Cong. § 307. 17 Id. 18 I.R.M. § 8.7.2.3.3 (11–13–2001). 19Treas. Reg. § 301.6330–1(i). 20See ‘‘Internal Revenue Service—Results of Nonfiler Strategy and Opportunities to Improve 

Future Efforts,’’ GAO/GGD–96–72 (May, 1996); ‘‘Tax Administration—Improving IRS’s Business 

Nonfiler Program,’’ GAO/GGD–89–39 (March, 1989); ‘‘Tax Administration—IRS Could Reduce 

the Number of Unproduced Business Nonfiler Investigations,’’ GAO/GGD–88–77 (May, 1998); 

and ‘‘Report to the Congress—Who’s Not Filing Income Tax Returns? IRS Needs Better Ways 

To Find Them And Collect Their Taxes,’’ GGD–79–69 (July 11, 1979).

tions (to be defined and listed periodically by the IRS) as never having been submitted, and would deny administrative or judicial review of such portions.16 Additionally, this legislation would preclude a taxpayer from raising frivolous issues at 

a CDP hearing.17 The passage of such legislation would be a step toward ensuring 

that collection due process serves the purpose originally intended by the 1998 Reform Act. However, we have some concern about granting the IRS unfettered discretion to determine when a position is frivolous. Consideration should be given to requiring that a ‘‘reasonable basis’’ (as described in Treas. Reg. sec. 1.6662–3(b)(3)) 

support any taxpayer request for a CDP hearing.’’

Short of legislation that denies CDP hearings based on frivolous positions, Treasury and the IRS should consider promoting legislative efforts that would amend the 

statute to deny further judicial or administrative review of Appeals determinations 

with respect to CDP hearings in which frivolous positions are advanced. Likewise, 

the Tax Court could be granted jurisdiction to enjoin further frivolous claims, and 

new criminal penalties could be enacted for application to taxpayers who have repeatedly requested CDP hearings based on frivolous positions and/or who have repeatedly advanced frivolous positions during CDP hearings. Additionally, legislation 

should be passed to specifically deny face-to-face hearings to tax protestors. Such 

a provision would still allow Appeals to process these types of cases more efficiently, 

and it would be consistent with Appeals’ practice of terminating CDP hearings in 

situations where a taxpayer persists in raising frivolous issues.18

Administrative measures might also be implemented in this area. For example, 

Treasury should consider amending the regulations to deny tax protestors the right 

to request an ‘‘equivalent hearing,’’ which is a hearing that is available to taxpayers 

who have failed to timely request a CDP hearing.19 Equivalent hearings are not required by statute and, therefore, administrative action alone may be taken to deny 

their availability to tax protestors. Furthermore, the IRS should develop a policy of 

prioritizing or fast-tracking frivolous CDP hearing requests. These claims should receive expedited consideration by Appeals and be promptly rejected using appropriate 

standard language. 

B. Priorities on Collection: Trust Fund Taxes

The next issue is the priority being given to collection of trust fund taxes. This 

issue involves employers who fail to pay over to the IRS the employment taxes 

which they withhold from employees’ wages. 

This is a critical enforcement priority but, in practice, we find that enforcement 

is frequently tardy and relatively ineffective. Perhaps more importantly, this is an 

area in which the announced, and often widely publicized, refusal of certain employers to withhold and pay over these taxes encourages tax non-compliance and disrespect for the tax system. 

Our system of payroll taxes serves a double function: it supports the revenue 

needs of our government, while simultaneously funding health and welfare benefits 

for broad segments of our society under the Medicare and Social Security programs. 

While enforcement of individual income tax liabilities will always be important, in 

a practical world in which competing claims for enforcement resources must be 

weighed and reconciled, we believe that the continued failure by the IRS to enforce 

payroll tax obligations aggressively is fundamentally detrimental to our tax system. 

In aggressively seeking to enforce employment tax obligations, however, the IRS 

must ensure that it carefully determines which employees may be personally liable 

for the penalties associated with the enforcement action.

C. Treatment of Nonfilers

Another perennial problem is nonfilers, taxpayers who simply do not file tax returns. Since 1979, the General Accounting Office has issued at least three studies, 

and one report to Congress, dealing with the nonfiler problem.20 The GAO studies 

provide the following recommendations to improve filing compliance: 

81

21See ‘‘IRS Reaches Out To Bring Nonfilers Back Into The Tax System, IR–News Rel., 1992–

94 (September 30, 1992); and ‘‘IRS Says Nonfilers Who Come Forward Are Not Prosecuted,’’ IR–

News Rel., 1992–114 (December 7, 1992). 22See ‘‘Internal Revenue Service—2001 Data Book’’ (September 30, 2001) at Table 25. 23 Id. 

• The IRS should contact delinquent taxpayers as soon as possible to get returns 

filed and to prevent delinquency over a number of years. 

• The IRS should consider using non-audit personnel to ‘‘man the phones’’ to follow up with delinquent taxpayers. 

• The IRS should develop a better statistical model to identify nonfiling situations 

and to use information obtained from various state agencies and other information sources more effectively to identify and track nonfilers. 

• The IRS should allocate sufficient funds and personnel to the nonfiler issue on 

an on-going basis.

About a decade ago, the IRS tried a new approach to this problem by instituting 

its ‘‘Nonfiler Initiative,’’ intended to get nonfilers back into compliance.21 The basic 

feature of the program was to allow taxpayers to file delinquent returns in exchange 

for the assurance that no criminal prosecutions would occur. In addition, the IRS 

told taxpayers that people who could not pay their outstanding liabilities would be 

allowed to enter into installment agreements, or that the liabilities might be reduced or eliminated under the offer-in-compromise program. The IRS was successful 

in obtaining the help of outside tax professionals who volunteered their time to help 

with the preparation of delinquent tax returns. 

The Nonfiler Initiative ran from 1993 through mid-1995. The program was a success because it (1) reduced the size of the nonfiler inventory; (2) eliminated unproductive cases; and (3) increased the number of returns secured from individual nonfilers. The GAO, however, had concerns about the results of the program because 

(1) the IRS had not set a goal for the number of nonfilers it wanted to bring into 

compliance; (2) the IRS had not prepared a plan to prevent recidivism of nonfilers; 

and (3) the IRS had not prepared a cost-benefit analysis with respect to the results 

achieved. 

Anecdotal evidence indicates that public perception of the program was mixed. Seriously delinquent taxpayers were brought into compliance, at least temporarily. In 

addition, a number of states instituted their own Nonfiler Initiative that helped increase state tax revenue. The Nonfiler Initiative did not provide, however, for a 

blanket waiver of either interest or penalties. As a result, a number of taxpayers 

decided not to enter into the program because of the significant tax bill that would 

clearly result. 

Where are we today? In 2001, the IRS issued roughly 1.4 million notices to nonfilers,22 and it made assessments totaling roughly $1.9 billion with respect to substitute returns prepared on account of nonfilers.23 In addition, the IRS has once 

again identified nonfilers as a significant problem. The IRS website indicates that 

‘‘IRS has implemented a ‘multifunctional, comprehensive effort called the National 

Nonfilers Strategy.’ The overall goal of the strategy is to bring taxpayers back into 

compliance and keep them there.’’

To help preserve the integrity of our tax system, it is essential that the IRS undertake serious efforts to bring nonfilers into compliance. This is especially true considering that many taxpayers now believe that the IRS has become a ‘‘paper tiger,’’ 

and that failure to file one’s tax return will not bring serious repercussions. We 

strongly recommend that the Oversight Subcommittee indicate its full support for 

any Nonfiler Initiative that the IRS may undertake. Moreover, we fully support any 

legislative or administrative proposal that:

• Increases funding which directly supports the IRS’s Nonfiler Strategy. 

• Increases trained personnel whose sole job is to identify and work with nonfilers. 

• Develops statistical models and other information sources that will help to identify and track nonfilers. 

• Develops methods to track and handle repeat nonfilers. 

• Expands the ‘‘substitute-for-return’’ program, and institutes a ‘‘refund hold’’ program for habitual non-filers until all returns are brought current. 

• Increases use of criminal prosecution with a dynamic publicity campaign. Considers another voluntary ‘‘Nonfiler Initiative’’ that will allow abatement of penalties and/or interest before implementing enforcement measures.

D. Repeat Abusers of the System

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24 IRC Sec. 7512 25Sec. 1204 Revenue Reconciliation Act, This section repeals an earlier statute which prohibited the Service from using records of tax enforcement results to (1) evaluate employees directly 

involved in collection activities or their immediate supervisors; and (2) impose or suggest production quotas or goals upon employees described in (1) above. The new section keeps those prohibitions but expands them to include ‘‘employees’’—not just those directly involved in collection 

activities. Additionally, this section expands the certification requirements by requiring ‘‘appropriate’’ supervisors to certify compliance with the law. The earlier law required only the District 

Directors to certify compliance. Finally, this section requires that the Internal Revenue Service 

use the fair and equitable treatment of taxpayers by employees as one of the standards for evaluating employee performance. As described above, the new law expands the prohibitions on the 

use of records of tax enforcement results to ‘‘employees,’’ no longer limiting the prohibitions to 

those directly involved in collection activities. Similarly, the new law imposes a certification of 

compliance requirement upon all ‘‘appropriate’’ supervisors, not just District Directors as in the 

earlier law. Finally, it requires that the fair and equitable treatment of taxpayers be a standard 

for evaluating employee performance.

Many repeat delinquent taxpayers create new tax debts after being allowed to 

repay prior obligations. The IRS uses a scoring system for field collection efforts, 

and we believe that more emphasis should be placed on aggressively pursuing collection from repeaters. In the case of trust fund repeat delinquencies, the IRS 

should place the highest priority on field contact. The IRS Automated Collection 

System is ill-equipped to deal with sophisticated delinquent trust fund liabilities 

whereas Revenues Officers have the skills to intervene to stop new liabilities. The 

IRS should also consider requiring repeaters to file returns monthly, not quarterly.24

E. Collection Outsourcing

It is our understanding that the IRS is considering the use of private vendors to 

assist in the collection process. We believe that this idea warrants additional study 

and consideration. We would note however, that paying vendors a percentage of collections appears to be inconsistence with the prohibition of collection statistics in 

the 1998 Revenue Reconciliation Act.25 That provision was passed by Congress to 

prevent abusive conduct by IRS employees. A private system that rewards and encourages aggressive collection activities by private collectors may only revive the 

abusive conduct which gave rise to the protections passed in 1998. Some of our 

members have related abuses by private collectors hired by state tax agencies. We 

therefore recommend that private collection agencies be hired if studies find that 

the bounty incentives inherent in private collection efforts can be reconciled with 

taxpayer protection and rights. 

F. Inadequate Training of IRS Employees

Many of our members have expressed concern that collection employees are not 

being trained to the standards observed in prior decades. Controversies often arise 

merely because inadequately trained collection employees do not follow the Internal 

Revenue Manual. Greater resources should be dedicated to providing quality continuing professional education to IRS employees. As a related matter, we believe 

that the IRS should consider raising the standards for initial employment. Raising 

the hiring standard, over time, will raise the quality and efficiency of IRS collection 

efforts. 

I hope that the foregoing observations and suggestions are helpful to the Oversight Subcommittee in discharging its important responsibilities. Other representatives of the ABA Tax Section and I would be happy to meet or otherwise communicate with Subcommittee members in order to further discuss these views or any 

other matter on which our input might be considered helpful.

Mr. McCormally? 

Chairman HOUGHTON. Thank you very much, Mr. McKenzie. 

f

83

STATEMENT OF J.A. (DREW) GLENNIE, INTERNATIONAL PRESIDENT, TAX EXECUTIVES INSTITUTE, INC., AS PRESENTED BY 

TIMOTHY MCCORMALLY, EXECUTIVE DIRECTOR, TAX EXECUTIVES INSTITUTE, INC. 

Mr. MCCORMALLY. Thank you, Mr. Chairman, Members of the 

Subcommittee. I am Timothy McCormally, Executive Director of 

TEI. Our International President, Drew Glennie, had flown to 

Washington yesterday from Calgary to testify today, but is unable 

to be here due to illness. 

The TEI is an international organization of 5,300 individuals 

who work in the tax departments of 2,800 companies in the United 

States, Canada, and Europe. I am accompanied today by our General Counsel, Fred Murray. 

The TEI is pleased to be here today to speak on three general 

topics. First, efforts of the IRS to implement effective enforcement 

strategies. Second, the IRS’s budget for fiscal year 2004. Finally, 

some tax administration issues that are present in the budget and 

in pending legislative bills. 

Mr. Chairman, for enforcement to succeed, the law must be clear 

because the ability to understand the law and to comply with it in 

an efficient fashion is a critical component of our tax system. Current law is marked by many ambiguous provisions that often 

produce unintended consequences, and we urge Congress and the 

Department of the Treasury to continue their efforts to simplify 

and clarify the law, both statutorily and administratively. 

In this regard, TEI commends the Department of the Treasury 

and the IRS for their efforts through the use of de minimis rules 

and safe harbors in recent regulations relating to the capitalization 

of expenditures. The consultative process that the government used 

in this case produced a good product and should be encouraged. 

An effective enforcement strategy also depends on a committed, 

well trained, and stable workforce. It is not enough just to announce new procedures from the national office in Washington. 

There must be buy-in and training in the field, and as Ms. Williams pointed out, qualified individuals must be recruited to replace the many seasoned agents who will be retiring in a few years. 

Both the IRS and taxpayers have a common goal in completing 

audits in a timely and efficient manner, and we commend the IRS 

and specifically the Large and Mid-Size Business (LMSB) Division 

for several innovative procedures, including fast-track settlement, 

accelerated issue resolution, and limited issue focused examinations. These programs will improve the examination process and 

promote currency. The increased attention on front-end activities 

can reduce contentious audits and expensive litigation. 

As business executives, TEI Members know how critical it is to 

invest in and plan for the future, and it is important that there be 

adequate resources devoted to core functions such as customer 

service and employee training. We applauded the IRS’s decision, 

Congress’s decision, to have the IRS restructured along taxpayer 

oriented service lines. Much has been accomplished under the modernization effort, but as you already heard and you already knew, 

much remains to be done. If the IRS is to continue its efforts to 

improve its credibility and effectiveness, the agency must have adequate resources for its programs. 

84

We believe the agency has made substantial progress in dealing 

with its management systems and other aspects of its operations, 

but this Subcommittee and Congress and all of us in the private 

sector must remain vigilant to monitor the progress. Critical systems, particularly those involving individual and business taxpayer 

master files, must be delivered successfully, on time, and within 

prescribed budget. 

We are encouraged that the President has nominated Mark 

Everson to be Commissioner of the IRS and are hopeful that the 

modernization effort will continue to progress under his tenure. 

Money and stability are also required for the agency to recruit, 

train, and retain qualified individuals. In the LMSB Division, 

which we are most familiar with, 46 percent of the workforce is eligible to retire or will be eligible to retire within the next 3 years. 

In 2001, 5.3 percent of the workforce did retire. 

Mr. Chairman, you have heard today certain concerns expressed 

by Mr. McKenzie and others about proposals to use private firms 

to collect Federal taxes. The TEI recognizes that the IRS must 

move to effectively resolve collection issues, and we share the Administration, the Chairman, and other Members’ concerns about 

the level of uncollected taxes. Moreover, we commend the sensitivity to privacy and confidentiality issues that has led to the presence in many proposals of sound safeguards. 

Nevertheless, TEI believes that the better approach is to provide 

the IRS with sufficient resources to perform its core governmental 

duties in an efficient manner. Private collection agencies should 

generally not be used to perform core governmental functions. If, 

however, these proposals go forward, TEI believes it is imperative 

that the legislation adopt safeguards of taxpayer rights, particularly in respect of any lien and levy powers delegated to outside 

parties. Like Mr. McKenzie and the ABA, we have significant reservations about basing compensation on the amount of tax collected. 

Mr. Chairman, last summer, Senator Grassley inquired whether 

consideration should be given to the disclosure of corporate tax returns, both to the public and to the Securities and Exchange Commission (SEC). The disclosure proposal engendered serious discussions within Congress, the business community, and the public at 

large, and we understand that the Department of the Treasury and 

the SEC have voiced concerns about the proposal. 

For our part, TEI believes that the proposals go in the wrong direction. Confidentiality of tax return information is a key privacy 

right that should be vindicated because it is the cornerstone of voluntary compliance. 

We similarly have questions about proposals to require the chief 

executive officer (CEO) of companies to sign corporate tax returns. 

In our view, this proposal would adversely affect tax administration. The tax affairs of major corporations are extraordinarily complicated and their management is routinely delegated to the chief 

tax officer, someone who has been specially trained. The proposal 

that has been recommended would force companies to devote substantial time and resources to educating CEOs about the intricacies 

of the company’s tax affairs, which in our view would distract them 

from more important items, including company and strategic vision 

85

and the overarching issues of corporate governance and accountability. 

Finally, Mr. Chairman, I wish to reiterate TEI’s support for and 

our appreciation to you and others on the Committee, including Mr. 

Portman, for your efforts to advance the goal of tax simplification. 

As I mentioned at the beginning, for the law to be effectively enforced, it must be understood. We understand that budget pressures and other concerns may impede progress on broad simplification proposals, but we remain eager to work with you and your 

staff to achieve whatever we can. 

In this regard, I would note that TEI continues to believe that 

fundamental reform and simplification could occur by eliminating 

completely the individual and corporate alternative minimum tax. 

I would be happy to answer any questions you have about any 

statements I made here or in the written testimony. Thank you. 

[The prepared statement of Mr. Glennie follows:]

Statement of J.A. (Drew) Glennie, International President, Tax Executives 

Institute, Inc., as presented by Timothy McCormally, Executive Director, 

Tax Executives Institute, Inc. 

Mr. Chairman, and distinguished Members of the Subcommittee: 

Good morning. I am Drew Glennie, General Manager—Tax and Insurance for 

Shell Canada Limited. I appear today as the International President of Tax Executives Institute, the preeminent association of business tax professionals. I am accompanied by the Institute’s Executive Director, Timothy McCormally, and by our General Counsel and Director of Tax Affairs, Fred Murray. The Institute is pleased to 

participate in this hearing. 

Background

Tax Executives Institute was established in 1944 to serve the professional needs 

of in-house tax practitioners. Today, the Institute has 53 chapters in the United 

States, Canada, and Europe. Our 5,300 members are accountants, attorneys, and 

other business professionals who work for 2,800 of the largest companies in North 

America and Europe; they are responsible for conducting the tax affairs of their 

companies and ensuring their compliance with the tax laws. Hence, TEI represents 

the business community as a whole, and our members deal with the tax code in all 

its complexity, as well as with the Internal Revenue Service, on almost a daily 

basis. TEI is dedicated to the development and effective implementation of sound 

tax policy, to promoting the uniform and equitable enforcement of the tax laws, and 

to reducing the cost and burden of administration and compliance to the benefit of 

taxpayers and government alike. 

The companies that employ TEI’s members have almost without exception been 

assigned to the IRS’s Large and Mid-Size Business (LMSB) Division. The largest 

1,600 taxpayers within LMSB are subject to ongoing audits as part of the Coordinated Industry Case (CIC) program. The Institute’s testimony is largely based upon 

our experience with this segment of IRS operations. 

We are pleased to offer our views on the enforcement challenges within LMSB, 

the IRS Budget for Fiscal Year 2004, the use of private collection agencies for collection of federal taxes, proposals regarding disclosure of corporate tax returns and requiring CEOs to sign income tax returns, and simplification of the complex tax system and its effects on our system of tax administration. 

The Components of an Effective Enforcement Strategy

A successful enforcement strategy has the following characteristics:

• Clarity. The ability to understand the tax law—and to comply with it in an efficient fashion—is a critical component of an effective tax system. Taxpayers 

must understand their responsibilities and commit resources to comply with the 

law in as efficient a manner as possible. Sadly, the current law—which is 

marked in many cases by complex, ambiguous provisions that often may 

produce unintended consequences—leaves much to be desired. We recognize 

that true simplification begins with the Internal Revenue Code which we adVerDate jul 14 2003 21:37 Dec 31, 2003 Jkt 090816 PO 00000 Frm 00089 Fmt 6633 Sfmt 6621 E:\HR\OC\90816.XXX 90816
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dress below, but there are ways in which the law can be made simpler by the 

IRS. For example, the Treasury and IRS are to be commended for the inclusion 

of de minimis rules and safe harbors in the recent regulations on the capitalization of expenditures. We also believe the consultative process used by the government before issuing the proposed regulations—last year the government 

used an advance notice to invite comments on a broad range of issues—will 

produce. • Confidence. Taxpayers must have confidence in the integrity of the tax system. 

The law must be applied evenhandedly, and taxpayers must believe that no one 

is getting a better ‘‘deal’’ upon audit. An effective enforcement strategy must be 

equitable and ensure that similarly situated taxpayers are being treated alike. 

• Competence and Continuity. An effective enforcement strategy also depends 

upon a committed, well-trained, and stable workforce. It is not enough to announce new procedures and policies from the National Office; there must be 

buy-in from the field to make the policies work. In addition, field personnel 

must know and understand the tax law and how it relates to the businesses 

they audit. Qualified individuals must also be recruited to take the place of the 

many seasoned agents who will be retiring over the next few years. 

• Currency. TEI’s members generally work for companies that are under continual audit by the IRS. Both the taxpayer and the IRS have a common goal 

of completing these audits in a fair, timely, and efficient manner. Several innovative procedures—such as Fast Track Mediation and Settlement, Accelerated 

Issue Resolution, Early Referral to Appeals, and Limited Issue Focused Examination—have been introduced in the last two years to improve the examination 

process and promote currency. An effective enforcement strategy must promote 

the efficient use of government and taxpayer resources during the course of an 

audit. The lack of currency in audits creates significant recordkeeping burdens 

for taxpayers. If taxable years are closed in a timely manner, there is less need 

to retain records relating to those years. 

Implementing an Effective Enforcement Strategy

LMSB has shown a refreshing openness to trying new and different ways of doing 

business. More than a year ago, the division announced several ‘‘pre-filing’’ initiatives, emphasizing the need to resolve issues before a return is filed. This increased 

attention on ‘‘front-end’’ activities—by the use of pre-filing agreements and industry 

issue resolution techniques—potentially could reduce contentious audits and prolonged litigation. 

In order to substantially complete its change in focus from post-filing to pre-filing 

activities, the IRS must improve the currency of its audits. Thus, we are pleased 

with LMSB’s recent announcement of its limited issue focused examination or 

‘‘LIFE’’ initiative. It is an innovative process to focus government and taxpayer resources on the most significant issues on a taxpayer’s return. The new initiative requires the execution of a formal memorandum of understanding between the taxpayer and the IRS that will govern key aspects of the examination, including the 

imposition of a dollar threshold on a case-by-case basis below which issues will not 

be raised. 

The use of materiality standards in examinations is an approach that TEI has 

long supported, and we commend LMSB for thinking outside the box to resolve the 

significant backlog of cases within the division. The LIFE initiative holds great 

promise for creating an atmosphere where the examination process is less time-consuming and more efficient for all parties. 

As the IRS has acknowledged, the new approach represents a major culture shift 

for LMSB. Critical to its success is the involvement—and training—of IRS field personnel. Without a commitment from the examination team and their supervisors, 

the new procedure could well be viewed as the latest ‘‘flavor of the week,’’ i.e., a 

mere reworking of other initiatives without an underlying change in philosophy. Reports from our members seem to indicate that not all specialists are yet on board 

with the new approach. However, we understand that LMSB has begun training its 

agents in the new process and remain hopeful that the LIFE process will succeed 

in institutionalizing ‘‘best practices’’ for IRS examinations and providing consistency 

in the treatment of taxpayers. 

Other innovative approaches to resolving issues may be found in IRS’s use of new 

settlement initiatives. In October, the IRS announced proposed settlement options 

in three groups of tax shelter cases: corporate-owned life insurance (COLI), section 

302/318 basis-shifting transactions, and contingent liability transactions. These 

cases have the potential for clogging the tax system, consuming undue resources, 

and preventing LMSB from making progress on other important issues. 

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The three initiatives offered taxpayers an opportunity to settle these issues in a 

timely manner and were intended to bring the cases to a comprehensive resolution, 

based on the IRS’s assessment of the strength and weaknesses of its legal positions. 

Although some may disagree with that assessment, the process demonstrates a willingness to let taxpayers resolve a contentious issue and move on. We understand, 

for example, that the COLI initiative has resulted in the resolution of nearly all outstanding cases. We understand that the IRS is working on settlement options for 

several other transactions and we encourage the agency to continue its undertaking 

to resolve issues on a wholesale, rather than a ‘‘retail’’ or case-by-case, basis. 

Possible Barriers to an Effective Enforcement Strategy

The IRS Budget for Fiscal Year 2004

One barrier to implementing an effective enforcement strategy is the lack of adequate and reliable funding. As the preeminent association of business tax executives, TEI knows how critical it is to invest in and plan for the future. Our members 

know the importance of sound business processes and strict internal controls. Equally important, the companies represented by TEI’s membership know that to be successful, they must plan ahead and ensure that adequate resources are devoted to 

core functions such as customer service and employee training. As a group, they applauded the decision to restructure the IRS to operate more like a business and to 

adopt a more taxpayer-oriented service focus. 

The IRS’s previous attempts at major technological modernization have not been 

successful. As a consequence, American taxpayers have had to endure customer 

service that has been less effective than it should be, and significant amounts of 

taxes that could have been collected were not. This failure to modernize has operated as an indirect tax increase on compliant taxpayers. Taxpayers trying to pay 

their taxes and IRS personnel trying to do their jobs have had to work with systems 

that are inadequate and seriously out of date. The current modernization effort is 

the most far-reaching yet, and at the five-year mark is approximately one-half of 

the way through the original planning horizon. 

If the IRS is to continue its efforts to improve the agency’s credibility and effectiveness, the agency must be assured that the programs needed to implement its 

mission will be fully and consistently funded. Much has been accomplished under 

the IRS Restructuring and Reform Act, but much remains to be done. We recognize 

that the IRS has experienced problems in the past with its modernization programs, 

but we believe that the agency has made substantial progress in dealing with internal management systems. In addition, these concerns, while important, should not 

impede the IRS’s efforts to deal with its broader mission. TEI respectfully suggests 

that reducing the IRS’s funding is not the most efficient or effective way to address 

concerns about management of its modernization. OMB, the Treasury, and the IRS 

should directly address problems as they are encountered and find workable solutions to them. This subcommittee and others within the Congress should continue 

to assess and monitor the progress. It is imperative that we all work together, and 

that effective solutions to problems be found as soon as possible. Critical systems, 

particularly those involving the individual and business taxpayer master files, 

should be delivered successfully, on time, and within prescribed budgets. A failure 

of the current effort would have far-reaching effects on our government and American taxpayers. The current reorganization programs must be successful. If the IRS 

is to succeed as a modern, customer-focused agency, it must have adequate funding 

for its service initiatives. We are encouraged that the President has nominated 

Mark W. Everson to be Commissioner of Internal Revenue and are hopeful that the 

modernization effort undertaken by former Commissioner Charles O. Rossotti will 

continue to progress under his tenure.

Staffing and Training Concerns

Money and stability are also required for the agency to recruit, train, and retain 

qualified personnel. LMSB experienced a 5.3 percent attrition in 2001, and 46 percent of its workforce is eligible to retire within the next three years. With the additional emphasis on auditing tax shelter issues, the IRS will need to deploy its resources carefully. Modern technology is important, but the lack of qualified, experienced personnel will almost certainly hinder an effective enforcement strategy. 

Stated simply, whether the promise of the reorganization can be realized depends 

in large measure on the IRS’s securing sufficient funds to do its job. TEI has consistently supported both adequate funding for the Internal Revenue Service and adequate oversight by the IRS Oversight Board, the Treasury, and Congress. We know 

88

1 In computing their annual tax liabilities, corporate taxpayers must disclose not only the nature, sources, and character of their revenues and expenses, but also all manner of information 

relating to their corporate legal structures as well as other proprietary data. For example, disclosure of sales, licensing, and leasing revenues by legal entity and jurisdiction may enable a 

competitor to more clearly understand the location and, potentially, the identity of a company’s 

customers, as well as other key data such as product pricing and gross margins. Together with 

advertising and other key selling expenses disclosed on the return, competitors would have clear 

the Subcommittee shares our concern and urge you to continue to support adequate 

funding of the IRS. 

Use of Private Collection Agencies to Collect Taxes

The President’s Budget proposes the use of private debt collection agencies to assist in the collection of delinquent taxes, and Chairman Houghton has recently introduced legislation to effect the same objective. Intended to reduce the number of 

deficiencies deemed uncollectible, the proposal would effect a significant and farreaching change in the way federal taxes are collected in this country. While the 

intent of the proposals is laudable, TEI believes that the collection of taxes is a core 

governmental function, the outsourcing of which could potentially imperil taxpayer 

rights and erode taxpayer confidence in the fairness of the tax system. 

In testimony before the House Government Reform Subcommittee last year regarding plans to implement a filing and payment compliance (FPC) initiative to resolve collection issues quickly and fairly, then Commissioner Rossotti emphasized 

that ‘‘[u]nlike private collection agencies, the IRS often takes inherently governmental actions involving judgment, such as discretionary decisions on liens and levies on delinquent accounts.’’

Because TEI’s members are generally part of LMSB, they are not often involved 

with the IRS’s collection function. Nevertheless, TEI is concerned about the effect 

of the proposal on tax policy and administration. Taxpayers’ perception that the tax 

system is fair is essential to voluntary compliance. For the tax system to work, taxpayers need to know that, when they deal with their government, they will be treated in a fair and impartial manner. The use of private firms to perform a core function of government—the collection of taxes due—could undermine this goal. As a 

practical matter, collection agencies involved in performing ministerial functions 

might be unable to assist a taxpayer who questions the underlying tax liability. In 

addition, low-income taxpayers—who do not have access to representation—may be 

pressured to enter into unreasonable collection agreements. 

Moreover, using outside, for-profit contractors could impede taxpayer privacy and 

undermine the perception of fairness. Employing private collection agents provokes 

all of the concerns raised by the sharing of sensitive taxpayer information with persons not employed by the Internal Revenue Service, and in fact not employed by 

the Federal Government or any governmental entity. Such concerns are even more 

acute if the companies are compensated on a contingency basis, which raises significant due process issues. 

TEI recognizes that IRS must move to effectively resolve collection issues, and we 

share the Administration’s and the Chairman’s concern about the level of uncollected tax debts. Moreover, we commend the presence in the current proposals of 

sound safeguards. Nevertheless, TEI believes the better approach is to provide the 

IRS with sufficient resources to perform core governmental duties in an efficient 

manner. Private collection agencies should not be used to perform these governmental functions. If, however, the proposals are adopted, the legislation must also 

adopt safeguards of taxpayer rights, particularly with respect to any lien or levy 

powers delegated to outside parties, that are at least as protective as those applicable to federal employees. Further, contract fees should not be determined on a contingent basis. 

Public Disclosure of Corporate Tax Returns

On July 8, 2002, Senator Charles Grassley wrote to the Treasury Department and 

the Securities and Exchange Commission (SEC), inquiring whether consideration 

should be given to requiring public companies to provide copies of their tax returns 

(or summaries thereof) to the SEC and to the public. The disclosure proposal has 

engendered important discussions within Congress, the business community, and 

the public at large, and we understand the Treasury Department and SEC have 

voiced concerns about the proposal. For our part, TEI believes that public disclosure 

of tax returns is wholly inappropriate. Confidentiality of tax return information is 

a key privacy right that should be vindicated not just for its own sake, but because 

it is the cornerstone of voluntary compliance.1

89

insights into a company’s marketing strategies. Similarly, the disclosure of the nature and location of a company’s manufacturing costs by functional type will, in many cases, enable competitors to understand the company’s manufacturing cost structure and permit them to identify potentially more cost-effective suppliers and more efficient ways of doing business. In summary, 

the greater the detail of information that is publicly available, the more a competitor can discern 

about a company’s business model. Indeed, if the confidentiality of taxpayer information is 

breached, U.S. public company taxpayers would be substantially impaired in the global competition for capital, labor, customers, and suppliers. 2Many provisions of the Code require companies to treat items of revenue or expense reported 

one way for financial accounting purposes in a vastly different fashion for tax purposes. By adhering to the different accounting treatments prescribed by Generally Accepted Accounting Principles (GAAP) and tax law in respect of the same item, companies are complying with legal requirements and business exigencies. For example, a major reason for differences between book 

and tax reporting lies in the determination of the reporting ‘‘entity.’’ Consolidated financial 

statements are generally required to be prepared under GAAP where one entity has an effective 

economic controlling interest (i.e., more than 50-percent ownership) in another entity. For tax 

purposes, affiliated groups of corporation subject to control by a common parent corporation may 

elect to file a consolidated tax return only where 80 percent of the vote and value of a subsidiary 

is owned by the group. In addition to the different ownership control thresholds for consolidation, U.S. tax rules exclude foreign corporations from the consolidated return but foreign affiliates must be included in GAAP consolidated financial statements. Thus, consolidated financial 

statements report worldwide results whereas the U.S. consolidated tax return generally includes 

only U.S.-based legal entities (plus their foreign branches). Even before the determination of 

taxable income and tax liability can begin, the composition of the reporting ‘‘entities’’ for tax 

and financial reporting purposes can be so different, and the reconciliation between the amounts 

reported by the differing ‘‘entities’’ such a complex exercise, that significant confusion will be 

engendered by a side-by-side comparison of the tax returns and financial statements. Given the 

scope and degree of differences in tax and financial accounting requirements, public disclosure 

of corporate tax returns poses great potential for confusing rather than enlightening investors. 

As important, we do not believe that providing copies of the tax returns (or summaries thereof) as a matter of course to the public or the SEC will enhance the overarching goal of protecting public investors through the disclosure of full, fair, and 

meaningful information. Should it be determined that the SEC lacks sufficient authority under current law to obtain tax returns or tax return information and that 

such information is necessary and appropriate in the SEC’s investigations or enforcement actions, TEI recommends that the SEC request a limited amendment to 

section 6103 of the Internal Revenue Code to clarify its authority to obtain expeditious access to confidential taxpayer information. Such limited authority, however, 

must be subject to appropriate privacy safeguards, including exemption from public 

disclosure under the Freedom of Information Act. 

TEI members share the concerns expressed by the Administration, Congress, and 

the public about recent allegations of financial reporting involving fraud and malfeasance. Such lapses in behavior, once investigated and proven, rightly merit not only 

public reproach, but also vigorous enforcement of applicable civil and criminal laws 

and sanctions. Moreover, if current laws and penalties are inadequate to deter, prevent, or punish such misconduct, they should be appropriately enhanced. But public 

disclosure of corporate tax returns is a solution in search of a problem; it is neither 

cure nor palliative for financial reporting irregularities. Indeed, public disclosure of 

corporate tax returns is not only contrary to the longstanding policy of protecting 

the confidentiality of taxpayer returns, but is potentially counterproductive to the 

goal of providing shareholders with meaningful information.2

CEO Signatures on Tax Returns

Section 722 of the CARE Act of 2003, S. 476, as reported in the Senate by the 

Committee on Finance, would amend section 6062 of the Internal Revenue Code to 

require the chief executive officer (CEO) of a corporation to sign the corporation’s 

income tax returns. Under the amendments, the Secretary of the Treasury would 

be authorized to designate other officers who may sign the income tax return where 

the corporation does not have a CEO. Because the provision misapprehends the 

CEO’s role in the preparation of company tax returns and could adversely affect tax 

administration, TEI recommends that it be abandoned. 

The tax affairs of major corporations are extraordinarily complicated and their 

management is routinely delegated to the Chief Tax Officer (or similarly titled individual) who has been specially trained. While the senior officers (including the CEO 

and CFO) remain ultimately responsible for the company’s compliance with the tax 

laws—and all other laws—it would be rare that a CEO could be personally involved 

in, or knowledgeable about, the plethora of tax rules that apply to literally thousands of transactions that are reflected in the company’s tax returns. Indeed, the 

level of detail and specialized knowledge demanded in the preparation and submisVerDate jul 14 2003 21:37 Dec 31, 2003 Jkt 090816 PO 00000 Frm 00093 Fmt 6633 Sfmt 6621 E:\HR\OC\90816.XXX 90816
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3 At a minimum, the provision must be clarified to apply solely to the Federal income tax returns (Form 1120) filed by corporations. If this provision extends to other federal tax returns, 

or worse, is copied by other jurisdictions, CEOs will have little time to properly perform their 

other substantial duties. Moreover, depending on the size and scope of the company’s Form 

1120, chief tax officers currently devote considerable time to the ministerial act of signing dozens, if not hundreds, of different forms, schedules, statements, and elections within the return 

that are subject to a signature requirement. Presumably, regulations would clarify whether the 

CEO signing on page one of Form 1120 would also be required to sign each form or statement 

subject to a separate attestation, but the sheer number of such attestations reinforces our concern about the demands the proposal would impose on the CEO’s limited time. 

sion of complex corporate tax returns demands that the responsibility for signing 

the return—and affirming under penalties of perjury the completeness and accuracy 

of the return—be delegated to an employee with a significant level of professional 

tax expertise, training, and experience. In TEI’s view, the senior tax official is the 

person in the best position to assess—and state affirmatively—that the return fulfills the company’s legal obligations. 

Although TEI has consistently supported efforts to enhance the disclosure of 

transactions justifying IRS scrutiny and supported IRS appropriations sufficient to 

adequately fund the IRS, the Institute believes the proposal to require a CEO to 

sign a corporate tax return is flawed. We regret that it misapprehends the role of 

the tax department as well as that of the CEO. And while we believe it unjustifiably 

impugns the integrity and professionalism of both CEOs and corporate tax professionals, our fundamental concern is that the proposal is misdirected: It would force 

companies to devote substantial time and resources to educating CEOs about the 

intricacies of the company’s tax affairs, distracting them (and the company’s tax personnel) from activities that put their respective professional expertise to their best 

uses—including, in the case of the CEO, overarching issues of corporate governance 

and accountability. Indeed, in a typical year, corporate tax officials will sign under 

penalties of perjury hundreds, sometimes thousands, of federal, state, and local income, excise, and property tax returns—and the penalties can be quite severe.3 Further, while recent reports unfortunately document that some corporations have engaged in improper conduct, there has been no showing that the noncompliance is 

due to the lack of sanctions. 

The CEO signature proposal would impose undue burdens on compliant taxpayers. Since most CEOs are not experts in the complexities of the tax law, they 

will of necessity turn to others (specifically, corporate tax officials or outside tax advisers) to compile the necessary background documents and review the thousands 

of pages and multiple volumes that constitute a complex, multinational corporate 

consolidated income tax return. The CEO’s review of the income tax return would 

be redundant to the review process currently undertaken by the chief corporate tax 

officer, and the added resources required to comply with the proposal, again without 

demonstrable need, should not be ignored, especially since it would distract both 

CEOs and tax department personnel, including (in the latter case) dealing with the 

IRS to resolve outstanding tax issues. 

Moreover, Congress has recently undertaken steps to strengthen the accountability of CEOs and CFOs for corporate financial matters, as well as the audit committees of the boards of directors of such corporations, in the Sarbanes-Oxley Act 

of 2002. 

In summary, the proposal to require CEOs to sign corporate tax returns would 

impose a burden on CEOs that most are ill-trained to bear, would unnecessarily 

saddle companies with additional compliance costs, and would represent a step 

backward for efficient tax administration since the person signing the return would 

not be the employee in the best position to ensure the accuracy or completeness of 

a complex multinational tax return. TEI urges that the proposal be abandoned. 

Tax Simplification

It is often said that tax simplification has no constituency. TEI disagrees, and we 

know that many on this committee do, too. Complexities in the tax system have important ramifications for tax administration and tax compliance. A joint task force 

of the American Institute of Certified Public Accountants, the American Bar Association Section of Taxation, and Tax Executives Institute has worked over the past 

few years to sensitize the public, the Treasury, and the Congress to the urgent need 

for major simplification of the tax laws. We applaud the Chairman’s ongoing efforts 

to make tax simplification a higher priority. 

In February 2000, the three groups submitted to the Treasury Department a list 

of ten areas of the Code as a starting point for simplification efforts. Others have 

identified a number of other worthy candidates for consideration. For example, the 

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4The JCT Study indicates that more than 11 percent of all individual taxpayers will be subject to the individual alternative minimum tax by 2011. Study of the Overall State of the Federal 

Tax System and Recommendations for Simplification, Pursuant to Section 8022(3)(B) of the Internal Revenue Code of 1986, Staff of the Joint Committee on Taxation, JCS–3–01, April 26, 

2001, v. II at 10 (JCT Study). 5 Initially enacted in 1969 and substantially modified to its present form in 1986, the corporate AMT today has little effect on its original target—companies with significant economic 

income that were paying little or no federal taxes. In its recent study on ways to simplify the 

Internal Revenue Code, the staff of the Joint Committee on Taxation concluded that the original 

purpose of the corporate alternative minimum tax is no longer served in any meaningful way. 

The AMT does not necessarily produce a more accurate measurement of income than the regular 

corporate income tax, especially after the provisions of the Tax Reform Act of 1986, and subsequent legislation, became fully effective. JCT Study, v. II at 16. 6The principal tax preference that contributes to taxpayers paying the corporate AMT is accelerated depreciation. Capital assets tend to produce a schedule of depreciation deductions that 

does not vary with economic conditions. As the economy enters a recession, business receipts 

fall. Consequently, corporate income as measured under the regular tax declines, but depreciation deductions generally remain the same. Because, in simple terms, a taxpayer becomes subject to the AMT when its AMT tax preferences and adjustments become large relative to its regular taxable income, a recession increases the likelihood that a business will become an AMT 

taxpayer. 

staff of the Joint Committee on Taxation produced a comprehensive study in April 

2001 that contained numerous recommendations, and the National Taxpayer Advocate has also pressed for change. In addition, tax simplification legislation was recently introduced by Chairman Houghton, as H.R. 22 and H.R. 285. In addition, recent bills introduced by Chairman Thomas, Representative Portman, and Representative Levin also include a number of simplification proposals worthy of consideration. 

The three groups in the joint task force of which we are a part continue to support 

the original proposals, but have more recently sought to emphasize three areas of 

reform in which modifications to present law would yield substantial and beneficial 

simplification: providing a uniform definition of a qualifying child; elimination of the 

many phase-outs for tax incentives, including child and education credits, personal 

exemptions, and itemized deductions; and, repeal of the individual and corporate alternative minimum taxes. We recognize that budget pressures and other concerns 

may impede progress on such wide reforms, but are eager to work with you and 

your staff in order to achieve them to the greatest extent possible and as soon as 

possible. 

We wish to stress today proposals relating to repeal of the alternative minimum 

taxes. When the alternative minimum tax was originally enacted in 1969, it was 

targeted at high-income individuals who paid no income taxes. It now hits middleclass taxpayers.4 Recent adjustments have provided some relief for those middleclass taxpayers seeking to take advantage of credits intended to benefit them, but 

soon millions will face the mind-numbing complexity of the AMT rules and find, to 

their great surprise, that they are subject to an extra tax that erodes the benefit 

of tax rates, deductions, and credits that Congress has specifically granted. 

No less complex is the corporate alternative minimum tax, which requires companies to keep two separate sets of books for tax purposes, and has the perverse effect 

of taxing struggling companies at a time when they can least afford it. These provisions no longer serve their intended purposes, and changes in the law in recent tax 

years have also changed the tax base in ways that address the concerns that originally gave rise to these taxes.5 The AMT creates enormous administrative burdens 

and undermines the policies underlying substantive provisions of the Code. Taxpayers should not be required to compute their taxes twice and to keep two sets 

of books. In addition, the AMT is counterproductive: It takes in more revenues during recessions and reduced revenues during periods of expansion. Thus, the AMT 

taxes corporations when they can least afford it—when they are struggling to survive in a downturning economy. Moreover, because the calculation and payment of 

AMT is driven in large measure by a slower depreciation schedule for capital investments, the AMT is a substantial drag on one of the potential engines of economic 

recovery: capital investment in plant and equipment.6 The AMT represented poor 

public policy when it was enacted and time has not tempered its lack of appeal. 

We reiterate our recommendation that both the individual and corporate alternative minimum taxes be eliminated. 

Congress is currently considering steps to provide an economic stimulus to offset 

the current economic downturn. In one stroke—repeal of the corporate AMT—Congress can eliminate a flawed tax policy that can only serve to exacerbate the downVerDate jul 14 2003 21:37 Dec 31, 2003 Jkt 090816 PO 00000 Frm 00095 Fmt 6633 Sfmt 6621 E:\HR\OC\90816.XXX 90816
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7 In addition to ameliorating the counter-productive nature of the tax, the repeal of the corporate AMT would have a salutary effect in reducing administrative burdens and costs comparable or greater in value than the foregone revenues. Many taxpayers must undertake the 

AMT calculation to determine whether, in fact, they are liable. For example, the GAO reported 

that while only 28,000 corporations actually paid corporate AMT in 1992, 400,000 corporations 

filed the AMT form. See General Accounting Office, Experience with the Corporate Alternative 

Minimum Tax, GAO/GGD–95–88 (April 3, 1995), at 3. The 400,000 figure would understate the 

number of corporations that did the necessary calculations to determine whether they had an 

AMT liability. 

turn and simultaneously effect a major simplification of the Internal Revenue Code.7

In addition, to provide further economic stimulus and investment, corporate taxpayers with accumulated AMT credits—amounts that represent a prepayment of a 

company’s regular corporate tax liability—should be afforded the opportunity to recover those credits. 

We recognize that AMT repeal would likely be an expensive fiscal step, but that 

cost will only continue to increase the longer the AMT remains in effect, and the 

cost to the tax system of retaining such a complicated regime is simply too great 

to bear. In the end, there can be little disagreement that the provisions must be 

repealed. 

At the very least, as an interim step toward full repeal, the temporary increase 

in the exemption amount enacted as part of the Economic Growth and Tax Relief 

Reconciliation Act of 2001 should be made permanent immediately. The Budget submitted by the President also contains modest incremental change. 

The international provisions of the Internal Revenue Code are among the most 

complicated provisions in the tax law. The last several years have seen several 

small steps taken to reduce tax law complexity for multinational corporations. For 

example, several years ago, Congress repealed section 956A of the Internal Revenue 

Code, which in our view was ill-conceived when it was enacted in 1993. And in 1997, 

Congress rectified an inequity that has existed for the past decade when it eliminated the overlap between the controlled foreign corporation and passive foreign investment company rules. Although laudable, these actions represent only a small 

step on the journey of simplifying the international tax provisions of the Code. 

TEI believes that the Code’s foreign provisions need fundamental reform and simplification, and for this reason we support efforts like those in Chairman Houghton’s 

bill to reform various complex provisions of the Code including reforms to subpart 

F, in particular the elimination of the foreign base company sales and service income rules, and the reforms of the foreign tax credit, in particular the reduction of 

the number of baskets under section 904(d) to three. These reforms will not only 

reduce compliance costs—thereby enhancing the country’s competitiveness—but 

they will also signal Congress’s continued commitment to the simplification of the 

tax law generally. 

We believe that implementation of simplification measures in each of these areas 

would significantly reduce complexity for large numbers of both individual and business taxpayers, and have the concomitant effect of making the tax laws far more 

administrable.

In Conclusion

We will continue to work with you to refine them and to develop additional proposals for simplification of the system. We appreciate the opportunity to submit 

these recommendations and stand ready to provide whatever assistance may be necessary to bring them to fruition. 

Tax Executives Institute commends the Subcommittee for holding this public 

hearing. TEI looks forward to working with the Subcommittee to improve tax administration.

venson? 

Chairman HOUGHTON. Thank you, Mr. McCormally. Mr. Stef

93

STATEMENT OF WILLIAM STEVENSON, PRESIDENT, NATIONAL 

TAX CONSULTANTS, AND CHAIRMAN, FEDERAL TAXATION 

COMMITTEE, NATIONAL SOCIETY OF ACCOUNTANTS, ALEXANDRIA, VIRGINIA 

Mr. STEVENSON. Good morning. In 1995, when you invited me 

to this table, Mr. Portman was sitting back there and I can remember you had asked me a question during the question and answer, 

and I am not exactly sure how we got into it, but my observation 

was that this Committee needed to provide more oversight to the 

IRS. That was 1995. Little did I know what would happen with the 

Commission and all the things that followed. 

Since then, the National Society of Accountants has been intimately involved with Mr. Portman and this Committee, and I do 

want to tell you how impressed I am with the staff that you have. 

They have a lot of perspective and they are very concerned people 

who work very hard, and I think we communicate probably once 

a week to stay connected about what is going on out in the field. 

I come to you today from the front lines of tax administration. 

Just like most other tax practitioners, we don’t just deal with filing 

tax returns. We deal with every aspect of the IRS, and some of us 

even have to go into U.S. Tax Court to get relief. 

My goal here today is to make you guys feel connected with the 

American taxpayer, and so what I am going to try to do is just 

laser focus on one concept and give you a handful of cases that are 

actually live cases now, that are not closed, to show you the kind 

of problems that we are facing. 

First off, filing season has ultimately been excellent, and we compliment the IRS and tip our hat. They are really doing a fine job. 

There are some nitpicking things that we can talk about, but by 

and large, our Members have not complained about it. We have 

done surveys and we are very satisfied with it. 

The problem that we have is with post-season, post-filing problems. What we have discovered is, first of all, there is a lack of access to the IRS. You heard it discussed earlier today. Offices have 

closed. The reorganization has made it impossible for us to deal 

with people face-to-face. All the relationships that we used to have, 

where we had credibility as a practitioner to solve many taxpayer 

problems, are gone. We are dealing with people across the country, 

well-meaning, perhaps, but the situation is different and we are 

very unhappy about not only our relationship but their ability to 

solve problems. 

What we have discovered is that middle management has not 

bought into the service concept of the IRS. When this Committee 

went along with the Senate Finance Committee and adopted my 

recommendation to change the mission of the IRS to service, I had 

made another recommendation that you had adopted and that had 

to do with education. Training programs are critical to the success 

of delivering service to the American public. 

I am talking to you as a person who has a doctorate in the educational process, and I am here to tell you that the IRS’s educational system is totally flawed. It is being run by middle management, middle managers who know nothing or very little about the 

educational process. In addition to that, many middle managers 

haven’t bought into the service mission. So, you have well-meaning 

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people at the top thinking they are doing a great job, but it is not 

being translated at the lower level. 

I think the educational process needs to be brought back into 

Washington. Experts in the field of education, people knowledgeable about tax administration need to develop a sounder education 

program and then put it out to the rest of the country. 

The IRS agents on the phone, from my perspective and the perspective of many of our Members, are not willing to solve problems. 

They don’t want to take on cases. They just want to move the 

cases. Let me give you just a few examples just to show you. 

We have a woman by the name of Pat T. I won’t give you her 

last name. Eight years ago, an IRS agent prepared seven tax returns for her. She was entitled to the EITC. He didn’t give it to 

her. She had a tax debt for those 7 years hanging over her head—

this woman makes less than $10,000, has a kid, on welfare—she 

had a $5,000 debt that is now over $20,000. Eight years later, the 

IRS is now doing enforced collections to try to get the money from 

her, and I am trying to work with the Taxpayer Advocate Service 

to get them to realize they made a mistake to begin with. 

Another person, Larry C., his company failed. He owed taxes as 

a responsible party. Another one of his partners paid off all of the 

taxes, but there is interest remaining that accidentally wasn’t 

wiped off the books. I can’t fix that problem. I talked to an IRS 

agent who said, on the phone, they knew what the problem was, 

they knew how much money had been paid, they told me that I had 

to file a Form 843 with the service center and close the case, which 

means this person could have solved the problem, and now I have 

to go to a service center to some unknown person who may or may 

not want to move the case. 

There’s another case where a salary is levied. I called the Practitioner Priority Service. Please lift the levy. Lo and behold, they lifted the levy for me to allow me some time to work out the case, 

gave me 2 months. Two weeks later, the levy is back on. The man 

is in my office crying. He is going to lose his job because his boss 

doesn’t want to deal with the IRS and the levy. I called the IRS. 

‘‘Oh, my God, we don’t know how this levy got on. It was an accident.’’

I just wanted to make you feel connected. I will be happy to respond to many of those other questions. Incidentally, on your way 

back to Corning, if you want to make a right-hand turn and come 

out to Long Island, I would love for you to come and see what a 

battlefield really looks like. 

[Laughter.] 

[The prepared statement of Mr. Stevenson follows:]

Statement of William Stevenson, President, National Tax Consultants, and 

Chairman, Federal Taxation Committee, National Society of Accountants, 

Alexandria, Virginia 

Good morning, Mr. Chairman and members of the Committee. My name is William Stevenson. I am the chairman of the National Society of Accountants Federal 

Taxation Committee. I am an Enrolled Agent and President of National Tax Consultants, based in Merrick, New York. 

NSA and its affiliated state organizations represent approximately 30,000 accountants, tax practitioners, business advisors and financial planners providing 

services to more than 19 million individuals and small businesses. Most NSA members are sole practitioners or partners in small- to mid-sized firms. NSA members 

95

agree to adhere to a code of ethics and professional conduct. NSA members are the 

champions of small business as we represent 20–25% of the small businesses in the 

United States. 

We appreciate the opportunity to testify before the Committee to share our views 

on the 2003 filing season and on tax administration issues of importance to practitioners.

THE 2003 FILING SEASON

I am pleased to report that we have had a smooth filing season in 2003. E-filing 

went well with no significant delays in processing returns and issuing refunds. The 

service campuses performed well. Indeed, the NSA national office received few complaints of any kind regarding the filing and processing of returns this season. On 

behalf of NSA members and the tax practitioner community at large, I congratulate 

the IRS for a job well done. The Congress did its part too and I wish to express 

our gratitude for not passing any tax legislation with effective dates retroactive to 

2002 during the tax-filing season! 

Although the filing season went well, that does not mean all is well in the area 

of tax administration. The IRS does a very good job in processing millions of routine 

forms and documents. Where NSA encounters significant problems is in the postfiling environment—dealing with small business and individual taxpayer problems 

such as IRS notices, levies, and audit issues, to name a few. Tax practitioners repeatedly cite the current difficulty in accessing IRS decision makers who are willing 

to take responsibility for a case in order to solve it in an expeditious manner. We 

also see a critical need for additional training for IRS personnel to improve their 

ability to serve the American taxpayer and administer the tax system. These problems are not insurmountable but they must be addressed expeditiously if the IRS 

is to become the world-class agency Congress envisioned when it passed the IRS Restructuring Act of 1998.

LACK OF ACCESS TO THE IRS

Part of the current access problem stems from the IRS reorganization. The need 

for the IRS to organize along business lines is not at issue. However, it appears that 

IRS senior management has yet to obtain the necessary buy-in from middle managers in the operating divisions to make the reorganization an actual success. 

One unfortunate consequence of the reorganization was to break up longstanding 

relationships between practitioners and IRS managerial employees. Before, practitioners knew whom to call to solve a problem. This is no longer the case and building new working relationships is proving to be difficult. 

We hear complaints by many IRS employees that they do not know how much 

authority they have, what their role is, or who they can turn to within the IRS to 

solve a taxpayer’s problem. Many employees fear that they will be criticized for 

making decisions and accepting responsibility. We continue to see a disconnect between the national office and field offices in the communication of new policies and 

procedures. Under the new structure, solving all but the easiest of taxpayer problems is becoming increasingly difficult. 

The results of inadequate access and poor communications are chaos and confusion. Here is a real life example. A taxpayer received a collection notice (CP 504) 

for a tax year that was part of an offer-in-compromise accepted by the IRS two years 

ago. An IRS employee working in the Automated Collection System (ACS) advised 

the practitioner handling the case that the Taxpayer Advocate Service (TAS) will 

need to resolve the problem. The practitioner contacted TAS and was informed that 

one of the two centralized offer processing centers will handle the case. The practitioner informed the TAS employee that the offer was accepted by the IRS before the 

creation of the centralized sites. The TAS employee responded that it might be necessary for the original revenue officer handling the case to resolve the problem. The 

practitioner asked what if that revenue officer is no longer with the IRS? The practitioner was placed on hold until the TAS employee found someone who might be 

available to handle the case. The TAS employee returned to the line and gave the 

practitioner the name of someone who could help, but unfortunately, that person 

was out of the office until the following week. The TAS employee opened a case file 

so no accidental levy would take place. 

Later, the ACS worker’s supervisor contacted the practitioner and said that this 

erroneous notice case would not be handled by the TAS after all but would go to 

one of the centralized offer centers. The practitioner explained, once again, that the 

offer was accepted prior to the formation of the centralized sites and that the original revenue officer may not be able to handle the case. The supervisor stated that 

the practitioner should not worry because a hold is placed on the account and no 

levy will occur. The practitioner responded that no account could exist because the 

96

accepted offer wiped the slate clean. After all of this activity and wasted time, the 

practitioner was no closer to getting the problem solved than at the outset. More 

importantly, the resolution of the problem—an erroneous account making wrongful 

enforcement measures possible—has not occurred and the practitioner is not being 

informed by any IRS or TAS personnel of any steps being taken to resolve the problem. 

Chaos and confusion will continue until IRS senior management clearly defines 

the duties and responsibilities of field personnel and IRS employees are trained and 

empowered to resolve cases at the lowest possible level as envisioned by then Commissioner Rossotti. 

We were encouraged by the remarks of Mark Everson, nominee for Commissioner 

of Internal Revenue, at his confirmation hearing before the Senate Committee on 

Finance on March 18, 2003. Mr. Everson stated:

‘‘In order to realize the full benefits of the ’98 Reform Act, line managers and employees at all levels must fully embrace the changes which began under Commissioner Rossotti.’’

We hope that improving internal IRS communications, developing clear lines of 

authority and responsibility and employee empowerment will be top priorities of the 

next commissioner.

TRAINING

We see a widening training gap at the IRS. NSA members deal with IRS personnel on a daily basis. Increasingly, we experience instances where IRS employees 

lack the expertise and skills to handle difficult, problem cases. Complex problems 

are shoved to the side. Often, the only way to get action on a case is to take it to 

the Taxpayer Advocate Service. This bogs down the TAS system and is a source of 

aggravation and concern to both taxpayers and practitioners who have hardship 

cases that should receive the undivided attention of TAS personnel. The resulting 

confusion erodes confidence in the tax system. 

Unfortunately, over the years, IRS training budgets have been slashed to deal 

with other funding problems. We ask that Congress reverse this trend and provide 

adequate funding to support critical training programs. Without adequate training, 

all the funds invested in systems modernization will be wasted. 

Also, NSA has grave concerns over the manner in which the IRS program of employee training has evolved. The IRS should introduce a concentrated training program, developed by experienced educators and implemented by individuals who understand and embrace the new IRS structure. The program must be supported, coordinated and directed from the highest levels of IRS.

IMPROVING ACCESS

Many access issues would be resolved if IRS would publish an on-line directory 

of IRS phone numbers for use by practitioners. The IRS has promised an on-line 

service for sometime now, but has yet to deliver. The need and importance of this 

directory information was well documented by the National Taxpayer Advocate in 

her 2002 report to Congress. We understand that IRS is working on this application 

and we encourage this effort. But it needs to come on-line quickly.

FIRST CALL PROBLEM RESOLUTION

Another opportunity is for the Service to empower its employees and adopt a policy of ‘‘First Call Resolution.’’ Such a program would lead to more timely problem 

resolution, improve IRS employee job satisfaction and lessen practitioner reliance on 

other tools, such as collection due process hearings. The IRS could model its program after any number of systems operated by complex organizations in the private 

sector. 

Here is a real life example of how a ‘‘First Call Resolution’’ program could resolve 

a problem. One of my clients, a responsible party in a failed business, received a 

notice of taxes, penalties and interest now personally owed. After contacting the 

ACS, I learned that one of the other responsible parties in that failed business had 

previously paid the debt in full. The problem was that IRS records were not properly updated and between $10,000 and $15,000 of interest remained on the IRS 

books, hence the notice to my client. The ACS worker informed me that this was 

an unusual situation and that I needed to file a claim (Form 843) with the appropriate service campus to resolve the problem. 

In this situation the ACS worker recognized the problem, understood the problem, 

knew how to fix the problem, but did not have either the authority or willingness 

to do so. A ‘‘First Call Resolution’’ program would have enabled the ACS worker to 

fix the problem. Now, I am at the mercy of an anonymous service campus employee 

97

who must start at square one to understand the problem and then, hopefully, will 

take appropriate action to resolve the issue. Under present practice, accountability 

for problem resolution is non-existent.

CONCLUSION

We commend the IRS for a successful 2003 tax-filing season. However, much work 

remains to be done in the post-filing tax administration environment. To improve 

this stage of tax administration, NSA recommends the following:

1. Senior IRS management needs to secure the buy-in of middle management and 

rank-and-file employees on the need for and benefits of IRS restructuring. 

2. IRS must revamp its employee training process. Programs should be developed 

by trained educators and taught by IRS staff dedicated to the new structure. 

3. Congress should provide adequate funding to support state-of-the-art training 

for IRS personnel. 

4. IRS should complete work on the directory for practitioners as soon as possible. 

5. IRS should empower its employees and give them the tools and responsibility 

to resolve problems as early in the process as practical and adopt a policy of 

‘‘First Call Resolution’’ to expedite problem resolution.

NSA believes that these steps will start the IRS toward a post-filing tax administration system that will meet with the same success as its filing season administration. 

do that. Thank you. We will get to the questions afterward. Ms. 

This concludes my remarks. Thank you, Mister Chairman.

Chairman HOUGHTON. Well, thank you very much. I might just 

f Hill? 

STATEMENT OF CLAUDIA HILL, GOVERNMENT RELATIONS 

COMMITTEE, NATIONAL ASSOCIATION OF ENROLLED 

AGENTS, GAITHERSBURG, MARYLAND 

Ms. HILL. Mr. Chairman and Members, I am representing the 

NAEA. I am Claudia Hill from Cupertino, California. I am an enrolled agent, and I am a return preparer. My firm will prepare over 

1,100 returns this filing season for individuals, small businesses, 

estates, trusts, gift tax returns. Almost half of those, we filed electronically. We work directly with taxpayers wishing to voluntarily 

comply with their annual filing rituals. 

Overall, this filing season has gone very smoothly, but every year 

as filing season approaches, I get prepared to hear my clients’ annual litany of commentary on the fairness of the tax system and 

what other people get away with. 

Last filing season, for example, a client called to let us know that 

she wouldn’t be needing the return we prepared for her, and she 

asked if we would discount our fee. She complained to her brotherin-law about how much taxes she was having to pay and he volunteered to prepare her return for her using software he had purchased, and he assured her that when he finished, she wouldn’t 

owe any taxes. 

Although this is just one obvious example of a client choosing not 

to volunteer last year, it was not the only challenge to our role as 

preparers in a voluntary compliance system. I am asked by my clients constantly, how will IRS know about this money? Is it true 

IRS isn’t doing audits anymore? These situations are played out in 

tax preparation offices throughout this country this time of year, 

and to me, they bring home quite vividly the meaning of declining 

enforcement statistics. 

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It is a good thing most taxpayers aren’t aware of the significant 

areas of noncompliance in reporting income that exists or the significant and growing backlog of collection cases involving individual 

taxpayers who know their tax liabilities and simply do not pay 

them. Currently, over $13 billion in delinquent tax liabilities are 

going uncollected because IRS cannot continuously pursue every 

taxpayer with an outstanding liability. 

The NAEA strongly supports the efforts that focus attention on 

serious compliance issues such as these and promotion of abusive 

shelters, misuse of devices such as trusts and offshore accounts, 

and corporate tax avoidance schemes, underreporting of income, 

and failure of employers to file and pay over employment taxes. 

While such activities go unchecked, honest taxpayers wonder 

whether they are being chumps for paying more than their fair 

share. 

There are three key proposals in the budget proposed that are 

aimed at improving the fairness of the tax system and addressing 

compliance and collection issues. The first proposal focuses resources on high-income taxpayers and businesses in areas where 

noncompliance is likely to be greatest. The second proposal permits 

private collection agencies to support IRS collection efforts, and the 

third proposal strives to improve the effectiveness of EITC. 

Generally, we applaud these new proposals. We believe to ensure 

fair and effective enforcement of the laws is essential to the perception of fairness in the system. Stable funding for the IRS is essential to permit them to focus their attention on the most serious 

compliance problems. However, we have reservations about the 

proposal to permit private collection agencies to collect tax debt. 

We encourage efforts to focus on those taxpayers who choose not 

to file returns. 

About a decade ago, IRS promoted a non-filer initiative with 

strong threats of consequences for those that didn’t come forward. 

Although many were brought into the system at that time, we have 

once again seen IRS become lax in following up on taxpayers who 

they know have not filed taxes and/or who have vastly underreported their income. 

As an active observer of our tax system for almost 30 years, I 

cannot understand why IRS would turn their backs on the highly 

cost-effective document matching programs and non-filer substitute 

for return programs. In efforts to reallocate resources to other customer services, IRS has done a disservice to those who consistently 

file and pay their taxes. The IRS must be given the budget to support continuing and consistent enforcement of tax laws. Honest taxpayers need to know there are consequences to noncompliance. 

I have additional comments on IRS communications with taxpayers and tax professionals. Acting Commissioner Wenzel reported just recently that for fiscal year 2002, IRS compliance work 

involved more than 11 million contacts with taxpayers. When it 

comes to IRS contacts with taxpayers, many of them result in requests for tax practitioners to intervene. The IRS Practitioner Priority Support Services is an essential tool in that intervention effort. It is cost effective and it allows us to resolve problems at the 

lowest administrative level. However, recent tinkering with that 

system is causing us to have problems. 

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Recently, the system switched from a regional routing to a national routing. Our Members’ experience has not been good to date 

on this. There are many instances where, on a national basis, a 

phone call can lead to several different locations. In resolving one 

problem recently, I contacted Ogden, Philadelphia, and Memphis 

all in one attempt to resolve one issue because none of them could 

get back to the center that started and needed additional information. 

Our Members have a similar complaint when it comes to national routing of the automated collection system. If the IRS is concerned by national routing as the most efficient way to use their 

toll-free telephone resources, I can assure them that practitioners 

would be glad to pay for the telephone calls if it would actually be 

routed to the center where they had previous contact and needed 

to provide additional information that would resolve the account. 

It also seems incongruous to me that the IRS Internal Investigation Division would focus on return preparer fraud deterrence and 

enhancing compliance in the preparation return industry, at the 

same time the IRS electronic tax administration is rushing to offer 

what could be access to information that would be an identity 

thief’s dream come true. 

In its zeal to meet the Congressionally mandated e-filing returns 

by 2007, IRS again has let the ends justify the means. The history 

of IRS e-filing has been replete with this. At this point we are 

much concerned with the proposal to offer e-filing services to any 

electronic return originator (ERO) that would give them access to 

taxpayer accounts that indicate bank accounts and brokerage account numbers on them. 

Thank you for your concerns. I would be glad to address any further questions. 

[The prepared statement of Ms. Hill follows:]

Statement of Claudia Hill, Government Relations Committee, National 

Association of Enrolled Agents, Gaithersburg, Maryland 

Mr. Chairman and members of the Oversight Subcommittee, I am honored to 

present this testimony on behalf of the National Association of Enrolled Agents 

(NAEA), which is the professional society of Enrolled Agents. 

I am Claudia Hill, EA from Cupertino, California and I am a member of NAEA’s 

Government Relations Committee. I am a tax return preparer. My firm will prepare 

over 1,100 individual, small business, estate, trust and gift tax returns during this 

filing season. As one who works directly with taxpayers wishing to comply with 

their annual filing rituals, I know it is important that hearings such as this take 

place so that concerns and frustrations of America’s taxpayers can be heard. 

Today, I am representing the National Association of Enrolled Agents whose 

10,000 members are tax professionals licensed by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue 

Service. 

Enrolled Agents were created in 1884 to ensure the ethical and professional representation of claims brought to the Treasury Department. Members of NAEA ascribe to a Code of Ethics and Rules of Professional Conduct and adhere to annual 

Continuing Professional Education standards that exceed IRS requirements. Like 

attorneys and Certified Public Accountants, Treasury Circular 230 governs us in our 

practice before the Internal Revenue Service. We are the only tax professionals who 

are tested by the IRS on our knowledge of tax law. Each year, we collectively work 

with millions of individual and small business taxpayers. Consequently, Enrolled 

Agents are uniquely positioned to observe and comment on the average American 

taxpayer’s experience within our system of tax administration. 

As our members are on the front lines of tax administration, we are pleased to 

share with you the views of these practitioners.

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IRS Filing Season Readiness

Filing season began even earlier this year than last year. We had reports of members starting the process as early as January 3. We attribute this phenomenon to 

a couple of factors: taxpayers seeking early refunds and increased use of electronically generated W–2s by businesses. 

Overall, tax season has run very smoothly. We are particularly pleased with the 

wealth of information and resources made available to the public through the IRS 

Internet web site, www.irs.gov. This season IRS has also been pro-active in release 

of news alerts to practitioner groups in a way that leverages the efforts of those of 

us in the preparer community. 

For example, publicity has been given to tax frauds and schemes via coordination 

information from the Department of Justice about prosecutions of tax evaders as 

well as fraudulent preparers. Publicizing the convictions of promoters has been very 

helpful to practitioners who find they are dealing with clients considering inappropriate or abusive techniques to avoid their tax responsibilities. This information is 

vital to maintaining taxpayer confidence in our system of tax administration and 

we strongly encourage the continuation of this effort. 

There have been very few glitches. Among those few were:

(1) Problems with the automated refund hotline and refund inquiry web site indicating when refunds would be deposited in bank accounts. Although this enhancement in availability of refund information is much welcome, it was very 

troubling to taxpayers and practitioners who relied on the technology. IRS managed to get things stabilized by March 1. 

(2) Many tax preparers, public libraries and volunteer tax clinics rely on IRS 

provided forms reference books annually (Package X) to assist them during filing 

season. Volume 1 of Package X came out January 3 but Volume 2 did not appear 

in mailboxes until mid to late March. Reports are that some forms, like the new 

Form 8880, Retirement Savers Credit, were missing. The IRS CD-ROM was also 

late. We attribute both the delay in Package X and the CD-ROM to the possibility 

of late tax legislation. 

(3) The paper IRS E-file Handbook (Pub 1345), a required reference for electronic filers, did not arrive until as late as March 27th. E-filing demand peaks 

by the second week of February. This did not inspire confidence in tax practitioners new to e-filing. 

(4) We had reports that clients whose returns were e-filed and had scheduled 

automatic payment withdrawn for their IRS tax bills were sent letters stating 

that they owed the amount that was supposed to be withdrawn automatically. 

This could have been merely a confirmation letter. However, it was confusing to 

taxpayers who misread the letter and paid. The IRS still withdrew the automatic 

payments, so taxpayers paid twice. This will need to be straightened out after filing season.

IRS Budget Request

We are aware that Congress is considering the President’s budget proposals requesting $133 million in new funding for audits and other law enforcement work. 

Over all, the IRS would receive $10.4 billion, a 5.25 percent increase, but still less 

per tax return, after adjusting for inflation, than it got five years ago. 

The IRS has identified the following as some of the most serious compliance problem areas:

(1) the promotion of abusive tax schemes; 

(2) the misuse of devices such as trusts and offshore accounts to hide or improperly reduce income; 

(3) the use of abusive corporate tax avoidance transactions; 

(4) the underreporting of income by higher-income individuals; and 

(5) the failure by employers to file employment tax returns and pay large 

amounts of employment taxes.

NAEA strongly supports efforts that focus attention on these areas of noncompliance. While such activities go unchecked, honest taxpayers wonder whether they are 

being chumps for paying more than their share. 

There are three key proposals in the budget aimed at improving the fairness of 

tax administration and addressing the compliance and collection issues. The first 

proposal focuses resources on high-income taxpayers and businesses in areas where 

noncompliance is likely to be greatest. The second proposal permits private collection agencies to support the IRS’s collection efforts while affording full protection 

of taxpayer rights, allowing the IRS to devote resources to more complex enforcement and collection issues. The third proposal strives to improve the effectiveness 

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[i] Id. [ii] Code Sec. 7122. [iii]Statement of Robert E. McKenzie on behalf of the American Bar Association Section of Taxation, IRS Oversight Board Hearing, Washington, DC January 27, 2003. Panel 3: Effective Collection Strategies. The complete testimony can be found at www.abanet/tax.org. 

of the Earned Income Tax Credit (EITC) program by ensuring that benefits go to 

those who qualify for them.[i]

Generally, we applaud these new proposals, because we believe a comprehensive 

strategy to ensure fair and effective enforcement of the tax laws on the part of the 

Treasury is essential to the perception of fairness in the tax system. Stable funding 

for the IRS is essential to permit them to refocus their attention on the most serious 

compliance problems, aggressively combat abusive tax avoidance transactions and 

schemes, and better detect new areas of non-compliance. 

However, we have strong reservations about the proposal to permit private collection agencies to collect tax debts. The opportunities for disclosure of taxpayer information combined with the potential for aggressive collection approaches inherent in 

a bounty-incentive approach runs counter to the protection of taxpayer rights. 

We encourage efforts to refocus on those taxpayers who choose not to file returns. 

About a decade ago, the IRS promoted a non-filer initiative, with strong threats of 

consequences for those that did not come forward. Although many were brought into 

the system at that time, we have once again seen IRS become lax in following up 

on taxpayers they know have not filed or have vastly under reported their income. 

As an active observer of our tax system for almost 30 years, I cannot understand 

why IRS would turn their backs on the highly cost efficient document matching programs and non-filer/substitute for return programs. In efforts to re-allocate resources to other customer services, IRS has done a dis-service to those who consistently file and pay their taxes. IRS must have the budget support to make their tax 

compliance activities once again have a presence in people’s lives. 

Honest taxpayers need to know there are consequences to non-compliance.

The Offer in Compromise program

Since the adoption of Policy Statement P–5–100 in 1992, the IRS has struggled 

with the design and administration of the offers-in-compromise program. In recent 

years, the volume of applications for offers in compromise has increased enormously, 

as have the frustrations of practitioners representing taxpayers in the process. This 

year it ranked as one of the ‘‘Most Serious Problems’’ encountered by taxpayers in 

the FY 2002 Annual Report of the Taxpayer Advocate Service. 

Pursuant to the IRS Restructuring and Reform Act of 1998 (P.L. 105–206), the 

IRS is required to develop employee guidelines for determining whether a proposed 

offer in compromise is adequate and should be accepted to resolve a dispute. The 

guidelines must include national and local allowances (standards) under which the 

IRS must determine basic living expenses of the taxpayer. However, the IRS must 

determine, based on the facts and circumstances of each taxpayer, whether use of 

the standard allowance is appropriate. 

The standards are not to be used if they would deprive a taxpayer of adequate 

means to provide for basic living expenses.[ii] Temporary Reg. § 301.7122–0T and 

Temporary Reg. § 301.7122–1T were issued by the IRS to comply with these requirements. Temporary Reg. § 301.7701–1T(a) provides that the grounds for compromise 

may be based on doubt as to collectibility or doubt as to liability. 

The effectiveness of the OIC program is being severely undermined in certain 

cases by the manner in which it is being implemented.[iii] Although compromise 

based upon effective tax administration (‘‘ETA’’) grounds is still relatively new, and 

final regulations on ETA were only issued in July of 2002, the ability of taxpayers 

to compromise on these grounds is being frustrated by a lack of clear policies concerning the processing of ETA offers. The final ETA regulations did not provide a 

meaningful indication of what kinds of cases have a chance of succeeding on ETA 

grounds. The continuing lack of guidance in this area has brought an already slow 

and cumbersome process to a standstill, with little willingness to even consider 

making a pro-taxpayer decision by IRS personnel. 

For over a year, the IRS has worked to develop an OIC user fee proposal. The 

purpose of the OIC user fee would be the same as the purpose of the installment 

agreement user fee: to defray the administrative costs associated with providing a 

specialized service to a limited segment of taxpayers. The Office of Management and 

Budget (OMB) and the Department of Treasury have approved the IRS’s proposed 

user fee regulations for offers. 

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[iv] News Release IR–2002–118—IRS Proposes User Fee For Certain Offer-In-Compromise Request and Frequently Asked Questions [v] IRS Data Book for Fiscal Year 2002 (IR–2003–38; Publication 55–A) 

The proposed fee is $150 [iv] Most taxpayers who submit an offer would pay the 

proposed fee. However, when a taxpayer is at the poverty level or is applying under 

doubt as to liability the fee will not be charged, or will be refunded to the taxpayer 

if their case successfully meets effective tax administration criteria. NAEA continues to oppose such user fees generally, and is not able to reconcile the reasoning 

behind imposing an additional fee on taxpayers who are currently in such financial 

straits they are not able to pay the tax. It seems to simply compound the problem, 

not contribute to a solution. 

IRS communications with taxpayers & tax professionals

On March 21, 2003, Acting IRS Commissioner Bob Wenzel issued a statement on 

compliance results and activities for Fiscal 2002. In terms of compliance activity, fiscal 2002 may be a sign of changing times at IRS. Revenue from IRS collection activity increased to more than $32 billion, reaching the highest level in eight years.[v]

Overall, Wenzel observed that IRS compliance work involved more than 11 million 

contacts with taxpayers in 2002. 

When it comes to IRS contacts with taxpayers, many of them result in requests 

for practitioners to intervene. Those practitioners who have used the former Practitioner Hotlines and the new Practitioner Priority Service (PPS), know that it has 

been an essential tool in resolving taxpayer issues at the least expense to the taxpayer, quickly, and at the lowest administrative level. However, just as we are 

learning to work with the new system, IRS has started ‘‘tinkering’’ with the process. 

Recently the PPS system switched from ‘‘regional’’ routing of calls to ‘‘national’’ 

routing. Our members’ experiences with national routing to date have not been positive. It seems that all the technology and training is not in place to allow access 

to the full variety of account inquiries that come in on a National basis, nor is the 

ability to transfer calls to the sites that are able to handle site-specific issues. The 

change from regional to national was expected to reduce hold times, but having a 

phone answered quickly is not always the same as resolving an issue quickly. Let 

us hope IRS reconsiders how this one should be administered. 

With IRS attempting to collect more unpaid taxes, we are seeing an erosion of 

the kinder, gentler IRS we have been hearing about in recent years. To cite just 

one example, several members have told us that when they have contacted the Practitioner Priority Service (PPS) about a client with a balance due, the PPS Customer 

Service Representatives (CSRs) appear to be taking on the role of collection officers 

seeking levy sources if the taxpayer’s account shows a balance due. In fact, most 

account related issues practitioners call about do involve a balance due; often an incorrect one, and that is why they make the call. This line of questioning is a significant departure from the friendly, information-providing, problem-solving approach 

we have come to appreciate. 

Although practitioners often see their role as being a buffer between the taxpayer 

and the Service, that role still focuses on assisting the taxpayer in resolving their 

tax obligations. This new policy will hinder case resolution if practitioners become 

reluctant to call PPS, fearing it will speed up enforced collection efforts or otherwise 

cause harm to their clients. 

Practitioner Priority Service is a program IRS benefits from as well, leveraging 

the resources of practitioners who are able to assist taxpayers with account resolutions or in coming back into the tax system and confronting their tax deficiencies. 

Practitioners are able to obtain needed information and chart a plan to remedy their 

clients account discrepancies or work out payment arrangements without fear of creating more imminent problems for the client. However, if the ‘‘levy source’’ line of 

questioning continues, practitioners will not utilize this resource, and both IRS and 

taxpayers will suffer. 

While on the subject of the Practitioner Priority Service, let me say that many 

members have expressed the view that IRS employees continue to strive to provide 

excellent service but run into systemic roadblocks. For example, since PPS is primarily a ‘‘call in’’ site, accommodations are not routinely made to allow CSRs to ‘‘call 

out’’ to follow-up on accounts that need that additional level of service. To circumvent this problem, IRS employees are giving up their lunch hours and breaks 

to call us back so we can close the loop and resolve issues more quickly. There really 

needs to be some kind of call back mechanism built into the system. 

Our members have a similar complaint when it comes to national routing and the 

Automated Collection System. Those cases, even more frequently, require more than 

one contact. If IRS is concerned that national routing is most efficient utilization 

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[vi]Disclosure of returns and return information to designee or taxpayer and oral tax information authorization is discussed in Temp. Regs. Sec. 301–6103(c)–1T. 

of their toll-free telephone access system, I can assure them that practitioners would 

be glad to pay for the telephone call if it would actually be routed to the center 

where they had previous contact and needed to provide additional information that 

would resolve the account.

Third Pary Authorization & E-Services for Tax Professionals

NAEA supports increasing the number of tax returns filed electronically and understands that incentives to those in the tax industry, particularly tax return preparers, are needed to achieve the electronic filing goals established by Congress. The 

‘‘e-services’’ program for practitioners fosters this goal and has, within its scope, 

many opportunities beneficial to practitioners in serving their clients. 

Over the last two years IRS has expanded the types of access they offer well beyond that afforded with the traditional Form 2848 Power of Attorney and Form 

8821 Taxpayer Information Authorization. Electronic return filers are provided limited authorization with the Form 8453, 1040 returns now have ‘‘third-party designees’’ and Oral Tax Information Authorization [vi] (OTIA) can be used to allow a 

taxpayer to call IRS and establish disclosure authority for all types of tax accounts. 

The issue of limitations of practice, access to taxpayer information and expansion 

of third party authorizations should be of concern to those who place a high priority 

on protection of taxpayer information as well as those who have studied, taken tests 

and earned designations recognized by IRS and the public as qualified to represent 

taxpayers. While IRS is charged with protecting the confidentiality of taxpayer information, they are also expected to make whatever accommodations they legally 

can to reduce taxpayer burden in allowing for assistance in resolving tax related 

matters. NAEA is concerned that the trade-off to rapidly expand access be tempered 

by imagining the field day identity thieves would have if given access to the thirdparty information reports IRS provides by social security number and account number listing. 

It seems incongruous that while the IRS Criminal Investigation Division focuses 

on return preparer fraud deterrence and enhancing compliance in the return preparer community, the IRS Electronic Tax Administration will rush to offer what 

could be access to information that would be an identity thief’s dream come true. 

In its zeal to meet the congressionally mandated 80% e-filed returns by 2007, IRS 

has once again let the ends justify the means. The history of IRS e-filing is replete 

with shortsightedness in this regard. If one goes back to the origination of the program in the late 1980’s, we find that refund anticipation loans were seen as the 

draw that would create the market demand for electronic services. They certainly 

did, and today we view these extremely high interest rate loans, as an onerous 

mechanism to take entitlement money out of the pockets of low-income, working 

taxpayers. 

Our current concern: In an effort to reward electronic filers, IRS has announced 

an intention to expand ‘‘e services for the third-party community’’ defined as ‘‘webbased products that allow practitioners to interact with the IRS electronically.’’ ‘‘eservices ’’ are expected to include, ‘‘disclosure authorization, electronic account resolution, transcript delivery system, and TIN matching.’’

The system is envisioned to allow authorized practitioners to electronically submit 

Power of Attorney and Tax Information Authorization forms over the Internet. The 

user may also review, revoke and modify authorization records online. It would 

allow authorized practitioners to submit account related inquiries for their clients’ 

individual and business accounts and support payment tracing, complex refund 

analysis, installment agreements, notice resolution and account problem resolution. 

It would provide request and delivery of the following information items: account 

transcripts; return transcripts, records of account, wage and income statements, and 

verifications of non-filing. 

Access to such information and ability to more quickly resolve client problems 

sounds like a beneficial service to all practitioners admitted to practice before IRS. 

However, IRS intends to ‘‘authorize’’ this service initially to a very select group of 

return preparers—those that are enrolled in the electronic filing program and who 

file a minimum number of returns online. This leaves out most attorneys, CPAs, 

and many Enrolled Agents. Yet, makes such services available to return preparers 

least likely to be qualified to represent taxpayers in the first place. Unless those 

return preparers are also ‘‘authorized to practice before IRS,’’ this suite of ‘‘e-services’’ will see very limited usage. Moreover, those who would use it most will not 

be able to access it. 

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To qualify for this enhanced level of access to account information would only require the preparer to be an Electronic Return Originator who has filed 100 returns. 

According to a report by the Treasury Inspector General for Tax Administration, ‘‘EFile Providers Are Not Adequately Screened’’ in June 2002:

‘‘Our review identified that the IRS does not have effective screening procedures 

to adequately determine who should be allowed to participate or to continue to 

participate in the e-file program. Specifically, we found that the IRS does not 

independently validate age and citizenship requirements. Our analysis of IRS 

data identified e-file providers who were not United States citizens, were under 

the age of 21, or were identified as deceased. In addition, screening checks publicized to the taxpaying public as being extensive were found to be limited primarily to whether an individual filed tax returns and paid taxes due. For those 

individuals that file electronic tax returns as part of IRS’s volunteer income tax 

preparation program, no checks are performed. We also identified that for those 

limited number of individuals selected for a criminal background check, 60 percent of the individuals received authorization to participate in the e-file program 

before results from the Federal Bureau of Investigation (FBI) were received and 

analyzed by the IRS. Finally, testing found that once individuals are authorized 

to participate in the e-file program, no subsequent non-tax related screening 

checks are performed to ensure these individuals continue to maintain a high degree of integrity and adhere to the highest professional and ethical standards.’’

NAEA is concerned about unauthorized disclosure of taxpayer information and 

the disclosure of tax account information to persons not authorized to represent taxpayers before the IRS. In this regard, many EROs’ activities are limited to return 

preparation; a great number engage in this endeavor during the filing season only. 

They have no training or education equipping them for tax practice and are not eligible to so practice. Hence, much of the information that would be made available 

to them would serve no valid purpose, would not be helpful to taxpayers, and/or 

would be counterproductive to effective and efficient tax administration. 

We believe adequate safeguards have not been placed into this program. In view 

of this, we recommend that this aspect of e-services be broken into two sections: Section One would allow all participating EROs (1) to apply for EINs for taxpayers who 

have executed the third party authorization on Form SS–4 and (2) to resolve processing issues on returns where the ‘‘check-box’’ authorization has been executed. 

Section Two would allow access to all other account information only to EROs who 

meet the eligibility to practice requirements and who have been authorized by the 

taxpayer to receive such information. 

As a result and in view of the sensitivity of the information that would be made 

available, it is our belief that access to Section Two information documents should 

be limited to credentialed practitioners, i.e. attorneys, Certified Public Accountants, 

and Enrolled Agents. 

We are particularly distressed that many Circular 230 practitioners who do not 

engage in tax preparation work will be denied access to e-services because they only 

do representation work. This strikes us as inherently unfair and counter productive 

to what should be a mechanism to assist all taxpayers in resolving account related 

problems at the least expense.

The Impact of Tax Law Complexity on IRS Employees

As we have told you in past years, we believe that tax law complexity is an area 

that requires your attention as it affects IRS employees and we respectfully urge 

you to press for simplification of the tax code. As we have reviewed proposals currently under consideration, our great fear is that you will fail to consider the administrative difficulties of implementing the changes before you pass on the legislation. 

If taxpayers (and their preparers) cannot understand the law, they are not likely 

to comply with it. 

As the National Commission on Restructuring the IRS found, there is a clear connection between the complexity of the Internal Revenue Code and the difficulty of 

tax law administration and taxpayer frustration. Clearly, how the public perceives 

how well the agency is doing its job is tied directly to the level of frustration taxpayers have with the constantly changing tax code. 

As frontline practitioners, we believe Congress could provide significant relief and 

make the job of IRS employees easier by making immediate changes in three areas. 

First, Congress needs to repeal or dramatically restructure the alternative minimum 

tax (AMT) for individuals. Second, phase-outs and phase-ins (such as those for IRA 

contributions, education incentives, child credit, itemized deductions and personal 

exemptions) need to be standardized. Finally, the rules for qualifying for the Earned 

Income Tax Credit need to be streamlined. 

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Once again, the Alternative Minimum Tax is providing nightmares to taxpayers 

and practitioners. Here is a representative sampling of what our members say:

• From a California EA: I am seeing so many people with small/large AMT taxes 

due to the disallowance of state income, real and personal property taxes. Since 

there have been almost no changes to the AMT exemptions or rules since 1986, 

could something be done to alleviate this problem before next year? 

• AMT is hitting quite a few of my clients this year—middle class taxpayers it 

was never intended to hit: senior citizens with a once in a lifetime bonanza of 

selling property that they’ve sat on for 45 years, low income folks with inherited 

stock, and middle class managers with bonuses. Not only are they hit with 

AMT, they lose Schedule A deductions and personal exemptions. They don’t get 

to take their rental losses. AMT should be abolished or adjusted for the times. 

‘‘Stealth taxes’’ should be abolished in favor of honest tax rates. 

• I personally prepare over 1200 tax returns per year and I am seeing an increasing incidence of the AMT being applied to the workforce and adversely affecting 

them in a way that I do not believe was the intent of the law. Employee business expenses are NECESSARY expenses incurred for conducting one’s employment. Outside sales persons are particularly hard hit when their expenses for 

travel already take a significant portion of their income. The employee is required to incur job related expenses to earn the income yet they are forced to 

absorb the equivalent of 2% of their AGI before any deduction can be claimed, 

and then the amount claimed cannot be taken for AMT purposes so often they 

lose the benefit completely. 

• More families with children are seeing the AMT this year since the personal 

exemption amount of $3000 per person is not allowed against AMT. Even with 

‘‘normal’’ amounts of state & local property taxes itemized on Schedule A, we 

are seeing a much higher percentage of middle-income filers with AMT.

Since most self-prepared returns do not calculate the AMT, IRS ends up sending 

change notices to affected taxpayers. On the more complex cases, IRS does not have 

the information on the return to calculate the correct AMT, so those taxpayers benefit from the complexity. Changes to these three areas would provide significant relief to taxpayers as well as allow the IRS to free up compliance resources within 

the agency for other purposes.

Conclusion

Mr. Chairman and members of the subcommittee, I am pleased to have been able 

to share with you our members’ views of the filing season and the IRS budget. If 

I may answer your questions or provide you with any additional information, I am 

happy to do so. 

ries of questions. The first one, I think, is Mr. McKenzie and Ms. 

Thank you.

Chairman HOUGHTON. Thank you very much. I just have a sef Hill have talked about the outside collection systems and they 

worry about it. Could you add a few additional comments about 

that? 

Also, as far as Mr. McCormally is concerned, it is pretty frightening, isn’t it, to think that half the employees in the IRS are eligible to retire in 3 years. Then, also, Mr. Stevenson, in terms of the 

training, what do you suggest we do, just bring it back to Washington or what? So, maybe each of you would like to comment on 

those. Do you want to start, Mr. McKenzie? 

Mr. MCKENZIE. Yes. The outsourcing, again, we think it could 

work, but we have noted to State agencies, and myself in particular, I have dealt with agencies all over the country. I have written a book on how to represent people in collection matters and I 

do it every day, and I found that not all the private collection agencies are very concerned about individual rights. On many occasions, 

I have had to invoke the procedures of the Fair Debt Collection 

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Practices Act (P.L. 90–321) to protect my clients from overly aggressive State collection agencies. 

So, again, we think we need more efforts to collect. It is unfair 

that many people file their returns and don’t pay them, and I applaud the efforts to look to outside collection. If we are going to do 

it, let us make sure that all the protections are in place before we 

allow an outside collector to call and abuse an American taxpayer. 

Chairman HOUGHTON. Is that possible, all the collection procedures are in place? Obviously, there are going to be some glitches 

along the line here. What are the fundamental things that you 

worry about most? 

Mr. MCKENZIE. Well, somebody calling and demanding the 

money repeatedly from the taxpayer without telling them their 

rights under the Fair Debt Collection Practices Act. We have the 

requirement that the IRS give each taxpayer a Publication 1 and 

tell them of their rights. If we are going to have private collectors 

calling on the phone, they should, before they even begin any interview with the taxpayer, have to give a full range of rights to the 

taxpayer, including the right to decline to discuss the matter with 

that collection agency as required by the Fair Debt Collection Practices Act. 

If we are going to have phone collection efforts and we are going 

to use private collectors, we have to assure that they go to the 

same high standards we hold the IRS collection agents to, and I 

want to assure that all those protections are within any legislation 

authorizing this. 

Chairman HOUGHTON. Mr. McCormally? 

Mr. MCCORMALLY. Mr. Chairman, I think actually there is a 

connection between the concerns that some of us have about the 

use of private collection agencies and the point that was made earlier during the hearing and in my testimony about training and 

education efforts with respect to agents. The tax law is not a simple thing. Tax administration is not a simple thing. 

I know that the Taxpayer Advocate has expressed some concerns, 

especially with respect to one of her core constituencies, low-income 

taxpayers who don’t have the wherewithal to understand fully their 

rights and what they can request when contacted by an IRS employee. The IRS employee currently has an obligation to know the 

processes and to make assistance available. I think what Mr. 

McKenzie was saying is that those same rights and that same 

knowledge don’t necessarily follow naturally from the IRS to a private debt collector. 

More generally, with respect to the concerns of TEI Members and 

large businesses in general, we believe it is essential that the IRS 

have adequate funding to hire new agents and really to stay the 

course with respect to training those agents. The LMSB Commissioner Langdon has testified before that it is a minimum of a 3- 

to 5-year process to create a good international agent, a good revenue agent that can understand and audit the complicated transactions that TEI Members engage in. So, funding on an ongoing 

basis to secure adequate personnel and to train them, I think are 

essential for the agency to address the challenges that lie ahead. 

Chairman HOUGHTON. Thank you very much. Mr. Stevenson? 

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Mr. STEVENSON. First off, the Restructuring and Reform Act 

1998 places a very high priority on education, and the IRS is really 

required by that bill to provide you with a multi-year layered plan 

of an educational process. 

I don’t know if this is quality time to discuss a whole educational 

mode, but off the top of my head, I suppose what I would consider 

doing is I would set up—I would formalize the educational process 

in such a way that I would have an academy inside the IRS, that 

this academy would be staffed by people who understand the mission, understand the educational process and also understand that 

they are working to change the culture of the IRS. If the plan stays 

the way it is, with middle management who haven’t bought into it, 

you are never going to change the culture of the IRS unless those 

43 percent retire and you get all new people in place. 

Chairman HOUGHTON. Thank you very much. Ms. Hill, any 

other comments? 

Ms. HILL. On this specific subject? 

Chairman HOUGHTON. Any subject you want, particularly the 

privatization issue which you talked about. 

Ms. HILL. The NAEA concern about the privatization is will taxpayers’ rights be protected. That is our primary concern. 

Chairman HOUGHTON. Right. 

Ms. HILL. Our other concerns have to do with the confidentiality 

of information that the IRS seems to be making available through 

its programs to encourage electronic filing by offering e-services, 

and that is where they would make available through the Internet 

access to taxpayer accounts and charts of accounts, as well as listings of accounts for those people who are electronic filers rather 

than those people who are prepared to represent taxpayers. 

Chairman HOUGHTON. Okay. Thanks very much. Mr. Pomeroy? 

Mr. POMEROY. It is a very difficult line, trying to put in place 

protections that are meaningful for taxpayers without creating inadvertently shelters for those who want to avoid their tax obligations. 

I was very interested in the comments of your testimony, Mr. 

McKenzie, but let me ask you a little more broadly something referenced by Ms. Hill, that there is almost a—let me put it this way. 

There was some publicity a year ago that there was a public attitude that audit functions were not as aggressively pursued by the 

IRS anymore and cheating, especially with more affluent filers, was 

increasing. I would like to just run across the panel and have your 

thoughts in terms of whether or not you sense in the areas where 

you work any changed public attitude about the IRS and its rigor 

relative to collections. 

Mr. MCKENZIE. As someone on the frontlines every day with 

the taxpayers, I certainly have seen a view that the IRS is not as 

aggressive, and many of my clients take the attitude when they 

first arrive in my office, perhaps, of who is to know, and the numbers bear them out. When the IRS is only doing about a third of 

the face-to-face audits it was doing 6 years ago, there is good reason for the taxpayers to believe that they can get away with more. 

More people are getting away with more. 

108

When in fiscal year 2001, we audited more poor people than we 

did wealthy people, something is wrong. I know Congress gave a 

mandate to come after EITC, but there are all types of inefficiencies. When I audit somebody poor in the 10 percent tax bracket and 

I find $1,000 wrong with their return, that is $100 into the Department of the Treasury. I audit a wealthy person in a 37.6 percent 

tax bracket and find $1,000 wrong with that return, I get $376 into 

the Department of the Treasury. So, there are huge inefficiencies. 

Going to Mr. McCormally’s comment, the IRS is the only profit 

center in the Federal Government. Why don’t we devote the resources to hire adequate people to go out and collect the money, because many taxpayers think it is unfair that a lot of people are not 

paying their fair share. Until we give the IRS adequate enforcement means to come after the tax cheats, the system is always 

going to be perceived as unfair. 

Mr. POMEROY. In your substantial practice, you see it deteriorating at present? 

Mr. MCKENZIE. Yes. I do not prepare returns. I only represent 

people who have come face-to-face with the IRS for some misconduct. Either they haven’t paid their taxes or they may not have 

reported everything or they may even face potential criminal prosecution. The attitude of those people I represent who do finally essentially get caught is, ‘‘Why me? Everybody else is getting away 

with it. Why am I caught?’’

Mr. POMEROY. Very interesting. Mr. McCormally? 

Mr. MCCORMALLY. Mr. Pomeroy, the Members of TEI don’t 

have the luxury of engaging in the audit lottery for the most part. 

They are part of this coordinated industry case program that the 

IRS runs. They have IRS agents living with them in their offices 

on a year-round basis. 

That doesn’t mean, however, that there aren’t ways that the IRS 

can do its job better and can bring efficiency. I think the question 

here, as in all things, is the appropriate balance to be struck between how aggressive the IRS is in pursuing certain issues and 

how helpful their employees are in helping taxpayers find better 

ways of doing things. As my written testimony elaborates, there 

are a number of initiatives that the LMSB Division, in particular, 

has instituted in the last few years that have really brought a lot 

of efficiency to the audits and, I think, have opened up a realm of 

possibilities to getting issues and cases resolved earlier. 

Certainly, the attention that this Committee and Congress as a 

whole has shown on questionable activities by some corporations in 

recent years has resonated throughout not only the IRS, but the 

entire business community. I do not think that the sense that Mr. 

McKenzie has with respect to the individual taxpayers at all obtains in respect to the large business community whose members 

make up TEI. 

Chairman HOUGHTON. Thank you. 

Mr. STEVENSON. Let me take a little different approach. I 

think the lack of enforcement plays a role in noncompliance. The 

behavior is manifest in a cadre of new tax preparers who have 

come into the business and never had to face an audit of a tax return that they have prepared. I think these people tend to be more 

cavalier. I think some of the people who have been around the barn 

109

a few times who know what it is like to have to face an audit of 

something you have done are less inclined to push the envelope beyond what they feel is reasonable. 

The practitioner community prepares about 50 or 60 percent of 

the tax returns in this country and I think if there were some education, not education, but enforcement where the younger people 

started getting a taste of the action, I think they would probably 

tighten up their practice, too. 

By the way, I will give you three ways to increase money flowing 

into the Department of the Treasury without having to go to outside third parties. Consider interest and penalty amnesty, not tax 

amnesty, but interest and penalty amnesty. Improve the offer and 

compromise program, not the administration of it, but the program, 

and adopt less than full pay installment agreements and you will 

probably get that $12 billion you were talking about a little while 

ago. 

Mr. POMEROY. Thank you I know my time is up, but Ms. Hill, 

if you could just briefly respond. 

Ms. HILL. I see a tremendous drop. Wage and investment sector 

examinations have almost totally disappeared in the area that I 

live in in the last 3 years. Small business examinations, I had two 

last year out of a client base that is primarily individual small 

businesses. This is an extremely low number. 

What amazes me that has dropped has been the follow-up on 

known non-filers, where IRS has third party information and has 

not contacted them with substitute for returns and instances where 

people who have underreported their income and that has not been 

followed up on. Now, those kind of contacts are cost effective. It is 

very inexpensive for IRS to make these kind of contacts, but they 

do indicate an IRS presence when those contacts go out. That lack 

of IRS presence is what makes my job difficult in working with clients when they sit there and ask, how do they know? 

Mr. POMEROY. You have professional exposure for not doing it 

right, dealing with a clientele that no longer thinks there is a penalty for doing it wrong. 

Ms. HILL. Mr. Pomeroy, when I have people who say, well, you 

don’t have to put that income down because I don’t think it got reported, I have to put that income down. We prepare returns competently and professionally knowing that we have standards to 

meet. 

Mr. POMEROY. Thank you very much. 

Mr. PORTMAN. Thank you, Mr. Pomeroy. I thank the panel. 

First, I hope the IRS is here and listening, because there continue 

to be major concerns, and yet I do think we are beginning to address some of them. Certainly, the IRS is focused more on the audit 

side as well as compliance in general. 

I would say to Mr. McKenzie, I agree with what you are saying, 

but remember with regard to going after wealthy taxpayers versus 

poor taxpayers, this is in specific response to the huge concerns we 

have with EITC and all audits are not equal. The amount of time 

the IRS puts into these EITC audits, as you know, is far less than 

they would put into, say, a small businessperson’s audit, which 

might result in a larger return to the Department of the Treasury. 

110

Sometimes these audits on the EITC side are minimal in terms of 

the IRS involvement, but that is all we can do right now. We talked about $12 billion being out there. We also talked about $9 million in missed payments every year, or erroneous payments under the EITC system. Again, as I said at the outset, I am 

not sure the IRS is equipped, nor would any entity that is always 

looking at taxpayers in terms of whether they are underreporting 

income, to deal with the EITC problem, which is often over-reporting in order to get EITC. I think it is a very different mindset, and 

I think there are some real concerns about whether the IRS and 

their employees, even trained up better, Mr. Stevenson, than they 

are now, are trained to go after the EITC problem and go to a person’s home and possess a rented television set or whatever assets 

are there. It is a very different kind of approach. 

So, I just throw that out and I don’t particularly expect a response, but if you had any great ideas as to how to change EITC 

so it could work better, we would appreciate it. 

With regard to some of the input you have given us, all of which 

is excellent, and I appreciate your comment on training in particular, Mr. Stevenson, and it concerns me that you think middle 

management is not accepting the reforms, my sense is that, over 

time, we have begun to see some movement down not just to middle management, but people on the line, or maybe you are saying 

on the line they are getting it and at the top they are getting it, 

but middle management isn’t yet understanding this lack of exclusivity between service and enforcement, which is what Ms. Williams talked about. 

Could you comment on that for a second, and then I would love 

to follow up with Ms. Hill on some of her comments, in terms of 

middle management and their acceptance of the new attitudes at 

the IRS. 

Mr. STEVENSON. My comments are pretty much supported, by 

the way, by people across the country in my organization, and so 

it is not just my own observation. It just seems to us that in the 

IRS’s current culture, there is no profit in the lower-level people resolving problems. The only profit they have is closing a case. It 

doesn’t make a difference whether the problem is resolved. Well, 

that is really poor training. They are not empowered, and even if 

they were empowered, they are afraid to make a decision. So, what 

they will do is move the case or push it aside or bury it. 

This is the fault of middle management, who have not bought 

into what it means to be a service organization. It is like buying 

a car. Everything is great, it is nice and shiny, and what happens 

when there is a problem? If you go back to try to fix the problem 

and you can’t fix it, then that says something about the agency. 

The quality of an organization is not how well it performs its 

function, it is how well it solves problems. The IRS does a very 

good job at pro forma stuff, but when it starts getting into people 

problems, where you have to make decisions and you have to have 

perspective, this agency is not doing very well, from my perspective. 

Mr. PORTMAN. Well, thank you, and ‘‘empowerment’’ is probably a good word to use because that is part of the vision here, is 

to empower people at that level to be able to make decisions to 

111

solve problems and to close cases in that way, not just to move the 

cases along. Thank you for your help. Since 1995, we have made 

a lot of progress, but we have got a long way to go. 

I was just following up, Ms. Hill, on your written testimony as 

well as your oral testimony. You didn’t have a chance to get into 

this as much in your oral statement, but you talked a lot about this 

confidentiality issue, and in response to Mr. Houghton, you talked 

about it again. You mentioned access to bank account and brokerage information being a problem. In your testimony, you talk about 

the Circular 230 practitioners and the EROs. Can you tell the Committee, what is the difference between the EROs and the Circular 

230 practitioners? 

Ms. HILL. Circular 230 practitioners includes enrolled agents, 

CPAs, and attorneys. They have established, and are held accountable to, standards of practice and professional responsibility. They 

are regulated by the Department of the Treasury and they have required continuing professional education (CPE) requirements. 

An ERO makes an application to IRS to file returns electronically. There are no standards, no CPE requirements, no level of expertise required, and it includes Mailboxes USA, used car dealers, 

anyone who is wishing to set up shop offering refund anticipation 

loans, as well as a number of very well-qualified practitioners. I am 

an ERO, but there is a difference. 

Mr. PORTMAN. What is the significance of that difference in 

terms of your recommendation to the IRS on electronic filing and 

confidentiality? 

Ms. HILL. The IRS is offering, as an incentive to become an electronic filer, a program called e-services. It is a suite of services that 

would authorize products electronically to practitioners who would 

be able to obtain disclosure authorization, that is, power of attorney, electronic account resolution, taxpayer identification number 

matching and transcript delivery over the Internet. These are 

items that are very, very useful to a person who practices tax. 

However, the people that IRS is going to authorize this access to 

are EROs who file more than 100 returns. This leaves out most attorneys, most CPAs, and many enrolled agents, people who could 

take advantage and use this service. 

What is of most concern to me is that in my review of the program so far, it appears that IRS has not built the safeguards into 

it to protect client information that is available when they offer 

electronic account services, including transcripts of accounts. There 

is a variety of transcripts. They go from the point of just proving 

that a person has filed to showing account status, but I have along 

with me today an example of one that gives actual bank account 

names and account numbers for each taxpayer. 

Now, a person who is looking at the access that they would be 

able to obtain without talking to an individual, electronically over 

the Internet, is going to receive this kind of information. They are 

people that IRS does not hold to standards of practice, that are difficult to control in terms of their practice before them, have no CPE 

requirements, no other kind of requirements. This is of real concern to us, that there are not safeguards being built in this program at the front end to prevent this kind of access. 

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Mr. PORTMAN. My time is more than expired. I appreciate your 

indulgence, Mr. Chairman, and thank you for raising that point 

again. I hope that is something that we will take a very serious 

look at as we put together the final e-file proposal that Acting 

Commissioner Wenzel talked about. Thank you, gentlemen and ladies. 

Chairman HOUGHTON. Thank you very much, Ms. Hill, Mr. 

Stevenson, Mr. McCormally, Mr. McKenzie. We certainly appreciate your testimony. The hearing is adjourned. 

[Whereupon, at 11:30 a.m., the hearing was adjourned.] 

[Submissions for the record follow:]

American Institute of Certified Public Accountants 

Washington, DC 20004

April 21, 2003

The Honorable Amo Houghton 

Chairman 

Subcommittee on Oversight 

Committee on Ways and Means 

U.S. House of Representatives 

1136 Longworth House Office Building 

Washington, DC 20515

RE: Hearing on the 2003 Tax Filing Season and the IRS Budget for Fiscal Year 

2004

Dear Chairman Houghton:

The American Institute of Certified Public Accountants appreciates the opportunity to submit this statement for the Subcommittee on Oversight’s April 8, 2003 

hearing record on the 2003 tax filing season and the IRS budget for fiscal year 2004. 

The AICPA is the national, professional organization of certified public accountants 

comprised of more than 350,000 members. Our members advise clients on federal, 

state, and international tax matters, and prepare income and other tax returns for 

millions of Americans. They provide services to individuals, not-for-profit organizations, small and medium-sized businesses, as well as America’s largest businesses. 

It is from this broad base of experience that we offer our comments. 

The AICPA is pleased to report that the 2003 filing season is progressing largely 

without any significant problems. American taxpayers and practitioners are reasonably pleased with the Service’s performance during the 2003 tax filing season. 

Our comments herein focus on the IRS budget for fiscal year 2004 and a number 

of critical programs administered by the Service. Specifically, we are pleased to address (1) the IRS budget, (2) Electronic Tax Administration, (3) enforcement, (4) collection strategies, and (5) the IRS workforce.

1. THE IRS Budget

The AICPA urges Congress to support full funding of the Internal Revenue Service’s fiscal year 2004 budget. The AICPA has long advocated funding levels which 

would allow the IRS to efficiently and effectively administer the tax laws and collect 

taxes. Without sufficient funding, taxpayers and practitioners will encounter unnecessary problems and frustrations. 

The IRS performs an essential role by collecting the revenue needed to operate 

our government. To continue improving collection efficiency, the IRS needs adequate 

funding. This does not eliminate the need to implement and monitor reforms to address the problems which exist within the Service. However, budget cuts should not 

be used to penalize the IRS. 

Many AICPA members are tax practitioners. As such, we have seen first-hand the 

problems caused by an IRS that is not responsive to the taxpaying public as customers. We are encouraged by the remarks of Mark W. Everson, President Bush’s 

nominee for IRS Commissioner, at his March 18, 2003 confirmation hearing before 

the Senate Finance Committee. Mr. Everson testified that (as Commissioner) he is 

committed to (1) staying the course on the reorganization, (2) continuing the emphasis on modernization, and (3) enhanced enforcement activities. By providing the IRS 

with full funding for the agency’s fiscal 2004 budget, the Congress would be going 

a long way towards helping Mr. Everson meet these commitments, commitments 

that we believe the Congress and the nation’s taxpayers expect. 

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The AICPA has long advocated that funding for the IRS must be sufficient for the 

Service to efficiently and effectively administer the tax laws and collect tax. It is 

vital to our voluntary compliance tax system that the Service be provided the necessary resources to properly enforce the tax laws. When the IRS is, or appears to 

be, unable or unwilling to actively administer and enforce the tax law, serious damage to the effectiveness of our tax system results. Therefore, we encourage Congress 

to strongly support the IRS’s budget needs. Obviously, we expect the Service to identify responsible ways to allocate any additional resources it receives over prior 

years, and Congress will through its oversight responsibilities ensure that those resources are properly utilized. We also believe Congress should pursue multi-year 

funding (i.e., budgeting for multiple years at once) to ensure stable funding for the 

IRS in the future. 

The American taxpaying public is just beginning to benefit from the Internal Revenue Service that Congress envisioned when it passed the IRS restructuring legislation. While the preliminary results are promising, it is critical that Congress facilitate moving the reform process ahead without delay by providing the necessary 

funding.

2. Electronic Tax Administration

The AICPA supports the IRS’s long-range goals for electronic tax administration 

in general, and electronic filing (ELF) in particular. Last year, the IRS implemented 

a number of improvements in the electronic filing program that we believe practitioners who file returns electronically should find positive. We especially appreciate 

that (1) nearly all Form 1040 forms and schedules have been made available to electronic filers; (2) electronic filers are no longer required to use a paper signature document; and (3) the electronic payment options have been expanded. Similarly, the 

IRS continues to expand the electronic filing options for business taxpayers. 

The AICPA has been frustrated in recent years by the Service’s response to our 

attempts both to partner with the IRS in promoting ELF to our membership and 

in explaining to the IRS the effects of the current systems’ limitations on our constituency. As the IRS shifts its electronic filing focus from individual returns to 

business returns, the importance of involving, listening to, and responding to the 

various stakeholder groups will become all the more critical. 

We appreciate the many hurdles on the road to achieving the goals established 

for the electronic filing program by Congress. And to this end, we look forward to 

being a positive partner in the ELF system.

3. ENFORCEMENT CHALLENGES

A. The IRS’s Enforcement Agenda

The AICPA appreciates public concerns regarding how non-compliance and aggressive taxpayer behavior threatens to overwhelm IRS resources. To counteract 

these tax administration trends, the IRS has announced a number of major compliance initiatives. Tax shelters are the primary focus for the Large and Mid-Sized 

Business (LMSB) Division. The Small Business/Self-Employed Division is emphasizing offshore credit cards, the unreported income and underreporting of income by 

high-income taxpayers, and promoter investigations and abusive schemes. 

These LMSB and SB/SE initiatives are resource intensive, and will change the allocation of resources which would otherwise fund enforcement initiatives targeting 

traditional and mainstream taxpayers. In order for the IRS to maintain a high level 

focus on compliance areas like tax shelters and abusive schemes, the IRS is forced 

to focus its remaining resources on mainstream taxpayers by principally basing 

their examination and collection efforts towards these taxpayers on the concept of 

materiality; that is, by emphasizing the more material issues under investigation. 

This materiality focus underlies the IRS’s efforts to reengineer the examination and 

collection efforts.

B. Reengineering of Examination

The AICPA supports the goals behind the reengineering of the examination function. These goals include: (1) streamlining the examination process, by reducing the 

taxpayer’s time and expense in responding to an IRS examination, (2) increasing 

SB/SE’s effectiveness and timeliness in examining returns, and (3) enabling the 

Service to reduce and redirect resources to major compliance initiatives. 

At the beginning of the ‘‘reengineered examination’’ audit, the examiner and taxpayer will conduct an audit engagement meeting; it is expected that the examiner 

and the taxpayer will discuss the audit issues, the information needed for resolution 

of the examination, and the time estimated to complete the audit. The IRS expects 

to establish materiality guidelines for examining critical audit issues, and for manVerDate jul 14 2003 21:37 Dec 31, 2003 Jkt 090816 PO 00000 Frm 00117 Fmt 6633 Sfmt 6621 E:\HR\OC\90816.XXX 90816
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ager involvement in the early stages of the audit to facilitate quick and effective 

problem resolution. 

Like SB/SE’s examination reengineering initiative, LMSB has announced its Limited Issue Focus Examination (LIFE) program. LMSB Commissioner Larry Langdon 

recently stated that this program is the Service’s ‘‘gold-card’’ treatment for taxpayers ‘‘who want to be cooperative and professional in sharing documents.’’ Under 

LIFE, the IRS will start building its case before referral to a Revenue Agent by 

identifying the material issues for review. LMSB expects to conduct a periodic review to ensure that Revenue Agents are not routinely extending the scope of the 

audit beyond the material issues that have been identified during the case building 

stage. The IRS and taxpayer would sign a memorandum of understanding at the 

start of the audit outlining the examination’s focus. 

We support the IRS’s quest to reengineer the examination function. These efforts 

are constructive ways to better target the overall scope of examinations; and practitioners believe the reengineered process offers significant opportunities to reduce 

taxpayer burden in terms of the time and cost of an examination.

4. EFFECTIVE COLLECTION STRATEGIES

The AICPA strongly supports IRS implementation of effective collection strategies 

designed to improve taxpayer compliance. Two particular collections areas that we 

believe warrant careful consideration are the Offer in Compromise program and the 

frivolous filing penalty.

A. Offer in Compromise User Fee

The IRS issued proposed regulations on November 5, 2002 that would impose a 

$150 user fee for Offer in Compromise filings. However, the user fee would not be 

imposed on Offers: (1) filed by ‘‘low income’’ taxpayers; (2) based on doubt as to liability; (3) based on doubt as to collectibility due to economic hardship; or (4) which 

promote effective tax administration. 

The AICPA commends the Service for seeking to alleviate its workload in processing Offers in Compromise, a burden that often results in taking more than a year 

to process, evaluate, or reach a final determination on an Offer. Nevertheless, we 

are concerned that the proposed regulations do not address the dire need to improve 

customer service in the Offers in Compromise program. We fear that taxpayers will 

pay a new fee without receiving improved customer service or reduced processing 

time in return. 

We generally do not support the IRS’s proposal because the user fee would place 

additional administrative and financial hardships on taxpayers. Instead, we suggest 

that consideration be given to a broadening in the scope of the frivolous filing penalty to cover frivolous Offers. We view this penalty proposal as potentially a more 

effective means of addressing problems with administering the Offer program. (See 

subsection B below, ‘‘Frivolous Tax Returns and Submissions.’’)

(1) The Concept of Imposing a User Fee

Based on our review of user fees in other IRS programs, the AICPA believes that 

the proposed Offer in Compromise user fee is not consistent with the use of such 

fees in other administrative programs. Most user fees routinely involve voluntary 

requests for advice from the Service, such as private letter rulings and determination letters. Moreover, we do not agree with those who suggest that an Offer user 

fee is similar to the current $43 fee assessed to set up an Installment Agreement. 

This Installment Agreement fee reimburses the IRS for the costs associated with 

monitoring and administering the Installment Agreement program over an extended 

period of time. In contrast, filing an Offer in Compromise is not a voluntary request 

for IRS administrative guidance. Rather, an Offer is a request of last-resort for administrative relief; one that provides the taxpayer with a possibility of making a 

fresh start financially.

(2) Taxpayers’ Inability to Pay the User Fee

To the extent a taxpayer does not qualify for an exemption from payment of the 

user fee, section 300.3(b)(3) of the proposed regulations states that ‘‘the fee will not 

be refunded to the taxpayer if the offer is accepted, rejected, withdrawn, or returned 

as nonprocessable after acceptance for processing.’’

Many practitioners feel that the IRS uses overly rigid criteria in processing and 

evaluating Offers. As a result, they fear that clients will be forced to pay multiple 

user fees, because clients must often submit Offers two or three times before reaching final resolution of their tax problem. These practitioners believe the user fee is 

being proposed solely to discourage taxpayers from filing Offers in Compromise, parVerDate jul 14 2003 21:37 Dec 31, 2003 Jkt 090816 PO 00000 Frm 00118 Fmt 6633 Sfmt 6621 E:\HR\OC\90816.XXX 90816
115

ticularly since persons who file Offers typically have insufficient funds or lacks financial resources. 

Under certain circumstances, the AICPA respects the need to establish user fees 

that are fair and reasonably approximate governmental costs for administering a 

program. Although we don’t agree with the suggestion that the user fee is being imposed solely to discourage Offer filings, we doubt that this user fee will result in 

any meaningful revenue increases for the IRS’s administrative budget or even for 

the U.S. Treasury.

(3) Cost of Administering the User Fee Program

Administering a new user fee program is not cost-free. Systems must be created 

to determine who is required to pay, and when refunds or exemptions from payment 

are appropriate. As previously stated, there will be a waiver (or in some cases, a 

refund) of a user fee for taxpayers filing Offers involving doubt as to liability, low 

income status, or Offers based on effective tax administration or economic hardship 

grounds. In all likelihood, a specific form, accompanied by potentially complex instructions, will be needed to apply for, and explain the grounds for waiver of, the 

fee. These costs will further reduce any revenues the Service hopes to collect from 

the fee.

(4) The Definition of Low-Income

The proposed regulations would exempt low-income persons from paying the user 

fee. A low-income person is defined under the regulations as a taxpayer falling at 

or below the Department of Health and Human Services’ annual poverty guidelines—for 2002, $18,100 for a family of four. 

This definition of ‘‘low income’’ is too low and would force many taxpayers of limited means, who happen to earn more than the HHS poverty guidelines, to pay the 

user fee. A more equitable—and consistent—definition for low-income can be found 

in IRC section 7525(b)(1)(B). This Code section defines a low-income taxpayer clinic 

(among other criteria) as a facility that represents taxpayers who generally do not 

have incomes exceeding 250 percent of the poverty level. If $18,100 represents 100 

percent of the poverty level for a family of four, then 250 percent of the poverty level 

amounts to $45,250. Few, if any families of four with incomes of $18,100 or less pay 

any tax at all, and are unlikely to use the Offer in Compromise program.

B. Frivolous Tax Returns and Submissions

Under current law, the IRS has the authority to impose a $500 civil penalty 

against individuals who file frivolous original or amended returns. Section 107 of 

H.R. 1528 addresses submissions raising frivolous positions or intending to delay or 

impede tax administration. This proposal would modify present law by (1) increasing the frivolous filing penalty to $5,000 and (2) expanding the penalty’s scope to 

cover collection due process hearings, installment agreements, offers-in-compromise, 

and taxpayer assistance orders. The bill would also require the IRS to publish a list 

of positions, arguments, requests, and proposals that the Service has determined to 

be frivolous. 

The AICPA supports increasing the frivolous filing penalty to $5,000 and the proposed expansions in its application. However, we would not want the frivolous penalty proposal to be used to stifle—overtly or inadvertently—legitimate taxpayer submissions involving collection due process hearings, installment agreements, offers in 

compromise, and taxpayer assistance orders. 

Although we are pleased that the proposal would require the IRS to publish guidance regarding what constitutes a frivolous position, we recommend expanding this 

requirement to also provide guidance regarding the meaning of the language of section 107 involving ‘‘a desire to delay or impede the administration of Federal tax 

laws.’’ It is particularly critical that the guidance regarding what constitutes ‘‘a desire to delay or impede the administration of Federal tax laws’’ be restricted to truly 

frivolous positions or actions. Such guidance would go a long way to ameliorate concerns about the potential misuse of the expanded penalty’s application, especially 

if the IRS consults with the practitioner community in the development of such 

guidance.

5. Workforce Empowerment

A. IRS Employee Training

There are many practitioners and IRS personnel who do not have a good grasp 

on how the overall IRS reorganization is supposed to work. When an IRS employee 

in the field is unsure how it implements a new program or procedure, that person 

116

will invariably fall back on his or her old ways of doing things. Nevertheless, the 

old way of doing things is not an option for the IRS or its employees in 2003. 

Some of the most frustrating experiences realized by taxpayers and tax practitioners in dealing with the IRS occur because of a lack of training on the part of 

the IRS employees. It is much easier to work out a solution that is fair to both the 

tax system and the taxpayer if the individuals resolving the issue are knowledgeable 

and well trained. Given the ‘‘taxpayer segmented’’ nature of the new IRS organization, it is more important than ever that IRS employees acquire the technical skills 

and insights that correspond to the needs and issues of their different taxpayer constituencies. 

The IRS needs to target meaningful resources toward the training of Service employees, particularly with the need to overcome any cultural inertia of mid-level and 

rank-and-file personnel toward the reorganization overall. The AICPA strongly supports such efforts. IRS executives must continue their resolve to hire and train new 

employees and replace its aging workforce. 

We believe we can be of immense help to the Service with the training of its employees. First, whenever the IRS seeks to implement a new program, we suggest 

that the Service seek input from key stakeholders on the details and development 

of any new program. Second, the Service could benefit from the constructive suggestions of the AICPA and other stakeholders regarding materials that will be used in 

the training program for the new IRS initiative. Third, we recommend that the IRS 

utilize CPAs and other stakeholders in teaching part of the training curriculum for 

IRS personnel involved with any new program. 

An excellent example of how this process can work and benefit the overall tax administration process is the IRS’s roll-out of the National Research Program. In fact, 

the IRS did share the initial NRP program details and the training materials with 

critical stakeholders. Also, the IRS successfully utilized CPAs in the training of IRS 

personnel for the NRP program. We firmly believe private sector involvement in the 

training process helps sensitize IRS employees to the need to conduct new programs 

in a way that proves effective for the tax administration process, but which remains 

non-intrusive and minimizes taxpayer burden. By including taxpayer representatives in the training of IRS personnel, the Service will help the public learn about 

a new compliance program, thereby potentially mitigating the emotional, and sometimes political, reactions of the public to a new IRS program.

B. Coordination Between Divisions

One of the greatest challenges for the IRS is to implement a strategy that promotes positive communications and coordination between the Large and Mid-sized 

Business, Small Business and Self-Employed, Wage and Investment, and the Tax 

Exempt and Government Entities Divisions. Such coordination is necessary to avoid 

confusion among the public regarding how to respond to an inquiry from one of the 

four operating divisions. Some early commentators on the reorganization were concerned that instead of one IRS, taxpayers might now face responding to four IRSs 

as represented by the operating divisions. During the last several years, IRS senior 

executives have done an excellent job of setting the tone for the overall organization, 

and the tone for proper coordination and cooperation among the operating divisions. 

At this juncture the IRS national office has successfully steered the organization in 

the direction of a united structure, overseeing its critical (but integral) components. 

We encourage the Service to stay the course with respect to the reorganization. 

While the AICPA recognizes that the reorganization effort remains in transition, 

with further work to be done, we believe that the general rationale underlying the 

formation of the four operating divisions—focusing on specific taxpayers and their 

needs—is the right one. Furthermore, we believe that any more significant changes 

to the IRS’s organizational structure would only serve to confuse taxpayers and 

practitioners who only now are beginning to become comfortable with the new organization. 

Sincerely, 

Robert A. Zarzar 

fChair, Tax Executive Committee

Statement of Gerald E. Scorse, New York, New York 

I wish to make a written statement regarding the Subcommittee’s April 8th hearing on the 2003 tax return filing season and the IRS budget for fiscal 2004. 

117

My statement takes the form of the article which appears immediately below. 

Pursuant to formatting requirement No. 3, a supplemental sheet also follows. 

The Sweet Math of Capital Gains Taxes 

My name is Peter Privilege. Along with millions of other Americans, I’ll be filing 

my Form 1040 with the Internal Revenue Service by April 15th. Unlike wage earners, however, the income that I report can be whatever I want it to be. I’m a capital 

gains taxpayer, which gives me a loophole so big you could drive a Hummer through 

it. 

Really, you say? Yes, really. 

And it’s ever so simple. 

Every year, I get a statement that lists my stock and bond sales. The IRS gets 

the same information: it tells them what I sold, when, and how much the proceeds 

were. 

But the statement doesn’t say what I paid in the first place. I could put down 

whatever I please, and the IRS would never know. 

Let’s say I bought 500 shares of IBM at $50 and sold them at $100. Commissions 

aside, that’s a capital gain of $25,000. But I could wipe it out entirely, or even claim 

a loss, by simply reporting that I paid $100 or more for the stock. Remember, the 

IRS receives no information on how much I paid in the beginning. 

And there’s almost no way it could find out. 

As long as my tax return jibes with the information the IRS has (in this case, 

a sale of 500 shares of IBM at $100 a share), why would they ever question me? 

The answer is, they wouldn’t. 

It’s the same with short-term gains, which incur higher taxes, and long-term 

gains, on which the taxes are lower. The IRS has only the sell date, which essentially tells them nothing. It’s left to me to report the gains as short-term or longterm. 

Didn’t I tell you it was simple? 

On my good days, when I feel virtuous, I’m inclined to report the real numbers 

and let my taxes fall where they may. 

But there are other days, I have to admit, when I’m tempted big-time. 

On those days I feel like jumping right through that loophole, and maybe buying 

myself a Hummer. 

I’m no angel, you know. 

(Author’s Note: If this gets your Irish up, do something. Contact your Congressman and demand third-party reporting of capital gains income by brokerage houses 

and mutual funds. Be sure to carbon Bill Thomas (R–CA), chairman of the Ways 

and Means Committee of the House, where all tax legislation originates. Why 

should capital gains not be reported, anyway?)

Æ