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23–854 2005

JOINT REVIEW OF THE STRATEGIC 

PLANS AND BUDGET OF THE 

INTERNAL REVENUE SERVICE, 2005 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

COMMITTEE ON APPROPRIATIONS 

COMMITTEE ON GOVERNMENT REFORM 

HOUSE OF REPRESENTATIVES 

AND THE

COMMITTEE ON FINANCE 

COMMITTEE ON APPROPRIATIONS 

COMMITTEE ON HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

One Hundred Ninth Congress 

First Session 

MAY 19, 2005 

JCS–6–05 


E:\Seals\Congress.#13
(II) 

JOINT COMMITTEE ON TAXATION 

109TH CONGRESS, 1ST SESSION 

HOUSE SENATE 

WILLIAM M. THOMAS, California, 

Chairman 

E. CLAY SHAW, Jr., Florida 

NANCY L. JOHNSON, Connecticut 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

CHARLES E. GRASSLEY, Iowa, 

Vice Chairman 

ORRIN G. HATCH, Utah 

TRENT LOTT, Mississippi 

MAX BAUCUS, Montana 

JOHN D. ROCKEFELLER IV, West Virginia 

GEORGE K. YIN, Chief of Staff 

BERNARD A. SCHMITT, Deputy Chief of Staff 

THOMAS A. BARTHOLD, Deputy Chief of Staff 

(III) 

COMMITTEE ON WAYS AND MEANS 

William M. Thomas, California, Chairman Charles B. Rangel, New York 

COMMITTEE ON APPROPRIATIONS 

Jerry Lewis, California, Chairman David R. Obey, Wisconsin 

COMMITTEE ON GOVERNMENT REFORM 

Tom Davis, Virginia, Chairman Henry A. Waxman, California 

COMMITTEE ON FINANCE 

Charles E. Grassley, Iowa, Chairman Max Baucus, Montana 

COMMITTEE ON APPROPRIATIONS 

Thad Cochran, Mississippi, Chairman Robert C. Byrd, West Virginia 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

Susan M. Collins, Maine, Chairman Joseph I. Lieberman, Connecticut 

(V) 

C O N T E N T S 

Page 

Press release of May 12, 2005, announcing joint review ...................................... VI 

Press release of May 16, 2005, announcing joint review (change of time) .......... VII 

Opening statements ................................................................................................. 2 

WITNESSES 

Internal Revenue Service, Hon. Mark W. Everson, Commissioner ..................... 6 

Department of the Treasury, Hon. J. Russell George, Treasury Inspector 

General for Tax Administration .......................................................................... 32 

IRS Oversight Board, Hon. Raymond T. Wagner, Jr., Chairman ....................... 47 

Internal Revenue Service, Ms. Nina E. Olson, National Taxpayer Advocate ..... 60 

U.S. Government Accountability Office, Mr. James R. White, Director, Strategic Issues ........................................................................................................... 70 

(VI)


Insert graphic folio 5 23854A.001
(VII)


Insert graphic folio 6 23854A.002
(1) 

JOINT REVIEW OF STRATEGIC PLANS AND 

FISCAL YEAR 2006 BUDGET OF THE INTERNAL REVENUE SERVICE 

THURSDAY, MAY 19, 2005 

HOUSE OF REPRESENTATIVES, 

JOINT COMMITTEE ON TAXATION, 

Washington, DC. 

The Joint Committee met, pursuant to call, at 3:02 p.m., in room 

1100, Longworth House Office Building, Hon. Jim Ramstad presiding. 

Present: Representatives RAMSTAD, Olver, Sweeney, Miller, and 

Beauprez. 

Senators Present: Senator Akaka. 

Representative RAMSTAD. The hearing will come to order. 

I want to welcome the witnesses and the Members from both the 

House and the Senate—Senator Akaka, it is always good to see 

you; and Ranking Member Olver, good to see you—to the joint 

hearing regarding the operations of the Internal Revenue Service. 

In 1998, Congress enacted the IRS Restructuring and Reform 

Act, fundamentally altering the way the IRS does business. That 

law also made a significant change to the way Congress oversees 

the IRS. The act required Congress to hold joint hearings with the 

six House and Senate committees invited here today. 

The joint review is enacted in part to address the finding of the 

National Commission on Restructuring the IRS that there was a 

lack—and I am quoting now—‘‘a lack of coordinated focus on highlevel and strategic matters,’’ among committees responsible for IRS 

oversight. 

The views of the Commission, in fact, are reflected in a drawing 

that former Senator Bob Kerrey gave to then-Commissioner 

Rossotti, depicting all the various entities overseeing the IRS, with 

arrows pointing to a bull’s-eye. The caption reads, from Senator 

Kerrey: ‘‘Good luck in the bull’s-eye.’’ 

The goal of the joint review is to replace all of these different arrows with one clear message. This will help Congress ensure that 

the IRS is pointed in the right direction. 

Today’s hearing will focus on the strategic plans and budget of 

the IRS. The strategic plan reflects the service’s complex responsibilities. The IRS is trying to improve taxpayer service while, at 

the same time, enhancing the enforcement of the tax law. On top 

of that, it is attempting to modernize its processes and computer 

technology, which would help achieve the first two goals. I believe 

there are signs of progress in all of these areas. 

2 

The past filing season saw a record number of taxpayers file electronically. More taxpayers are getting the assistance they need 

through the IRS Web site. A record number of taxpayers, 46 percent more than last year, were able to file their income tax returns 

for free through the innovative Free File program. The IRS has announced major enforcement initiatives that have saved taxpayers 

billions of dollars. The IRS has begun to implement significant aspects of its business systems modernization program. These are 

successes. 

Despite these successes, however, it is clear the IRS faces significant hurdles. For example, budgetary pressures have led the Commissioner to consider significant cuts in service including the closure of Taxpayer Assistance Centers which provide valuable in-person assistance to taxpayers around the country. 

The IRS also faces challenges in implementing its modernization 

plans. Those plans have been scaled back significantly since they 

were first conceived six years ago. Given the expense of this 

project, we need to have confidence the Service is now on the right 

track. 

In light of the success of the 80 percent e-filing goal in motivating the IRS, it is worth considering what other goals Congress 

might establish to spur the IRS to realize higher rates of taxpayer 

satisfaction and voluntary compliance. 

We are fortunate to have with us today a distinguished group of 

public servants. We will hear testimony from IRS Commissioner 

Mark Everson, Treasury Inspector General for Tax Administration 

Russell George, Chairman of the IRS Oversight Board Ray Wagner, 

Taxpayer Advocate Nina Olson, and GAO Director for Tax Issues 

James White. 

I have a unanimous consent request. I ask unanimous consent 

that joint review participants who are not able to attend today’s 

hearing be permitted to submit written statements to be included 

in the record. 

Without objection, so ordered. 

Representative RAMSTAD. At this time I would like to call on 

Ranking Member Olver from the Appropriations Committee for an 

opening statement. 

OPENING STATEMENT OF HON. JOHN W. OLVER, U.S. 

REPRESENTATIVE FROM MASSACHUSETTS 

Representative OLVER. Thank you, Mr. Chairman. I am startled 

to be number two in line here, and particularly ahead of a distinguished Senator. But the orders of these things sometimes do 

change. 

Mr. Chairman, I do believe that this is an extremely important 

and hopefully valuable hearing. It gives all of those involved with 

oversight of IRS a chance to raise questions and get answers regarding specific issues to each relevant committee. 

Even though this is a different venue from the Appropriations 

Committee hearings that we have already had, I still have the 

same concerns regarding private debt collection and the budget reductions for taxpayer service. 

And my concern with the private debt collection plan is that the 

IRS is giving away the, in quote, lowest hanging fruit, end quote, 

3 

by giving collection firms the easiest to collect receivables and 

allow collections vendors from, what I have heard, to keep 20 or 

more percent of all funds they collect. So that this has the potential 

of being pretty easy money for the vendors. 

My second concern is that it seems the emphasis within the IRS 

is clearly on tax enforcement—I have no problem with that—with 

taxpayer service accounts receiving a 1 percent decrease in the 

President’s budget. This budget also proposed a $55 million cut associated with the closure of up to a quarter of the 400 current Taxpayer Assistance Centers, as the chairman has already alluded to, 

but it didn’t provide any specific details, and I really would look 

forward to hearing some specific details on that proposal. 

We have lots that can be covered, and I will yield back the remainder of my time. 

Representative RAMSTAD. The distinguished Senator from Hawaii 

is recognized. 

OPENING STATEMENT OF HON. DANIEL K. AKAKA, U.S. 

SENATOR FROM HAWAII 

Senator AKAKA. Thank you very much, Mr. Chairman, Chairman 

Ramstad from the State of Minnesota, and I am delighted to be 

here with you, delighted to be back on the House side for a few 

minutes, having served here on the Appropriations Committee for 

a number of years. I am pleased to join you today as we examine 

the Internal Revenue Service strategic plan and fiscal year 2006 

budget. 

A constant challenge for the IRS is to strike the appropriate balance between taxpayer services and enforcement activities to ensure that taxes are collected in a fair manner. 

However, as the IRS moves forward with goals and modernization efforts reflected in a strategic plan and budget, it is leaving 

behind the most vulnerable, low income taxpayers who depend on 

quality taxpayer services. 

The IRS has failed low income taxpayers by cutting essential 

services and facilitating the exploitation of families that earn the 

earned income tax credit through its support of refund anticipation 

loans, as we call RALs. Incredibly, interest rates on RALs can 

range from 97 percent to 2,000 percent. Given the limited risk and 

the relative bargaining positions of the taxpayers and the RAL providers, these loans are predatory. 

EITC was designed to help working families meet their food, 

clothing, housing, transportation and educational needs. More than 

4 million Americans were brought above the poverty line due to the 

EITC in 2002. Unfortunately, due to the prevalence of RALs, a significant amount of the EITC is lining the pockets of commercial tax 

preparers and affiliated banks. The EITC was diminished by an estimated $1.75 billion intended to assist low income families that instead went towards commercial tax preparers and affiliated national banks for tax assistance, electronic filing of returns, and 

high cost refund loans in 1999. 

The excessive interest rates and fees charges on RALs are not 

justified because of the short length of time that these loans are 

outstanding and the minimal risk they present. RALs carry little 

risk because of the debt indicator, the DI program, which is a servVerDate Aug 31 2005 02:13 Oct 28, 2005 Jkt 023854 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HR\OC\A854.XXX A854
4 

ice provided by the IRS that informs the lender whether or not an 

applicant owes Federal taxes, child support, student loans or other 

government obligations. This service assists the tax preparer in 

ascertaining the applicant’s ability to obtain their full refund. The 

IRS should not be facilitating these predatory loans that allow tax 

preparers to reap outrageous profits by exploiting working families. 

In 1995, the use of the DI was suspended because of massive 

fraud in E-filed returns with RALs. This caused RAL participation 

to decline. RAL prices were expected to go down as a result of the 

reinstatement of the DI in 1999. This has not occurred. The debt 

indicator should once again be stopped. The DI is helping tax preparers to make excessive profits of low and moderate income taxpayers who utilize the service. If the debt indicator is removed, 

then the loans become riskier and tax preparers will not aggressively market them among EITC filers. The IRS should not be aiding efforts that take the earned benefit away from low income families and allow unscrupulous preparers to take advantage of low income taxpayers. 

In addition, the IRS must do more to restrict RALs by providing 

alternatives for consumers to receive their refunds directly in a 

timely manner. Simple bank or credit union accounts allow taxpayers to receive direct deposit refunds into an account without the 

need for a refund anticipation loan. Instead of expanding access to 

mainstream financial institutions, the Department of the Treasury 

has chosen to rescind previously appropriated funds that had been 

designated for the purpose of banking. 

Overall, I am also disappointed over the failure to provide sufficient resources for taxpayer services. The proposed cuts for taxpayer services and outreach are, I feel, irresponsible. The Tax Code 

is complex, especially for low income taxpayers who are eligible for 

the EITC and child tax credit. These cuts will unfairly deny access 

to taxpayers in need of assistance. Volunteer income tax assistance, 

VITA, sites will not be able to replace all of the service centers, so 

more low income taxpayers will be driven to pay tax preparers, 

many who ruthlessly pedal high cost refund anticipation loans and 

other products with high fees. 

In light of my comments, Mr. Chairman, I am interested to hear 

today’s discussion of the strategic plans and budget of the IRS, and 

I thank our witnesses for joining us today. We must work together 

to restrict predatory RALs and expand access to mainstream financial institutions. 

Mr. Chairman, I also want to applaud the National Taxpayer Advocate Nina Olson for all of her courageous work on behalf of taxpayers. In addition, I want to recognize the work done by the National Taxpayer Representative in Hawaii, Don Williams, and the 

rest of his staff to help our taxpayers. 

Thank you so much, Mr. Chairman. 

Representative RAMSTAD. The Chair thanks the distinguished 

Senator and welcomes him back to the House side. It is good to see 

you back here, Senator. 

At this time the Chair would recognize the distinguished member 

from the Government Reform committee, the gentlewoman from 

Michigan. 

5 

OPENING STATEMENT OF HON. CANDICE S. MILLER, U.S. 

REPRESENTATIVE FROM MICHIGAN 

Representative MILLER. Thank you, Mr. Chairman. I am absolutely delighted to be here with all my colleagues. I am certainly 

looking forward to this hearing today as well. 

This is an issue that we are going to be discussing today that 

certainly affects every taxpayer, every business in our Nation. It is 

vitally important that each and every taxpayer understands the 

Tax Code, that each and every taxpayer has the ability to comply 

with the law, and certainly that they have services made available 

by the IRS to assist them in filling out their tax forms. 

The tax gap continues to widen every year. We need to get tough 

on those who seek to use loopholes to abuse the system and pay 

less than their fair share of taxes. However, the tax gap also includes average citizens and small business owners who do not have 

the assistance of high-priced attorneys and accountants, and, because of this, sometimes they are unable to make heads or tails of 

a very complex system and the paperwork that is associated with 

it. And then sometimes when their taxes are due to be filed, they 

find that they have a huge outstanding balance that in many cases 

are of course very difficult for them to pay. 

Another issue we will be interested in exploring today, as has already been mentioned, of course, and this is an issue of concern 

that is the contracting out of debt collection services to private 

companies, an authority that was recently granted to the Internal 

Revenue Service. And while some might consider this a way to 

close the tax gap, most of the gap is actually caused by small businesses, nonfilers, and underreporters, the debt collectors who will 

be used to retrieve debt from individuals who file but have not yet 

fulfilled their tax obligations by paying. Some may have a problem 

with people outside of the government dealing with personal and 

private tax information for citizens and businesses. And if this is 

to be done, it certainly needs to be handled with the utmost security and sensitivity. My preference would be to simply have a better trained IRS workforce to handle this function, but we will see 

how this all unfolds. 

It is vitally important that the IRS take advantage of the latest 

technology to assist taxpayers with compliance. Having served in 

State government before I came to Congress here, overseeing a 

very out-of-date and antiquated bureaucracy, I certainly understand the importance of leveraging technology to better serve the 

customer, and of course in this case it is the American taxpayer. 

The IRS must update its technology and encourage more Americans to take advantage of E-filing and approve other services available to assist our taxpayers. 

Any government agency is only as good as the people who work 

for that agency. You can have the best technology in the entire 

world, but it is always about the people. I believe in the people that 

work in your association and in your agency there. And these employees can only perform as well as the training that they are 

given and the kind of resources and tools that the Congress sees 

fit to provide them with. The IRS must do a better job in helping 

to train its workers and providing them with the tools they need 

to succeed, and to teach them to understand that the taxpayers are 

6 

not just people that pay their taxes but in fact they are customers. 

And we need to think about customer service in that agency as well 

as many other agencies in the Federal Government. 

Customer service I think is absolutely vital. The taxpayers must 

know that when they contact the IRS with questions about the 

very confusing Tax Code that they are facing, that they can trust 

the answers that they are given. Far too often you hear stories told 

about taxpayers given improper advice or answers to questions 

that end up perhaps harming the taxpayers. It is also very harmful 

to the morale and the retention of the employees if again they don’t 

have the tools and the information that they need to be successful 

in their jobs. 

So I certainly see this as a partnership between the Federal Government and the agency that we need to work together there. 

These reviews, as we are having here today, I think are certainly 

crucial for the advancement of the Internal Revenue Service. There 

have been tremendous strides and tremendous improvements made 

over the years. But my view on life, I suppose on everything, is 

that the largest room is always the room for improvement, and we 

are certainly looking forward to working with you to continue to do 

that, to make the tax process much more friendly, user friendly, 

and certainly less complicated as well. 

And I am particularly interested to hear the testimony of Mr. 

Everson. You actually, sir, have also agreed to testify next week at 

a subcommittee that I chair on regulatory affairs, and we will be 

looking at the Paperwork Reduction Act. So we will see how you 

do here today before we get at you next week. But I certainly appreciate your willingness to come to that subcommittee as well and 

appreciate hearing your testimony today. 

Thank you. 

Representative RAMSTAD. The Chair thanks the distinguished 

member from the Government Reform Committee for her opening 

statement. 

I now call the first panel, the Honorable Mark W. Everson, Commissioner of the Internal Revenue Service. Commissioner, welcome 

to the hearing. We look forward to your testimony. 

STATEMENT OF MARK W. EVERSON, COMMISSIONER, 

INTERNAL REVENUE SERVICE 

Mr. EVERSON. Thank you, Mr. Chairman, members of the joint 

review. I am just sorry that Mr. Pomeroy isn’t here. Last week at 

the ACLI Capital Challenge, that is that road race that a lot of 

people ran in, I am pleased to say that our team got two prizes: 

We got the best team spirit award and the third worst team name. 

That was for Team IRS Pay Your Taxes. But I owe him a congratulations, because as to the captain of his team and the captain of 

my team, he beat me by eight seconds. So please convey when you 

see him my congratulations. 

Thank you for the opportunity to testify on progress in implementing our strategic plan. While much remains to be done, I believe the IRS has made progress on a number of fronts since the 

last joint review was conducted in May, 2 years ago. 

First and most importantly, last year we issued a new strategic 

plan for the IRS covering the years 2005 through 2009. The three 

7 

goals of the plan are as follows: One, improve taxpayer service; 

two, enhance enforcement of the tax law; and three, modernize the 

IRS through its people, processes, and technology. 

I believe we are using the plan as Congress intended when it 

passed the Government Performance and Results Act. It is the 

foundation of our management of the agency and guides our decision-making. 

At this stage, just over 2 years into my 5–year term, we have 

made significant strides in each area. GAO states in its report 

issued today, first, as to service, quote: IRS’s most notable progress 

has been in IRS’s taxpayer service. And second as to enforcement, 

quote: IRS experienced declines in enforcement staffing after 1998, 

but has recently stopped the declines and begun to show increases. 

And, third, as to modernization: IRS has made significant progress 

in establishing management controls in acquiring infrastructure as 

part of the BSM program, as well as significant progress in addressing financial management issues. 

This is good news and I am thankful for it. There isn’t always 

good news in GAO reports. However, my old boss, Governor Daniels of Indiana, always reminded me to watch out for the ‘‘buts’’ 

that come after the comma, and there are two big buts here: GAO 

has placed both enforcement of tax laws and business systems 

modernization on its high risk list. I agree with the designation of 

these two challenges as of governmentwide importance. 

The IRS has improved services. We are just finishing a successful 

filing season, one where for the first time a majority of individuals 

have filed their returns electronically. We will continue our emphasis on service, but on balance at this stage the greater challenge 

to our Nation’s tax administration system are, as GAO has indicated, in the areas of enforcement and modernization. 

Our enforcement activities are recovering, but given the size of 

the tax gap they are still at inadequate levels, and while we have 

finally started delivering new return processing and administrative 

systems, the modernization program has a lot of ground to cover. 

Modernization remains essential to our long-term success. 

Before taking your questions, I would like to turn briefly to the 

subject of IRS funding. In fiscal year 2002, Congress fully funded 

the President’s request for the IRS. In fact, the enacted appropriations level was $15 million over the request. In 2003, there was a 

shortfall of $81 million, and in 2004 a shortfall of $252 million. In 

this year, fiscal year 2005, the IRS is operating with a budget $438 

million below that requested. 

Sitting where I am, this is a bad trend line. Over the last 4 

years, this gap is over three-quarters of a billion dollars, a figure 

which is compounded, as you know, by higher than requested pay 

increases. 

I want to stress that fully funding the IRS at the President’s requested level of $10.679 billion for 2006 will strengthen tax administration and help drive down the deficit. I ask your full support 

for this request. Thank you. I will be happy to take your questions. 

[The statement of Mr. Everson follows:] 

8 

WRITTEN TESTIMONY OF MARK W. EVERSON, COMMISSIONER OF THE INTERNAL

REVENUE SERVICE

INTRODUCTION

Mr. Chairman and Members of the Joint Review, thank you for the opportunity 

to testify today on the FY 2006 budget request, the status of our modernization program, and the 2005 tax filing season. I look forward to working with all of you as 

you exercise your oversight responsibilities and we ensure the fair and efficient administration of taxes. I welcome your insights and suggestions on how we can increase compliance and improve both the management and processes that guide systems modernization and the critical services we provide to America’s taxpayers. 

I have been on the job for over two years, yet I have only had the opportunity 

to appear in this forum once. I was just fifteen days into my job at that point. We 

have come quite a way since then. I have testified about the IRS mission of service 

and enforcement, and about our need to modernize. I have spoken about how the 

IRS was doing a good job improving service, had a mixed record on modernization, 

and had work to do to restore enforcement to proper levels. 

Our working equation at the IRS is service plus enforcement equals compliance. 

The better we serve the taxpayer, and the better we enforce the law, the more likely 

the taxpayer will pay the taxes he or she owes. This is not an issue of service OR 

enforcement, but service AND enforcement. As you know, IRS service lagged in the 

1990s. In response, we took important and necessary steps to upgrade service—we 

significantly improved the answering of taxpayer telephone inquiries and electronic 

filing to name just a couple areas. Unfortunately, improvement in service coincided 

with a drop in enforcement of the tax law. After 1996, the number of IRS revenue 

agents, officers, and criminal investigators dropped by over 25 percent. 

The President’s request for the IRS for Fiscal Year (FY) 2006 is crafted to continue the necessary rebuilding of our enforcement capabilities while providing adequate funding levels for taxpayer service. And it maintains a stable commitment to 

our important IT modernization program. Both enforcement and modernization 

were categorized earlier this year by the GAO as high-risk areas of governmentwide importance. 

As we work to reduce the deficit and hold the line on spending, we must find ways 

to be more efficient with tax dollars while maintaining the quality and level of customer service that American taxpayers deserve. The President’s budget request for 

the IRS adopts just this approach. I am comfortable with this request and support 

it wholeheartedly. I believe that if the budget request is enacted without constraining language, the IRS will continue to provide very good service and at a lesser cost to the taxpayer. 

Today, I wish to discuss the budget request for the IRS, as well as what we have 

accomplished in my first few years here, particularly addressing enforcement, the 

area where our challenges remain the greatest. Let me first update you about the 

budget. 

CONTINUING SERVICE AND INCREASING ENFORCEMENT

We are quite aware of the need to operate efficiently, consolidate operations and 

drive down costs wherever we can. In today’s fiscal environment, we recognize that 

resources are tight. Nevertheless, we are determined to do all we can to improve 

service and modernize the IRS. In the last several years, we have begun to strengthen enforcement and stabilize IRS enforcement staffing; now 73 percent of taxpayers 

completely agree that it is every American’s duty to pay their fair share of taxes, 

up from 68 percent in 2003. A 2004 IRS Oversight Board-commissioned NOP World 

study revealed 79 percent of taxpayers believe it is very important for the IRS to 

enforce compliance from high-income individuals and 85 percent believe it is very 

important for the IRS to enforce compliance from corporations. But in order to continue to bolster compliance, we must continue to use our resources wisely. 

The way taxpayers pay their taxes and access IRS information is changing. In recent years, the use of IRS.gov and e-Filing has increased rapidly, while paper filing 

and visits to walk-in taxpayer assistance centers (TACs) have declined. In fact, this 

year the majority of returns were filed electronically, marking the first time in history that e-Filing has outpaced paper returns. 

This shift presents an opportunity to adjust the way IRS serves taxpayers and 

to focus on the most efficient services. Taxpayers deserve excellent customer service, 

but they also deserve value for the tax dollars we are spending on their behalf. 

Changing the way the IRS provides customer service to meet the new ways people 

are dealing with their taxes in the 21st century allows us to meet the needs of taxpayers while spending their tax dollars more efficiently. 

9 

Our budget estimates all these taxpayer service reengineering initiatives will yield $134 million in savings we can reinvest in other program areas. The reductions represent a balanced approach in program delivery and service to taxpayers 

to enable them to meet their tax obligations. We estimate savings of $75 to 95 million from additional efficiencies in our field 

assistance, accounts management and toll-free telephone operations. We will achieve 

these savings, in part, by reducing the number of walk-in sites. In recent years, the 

number of taxpayers walking into a Taxpayer Assistance Center (TAC) site for assistance has decreased from a high of nearly 10 million contacts in FY 2000 to about 

7.7 million contacts in FY 2004. This trend reflects the increased availability and 

quality of services that do not require travel or waiting in line. Examples include 

improved access to IRS telephone service, the increasing availability of volunteer assistance, and the many services now available through IRS.gov, such as ‘‘Free File’’ 

and ‘‘Where’s My Refund.’’ In addition, the ability to download forms online has also 

contributed to the decline in the number of customers walking into a TAC. Because 

of these other options, fewer taxpayers need to travel to an IRS office to get the 

services they need. 

There are currently about 400 TAC sites across the country which are serviced 

by approximately 2,300 TAC employees. We believe that adjusting the TAC sites to 

more closely align to this decreased walk-in volume will yield staffing and building 

cost savings of $45 to 55 million of the $75 to 95 million in savings, and allow us 

the flexibility to improve efficiencies. 

To determine which TAC sites to close, we have developed a criteria model that 

measures the impact on taxpayers across the country. The criteria include: location, 

employee cost, facilities cost, workload, and demographic measurements. In anticipation of the closing of approximately 70 TACs, we have requested authority to offer 

early-outs and buy-outs to all eligible IRS TAC personnel. We expect to have further 

announcements in the near future. 

We will achieve additional savings because of our recent consolidation of our Customer Accounts Service organizations and revamping of our business processes. For 

example, due to the steady decline in taxpayers corresponding with us about their 

accounts, we will need fewer resources to manage these accounts. We are also adjusting the hours of our toll-free telephone operations from 15 to 12 hours daily, 

Monday through Friday in the local times zones, beginning in 2005. We expect minimal impact to our level of service for taxpayers who call us. We have also continued 

to improve our telephone service for taxpayers who call the IRS with questions. The 

use of other service alternatives, such as volunteer return assistance at Volunteer 

Income Tax Assistance (VITA) sites and Tax Counseling for the Elderly (TCE) sites, 

has steadily increased while the number of TAC contacts has decreased. In FY 1999, 

for example, VITA sites filed almost 584,000 returns, and TCE sites filed 446,000 

returns. In the next five years, the numbers of returns filed through these sites increased 88 percent, reaching 976,000 VITA returns and 958,000 TCE returns in FY 

2004. 

In addition to reducing the number of TAC sites and restructuring our telephone 

operations, we will save $20 to $31 million in outreach programs though reductions 

in printing and postage and additional efficiencies in our outreach organizations. 

For example, we will save money in printing and postage as taxpayers shift to efiling, and as we eliminate redundant services and publications. 

We will save another $17 to $23 million by retiring Telefile, implementing program enhancements in the processing of employment tax returns, and re-engineering processes in Submission Processing. We will redirect taxpayers who previously 

used Telefile to e-file alternatives, such as Free File, that are available through 

IRS.gov so we maintain a high level of service. 

Though we are re-engineering how we provide service, we will continually strive 

to improve service to taxpayers. Having stated this, I must address the fundamental 

issue of enforcement. The President’s Budget Request to Congress would increase 

IRS enforcement activities by 7.8 percent. 

Average Americans pay their taxes honestly and accurately, and have every right 

to be confident that when they do so, their neighbors and competitors are doing the 

same. Let me provide an overview of the steps we have taken over the past year 

to bolster this confidence, turning briefly to each of our four service-wide enforcement priorities. 

Our first enforcement priority is to discourage and deter non-compliance, with emphasis on corrosive activity by corporations, high-income individuals, and other contributors to the tax gap. 

• In 2004, audits of high-income taxpayers jumped 40 percent from the year before. We audited almost 200,000 high-income individuals last year—double the number from 2000. 

10 

• Overall, audits for individuals exceeded the one million mark last year, up from 

618,000 four years earlier. 

• In 2004, the number of audits of the largest businesses—those with assets of 

$10 million or more—finally increased after years of decline. 

The centerpiece of our enforcement strategy is combating abusive tax shelters, 

both for corporations and high-income individuals. I will touch upon two important 

initiatives of the past twelve months. 

We have continued our program of settlement offers for those who entered into 

abusive transactions in the past but would like to get their problems behind them. 

Last May, we made a settlement offer regarding the Son of Boss tax shelter, a particularly abusive transaction used by wealthy individuals to eliminate taxes on large 

gains, often in the tens of millions of dollars. In this program, for the first time, 

the IRS required a total concession by the taxpayer of artificial losses claimed, plus 

payment of a penalty. I am pleased with the response to the offer. So far, $3.2 billion in taxes, interest and penalties have been collected from the 1,165 taxpayers 

who are participating in the settlement initiative. The typical taxpayer payment 

was almost $1 million, with 18 taxpayers paying more than $20 million each and 

one paying over $100 million. Processing of individual settlements continues. 

Based on disclosures we have received from promoter investigations and from investor lists obtained through summons enforcement litigation, we have determined 

that just over 1,800 people participated in Son of Boss. When the project concludes 

in the coming months, we expect the collected figure from this settlement initiative 

should top $3.5 billion. 

In February 2005, we announced a second important settlement initiative—this 

one involving executive stock options. This abusive tax transaction involved the 

transfer of stock options or restricted stock to family-controlled entities. These deals 

were done for the personal benefit of executives, sometimes at the expense of public 

shareholders. This shelter was not just a matter of tax avoidance but, in some instances, raises basic questions about corporate governance. Again, the settlement 

offer is a tough one: full payment of the taxes plus a penalty. 

A noteworthy point about the stock option settlement offer is that our actions in 

this matter were closely coordinated with the Securities and Exchange Commission 

and the Public Company Accounting Oversight Board. 

Our settlement initiatives and increased audits have sent a signal to taxpayers: 

the playing field is no longer as lopsided as it once was. It is now more likely noncompliant taxpayers will have to pay the entire tax, interest, and a stiff penalty. 

A taxpayer might have to wrestle with questions like ‘‘how much am I going to have 

to pay the lawyers and expert witnesses to litigate this thing?’’ Moreover, going to 

court is a public matter. Damage to one’s reputation is a potential factor. Many 

wealthy individuals, otherwise seen as community leaders, may not want to be identified as paying less than their fair share in taxes. 

Another example of cooperation in the battle against abusive shelters is in the 

international arena. A year ago, I announced the formation of what has come to be 

known as the Joint International Tax Shelter Information Centre. Since last Labor 

Day, we have had an operational task force of personnel from Australia, Canada, 

the United Kingdom, and the U.S. working together on-site here in Washington. We 

are exchanging information about specific abusive transactions. Results to date are 

promising. Thus far, we have uncovered a number of transactions which, but for the 

Centre, we would have unraveled only over a number of years, if ever. It makes 

sense that we continue to work with other countries because, in this increasingly 

global economy, we are up against what is, in essence, a reinforcing commercial network of largely stateless accounting firms, law firms, investment banks, and brokerage houses. 

The government stepped up its use of civil injunctions in 2001 to prohibit promoters from selling illegal tax schemes on the Internet, at seminars or through 

other means. Since that time, the courts have issued injunctions against more than 

100 abusive scheme promoters. They have issued injunctions against 17 abusive return preparers—all permanent injunctions. And an additional 49 suits have been 

filed by the Justice Department seeking injunctions—28 against scheme promoters 

and 21 against return preparers. Injunctions issued have involved schemes such as: 

• Using abusive trusts to shift assets out of a taxpayer’s name while retaining 

control 

• Misusing ‘‘corporation sole’’ laws to establish phony religious organizations 

• Using frivolous ‘‘Section 861’’ arguments to evade employment taxes 

• Claiming personal housing and living expenses as business expenses 

• Filing tax returns reporting ‘‘zero income’’ 

• Misusing the Disabled Access Credit 

11 

The IRS has another 1,000 investigations ongoing for possible referral to the Department of Justice; and individual examinations are being conducted on thousands 

of scheme participants. Most of the investigations and examinations are being conducted by the IRS Small Business/Self-Employed (SB/SE) Division. 

Our second enforcement priority is to assure that attorneys, accountants, and 

other tax practitioners adhere to professional standards and follow the law. 

Our system of tax administration depends upon the integrity of practitioners. Altogether, there are approximately 1.2 million tax practitioners, including return preparers. The vast majority of these practitioners are conscientious and honest, but 

even honest tax professionals suffered from the sad and steep erosion of ethics in 

recent years by being subjected to untoward competitive pressures. The tax shelter 

industry had a corrupting influence on our legal and accounting professions. 

We have done quite a bit since March 2004 to restore faith in the work of tax 

professionals. We have strengthened regulations governing the standards of tax 

practice to discourage the manufacturing of bogus legal opinions on the validity of 

tax shelters. The IRS standards set forth rules governing what does and does not 

qualify as an independent opinion about a tax shelter. 

Last year, the government won a series of court cases on privilege. The cases confirmed that promoters who develop and market generic tax shelters can no longer 

protect the identity of their clients by hiding behind a false wall of privilege. 

Abusive tax shelters often flourished because penalties were too small. Some blue 

chip tax professionals actually weighed potential fees from promoting shelters, but 

not following the law, against the risk of IRS detection and the size of our penalties. 

Clearly, the penalties were too low. They were no more than a speed bump on a 

single-minded road to professional riches. 

But these speed bumps have become speed traps. Last fall, Congress enacted and 

the President signed into law, the American Jobs Creation Act. The legislation both 

created new penalties and increased existing penalties for those who make false 

statements or fail to properly disclose information on tax shelters. Under the new 

law, the IRS can now impose monetary penalties not just on tax professionals who 

violate standards, but also on their employers, firms, or other entities if those parties knew, or should have known, of the misconduct. 

Our third enforcement priority is to detect and deter domestic and off-shore based 

criminal tax activity and related financial criminal activity. 

Last year, the IRS referred more than 3,000 cases to the Justice Department for 

possible criminal prosecution, nearly a 20 percent jump over the previous year. We 

continue our active role in the President’s Corporate Fraud Task Force. We are 

going after promoters of tax shelters—both civilly and, where warranted, criminally. 

This tactic is a departure from the past. Previously, during a criminal investigation, 

all civil activity came to a halt. The result was that in the past, our business units 

were reluctant to refer matters for criminal investigation lest they lose their traditional turf. But, we are now moving forward on parallel tracks with the Department 

of Justice. We have a number of important criminal investigations underway. The 

enforcement model is changing. 

Our fourth enforcement priority is to discourage and deter noncompliance within 

tax-exempt and government entities, and misuse of such entities by third parties 

for tax avoidance purposes. 

Consider, for example, certain credit counseling agencies. Increasingly, it appears 

that some credit counseling organizations have moved from their original purposes, 

that is, to counsel and educate troubled debtors, to inappropriately enrolling debtors 

in proprietary debt-management plans and credit-repair schemes for a fee. These activities may be disadvantageous to the debtors and are not consistent with the requirements for tax exemption. Further, a number of these organizations appear to 

be rewarding their insiders by negotiating service contracts with for-profit entities 

owned by related parties. Many newer organizations appear to have been created 

as a result of promoter activity. 

Some shelter promoters use tax-exempt organizations to create abusive shelters. 

In some cases, the organization receives a fee for allowing the promoter to exploit 

its tax-free status. A tax-exempt organization that participates or allows itself to be 

used in an abusive transaction may be inappropriately trading on its privileged taxexempt status. 

It is heartening to see leading members of the nonprofit community taking steps 

to address abuses. I particularly want to salute the Independent Sector—which recently delivered a constructive report to the Senate Finance Committee. The report 

states that ‘‘government should ensure effective enforcement of the law’’ and calls 

for tougher rules for charities and foundations. The report calls for stronger action 

by the IRS to hold accountable charities that do not supply accurate and timely public information. I encourage the accounting, legal, and business communities to be 

12 

as enthusiastic about confronting abuses and the erosion of professional ethics as 

the nonprofit community. An interesting point to note is that the report supports 

mandatory electronic filing of annual information returns by all nonprofits. 

The focus on problems with compliance we are now encountering in the tax-exempt sector should not overshadow the inspiring work the charitable community 

does day in and day out. The overwhelming majority of these organizations try hard 

to comply with the letter and spirit of the tax law. But we recognize tax abuse is 

increasingly present in the sector, and we intend to address it. We are augmenting 

our resources in the nonprofit area. By the end of September, we will have increased 

the number of our personnel who audit tax-exempt organizations by over 30 percent 

from two years earlier. If we do not act expeditiously, there is a risk that bad actors 

who abuse tax benefits for charities will tarnish those charities that do good work. 

If that happens, Americans may be more reluctant to give and those in need will 

suffer. 

As we move forward with these priorities, we will leverage our success to achieve 

greater results within our FY 2006 budget request. 

BUDGET RESTRUCTURE

To facilitate full alignment and integration of the Service’s goals and measures 

with its resources, we are proposing to restructure our budget beginning in FY 2006. 

This restructuring will facilitate a more accurate assessment of the overall value of 

IRS programs, simplify the full costing of programs, and allow the IRS to demonstrate incremental increases in an initiative’s effectiveness based on the level of 

funding received. 

In addition, this new budget structure will enable us to manage activities more 

effectively. The normal processing of tax returns generally proceeds from pre-filing 

activities to filing activities, and finally to compliance activities, should they prove 

necessary. Although these activities are interrelated, we currently distribute their 

resources among three appropriations, with unevenly distributed support costs. This 

system makes it difficult to manage, track, and report the full cost of a given taxpayer service or enforcement program. 

This new budget structure will enable us to prepare a true performance-based 

budget by providing the capability to integrate operational and support costs into 

one appropriation, thereby allowing us to cost budget activities and programs fully 

for the first time. The new structure will also facilitate the full incorporation of performance measures into the budget, as the measures could be tied to funds in one 

appropriation rather than a series of program activities dispersed across multiple 

appropriations. The proposed new budget structure will allow stakeholders to assess 

more accurately the overall value of IRS programs, and make program reviews, such 

as the Office of Management and Budget’s Program Assessment Rating Tool 

(PART), more effective, thus providing greater accountability and results-oriented 

management focus. 

The proposed budget structure combines the three major appropriations accounts—Processing, Assistance and Management (PAM); Tax Law Enforcement 

(TLE); and Information Systems (ISY)—into one appropriation called Tax Administration and Operations (TAO). 

The taxpayer service and enforcement programs of the TAO appropriation are divided among eight critical program areas. These budget activities focus on Assistance, Outreach, Processing, Examination, Collection, Investigations, Regulatory 

Compliance, and Research. Full funding for each activity will be reflected in the 

budget, along with key performance measures. As we continue to move toward the 

development and implementation of this new structure, we will refine these program areas and the associated resource distributions to provide more accurate costing. 

Let me now provide more details on the budget request for the IRS. 

PRESIDENT’S FY 2006 BUDGET SEEKS INCREASE IN ENFORCEMENT TO ADDRESS GROWING

TAX GAP

The President’s fiscal year 2006 budget requests $10.7 billion for the IRS, a 4.3 

percent increase over the fiscal year 2005 enacted level. This request represents a 

1 percent decrease in Taxpayer Service and a 2 percent decrease in Business Systems Modernization (BSM), but a nearly 8 percent increase in enforcement. 

This budget includes $265 million for initiatives aimed at enhancing the enforcement of tax laws. This request is above the increases to fund the pay raise and other 

cost adjustments ($182 million), for a total of $446 million for new enforcement investments and cost increases. It is important the Congress fully fund these cost increases and new enforcement investments. The President’s budget proposal to fund 

13 

them through an adjustment to the discretionary caps reflects the importance of this 

investment to the Administration. 

To ensure full funding of the new enforcement investments, the budget proposes 

to employ a budget enforcement mechanism that allows for an adjustment by the 

Budget Committees to the section 302(a) allocation to the Appropriations Committees found in the concurrent resolution on the budget. In addition, the Administration will also seek to establish statutory spending limits, as defined by section 251 

of the Balanced Budget and Emergency Deficit Control Act of 1985, and to adjust 

them for this purpose. To ensure full funding of the cost increases, either of these 

adjustments would only be permissible if the Congress funds the base level for IRS 

enforcement at $6.4 million and restricts the use of the funds to the specified purpose. The maximum allowable adjustment to the 302(a) allocation and/or the statutory spending limit would be $446 million for 2006, bringing the total enforcement 

level in the IRS to $6.9 million. 

We will use the additional funds for enforcement in several key ways to combat 

the tax gap, the difference between what taxpayers are supposed to pay and what 

they actually do pay, due to non-filing, underreporting, and nonpayment. Combating 

tax non-compliance is a top priority for us. Americans deserve to feel confident that 

when they pay their taxes, their neighbors and competitors are doing the same. 

These investments will yield substantial results. Even though we have increased the 

focus on specific areas of noncompliance, the tax gap increased slightly to between 

$311 billion and $353 billion in tax year 2001. IRS enforcement activities, coupled 

with late payments, recover about $55 billion of the tax gap, leaving a net tax gap 

of between $257 billion and $298 billion. 

Since 2001, the year covered by the National Research Program (NRP) three-year 

study in which we audited 46,000 individual income tax returns, we have taken a 

number of steps to bolster enforcement. We increased our enforcement revenues by 

nearly 28 percent from $33.8 billion in 2001 to $43.1 billion in 2004. Audits of highincome taxpayers—those earning $100,000 or more—topped 195,000 in fiscal year 

2004, which is more than double those conducted in 2001. Total audits of all taxpayers topped 1 million last year—a 37 percent jump from 2001. 

We are ramping up our audits on high-income taxpayers and corporations, focusing more attention on abusive shelters and launching more criminal investigations. 

We recently announced we collected $3.2 billion in the settlement initiative for Son 

of Boss, a particularly abusive tax shelter. 

Our enforcement efforts are designed to increase compliance and reduce the tax 

gap. 

The preliminary results of the NRP determined a range for the tax gap, which 

will be refined into final, more detailed estimates by year-end 2005. It is unlikely 

but possible that the final estimates of the total tax gap will fall outside the established range. We need to continue our efforts in these areas and increase the investment in these areas. 

We need to enforce the law so that when Americans pay their taxes, they are confident that everyone is paying his or her fair share. At the same time, the research 

underscores the President’s call for fundamental tax reform and simplification. Complexity obscures understanding. Complexity in the tax code compromises both the 

service and enforcement missions of the IRS. Those who try to follow the law but 

cannot understand their tax obligations may make inadvertent errors or ultimately 

throw up their hands and say ‘‘why bother.’’ Meanwhile, individuals who seek to pay 

less than what they owe often hide behind the tax code’s complexity in order to escape detection by the IRS and pay less than their fair share. 

The IRS yields more than four dollars in direct revenue from its enforcement efforts for every dollar invested in its total budget. In FY 2004, we brought in a record 

$43.1 billion in enforcement revenue—an increase of $5.5 billion from the year before, or 15 percent. Beyond the direct revenues generated by increasing audits, collection, and criminal investigations, our enforcement efforts have a deterrent effect 

on those who might be tempted to skirt their tax obligations. 

The nearly 8 percent increase for enforcement activities in the Administration’s 

2006 IRS budget request will increase audits of corporations and high-income individuals as well as expand collection and criminal investigation efforts. 

DETAILED BUDGET SUMMARY

Our FY 2006 request of $10.7 billion includes a transfer from the Justice Department of $53.9 million and 329 FTE for our portion of the Interagency Crime and 

Drug Enforcement (ICDE) appropriation, $277.6 million for a 2.3 percent pay raise 

and non-labor inflationary costs, and $264.6 million for initiatives aimed at enhancing our enforcement efforts. This request also includes a $22 million rent reduction 

14 

to result from consolidation of space, and the $134.1 million reduction to taxpayer 

service activities that we will responsibly leverage through productivity improvements and program reengineering, as previously discussed. We will take a balanced 

approach to these targeted reductions. 

In addition to the taxpayer service reengineering initiatives, we also expect to continue to realize savings, which we will reinvest to other key areas, through the following other reengineering initiatives: 

• Savings from Increased Individual Master File (IMF) E-Filing (Reduction: 

¥$7,700,000 and ¥190 FTE; Reinvestment: +$7,600,000 and +12 FTE): This savings is based on processing efficiencies from the projected decrease in IMF paper 

returns and processing costs for electronically filed IMF returns in Submission Processing Centers. These savings will be reinvested to enable us to continue our consolidation of IMF returns processing into fewer Submissions Processing sites. 

• Consolidation of Case Processing Activities to Maximize Resources Devoted to 

Front-Line Operations (Reduction: ¥$66,654,000 and ¥649 FTE; Reinvestment: 

+$66,654,000 and +585 FTE): Staffing for conducting case processing activities that 

support our examination, collection and lien-processing programs will be consolidated from nearly 100 sites and centralized among four campuses (Philadelphia, 

Cincinnati, Ogden and Memphis). 

• Consolidation of Insolvency Activities to Maximize Resources Devoted to FrontLine Operations (Reduction: ¥$14,928,000 and ¥134 FTE; Reinvestment: 

+$14,928,000 and +156 FTE): Staff conducting insolvency operations to protect the 

government’s interest in bankruptcy proceedings will be consolidated from numerous sites and centralized at the Philadelphia campus. 

• Detection and Deterrence of Corrosive Corporate Non-Compliance (Reduction: 

¥$6,711,000 and ¥52 FTE; Reinvestment: +$6,711,000 and +52 FTE): By using improved issue-management and risk-assessment strategies for examining corporations, the IRS expects to realize productivity improvements. These savings will be 

reinvested to fund front-line enforcement activities. 

Finally, the FY 2006 request includes several program increases, totaling $264.6 

million: 

• Attack Corrosive Non-Compliance Activity Driving the Tax Gap (+$149,700,000 

and +920 FTE): This initiative increases coverage of the growing number of highrisk compliance problems and addresses the largest portion of the tax gap—underreporting of tax. It proposes a funding increase across all major domestic and international compliance programs to leverage new workload-selection systems and casebuilding approaches from continuing reengineering efforts. 

• Detect and Deter Corrosive Corporate Non-Compliance (+$51,800,000 and +236 

FTE): This initiative addresses complex, high-risk issues in abusive tax avoidance 

transactions, promoter activities, corporate fraud, and aggressive domestic and offshore transactions, resulting in increased corporate and high-income return closures 

and audit coverage. This initiative also includes critical post-filing support provided 

by outside experts to expedite the resolution of issues at the field examination level, 

reducing taxpayer burden, and increasing the credibility of the Service’s positions 

on the most complex and potentially highest compliance impact issues sent to court. 

• Increase Individual Taxpayer Compliance (+$37,900,000 and +417 FTE): This 

initiative addresses the tax gap through: the identification and implementation of 

actions needed to address non-compliance with filing requirements; increased Automated Underreporter resources to address the reporting compliance tax gap; increased audit coverage; and expanded collection work in Taxpayer Assistance Centers. 

• Combat Abusive Transactions by Entities with Special Tax Status 

(+$14,460,000 and +77 FTE): This initiative focuses on the most egregious cases of 

non-compliance and identifies compliance risks sooner, reducing burden on compliant customers and enabling the development of new interventions to curtail the 

growth of abusive transactions. 

• Curtailing Fraudulent Refund Crimes (+$10,772,000 and +22 FTE): This initiative is aimed at attacking the increased questionable refunds and return preparer 

fraud identified through expanded operations of the Fraud Detection Centers located 

on IRS campuses. Fraudulent refund schemes are one of the most serious threats 

to voluntary compliance and an IRS investigative priority. 

The FY 2006 request of $10.7 billion funds the IRS’ three appropriations: Tax Administration and Operations (TAO) for operations, service and enforcement; Business Systems Modernization (BSM) for modernization; and, the Health Insurance 

Tax Credit (HITCA) for administering a refundable tax credit for qualified individuals. I will describe each in turn. 

15 

TAX ADMINISTRATION AND OPERATIONS (TAO)

For FY 2006, we request funding of $10,460,051,000, an increase of 4.6 percent 

over the FY 2005 appropriation of $9,998,164,640 for programs previously funded 

from the PAM, TLE, and ISY appropriations. 

The TAO appropriation provides resources for the IRS’ service and enforcement 

programs. The IRS is responsible for ensuring that each taxpayer receives prompt 

and professional service. To that end, the IRS’ assistance, outreach, and processing 

activities funded in the TAO appropriation are dedicated to providing assistance to 

taxpayers in all forms—electronic interaction, published guidance, paper correspondence, telephone contact, and face-to-face communication—so that taxpayers may fulfill their tax obligations timely and accurately. It also includes the resources the IRS 

requires to handle the processing and disposition of tax returns, refunds, and other 

filing materials. 

We are also responsible for the fair enforcement of the nation’s tax laws. Each 

year, a small percentage of taxpayers file erroneous returns or, for reasons both innocent and less benign, fail to file a return at all. The IRS conducts enforcement 

activities using a variety of methods, including correspondence audits, matching reporting documents (such as Forms W–2) to information on taxpayer returns, in-person audits, criminal investigations of those suspected of violating tax laws, and participation in joint governmental task forces. The IRS’ examination, collection, investigations, regulatory compliance, and research activities funded in the TAO appropriation provide the resources required for equitable enforcement of the tax code 

and the investigation and prosecution of individuals and organizations that circumvent tax laws. 

HEALTH INSURANCE TAX CREDIT ADMINISTRATION (HITCA)

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

which, among other things, 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 Health Insurance Tax Credit Administration (HITCA) Appropriation funds the costs to administer a refundable tax credit for health insurance to qualified individuals. The tax 

credit is equal to 65 percent of the health insurance premium paid by eligible persons for themselves and qualifying family members. For FY 2006 we request funding of $20,210,000, a decrease of 41.5 percent below the FY 2005 appropriation of 

$34,562,272. Costs for the HITCA program have declined since implementation due 

to our active program oversight and management, as well as several cost-cutting initiatives we began to implement in March 2004. We developed a comprehensive action plan outlining cost-reduction initiatives and are following it to achieve these 

significant savings. 

BUSINESS SYSTEMS MODERNIZATION (BSM)

The IRS tax administration system, which collects $2 trillion in revenues annually, is critically dependent on a collection of 40-year-old, obsolete computer systems. 

Recognizing the long-term commitment needed to solve the problem of modernizing 

these antiquated systems, Congress and the Administration created a special business systems modernization account. They designed the BSM program to bring the 

IRS’ business systems to a level equivalent with best practices in the private and 

public sectors while managing the risks inherent in a program that is unquestionably one of the largest, most visible, and most sensitive modernization programs 

ever undertaken. 

Our most successful year ever for the modernization program was 2004; however, 

we realize one successful year does not a successful program make. The slow rampup of our modernization efforts, caused by many factors including a lack of adequate 

technical and application engineering, program complexity, immature management 

processes, infrastructure instability and role confusion between the IRS and our 

PRIME contractor, Computer Sciences Corporations (CSC), caused us to deliver 

projects late and over budget. When I came onboard in 2003, I reorganized the IRS 

to provide greater focus and accountability in modernization by creating and appointed a Deputy Commissioner for Operations Support. Because of this focus, we 

have begun to see real progress in delivering projects with business value. 

In 2004, we measured our success by the number of projects we delivered, the 

schedule and cost targets we hit, and the substantial improvements we made in program management. 

We delivered the first release of the Customer Account Data Engine (CADE) 

project in July 2004, allowing the IRS to process an initial set of the simplest tax 

16 

returns on a new computer system for the first time in 40 years. We launched IRS’ 

new Integrated Financial System (IFS), and declared it the IRS’ financial accounting 

system of record. IFS will provide the capability for improved timeliness and accuracy of the financial reports and information available to IRS management and key 

stakeholders, facilitating continued clean financial audit opinions of the IRS. We deployed a full suite of e-Services products, providing tax professionals and businesses 

with new Web-based tools that dramatically improve their interface with the IRS. 

Additionally, we released Modernized e-File, whereby corporations and tax-exempt 

organizations can file their annual income tax and information returns electronically. Regarding the BSM budget, in 2004, the modernization budget was $387 million. 

Based on the challenges the modernization program was facing, we realized the program needed to be smaller in 2005 so we requested a lesser budget of $285 million. 

In the end, Congress appropriated $203 million. One of the ways we are accommodating these changes is by substantially lowering the costs of the core infrastructure 

as well as the architecture, integration, and management parts of the BSM program 

in 2005. These two areas are the programmatic elements of the program, and cost 

$160 million in FY 2004. We certainly cannot justify that level of continued investment for a program that is roughly $200 million. Therefore, we are dramatically reducing those core services to $107 million in FY 2005 and we anticipate making additional reduction in FY 2006. For FY 2006, we request funding of $199 million for 

all BSM activities, substantially the same funding as the FY 2005 appropriated 

level. This funding level allows us to focus on on-going projects to ensure they deliver the functionality we planned. 

In FY 2005, BSM continues to build and improve upon our success by delivering 

projects, attaining cost and schedule targets, realizing benefits to taxpayers, and improving BSM program management capabilities. BSM delivered all projects and releases planned for the first half of FY 2005 on time, on budget, and met or exceed 

scope expectations. 

In terms of improving program management, we identified four key areas that we 

had to address to enhance the performance of the modernization program: • Resizing our modernization efforts to better align with our management and 

skill capacity; • Engaging IRS business units to drive the modernization projects with a business focus; • Improving contractor performance on cost, schedule, and functionality; and • Hiring outside executives to achieve a better balance between large project 

management and tax administration experience. 

We have made significant progress in addressing each of these major challenges. 

First, the IRS will concentrate on a few key projects and will develop a track 

record of improved management and successful delivery of modernization projects. 

Second, the IRS assigned a business unit leader to each project with responsibility 

for leading the related BSM Governance Committee, and sharing accountability for 

delivering the modernization project as stated in their annual performance commitments. 

Third, we are making real progress in improving the accountability of the PRIME 

contractor. I meet monthly with the Chief Operating Officer of CSC to reinforce the 

accountability of the contractor to the IRS. Additionally, we have made major 

progress in restructuring BSM project contracts with the PRIME that shift an appropriate amount of financial risk to the contractor and tie costs to performance. 

These steps have resulted in improved contractor performance, as demonstrated in 

the deliverables in 2004 and the general adherence to costs and schedules. 

Fourth, we have made great progress in hiring experienced executives and seasoned managers from outside the agency who have expertise in running large-scale 

information technology programs and projects. A little over a year ago the mix of 

leadership at the top of the BSM program consisted of one outside expert and six 

internal IRS executives. Today, that mix is four outside experienced outside experts 

and three internal IRS executives. This mix is a much better balance of the project 

management and technology talent and tax administration experience needed to 

successfully run the BSM program. 

As I said earlier, while we were very successful in 2004, we have a lot of work 

ahead of us. It is critical that we continue this level of performance in 2005 and 

beyond. 

Our focus for FY 2005 is on maintaining substantial modernization work for three 

key tax administration systems that will provide additional benefits to taxpayers 

and IRS employees, specifically: 

• The Customer Account Data Engine (CADE) project; 

• Modernized e-File; and 

17 

• Filing and Payment Compliance (F&PC). 

CADE 

CADE replaces the IRS’ antiquated system called the Master File which is the 

Service’s repository of taxpayer information. With CADE being the core fundamental component of the modernized systems, it is the IRS’ highest priority technology project. It will be the single authoritative repository for account and return 

data. 

We cannot over-emphasize the importance of CADE. The current Master Files 

have served the IRS for more than 40 years. However, they were developed in a different era and rely on an obsolete programming language and a flat-file system that 

still requires batch updates. These systems are very expensive to maintain; development of new applications costs the IRS two to three times what it would cost if they 

were already retired. Yet the IRS must update the Master Files every year to take 

into account tax law changes. As importantly, the vast majority of the workforce 

who are familiar with these old systems will be retiring over the next few years and 

we cannot hire individuals with these obsolete skills. Until the Master Files are replaced, the IRS can not offer service approaching what a typical financial services 

firm offers today (such as full account views for employees and real-time account 

updates and settlement). 

The returns we are processing in CADE are the most basic of 1040EZ forms and 

have a narrow range of taxpayer information, but it marks the first time since the 

1960s that the IRS has processed individual tax returns in a new way. The success 

of CADE proves that we can deliver technology that will process tax returns on a 

24-hour cycle, breaking the 40-year old standard of processing on a weekly cycle. 

As of April 27, 2005, CADE had processed over 1.3 million returns and generated 

over $402 million in refunds to taxpayers. This achievement is significant. With the 

FY 2006 funding request, we plan to undertake improvements that will allow us to 

process 33 million returns by the FY 2007 filing season. 

The CADE system is scheduled to be phased in over several years, processing increasingly more complex tax returns. When fully operational, CADE will be a modern database that will house tax information for more than 200 million individual 

and business tax returns. It will provide a variety of benefits to taxpayers, such as 

faster refunds (by over 50 percent) along with daily postings of transactions and updating accounts, which (with other technology elements) will significantly improve 

customer service and enforcement. With CADE, we will have the flexibility necessary to respond quickly to our complex tax law and tax reform changes. 

One of the most significant changes that we introduced in 2004 was the segmentation of CADE releases into two annual deliveries—one in July and one in January. The July delivery will involve higher risk, more complex functionality, and the 

January delivery will include filing season changes combined with additional 

changes as capacity permits. For the July release, returns will be available from the 

previous six months which will enable us to test the higher risk, complex changes 

with high volumes, and then go live with reduced volumes, which will mitigate the 

operational risks. Based on our current planning, we anticipate having all individual returns processed by CADE by the year 2012. 

Modernized e-File (MeF) 

In FY 2004, the IRS successfully introduced e-filing to large corporations and taxexempt organizations. These taxpayers now file their annual income tax and information returns electronically without an intermediary, significantly reducing time 

to file Forms 1120 and 990. MeF electronically captures 100% of the tax return information submitted by a taxpayer/practitioner, including third-party documents 

such as appraiser statements and state documents required at time of submission. 

This change is significant progress since with paper returns, the IRS can only transcribe a fraction of Form 1120 and Form 990 return data. MeF also improves communication with tax practitioners through near real-time return receipt acknowledgements, streamlined error detection, and standardization of business rules and 

requirements across form types. MeF is an efficient and effective way of providing 

data requested by tax practitioners and is required for maintaining tax audit effectiveness. 

In January 2005, MeF Release 3.1 deployed Form 7004 (filing extension for corporations), Form 990PF (information return for private foundations), and tax law 

changes for filing season 2004. This allowed the IRS to establish regulations requiring large corporations and tax-exempt organizations to electronically file their income tax or annual information returns beginning in 2005. To date, MeF is processing 1120 and 990 returns at higher than expected volumes while still achieving 

18 

performance goals—a significant reduction in burden and time for corporate and 

tax-exempt taxpayers. 

MeF releases funded in FY 2005 will provide an interface with state tax information retrieval systems. Adding capabilities for major corporations and tax exempt organizations to file Federal and State returns jointly with single point electronic 

transmission and acknowledgements will reduce taxpayer burden and simplify filing 

processes. MeF will also offer a Web Services interface. By FY 2007, the IRS expects 

more than 20,000 large corporate taxpayers and up to 10,000 tax-exempt entities 

will be covered by the electronic filing requirement. The use of electronic filing technology will also help improve service and enforcement missions. 

Despite MeF’s success, the benefits of electronic filing are not yet available to all 

taxpayers. Small businesses, self-employed taxpayers and some governmental entities cannot yet interface with the IRS in a manner consistent with their operational 

environments. During the next few years, it is our plan to extend the MeF architecture for 1065s (Partnership Income), 1041 (Estates and Trusts), 940 (Employer’s Unemployment Tax Return), and 941 (Employer’s Quarterly Federal Tax Return), with 

an ultimate goal of conversion of the legacy 1040 e-file program. Adding 1065 form 

processing will enable the small business community, estimated at 2.68 million in 

2005, to realize the same benefits experienced by large corporations and tax exempt 

organizations. The volume of small business community response is expected to exceed that seen from large corporations. 

Filing and Payment Compliance/Private Collection Agencies 

In 2004, Congress passed and the President signed into law, the American Jobs 

Creation Act, a provision of which allows the IRS to use Private Collection Agencies 

(PCAs). The legislation authorized the IRS to augment our collection efforts by allowing us to use PCAs to pursue what has been deemed as uncollectible tax liabilities; these agencies will not have enforcement authority and will only contact delinquent taxpayers to arrange voluntary, full-payment installment agreements. We will 

use the Filing and Payment Compliance (F&PC) system to analyze tax collection 

cases and divide the complex cases requiring direct IRS involvement from the simple ‘‘balance due’’ cases that can be handled by PCAs. 

The current volume of delinquent taxpayers exceeds the IRS’ capacity and results 

in a serious backlog of collection cases that cannot be adequately addressed without 

additional resources. This backlog of collection cases creates both a lost revenue opportunity and undermines the fairness of the tax system. Today’s IRS collection operations rely on 20-year-old technology and 30-year-old processes no longer compatible with the realities of today’s taxpayer environment. The GAO noted significant 

declines between 1996 and 2001 for staff time, productivity and the amount of unpaid taxes identified, collected and resolved. The GAO noted the number of pending 

tax delinquent investigations rose 430 percent since 1997, while the number of confirmed tax delinquent accounts ‘‘in queue’’ (awaiting staff attention), rose 54 percent. 

F&PC will enable taxpayers and practitioners to conduct IRS business over the 

Internet, for issues which previously required direct IRS employee interaction (telephone or paper correspondence), thus providing better access to government services 

on a 24/7 basis. F&PC will provide support for detecting, scoring, and working nonfiler and delinquency cases through advanced state-of-the-art case selection methods. This capability will improve prioritization of delinquent case inventories, improve case selection, and optimize collection and resolution rates. 

F&PC Release 1.1 will analyze tax collection cases and separate complex cases requiring direct IRS involvement from those that can be handled by PCAs. The passage of the enabling legislation allowed BSM to restart F&PC activities in FY 2005. 

F&PC will use FY 2004 funding during FY 2005 to complete architecture engineering analysis, and development of a limited functionality release to allow initial competitive outsourcing of collection activities, with a planned operational debut of January 2006. 

Future F&PC releases will increase enforcement by developing targeted treatment 

streams for delinquent tax cases at various stages in the collection process, which 

reduces the volume of cases requiring more cost intensive attention in back-end collection processes. Subsequent releases will further enhance capabilities such as an 

electronic inventory management, case selection and segmentation, electronic data 

interchange with PCAs, enhanced reporting, monitoring and control capabilities. 

F&PC meets the President’s Management Agenda (PMA) under the governmentwide initiative for expanded e-Government and aligns with the ‘‘Government to Citizen’’ profile by posting information that allows citizens to access delinquent tax accounts, and offering instructions on how to resolve unpaid tax balances. 

19 

IRS PROGRAM PERFORMANCE

The IRS expects to achieve the following levels of performance after attaining full 

performance of the requested FY 2006 initiatives: • Increase in field examinations for high-income individuals with complex returns; significant increase in collection processed; and closing of over 40 percent 

more delinquent balance-due accounts in FY 2008 than in FY 2004. • Nearly double the audit coverage for individuals with income between $250,000 and $1 million, from 1.5 percent in FY 2004 to 2.8 percent in FY 2008. • Auditing 15 percent more individuals earning above $1 million, from 3.4 percent 

projected for FY 2004 to 3.9 percent in FY 2008. • Significantly more collection cases processed, closing 50 percent more delinquent accounts in FY 2008 than FY 2004. • Double the audit coverage for mid-size corporations, from 7.6 percent in FY 

2004 to 16 percent in FY 2008. • Increased efforts to deter abusive tax shelters among corporations. 

Let me now talk to you about our current levels of service. By service, I mean 

helping people understand their tax obligations and making it easier for them to 

participate in the tax system. 

The IRS has greatly improved service to our nation’s taxpayers over the last several years. We are delivering services to taxpayers and we have improved the efficiency and effectiveness for our tax administration system. 

CUSTOMER SATISFACTION

The American Customer Satisfaction Index (ACSI), which began in 1994, is a 

measure of customer satisfaction that covers seven economic sectors, 40 industries, 

more than 200 private sector companies, and many governmental agencies. Scores 

are reported on a 0 to 100 scale based on survey data from consumer households 

across the nation. The ACSI is produced by the National Quality Research Center 

at the University of Michigan Business School, the Claes Fornell International (CFI) 

Group, and the Federal Consulting Group (FCG). Claes Fornell, Chairman of the 

CFI Group, recently praised our progress. He said, 

‘‘The Internal Revenue Service (IRS) continues to improve its services. The IRS 

is obviously in a special category when it comes to the satisfaction of the people it 

deals with, and cannot be compared with the private sector or even with most public 

sector services. The collection of taxes is not an activity that taxpayers look forward 

to or expect a great deal of satisfaction from. But even in the face of this handicap, 

the IRS continues to improve on taxpayer satisfaction. Since 1999, IRS’ overall ACSI 

score has surged by 26%. While the rate of the improvement has slowed recently, 

it is clear that a good deal of this increase is attributable to electronic filing. Filers 

find it convenient, accurate, and refunds are delivered quickly. The satisfaction 

score for electronic filing stands at a remarkable 78, compared with paper filing at 

52. The more tax filers the IRS manages to move from paper to electronic filing, 

the more customer satisfaction can be expected to increase.’’ 

RETURN RECEIPTS/ELECTRONIC FILING

Electronic filing continues to grow. Last year, individuals filed over 61 million 

electronic returns. This year, over half of all individual returns were be e-filed. Individuals who file paper tax returns are now in the minority. We take every opportunity we can to broadcast the benefits of electronic filing, including a reduction in 

processing errors and cost savings for taxpayers and the IRS. E-filing is fast, convenient, and gets your refund to you in half the time of paper returns. 

As of May 6, 2005, we have received more than 122.1 million total individual returns. 66.1 million returns (54.1 percent) are electronically filed and 55.9 million 

(45.8 percent) are paper. 

• The number of online returns is 16.7 million, a 17.2 percent increase from last 

year. 

• Through April 28, 2005, 5 million Free File returns have been accepted, an increase of 46.6 percent from last year. 

• We have issued 88.6 million refunds, with an average refund of $2,113 paid. 

IRS.GOV

Use of our website, IRS.gov, has exceeded 134.6 million homepage visits, up 66.3 

percent from 2004. Not surprisingly, during the filing season, it is one of the busiest 

websites in the world. We average more than one million visits a day. Many of those 

visits are to the ‘‘Free File’’ page, which allows taxpayers visiting the website to 

chose among several free, online filing options. As of May 7, nearly 18.9 million taxVerDate Aug 31 2005 02:13 Oct 28, 2005 Jkt 023854 PO 00000 Frm 00029 Fmt 6633 Sfmt 6621 E:\HR\OC\A854.XXX A854
20 

payers used the ‘‘Where’s my Refund’’ feature on the web page, an increase of 52 

percent from the same time last filing season. These visits decrease the need to visit 

a Taxpayer Assistance Center (TAC), or to call our operators, which allows them to 

focus on more complex calls. During the past year, we have also rolled out important new online services to tax professionals to help them better serve their clients. 

Tax practitioners and other third parties, such as banks and brokerage firms that 

file 1099s, may now access the following functionalities online: electronic account 

resolution, transcript delivery, secure email, disclosure authorization, and bulk Taxpayer Identification Number (TIN) matching. In fact, as of May 9, 2005, for the fiscal year tax practitioners submitted 3,370 cases for Electronic Account Resolution, 

62,737 requests for transcripts, 28 million Bulk TIN matching requests, and over 

15,000 powers of attorney or disclosure authorizations. 

TELEPHONE SERVICE

Our efforts to improve call routing, as well as staffing and training of phone 

assistors have allowed us to dramatically improve service. In filing season 2005, we 

are maintaining the level of service that our customers have come to expect from 

us. 

As recently as fiscal year 2002, the level of service for those taxpayers who want 

to speak to an assistor was 68 percent. Our improvement efforts raised the level 

to 80 percent in 2003 and to an all-time high of 87 percent in 2004. 

In FY 2004, the number of taxpayers receiving busy signals decreased to 220,000, 

a 66 percent reduction from the previous year. And, that is a reduction of 99.5 percent from the 2.6 million busy signals generated as recently as FY 2002. 

Our telephone service—that is, answering questions from taxpayers—continues to 

improve. We measure telephone quality two ways, 1) customer account accuracy and 

2) tax law accuracy. For the filing season, our customer account accuracy is 91.6 

percent, up from 89.3 percent; our tax law accuracy has improved from 77.7 percent 

in 2004 to 88 percent in 2005. 

LEGISLATIVE PROPOSALS

The President’s FY 2006 request includes several proposals that will assist me in 

managing the agency more efficiently and effectively. These proposals, if enacted, 

will allow us to focus more resources on high-income, high-risk areas, automate several routine transactions, use electronic data to reduce costly manual transactions, 

consolidate resources related to judicial and counsel review, and broaden administrative authorities and accesses to support further electronic administration and tax 

reform. We are seeking to: 

• Make Section 1203 of the IRS Restructuring and Reform Act of 1998 more effective and fair; 

• Curb the use of frivolous submissions and filings made to impede or delay tax 

administration; 

• Allow for the termination of installment agreements for failure to file returns 

and for failure to make tax deposits; 

• Consolidate judicial review of collection due process cases in the United States 

Tax Court; 

• Eliminate the monetary threshold for counsel review of offers in compromise; 

• Allow the Financial Management Service to retain transaction fees otherwise 

paid from IRS appropriations from levied amounts to recover delinquent taxes; 

• Extend the due date for electronically filed returns to provide additional incentive for taxpayers to e-file and expand the authority to require electronic filing by 

businesses and exempt organizations; and, 

• Allow IRS to access information in the National Directory of New Hires for tax 

administration purposes. 

CONCLUSION

The IRS is committed to continuing to improve service and respect taxpayer rights 

while enforcing the law. 

Mr. Chairman and Members of the Joint Review, the great majority of Americans 

honestly and accurately pay their taxes. Average Americans deserve to feel confident that, when they pay their taxes, their neighbors and competitors are doing 

the same. 

The President’s budget request will help us enforce the tax law more fairly and 

efficiently. I am most grateful for your support of increased enforcement, and I look 

forward to working with you on this important budget request. 

Thank you very much. I am happy to take your questions. 

21 

Representative RAMSTAD. Thank you, Commissioner, for your testimony and for doing a tough job well. 

Let me ask you, Commissioner, my friend from Massachusetts 

has referred to the limited number of cases that will be delegated 

to private collection agents as low hanging fruit that will be easy 

to collect. It is my understanding that private collection agencies 

have better access to technology that will help them locate taxpayers; and, further, the more complex tax cases where the amount 

of tax owed is disputed will be reserved for IRS employees. It 

seems to me to make sense to delegate the less complex cases to 

the private sector and delegate the tougher cases to IRS employees 

because they have the expertise and the enforcement power. 

Do you agree with that? 

Mr. EVERSON. Yes, sir, I do. I want to note, however, I totally 

agree with Mr. Olver. I mean, if we had limitless funding, of course 

it would make more sense to have the IRS employees do this work. 

But as I just indicated, talking about the funding, the budgets that 

we actually get, don’t afford us that luxury. So we do have to 

choose. This is a program that will supplement the IRS efforts, enable us to do just as you say, work on the more complex, higher 

end cases, and I think that this is an expansion of our reach. 

It is already being done, as I indicated in testimony before, in 

over 40 States around the country. And it is comparable in many 

ways to the kind of leverage we are trying to get in other areas, 

where right now we have agreements to look at abuse of tax shelters with something like 46 States and the District of Columbia. 

They are doing some work and we are doing other work, and it 

does help us. So I actually have to agree with both of you, frankly, 

which is always good practice. 

Representative RAMSTAD. Let me ask another question with respect to private collection agencies. Could you just briefly explain 

the safeguards that are in place to prevent the misuse of taxpayer 

information or violation of taxpayer rights, as you implement last 

year’s legislation? 

Mr. EVERSON. Yes, sir, of course. That is one of the reasons why 

the program isn’t up and running right now. We are taking the 

time to develop the systems appropriately so that we are only providing the data that these folks will absolutely have to have. We 

want to make sure that the systems interact correctly, that if you 

are getting in touch with someone and they have already made a 

payment, for example, that that is reflected in the data that the 

contracting agencies will have. We are proceeding to do that work 

now, and that is why we won’t actually start the collection activities themselves until probably around January of this coming year. 

I want to emphasize, as I have in other testimony, that all the 

standards that will be followed by the contractors will be those 

same standards that IRS employees would have as to the kind of 

questions they could ask. There is also, as you know, the third 

Debt Collections Practices Act that governs these activities as well. 

So there will be a lot of controls over this, a lot of monitoring, 

and there will be great focus on security. IT security was a point 

that was mentioned. We want to make sure that we are attending 

to that, too. 

22 

Representative RAMSTAD. My final question concerns Taxpayer 

Assistance Centers. Your hand was really forced by the budget to 

close a number of them throughout the country. What are you 

planning to do to compensate—that is, to make sure tax administration will not suffer—due to the loss of this face-to-face interaction through the closures? 

Mr. EVERSON. We will develop plans for each and every one of 

the sites that we expect to close. Right now, we are heading towards a model or a listing of about 68 sites. I expect that we will 

probably issue that within the next week to 2 weeks. We will do 

a site-by-site analysis and work on things like the nearby existing 

sites, remaining sites, depending on where the location is. Also, 

working on the VITA sites that were mentioned. As you probably 

know, there is something like 14,000 volunteer sites around the 

country. I recognize this is not a one-to-one trade-off in any way, 

but we will develop a targeted plan in each and every location that 

we close to do the best we can. 

As you indicate, what is really happening here, Mr. Chairman, 

is we are doing some belt tightening. This is consistent with what 

GAO has said, that I would like to, if I could, draw this to your 

attention in terms of what they have concluded. It says: 

We recognize that the options listed below involve trade-offs. In 

each case, some taxpayers would lose the service they use. However, the savings could be used to help maintain the quality of 

other services. We also want to give the IRS credit for identifying 

savings, including some on this list. The options include the following: 

Closing walk-in sites. As discussed previously, taxpayer demand 

for walk-in services has continued to decrease and staff answer a 

more limited number of tax law questions in person than staff answer via telephone. And a series of other points here. 

As you say, what we are trying to do is be responsible in a period 

of budget austerity. This is an area where we think we will save 

about $48 million. We have to save 150 overall, frankly, to get 

within the President’s request. 

The final point I will make on this, as Mr. Olver and others have 

heard me testify to, my real concern is not this; it is that if the 

Congress does what it did the last few years and uses the President’s service request as a ceiling and then cuts it further, we will 

get to far harder cuts in services than this implies. 

Representative RAMSTAD. Thank you, Commissioner. At this time 

I would recognize the distinguished member from the appropriations committee, Mr. Olver. 

Representative OLVER. Thank you, Mr. Chairman. Commissioner 

Everson, I have read your written testimony. It is not so easy for 

me to assimilate your new summary of that testimony in order. 

You mentioned in your written testimony that the tax gap in the 

last year that your publishing data, your advertising data on that 

is for the year 2001, and you say that the tax gap is somewhere 

between 311 and $353 billion. And that in fact through late payments and enforcement activities, coupled with those payments, 

that you recovered 55 billion. So that there may be somewhere between 257 and 298 net tax gap. 

23 

You have indicated that for this year, in your written testimony, 

that your priorities for enforcement—and I take it the priorities for 

enforcement mean going at that net tax gap. The priorities for enforcement would be to discourage and deter noncompliance with 

emphasis on corrosive activity by corporations, high income individuals, and other contributors to the tax gap. 

Then your second priority is to ensure that tax professionals are 

adhering to professional standards and follow the law. 

The third priority is to detect and deter domestic and offshore 

based criminal tax activity. 

And, fourth, to discourage and deter noncompliance within tax 

exempt and government entities. 

Now, is all of that net tax gap contained among those four priorities, or are those just components of the tax gap? 

Mr. EVERSON. Those are the four objectives that support the enforcement goal of the strategic plan. They were constructed to cover 

what we felt were the most essential elements of returning or recovering enforcement. And some of those play in a tax gap more 

than others. 

Let us talk about the last one as an example, maintaining the 

integrity of charities. As you know, the tax exempt sector is a very 

large portion of our economy, but we aren’t generating tax there. 

Therefore, it is not in the gap calculation. 

Representative OLVER. All right. That is fine. Thank you. I have 

to get some questions in here. 

All of the tax gap issues there require extensive work, as the 

chairman has suggested, on the part of professional tax personnel 

of the Department and so on, the enforcement audit process and so 

forth. I assume that these audits must be done, you will have to 

do those in order to identify where the underreporting of income 

is, and whether it can be found through document matching or 

whether it is small or large corporations or abusive devices or all 

of that. That has to be done through the audit process. 

Mr. EVERSON. Sir, we have just completed the first phase of the 

national research program. This has generated the results that you 

spoke about, the tax gap range that was articulated. It was based 

on 46,000 detailed audits, from which we have reached conclusions 

on the ranges. We are refining that work now. That work will enable us to refine those ranges and update our audit tools. Ultimately, we will use the results to inform our budget decisions down 

the road. 

Representative OLVER. Okay. Let me just ask you, where is it 

that you intend to use the private collectors? 

Mr. EVERSON. Let us go to the tax gap map. If you look at the 

components of the tax gap, about 80 percent of it is in underreporting, about 10 percent is in nonfiling, and 10 percent that is 

this box out at the right, a little over $30 billion, is in underpayment. That is when I owe a balance, we have agreed that I owe 

the balance, but I haven’t paid all of it. 

Representative OLVER. 30 billion? 

Mr. EVERSON. Yes, sir. So that is each year. We estimate right 

now, on the balance sheet of the U.S. Government—— 

Representative OLVER. This is underpayment? 

Mr. EVERSON. Underpayment. Yes, sir. 

24 

Representative OLVER. So this is where it is already agreed what 

is owed? 

Mr. EVERSON. Exactly. 

Representative OLVER. And it just hasn’t been paid. And this is 

where you will use the—— 

Mr. EVERSON. That is where the private collection agencies come 

in. That is exactly right. They are not doing audit work or anything 

like that. No, sir. 

Representative OLVER. Okay. Now, doesn’t that correspond essentially to a group of items that were included in your predecessor’s Mr. Rossotti’s report to the review board, to the IRS review 

board? Because that comes to virtually exactly $30 billion of field 

and phone accounts receivable, plus the cases of—other sorts of 

cases where they have been looked at and you didn’t have enough 

staff to look at all of them. 

Mr. EVERSON. I would have to go back and look at Charles’ report. 

Representative OLVER. The point I am trying to make is that in 

a category of $10 billion of field and phone accounts receivable, $10 

billion that is understood to be owed and agreed to be owed, Mr. 

Rossotti suggested that hiring with about $300 million to collect 

those, that you could collect that $10 billion, which is $30 per dollar expended. How much is it that you plan—because I have heard 

and I use the number about 20 percent. How much is it that you 

are going to give to the collectors for what they collect? 

Mr. EVERSON. I can’t answer that question yet. I think that this 

will be a function of the competitive process in terms of the bids 

that will be received. 

Representative OLVER. You have no estimate? 

Mr. EVERSON. Well, we said we could allow it to go up to 25 percent, as you know. I don’t think it will get that high, but I don’t 

want to speculate until we get further down the road. 

Representative OLVER. I just want to point out to you and to everyone else that that comes to—if it were 20 percent, which is what 

it costs for the collection process, that that is a 5 to 1 margin. I 

cannot imagine why anyone would want to use that kind of a margin versus expenditure of $300 million to collect the $9 billion. 

Representative RAMSTAD. The gentleman’s time has more than 

expired. The Chair would just ask that we try to stick within a 

minute or so of the 5-minute rule. 

The Chair now recognizes the distinguished Senator from Hawaii. 

Senator AKAKA. Thank you. Thank you very much, Mr. Chairman. The ranking member of the Senate Committee on Finance is 

unable to be here, Mr. Chairman. I ask unanimous consent that 

the statement by Max Baucus be inserted in the record. 

Representative RAMSTAD. Without objection, so ordered. 

[The statement of Senator Baucus follows:] 

STATEMENT OF SENATOR MAX BAUCUS

In 1998, Congress and the Administration determined that it was time for the IRS 

to stop spinning its wheels and start advancing with the rest of the world—in technology, taxpayer service, and enforcement. Although the IRS made significant 

progress in taxpayer service, enforcement and technology have had fewer successes. 

Unfortunately, seven years later, the IRS continues to have few successes in techVerDate Aug 31 2005 02:13 Oct 28, 2005 Jkt 023854 PO 00000 Frm 00034 Fmt 6633 Sfmt 6621 E:\HR\OC\A854.XXX A854
25 

nology; strives for increased enforcement but with concern that quality is being sacrificed; and diminishes taxpayer service under the guise of lower demand and tighter budgets. I am concerned that the IRS wheels did in fact stop spinning, but they 

are now going backwards. 

Congress required the IRS ‘‘to revise its mission statement to provide greater emphasis on serving the public and meeting the needs of taxpayers’’ in the IRS Restructuring and Reform Act of 1998. The 1998 changes reflect unanimity that it was 

time to stop the pendulum from swinging between taxpayer service and enforcement. Further, the National Taxpayer Advocate emphasizes that investments in 

both enforcement and taxpayer service contribute to compliance. 

While I agree that we need targeted, appropriate enforcement, taxpayer service 

cannot be the sacrificial lamb. If the IRS diminishes the access and accuracy of taxpayer service—including the essential need for face-to-face taxpayer service—then 

we fail to help taxpayers comply with the law on the front end. Ensuring up front 

quality is simply more efficient than back end enforcement. 

One of the lambs scheduled for slaughter is the IRS Taxpayer Assistance Center 

program. In Montana, taxpayers already have to drive 200 miles to a Taxpayer Assistance Center. Because of cuts in hours of operation and new restrictions on the 

type and level of assistance that taxpayer service personnel may provide, when 

Montanans get to an IRS assistance center, it is often closed. It seems to me that 

justifying the closing of Taxpayer Assistance Centers based on a decrease in usage 

is simply the next step in a planned self-fulfilling prophecy. I fear that the proposed 

cuts in telephone service are also unwarranted cuts in taxpayer service. I urge Commissioner Everson to re-think the direction he is headed with respect to taxpayer 

service cuts. 

The IRS’s third strategic goal is to modernize the IRS through its people, processes, and technology. Simply put, the IRS cannot operate efficiently and effectively 

with outdated technology. Unfortunately, critically important taxpayer service and 

enforcement needs are going unmet because of a failure of the IRS to modernize. 

In 1998, the general view was that the IRS could not build the needed technology 

in-house. Seven years later, the IRS has not been able to build the needed technology using the private sector. Billions have been spent to modernize the IRS. Yet, 

the IRS is overbudget and behind schedule when it comes to the goal of advancing 

with the rest of the world in technology. 

Worse yet, one of the few technology successes the IRS has had is now on the 

chopping block as well. In 2004, over four million individuals and one million employers filed income and employment tax returns by telephone via the IRS’s Telefile program. Once again, we are told that usage has declined and tight budgets result in elimination of this program. However, perhaps the problem actually lies with 

ineffective promotion of the program, limitations on the types of taxpayers who may 

use the system, and inefficient maintenance of excess circuit capacity and overhead. 

Finally, the IRS’s struggle for a level of funding that is commensurate with its 

workload has existed for years. I appreciate Commissioner Everson’s efforts to 

change the manner in which we think about IRS funding. Specifically, he argues 

that every dollar invested in the IRS results in a return of four dollars to the Federal government. I believe we should treat the IRS as the unique agency that it is 

during the appropriation process. However, I believe any change should impact the 

entire agency, not just enforcement. 

In 1998, Members of Congress shared a vision for a restructured IRS. We shared 

a vision where taxpayers could ask questions and get quick and accurate responses, 

where paperwork was reduced and more taxpayers filed electronically, where taxpayer data was readily available on computer screens so accounts could be adjusted 

promptly, where honest taxpayers were treated with respect, and where tax cheats 

were brought to justice. In other words, we shared a vision of a modern professional 

organization that provides quality taxpayer service while still collecting its accounts 

receivable. We should not lose sight of that vision. 

Senator AKAKA. Thank you, Mr. Chairman. 

Mr. Everson, why does the IRS continue to facilitate the exploitation of taxpayers by providing the debt indicator service and facilitate the refund anticipation loan industry as it exploits low income taxpayers? 

Mr. EVERSON. Senator, I listened very carefully to your statement, and I agree with many of the facts that you stated in it. But 

I do not agree with the characterization that the IRS supports 

RALs. I am on record as saying I don’t think they are a good thing. 

26 

We have stated that with the increase in electronic filing, and this 

year the electronic filing has exceeded 50 percent, one of the primary benefits you get through that is it cuts in half the time of getting your refund. The other thing that we have done is in the Free 

File Alliance—that is a consortium of companies that provide services—this year the usage of that has increased by almost 50 percent, so that over 5 million taxpayers have filed for free, without 

going through the preparers that you speak of in order to process 

their returns. This was designed for middle and low income people. 

Now, it is a complicated problem. I met with your colleague Senator Coleman just last week on this subject. He has expressed concern about it. We are going to take a look at this. There is a delicate balance, though, with the Free File Alliance doing a service, 

which is good for just the taxpayers you are speaking about. Some 

of them do provide these services and generate fees that way, you 

are exactly correct. I am not in favor of that, but there are a lot 

of competitive pressures here. 

All I will say to you, sir, is we are going to take a good look at 

this. A lot of it is not regulated by us. As you know, it would be 

subject to State or other banking law. 

Senator AKAKA. Yes. And I would say we look forward to your 

taking steps to reduce the use of refund anticipation loans. 

Mr. Everson, the President’s budget proposes to cut more than $134 million and 1,205 positions from customer service, and I am 

sure that is correct, with Taxpayer Assistance Centers targeted for 

drastic reductions. These cuts will decrease customer service to taxpayers who rely on their local centers to help them with their tax 

inquiries. This means that minorities and low income taxpayers 

who rely on centers to help with language barriers, the earned income tax credit, and general tax preparation, who seek cuts in tax 

services they rely on. You have talked a little about this. But what 

criteria will you use to determine which centers will be closed? Are 

the targeted centers predominantly in rural or metropolitan areas? 

Once the walk-in centers are closed, how will taxpayers receive the 

customer services they currently receive through the walk-in centers? 

Mr. EVERSON. Yes, Senator, I am happy to explore that. We developed a model that includes five broad categories. And within 

those categories there is a total of 32 different criteria. The general 

categories are geography, employee cost, facility cost, workload, 

and demographics. And they consider factors such as those that 

you are mentioning: The number of EITC returns that were being 

prepared in those centers, inquiries as to the number of forms, 

items like distance to the nearest adjoining TAC or the distance to 

the next VITA site. 

So we try to weigh all these factors. We had input from a variety 

of stakeholders and the input that we received indicated initially 

you want to weigh cost heavily. And what the result of that would 

have been was that you would have closed a smaller amount of 

TACs, but they would have been in the big cities, predominantly 

in the Northeast where you had a lot of old structure that has been 

there for years, if you will. 

We received input that we ought to look more at workload and 

demographics, the kind of issues that you are talking about. And 

27 

we have reweighted this so that now almost half of the weighting 

in the model goes to those two figures. So we think it is a better 

solution. It comes up with 68 facilities that we expect to announce 

the closure of. We are finalizing that now, doing some quality 

checks, make sure we have got it all right. 

And there are three business rules that we have articulated in 

this model. One is that we want to make sure that each of the 35 

largest metropolitan areas retains a TAC presence. Secondly, we 

don’t want to close more than half of the TACs in any individual 

State, and this will seem like a coincidence but we are not closing 

anything in Alaska or Hawaii just because of the lack of geographic 

proximity and—‘‘isolation’’ would probably be a bad word, but just 

the distances, sir. 

Senator AKAKA. Thank you. Mr. Chairman, my time has expired. 

Representative RAMSTAD. The Chair thanks the distinguished 

Senator for questions. It is good to see you again. 

If there is no objection, the Chair would now recognize out of 

order my distinguished colleague from Ways and Means, Mr. 

Beauprez, because, as I understand, you have to leave at 4:00 to 

offer an amendment on the floor. 

The gentleman from Colorado. 

Representative BEAUPREZ. Thank you, Mr. Chairman, and thank 

you for being with us today, Mr. Everson. A couple of quick questions, if I might. The number of corporate returns audited, as I understand it, has declined or the percentage, if you will, the ratio 

has declined rather dramatically since 1997, at least the numbers 

I looked at were roughly one out of 50 back then, and now more 

like one out of 180 or so. What is a reasonable ratio? And are we— 

I am assuming that you are going to tell me that that is a resources problem. I accept that if that is the answer. But tell me, 

what is a reasonable ratio and what must be done about it? What 

else are you doing at the Service to try to find the mistakes that 

are made? And then I want to probe that last part, the mistakes 

part. 

Mr. EVERSON. Yes, sir. First of all, we separate corporations by 

type. We have a business unit that deals with the large and midsize corporations. Those are corporations that have assets of over 

$10 million. And then there are smaller corporations and also selfemployed individuals or people doing business without incorporating that are in our small business and self-employed business 

unit. 

The figures you are referring to refer to the aggregate of the larger corporations and the small businesses that are organized as C 

corporations. If you look at the larger corporations, those rates 

went down for years and we finally stabilized that audit rate in 

2004. The 2004 audit rate on those larger businesses was actually 

something like 15 percent, I believe, 15, 16 percent, and that is a 

recovery from 12 percent the year before. So we are bringing that 

back. 

On the other hand, last year there was a continuing decline in 

the audit rate of the smallest of the businesses organized as C 

corps. This year, that will stabilize and start to come back up. But 

the rate is very low. I believe it is, as you indicate, under 1 percent. 

The things that we are doing to try and go after problems in the 

28 

largest corporations in particular—because when I talk about corporations, I am talking about that first group, over 10 million in 

assets where we think we have real compliance problems. We are 

bringing back resources there. 

The centerpiece of the President’s budget the last 2 years has 

been corporations and high-income individuals. We are improving 

our tools, we have new mandatory reporting, something called the 

M–3 that analyzes the difference between book earnings and tax 

earnings. Items pop out that you then look at in your audit process. 

That has been changed. Just now we are starting to get the information that is really going to be terribly helpful. 

We are mandating electronic filing for corporations of a certain 

size, and many of them are crying like stuck pigs now. But we are 

telling them that next year when they file they have got to do so 

electronically. That will cut a year and a half off of the processing. 

So we are doing a whole host of things here. The last thing I will 

say is we formed something called a Joint International Tax Shelter Information Center with partners from Canada, Australia, and 

Britain, where we have a couple of their agents working side by 

side with our folks in Washington looking at abusive shelters and 

transactions between U.S. businesses and their affiliates overseas, 

because we see real problems in that area. As you can imagine, the 

accounting firms and the investment banks went overseas years 

ago. We are only now responding, frankly. 

Representative BEAUPREZ. There is the old cliche ‘‘garbage in, 

garbage out.’’ I worry a little bit—I worry a lot, frankly, that we 

maybe have both you at the Service and the taxpayer on a bit of 

mission impossible in trying to comply with this very complex Tax 

Code that we have given you, we here in Congress. How difficult 

is that job, and do we create a bit of the cat chasing the tail in that 

in trying to not have garbage go in, you are trying to give the advice and the service and the support to the taxpayer to file accurately in the first place? How difficult is that job? 

I happen to have a prop here. This is your latest contribution to 

our work. Please look somewhere other than just me, if you would. 

Mr. EVERSON. This is the American Jobs Creation Act of 2004, 

which did a lot of good things for the country, and I am not suggesting otherwise. But let us make no mistake about it, it did not 

do a lot of good things for the IRS. It did some good things in terms 

of strengthening penalties for promoters who didn’t comply with 

our standards, but the level of complexity in here is quite significant, especially in things like the manufacturing exemption or 

change where there will be a lot of attempts to make sure that 

things qualify as manufacturing that has already required some 

guidance from us and a great deal of work, as I have indicated in 

some of my correspondence with Congress. So you do not make it 

easier. And, in fact, I am looking forward to the tax reform discussion, because simplification will really make compliance better and 

it will help the IRS. And what I would really ask for is, no matter 

what we do, let us get some stability in this system once we make 

the changes, because the constant changes are really hard. 

Representative BEAUPREZ. I thank the gentleman. That is valuable information. I yield back. 

29 

Representative RAMSTAD. I think all of us will look forward to 

July 31, which is the date the Tax Reform Commission reports to 

Congress. 

The gentlewoman from Michigan. 

Representative MILLER. Thank you, Mr. Chairman. You know, I 

was in the tax collection business actually in another lifetime; in 

one of my former jobs I was a county treasurer. And I was delighted to hear you say that you now have a majority of the people 

filing electronically. But everybody won’t file electronically, or I 

know there is an institutional resistance to that depending on demographics, ages, and such. In fact, I can remember during tax collection time in my county, the older people would come in, particularly those that sort of remember the Depression or they listen to 

their parents, and they would peel off that money in cash. They 

would never give you a credit card. And they wanted a receipt, because they wanted to see a real person. So as one generation is 

willing to access information and transact business and that electronically, we still have a large demographic of our population sort 

of resistant to that. And I know you were closing down—I was listening to you talking about your modeling for closing down your 

walk-ins. But what about the ones that you have left, those that 

you still have left? Are you doing operational audits on how you 

transit people in and out of there as quickly as you can, I mean, 

perhaps express lines? Are you doing educational kinds of services 

for those that might come into a walk-in where you can actually 

educate them on how easy it would be and encourage them to file 

electronically? How are you expanding the amount of the population that would do their business with you electronically? 

Mr. EVERSON. We have taken a number of steps. We have expanded outreach and education programs that have been put in 

place in the last 4 or 5 years. I think that one of the real success 

stories here is with the volunteer programs which have grown now 

to where some 2 million returns were prepared this filing season. 

The GAO and others have correctly pointed out that we need to improve the quality of those programs. That is a dedicated effort right 

now, terribly important. 

I have visited some of these sites. I have been very impressed by 

the spirit, the willingness of volunteers, if you will, to pick up that 

slack and to help out. We have a series of steps we have taken 

here. It is a very important area of activity for us, and I agree entirely with your assessment. The statutory objective of getting to 80 

percent electronic filing is important to pursue, but it is also important for us to recognize that there are populations who are difficult 

to reach. And, frankly, I don’t worry as much about the elderly as 

I worry about immigrant communities and others who are new into 

the system that we want to educate to be compliant. 

As the country changes and the demographics change, that is of 

particular concern to me to make sure that we are working with 

those populations, because some of these folks come from cultures 

where respect for the rule of law wasn’t as great it is here, and 

that is why they came here. We want to make sure that the front 

end is one that sends the right messages. 

Representative MILLER. Thank you. If I could switch gears quickly and talk just for a moment with this debt collection with the priVerDate Aug 31 2005 02:13 Oct 28, 2005 Jkt 023854 PO 00000 Frm 00039 Fmt 6633 Sfmt 6602 E:\HR\OC\A854.XXX A854
30 

vate collection agencies and that. What about the people that might 

have real consternation about having their debts collected with the 

IRS or having that kind of—or the private collectors? Is there any 

kind of a system in place or an appeals process where they would 

not allow for a private collection agency to do that, where they 

would insist on the IRS actually doing that? 

Mr. EVERSON. We are looking at that issue now, and I believe we 

are considering whether someone would say I would prefer to talk 

to someone from the IRS, and I think that we are considering 

whether we will put that into the system. 

Representative MILLER. Because I forget exactly, does the legislation preclude you from doing that, that you have to go to a private 

collection agency? 

Mr. EVERSON. No. This is an option. It gives us the authority to 

do this work, and that is what we are developing. 

Representative MILLER. And one other question, and I know I am 

running out of time here. But I do remember in the legislation we 

made sure that the Federal Government would never be responsible if you mishandled anybody’s private information, which was 

nice for us I suppose. But what recourse would the taxpayer have 

if there was mishandling of their private information? Is there 

going to be something within the process as you do the construct 

there that they would—— 

Mr. EVERSON. Well, I don’t think that those liabilities would be 

any different than any other rights that Americans enjoy, and we 

all know we live in a fairly litigious society where there is an ability to go after these businesses. But we are going to be very careful 

in how we scrub the applications, and in monitoring these companies. 

I recognize this is a controversial initiative with concern as to 

privacy and rights, and that is why we are ramping it up relatively 

slowly. We are not just getting up and running. We had some experience with this some 8 or 10 years ago. It did not go well because 

we didn’t plan it as carefully as we needed to. I think we have 

learned that lesson, and we have got a very good team that is 

working on it. I had asked them to get it going this summer, and 

they came to me about 60 days ago and said you need to slow it 

down because of some of the very issues you are raising. So that 

is what we have done. 

Representative MILLER. Thank you. 

Representative RAMSTAD. And last, but certainly not least, the 

gentleman from New York. 

Representative SWEENEY. I thank the chairman for recognizing 

me on behalf of Chairman Knollenberg in the Treasury-Transportation Subcommittee. I really appreciate the opportunity, and am 

glad to see you, Commissioner. 

Let me start by just associating myself with Senator Akaka’s 

questioning and commentary regarding the Taxpayer Assistance 

Centers. I know that, in the strive to modernize not only the Department but also the filers to the Department, the assistance centers serve a really vital purpose. I happen to represent one of those 

very mountainous and geographically spread out communities. And 

I heard your responses, that you were looking at workforce issues 

and demographics. And I am assuming demographics includes 

31 

some of the geography, because you did mention both Alaska and 

Hawaii and those considerations, and I appreciate that. And I just 

would point out to you that it is a big concern for people in rural 

areas in particular. 

Mr. EVERSON. Yes, sir. In fact, I think that our concerns were 

just this: If you only looked at workload per se, you would end up 

closing a lot of rural sites because you have got to close lots of 

small rural sites to get to the cost savings. And we have done the 

best we can. I think we are going to do a pretty balanced run of 

this. 

Representative SWEENEY. Well, I hesitantly say I look forward to 

seeing what the final product is. But we have had that conversation. Let me really shift gears to something I don’t imagine you 

would have been prepared, necessarily, for. 

Mr. EVERSON. Those are always the fun ones. 

Representative SWEENEY. This relates to the oversight that—out 

of Appropriations, we have had a lot of discussions about our membership. And I am concerned that, structurally—I also serve on the 

Homeland Security Subcommittee. In prior times, I served on Commerce-Justice-State, so I have a pretty good sense, and a number 

of members have a pretty good sense of the issue of—the issues attendant to money laundering and counterterrorism funding and financing. 

I have a belief that the culture within Federal law enforcement, 

in particular, is such that be it the FBI or even DOJ or Secret 

Service, there isn’t a real cultural bent towards doing the kind of 

nitty-gritty work that you need to do over the number of years— 

that you need to do to really investigate the complexities of the terrorist financing entities; and I have tentatively come to a conclusion that your agency may be the only entity culturally and in 

terms of experience that may really have the capability to quickly 

do—‘‘quickly’’ being not an oxymoronic term, but really quickly be 

able to kind of indoctrinate itself to such a mission. 

I asked the question of some people around the country in terms 

of the local JTTFs in terms of the involvement the IRS, whether 

the IRS indeed had seats at the table; and was told that formally 

that is not the case in most instances and in most jurisdictions— 

and, in fact, I haven’t found one that that is the case. 

Secondly, I have been told that part of your mission statement 

may actually be a preclusion that IRS, without the invitation of 

DOJ and/or the FBI, really has no role here. 

So my simple fundamental question is, is that true? In the mission statement, are you precluded? And would the Agency, given all 

this discussion about how you are being asked to really kind of 

hone down and cut down and focus and not be too spread out, 

would the Agency have an aversion to such an expansion of its duties? 

Mr. EVERSON. You cover a lot of ground there. And let me—— 

Representative SWEENEY. I know. I only have 5 minutes. 

Mr. EVERSON [continuing]. Take it in pieces. 

First of all, I would agree with your characterization that our 

people are the best, our criminal investigators, at tracking the flow 

of funds. I have been told that by numerous individuals, the most 

senior members of the Justice Department and other agencies. And 

32 

it is because our people—they are often accountants, and that is 

how they got into the 1811 series. They like doing that kind of 

work, whereas some of the other agencies are more interested in 

other elements of it. So there is a natural division of labor. 

I believe we are participating in the work. I have not been told 

of being shut out. I have been many times approached by Attorneys 

General Ashcroft, Deputy Thompson, Comey and others. Chris Ray 

runs the Criminal Division, thanking us for the work we do not 

just there, but also as an example on the President’s corporate 

fraud task force, same kind of thing, where we provide support to 

Justice-led investigations. 

Now, there are other terrorism-related investigations that we initiate, some of them in charitable terrorist financing, where we do 

take the lead because it falls within the charitable arena. And then 

we are in front and we bring Justice in, but I don’t think it is as 

stark as you are suggesting, sir. 

Representative SWEENEY. Well I have a couple of cases that I 

have been following over the years that have fallen by the wayside. 

And one of the explanations on one case, in particular, that is quite 

disturbing is that effectively the FBI didn’t know where to go with 

the case and they didn’t go to you, and they should have. So I will 

follow up with you. 

Mr. EVERSON. I would be happy to follow up with you, sir. Nancy 

Jardini runs our Criminal Division. I will ask her to come see you 

and cover any details you would like. 

Representative RAMSTAD. Well, thank you, Commissioner. Thank 

you for your testimony as well as your responses to the questions. 

We look forward to seeing you. 

The Chair would now call the second panel, the Honorable J. 

Russell George, Treasury Inspector General for Tax Administration; the Honorable Raymond T. Wagner, Chairman, IRS Oversight 

Board; Ms. Nina E. Olson, National Taxpayer Advocate, Internal 

Revenue Service; and Mr. James R. White, Director, Tax Issues, 

U.S. Government Accountability Office. 

Representative RAMSTAD. Again, I would remind the witnesses of 

the 5-minute rule and look forward to your testimony. 

Please, Mr. George. 

STATEMENT OF J. RUSSELL GEORGE, TREASURY INSPECTOR 

GENERAL FOR TAX ADMINISTRATION 

Mr. GEORGE. Thank you, Mr. Chairman. Mr. Chairman, members of the joint review, thank you for the opportunity to testify 

today. 

As you know, the IRS Restructuring and Reform Act of 1998, or 

RRA 98, originally called for this hearing. I believe this hearing 

serves a valid purpose in bringing many different congressional 

committees up to date on the progress the IRS has made in achieving the goals established in its strategic plan. 

And as an aside, Mr. Chairman, I served as the Staff Director 

of Steve Horn’s subcommittee back when this legislation first required these hearings, and attended the first ones, and so for me 

it is a particular pleasure to be back. 

TIGTA conducts audits of the areas covered by the strategic plan 

and provides recommendations on how this plan can be achieved. 

33 

My testimony will share some of the results of these audits. I hope 

it provides this panel with a more complete picture of the progress 

the IRS has made and the challenges it faces as it attempts to implement the strategic plan. 

One of the most important and persistent challenges facing the 

service is the modernization of its computer systems. This has been 

an issue for many years and will likely remain so for the foreseeable future. Before the current modernization program is completed, it is expected to last a total of 15 years and contractor costs 

are estimated to exceed $8 billion. 

The IRS has begun to assume more responsibility for the outcome of the modernization program. For it to succeed, the IRS 

must effectively manage contractor performance and hold poorly 

performing contractors accountable. I am concerned about the ability of the IRS to do this since we have identified weaknesses in the 

IRS’s ability to manage contracts and to implement information security measures. 

In testimony he presented last month, the Commissioner noted 

that the Service had substantially met its 2004 goals for the modernization program. While revised cost estimates and delivery 

dates were met, the IRS exceeded its original cost estimates and 

delivery dates, and the systems that were released provided less 

functionality than intended. 

I remain cautious about declaring success, based on results 

achieved in 2004, due to TIGTA’s historical perspective of the modernization effort and our familiarity with the persistent modernization challenges facing the IRS. 

One particular concern in the modernization program is in the 

area of information security. TIGTA has found that the IRS has 

implemented modernized systems without protection from common 

security vulnerabilities. These systems cost hundreds of millions of 

dollars to develop and implement, yet inadequate attention has 

been devoted to the security of these systems. As a result, sensitive 

taxpayer information remains vulnerable to attack by disgruntled 

employees and contractors. 

Modernized systems will also assist the IRS with its strategic 

goal of improving taxpayer service. Providing quality customer 

service influences the ability and desire of taxpayers to comply voluntarily with the tax law. 

Since the passage of the law, the IRS has been more responsive 

to taxpayers’ needs. The increased attention to customer service 

has caused taxpayer satisfaction rates to rise. Although the IRS is 

striving to reach its goal in the customer service area, it must 

avoid enhancing enforcement to the detriment of customer service. 

For example, the IRS recently announced plans to close about 68 

to 70 of the approximately 400 Taxpayer Assistance Centers it has 

nationwide. These centers provide face-to-face services to taxpayers 

with questions about their accounts or the tax law. 

TIGTA is currently reviewing the methodology used to select 

which centers to close. At this point, I believe better data is needed 

to assess the impact that closing these centers will have on customer service. I am concerned that the IRS has insufficient data to 

draw conclusions on the likelihood that taxpayers who have used 

34 

these centers in the past are willing or able to use other methods 

of seeking help. 

In addition to providing customer service to American taxpayers, 

the IRS must effectively administer the Tax Code. Each filing season tests the IRS’s ability to coordinate tax law changes, program 

activities and resources. I am pleased to report that our audits thus 

far indicate that the 2005 tax filing season has gone well, and 

TIGTA has identified no major problems. However, the implementation of certain tax law provisions could be improved. 

For example, the IRS needs to do a better job handling the accounts of taxpayers who serve our country in combat zones. Military personnel who are serving in combat zones are entitled to certain tax benefits, such as the ability to file late, not be audited and 

have collection action suspended. 

TIGTA has found that when the IRS attempted to update the tax 

accounts of military personnel who have entered or exited a combat 

zone, the IRS did not identify and correct errors that resulted from 

missing information or mismatches between names and Social Security numbers of the personnel. As a result, our men and women 

in uniform who are currently serving in combat zones may not be 

receiving the tax benefits they deserve. 

Conversely, taxpayers who are no longer serving in combat zones 

may still be receiving special tax treatment to which they are not 

entitled. In fact, we found that over 58 percent of taxpayers with 

an active combat zone indicator on their tax accounts appeared to 

be no longer serving in a combat zone. 

The point is that the IRS needs to better identify who is and who 

is not serving in a combat zone. We have recommended that the 

Service work with the Department of Defense to fix this problem. 

One last issue I want to raise today is potential changes to the 

Reform Act. In my written testimony, I have requested that Congress consider amending the law to reflect changes in the tax administration environment since the law was passed. To promote efficiency and ensure that TIGTA’s resources are effectively allocated, I respectfully request that Congress consider the issue presented in my submitted testimony. 

Thank you, Mr. Chairman and members of the joint review. I 

will be happy to answer any questions you may have at the appropriate time. 

Representative RAMSTAD. Thank you, Mr. George. 

[The statement of Mr. George follows:] 

WRITTEN TESTIMONY OF J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL FOR

TAX ADMINISTRATION

Mr. Chairman and Members of the Joint Review, thank you for the opportunity 

to participate in this discussion of the strategic plan and budget request for the Internal Revenue Service (IRS). The IRS strategic plan consists of three primary 

goals: 

• Improve taxpayer service; 

• Enhance enforcement of the tax law; and, 

• Modernize the IRS through its people, processes, and technology. 

Commissioner Everson has indicated that this strategic plan provides a roadmap 

for IRS operations over the next five years, and that the guiding principle for the 

35 

1 Internal Revenue Service, Pub. 3744, IRS Strategic Plan 2005–2009 (Rev. 2004). 

2The CADE project is the foundation for managing taxpayer accounts in the IRS modernization plan. 3The tax return filing season is the period from January through mid-April when most individual income tax returns are filed. 4The IRS has initiated the National Research Program to measure taxpayers’ voluntary compliance, to better approximate the tax gap, and to develop updated formulas to select noncompliant returns for examination. The first phase of this program addresses reporting compliance for 

individual taxpayers, and data from this phase were used to produce the recently updated estimates of this portion of the tax gap. 5The PRIME contractor, Computer Sciences Corporation, is the principal contractor responsible for modernizing IRS business systems. 6These special services include processing installment agreement requests; providing Employee Plans/Exempt Organization letter rulings, opinion letters, determination letters, and advisory letters; providing IRS Counsel rulings; processing Offer-In-Compromise applications; and 

providing copies of tax returns. 7Treasury Inspector General for Tax Administration, Ref. No. 2002–30–055, Federal Requirements Need Strengthening at Lockbox Banks to Better Protect Taxpayer Payments and Safeguard Taxpayer Information (2002); Treasury Inspector General for Tax Administration, Ref No. 

2004–20–0063, Insufficient Contractor Oversight Put Data and Equipment at Risk (2004). 8Pub. L. No. 105–206, 112 Stat. 685 (codified as amended in scattered sections of 2 U.S.C., 

5 U.S.C. app. 3, 16 U.S.C., 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C., 31 U.S.C., 38 U.S.C., 

and 49 U.S.C.). 

IRS, Service + Enforcement = Compliance, relates his goal for striking the right balance necessary to achieve compliance and address the tax gap. 1

The IRS deserves credit for its considerable accomplishments in fiscal year (FY) 

2004. For example, the IRS processed approximately 224 million tax returns and 

collected over $2 trillion in FY 2004. Enforcement revenue collected increased by 

over 15 percent to more than $43 billion. The IRS implemented the first release of 

the Customer Account Data Engine (CADE) modernization project, 2 which processed over a million tax returns during the 2005 filing season. 3 Furthermore, the 

completion of the initial phases of the National Research Project allowed the IRS 

to recently release an updated estimate of the tax gap. 4

However, in the midst of these accomplishments, the IRS faces some significant 

challenges. The IRS’ updated estimates of the tax gap, which is defined as the difference between what taxpayers are supposed to pay and what is actually and timely paid, have risen to between $312 and $353 billion annually. These figures are 

alarmingly high and indicate a significant threat to our nation’s tax system. 

Although enforcement revenue has increased, gross accounts receivable grew by two percent in 2004 to an historical high of $285 billion. Cost increases and schedule delays continue to occur in business systems modernization, even though the 

number of projects under development has been reduced. Additionally, security 

vulnerabilities persist in existing IRS systems, and are even present in modernized 

systems developed by the IRS and the PRIME contractor. 5

The proposed budget for FY 2006 provides additional resources to IRS enforcement in order to narrow the tax gap. However, the IRS has proposed cuts to customer service to offset a portion of the funding that is being redirected towards enforcement. I have some concerns about these decisions, which I discuss later in this 

testimony. 

One aspect of the budget that the Treasury Inspector General for Tax Administration (TIGTA) is currently evaluating is the IRS’ application of user fees to taxpayers 

who seek special services. 6 Opportunities may exist to charge a more accurate 

amount for these services, which would help offset operating costs. In addition, last 

year Congress authorized the IRS to use private collection agencies to collect taxes. 

Once the IRS implements this program, more outstanding taxes should be collected. 

TIGTA will be vigilant in overseeing the IRS’ use of these contractors to ensure that 

abuses do not occur. Past experiences with bank lockbox thefts and insufficient contractor oversight have provided invaluable lessons to help prevent similar issues 

from plaguing the collection of tax debt. 7

I will also address the progress the IRS has made and the challenges it faces in 

the security and modernization of IRS information systems, the tax filing season, 

customer service, and implementation of the various provisions of the IRS Restructuring and Reform Act of 1998 (RRA 98). 8 TIGTA has performed extensive work in 

these areas, and I appreciate the opportunity to highlight our results. 

INFORMATION SYSTEMS SECURITY

In the area of information systems security, the IRS has developed security policies and procedures but has not implemented them effectively or consistently. As a 

result, sensitive information remains vulnerable to attack by disgruntled employees 

36 

9Government Accountability Office, Pub. No. GAO–05–482, Information Security: Internal 

Revenue Service Needs to Remedy Serious Weaknesses over Taxpayer and Bank Secrecy Act 

Data (2005). 10Treasury Inspector General for Tax Administration, Ref. No. 2004–20–081, Key Security 

Controls of the Criminal Investigation Management Information System Have Not Been Implemented (2004); Treasury Inspector General for Tax Administration, Ref. No. 2005–20–069, Security Controls for the Appeals Centralized Database System Could Be Improved (2005); Treasury 

Inspector General for Tax Administration, Ref. No. 2005–20–036, Security Controls for the 

Counsel Automated System Environment Management Information System Could Be Improved 

(2005). 11Treasury Inspector General for Tax Administration, Ref. No. 2004–20–135 Security Weaknesses in the Modernization Infrastructure Have Not Been Adequately Addressed (2004); Treasury Inspector General for Tax Administration, Ref. No. 2005–20–024, The Disaster Recovery 

Program Has Improved, but It Should Be Reported as a Material Weakness Due to Limited Resources and Control Weaknesses (2005). 12Treasury Inspector General for Tax Administration, Ref. No. 2004–20–135 The Audit Trail 

System for Detecting Improper Activities on Modernized Systems Is Not Functioning (2004). 13These vulnerabilities are discussed in further detail in limited official use audit reports provided to the IRS. See Treasury Inspector General for Tax Administration, supra note 10. 

and contractors. While recognizing that complete security can never be achieved and 

that there are necessary trade-offs between security and operational needs, TIGTA 

continues to identify significant weaknesses in infrastructure and applications security. 

Although TIGTA is not aware of a successful intrusion into the IRS network from 

an external source, such as the Internet, TIGTA investigations have led to two significant prosecutions for computer intrusions. One case involved an IRS contractor 

who installed on a large database server malicious code that was designed to destroy the information on the system. The second case involved an IRS contractor 

that illegally accessed and compromised several large servers in an IRS computing 

center. In both cases, although no taxpayer data was immediately at risk, IRS contractors were responsible, which highlights the fact that the greatest threat to IRS 

systems is from internal sources such as disgruntled employees or contractors. 

The Government Accountability Office (GAO) recently issued a report documenting weaknesses in controls to prevent, limit, or detect unauthorized access to 

taxpayer and Bank Secrecy Act data from the IRS’ internal network.9 Recent TIGTA 

reviews of access controls over taxpayer data in IRS’ Criminal Investigation function, Appeals office, and Office of Chief Counsel have noted similar exposures to unauthorized access.10

I am particularly concerned with weaknesses TIGTA has identified in the systems 

developed as part of the modernization program. We found that modernized systems 

had been implemented without protection against common security vulnerabilities. 

For example, computers were running unnecessary high-risk applications, systems 

were implemented without disaster recovery capability, and computer configurations 

did not meet IRS standards.11 These systems cost hundreds of millions of dollars 

to develop and implement, yet the security of these systems has not received adequate attention. The IRS will have to correct these security deficiencies after the 

systems are already running; however, it is much more costly and complex to retrofit systems after-the-fact than to install security features in the design and development of the systems. 

For example, the IRS paid the PRIME contractor to develop a system that tracked 

the activity of users on modernized systems. What is troubling is that the IRS accepted this system in late 2002 despite knowing that the system could not be used 

for the purpose for which it was designed.12 Software vulnerabilities and performance issues rendered it basically useless for identifying unauthorized accesses to 

IRS systems. After more than two years, the IRS still has not completed corrective 

actions to address these weaknesses and ensure that monitoring of user activity occurs on the modernized systems currently operating. 

Additionally, while security roles and responsibilities have been defined, significant security weaknesses exist throughout the IRS because IRS employees with key 

security responsibilities are not fulfilling their duties. For example, TIGTA has identified vulnerabilities on the network and in sensitive systems across the IRS.13 IRS 

employees have not consistently assessed and accredited the security controls 

present on their systems. The IRS has initiated actions to improve the training of 

its key security employees, and we will continue to monitor whether employees receive proper training in this complex area. 

Although electronic access controls can help prevent some security breaches, it is 

also critical to ensure employees are aware of their individual security responsibilities to protect taxpayer data from unauthorized access. When TIGTA auditors posing as IRS Information Technology employees recently called IRS employees and 

37 

14Treasury Inspector General for Tax Administration, Ref. No. 2005–20–042, While Progress 

Has Been Made, Managers and Employees Are Still Susceptible to Social Engineering Techniques (2005). 15Prior to the BSM program, the IRS initiated the Tax Systems Modernization (TSM) program. The purpose of TSM was the same as the purpose of BSM: to modernize the IRS’ technology and related business processes. The TSM program, however, encountered management 

and technical weaknesses. After spending over $3 billion on TSM, the program was abandoned 

and the BSM program was initiated. 16 In conjunction with other applications, the CADE will eventually allow employees to post 

transactions and update taxpayer account and return data online from their desks. Updates will 

be immediately available to any employee who accesses the data and will provide a complete, 

timely, and accurate account of taxpayer information. In contrast, the current Master File processing system can take up to two weeks to update tax accounts, and IRS employees may need 

to access several computer systems to gather all relevant information related to tax accounts. 17The Master File is the IRS database that stores various types of taxpayer account information. This database includes individual, business, and employee plans and exempt organizations 

data. 18Form 1040EZ is the income tax return used by some single and joint filers with no dependents. The initial release of the CADE does not process Forms 1040EZ for joint filers. 

managers, 35 percent of them were willing to provide their user account names and 

change their passwords as requested.14 With an employee’s user account name and 

password, a hacker could gain access to IRS systems, though the IRS’ strong systemic perimeter controls lessen this risk. Even more significant, a disgruntled employee could use the same social engineering tactics and obtain another employee’s 

username and password. With some knowledge of IRS systems and applications, 

this disgruntled employee could more easily gain unauthorized access to IRS data 

as well as damage information on IRS systems. 

Although many steps have been taken to limit risks, IRS systems and taxpayer 

information remain susceptible to threats that could impact the confidentiality, integrity, and availability of data and information systems. 

BUSINESS SYSTEMS MODERNIZATION

Modernizing the IRS’ computer systems has been a persistent challenge for many 

years and will likely remain a challenge for the foreseeable future. The latest effort 

to modernize the IRS’ systems, the Business Systems Modernization (BSM) program, began in FY 1999.15 The purpose of the BSM program is to modernize the 

IRS’ technology and related business processes. The BSM program is a complex effort which will involve integrating thousands of hardware and software components. 

All of this must be done while replacing outdated technology and continuing tax administration. 

This effort will be lengthy and costly. It is estimated to last up to 15 years, and the IRS will incur PRIME contract costs over $8 billion. The program is in its seventh year and has been allocated approximately $1.9 billion in funding for contractor activities. The IRS has further supported the modernization effort by funding the Business Systems Modernization Office (BSMO) with $213 million since FY 

1999. 

Key projects have made significant progress during the past year 

Working with its contractors, the IRS has deployed projects that provide value to 

taxpayers and has built the infrastructure needed to support these projects. Two 

BSM projects have been deployed and delivered value to taxpayers in the past year: 

the Customer Account Data Engine (CADE) and the Modernized e-File (MeF) 

project. The CADE project is the foundation for managing taxpayer accounts in the 

IRS modernization plan.16 Once completed, CADE will consist of databases and related applications to replace the IRS’ existing Master File processing systems.17 In 

July 2004, the IRS delivered CADE Release 1.1 which successfully processed refund 

and even-balance Forms 1040EZ 18 for single taxpayers with no pending tax issues. 

CADE Release 1.2 incorporated the tax law changes for the 2005 filing season and 

started processing the same type of tax returns in January 2005. It has processed 

over 1 million tax returns during the 2005 filing season. 

The MeF project involves developing a modernized, web-based platform for electronically filing approximately 330 different IRS forms. The MeF deployed three releases from February 2004 to January 2005, which allow for the electronic filing of 

over 100 different tax forms, including forms filed by corporations and exempt organizations. 

In addition, the IRS and its contractors issued the first release of the Integrated 

Financial System (IFS), which provides new capabilities for internal use. The IFS 

was developed to address administrative financial management weaknesses in IRS 

accounting systems. The first release of the IFS became fully operational in January 

38 

19The F&PC project was intended to provide support for detecting, scoring, and working 

nonfiler cases (filing compliance) and delinquency cases (payment compliance). The first release 

of the F&PC project is called the Private Debt Collection project. The IRS completed the planning phases for the Filing and Payment Compliance project in 2002, but suspended the project 

due to concerns with costs. In FY 2004, the portion of this project designed to support private 

debt collection was restarted. 20The CAM project is intended to provide improved technology and business processes to provide account and tax law assistance, manage case workflow, and support other modernization 

efforts by providing access to comprehensive, timely, and accurate taxpayer account information. 21The IRS reported that the data models developed for CAP can be used on the CADE project, 

and the CAP analysis and requirements can be used as the basis for a new system. 22For example, contract award justifications did not always provide adequate detail for not 

using firm fixed-price contract provisions. Contracting provisions that could balance risk between the IRS and the contractor were used inconsistently. Additionally, consistent application 

of best practices could further improve the contract negotiations process. Treasury Inspector 

General for Tax Administration, Draft, Audit No. 200420002, While Many Improvements Have 

Been Made, Continued Focus Is Needed to Improve Contract Negotiations and Fully Realize the 

Potential of Performance-Based Contracting (2005). 23Treasury Inspector General for Tax Administration, Ref. No. 2004–20–157, The Office of Release Management Can Improve Controls for Modernization Program Coordination (2004). 24Treasury Inspector General for Tax Administration, Ref. No. 2004–20–147, the Integrated 

Financial System Project Team Needs to Resolve Transition Planning and Testing Issues to Increase the Chances of a Successful Deployment (2004). 25Treasury Inspector General for Tax Administration, Ref. No. 2005–20–019, System Requirements Were Not Adequately Managed During the Testing of the Custodial Accounting Project 

(2004). 26Draft audit report has not yet been issued. 

2005, and included accounts payable, accounts receivable, general ledger, budget 

execution, cost management, and financial reporting activities. A future IFS release 

was planned to include property, performance, and procurement management, but 

work was suspended in early 2005 due to budget constraints. Without this future 

release, the IRS will be unable to fully address a material weakness in its accounting systems. 

Budget reductions have resulted in decreased development activities 

During FY 2004, the IRS scaled back development activities because of reduced 

appropriations. The available budget caused the IRS to limit its development activity to focus primarily on the CADE, MeF, and the Filing and Payment Compliance 

(F&PC) 19 projects. For example, the schedule for the CADE project has been revised 

several times to accommodate development delays and uncertainty in program direction. The refocus of the CADE project impacts related modernization activity 

such as the Customer Account Management (CAM) project.20 The CAM project is 

intended to improve customer service by providing more accurate and timely account maintenance and analysis. The uncertainty of CADE’s development, along 

with reductions in available funding, affect when CAM can be developed. Without 

an application such as CAM, CADE can only act as a system to process tax returns 

that require no account adjustments. 

In addition, the budget reduction prompted the IRS to suspend further development of the IFS project and cancel the Custodial Accounting Project (CAP). Canceling CAP made the initial releases unusable for its intended purpose of performing 

accounting work. The IRS has indicated it will leverage the work products and 

knowledge gained from CAP in other modernization initiatives. While leveraging 

may produce some residual benefits, a significant portion of the $135 million spent 

on CAP will result in unrecoverable costs.21

Weaknesses remain in certain areas of BSM program management 

TIGTA has also identified weaknesses in the BSMO, which is responsible for the 

overall management of the BSM program. These weaknesses are in the following 

areas: requirements management, contract management, software testing, and security controls. To address issues in requirements management, the IRS established 

a Requirements Management Office in January 2005. The Office is responsible for 

developing processes and procedures to effectively create and manage project requirements. Weaknesses in contract management have resulted from the BSMO 

failing to consistently use contract provisions and negotiations that would protect 

the best interest of the Federal Government.22 In the area of software testing, the 

BSMO needs to clearly define testing procedures,23 improve testing practices,24 and 

ensure that software is tested prior to system deployment.25 Finally, the BSMO 

needs to place additional emphasis on security controls in the design of information 

systems.26

39 

27The annual BSM program assessments are required by RRA 98. 28Government Accountability Office, Pub. No. GAO–05–207, High-Risk Series (2005). 29 It is worth noting that GAO also identified the Tax Systems Modernization program, which 

preceded the BSM program, as a high-risk area. 30The e-Services project focuses on changing the way taxpayers transact and communicate 

with the IRS. This web-based project expands the existing third-party tools and data collection 

processes. 

Cost increases and schedule delays continue 

Since the start of the modernization effort, the BSM program has experienced cost 

overruns and schedule delays in its project development and deployment. In early 

2005, the IRS reported project deliveries were within budget and schedule estimates 

for projects delivered since August 2004. This assessment was based on cost and 

schedule estimates that the IRS revised in May 2004. 

Our analysis of the re-baselined project deliveries confirms the IRS’ assessment 

that project releases were generally within budget and on schedule. However, our 

comparison of the May 2004 and February 2005 IRS BSM expenditure plan estimates shows significant project cost and schedule increases for several ongoing 

projects, such as MeF and F&PC. 

The division of responsibilities between the IRS and the PRIME contractor 

In February 2004, Commissioner Everson testified that the IRS would carefully 

assess the PRIME contractor’s performance on current projects. The Commissioner 

would consider the results of the PRIME contractor’s overall program management 

and integration efforts before awarding additional work. 

In January 2005, the IRS began assuming the role of systems integrator from the 

PRIME contractor due to reductions in funding and concerns about the adequacy 

of the PRIME contractor’s performance. In the IRS’ new operating model as the systems integrator, the IRS will now be responsible for program-level activities such 

as: 

• Systems integration; 

• Business requirements management and validation; 

• Procurement administration; 

• Engineering; and, 

• Architecture. 

Skills needed to perform these responsibilities have been an issue of concern. Specialized skill positions, such as systems architects and engineers, have been difficult 

to fill. The assumption of the integrator role by the IRS is recognized in the BSM 

program as part of its highest priority needs. 

TIGTA has found that the BSM program has begun to assign the role of systems 

integrator to parties other than the PRIME contractor. For example, the BSMO 

acted as the integrator for the MeF project, and the Northrop Grumman Corporation served as the integrator for CAP before it was cancelled. The PRIME contractor’s new primary function is to deliver projects and to provide support services to 

the IRS. On new projects, the PRIME contractor will compete for the contracts with 

other contractors. The effective management of contractor performance and accountability will become even more important and difficult for the IRS as it now functions 

as the systems integrator for all contractors. 

Previously reported challenges still exist 

During the past three fiscal years, our annual BSM program assessments 27 have 

cited four primary challenges the IRS and its contractors must meet to achieve program success: 

1) Implement planned improvements in key management processes and commit 

necessary resources to enable success; 

2) Manage the increasing complexity and risks of the BSM program; 

3) Maintain the continuity of strategic direction with experienced leadership; and, 

4) Ensure contractor performance and accountability are effectively managed. 

While the IRS has taken steps to address these areas, continued attention by 

management will be required for the IRS to succeed with its modernization activities. The GAO has also recognized the need for continued management attention 

and has included the modernization program as a high-risk area in its 2005 HighRisk Report,28 as it has since 1995.29

Commissioner Everson testified in April 2005 that the IRS substantially met its 

2004 plans for the BSM program based on the delivery of the planned CADE, MeF, 

e-Services,30 and IFS project releases. Although these releases were operational on 

or close to revised cost estimates and delivery dates, they exceeded original cost estimates and delivery dates and did not provide all intended systems capabilities. We 

40 

31 American Customer Satisfaction Index, ‘‘ACSI Overall Federal Government Scores with Historic Scores of Agencies Measured 1999–2004,’’ December 14, 2004. 32Taxpayer Assistance Centers are walk-in sites where taxpayers can get answers to both account and tax law questions and receive assistance with return preparation. We audited the accuracy of tax law answers given to taxpayers at these Centers and determined that the accuracy 

rate had increased from 54 to 67 percent from January 2002 to April 2004. Treasury Inspector 

General for Tax Administration, Ref. No. 2004–30–038, Access to the Toll-Free Telephone System Was Significantly Improved in 2003, but Additional Enhancements Are Needed (2004); 

Treasury Inspector General for Tax Administration, Ref. No. 2005–40–021, Customer Service at 

the Taxpayer Assistance Centers Is Improving But Is Still Not Meeting Expectations (2004). 33 Internal Revenue Service, IRS.gov Cited As Most Reliable Government Web Site, IR–2004– 

131, available at http://www.irs.gov/newsroom/article/0,,id=130492,00.html (last visited May 10, 

2005). 34 Internal Revenue Service, Free File Tops Last Year’s Total, IR–2005–36, available at http:// 

www.irs.gov/newsroom/article/0,,id=137055,00.html (last visited May 10, 2005). 

remain cautious about declaring success based on results achieved in 2004 due to 

our historical perspective of the modernization effort and our familiarity with the 

persistent modernization challenges facing the IRS. 

CUSTOMER SERVICE

To assist taxpayers in complying with the complex tax code, the IRS offers assistance through its toll-free telephone system, walk-in services, and written and electronic communications, including the IRS Web site: www.IRS.gov. The effectiveness 

of each of these services influences a taxpayer’s ability and desire to comply voluntarily with tax laws. 

RRA 98 mandated that the IRS be more responsive to customer needs. Since the 

passage of RRA 98, the IRS’ focus on customer service has led to many improvements. Individual taxpayer satisfaction rates with the IRS have increased since the 

law’s passage, rising from 51 to 64 percent between 1999 and 2004.31 The ability 

of taxpayers to contact the IRS via telephone has improved, and customer service 

at the Taxpayer Assistance Centers (TACs) has shown progress.32

The IRS internet site, www.IRS.gov, is an excellent source for forms, publications, 

and other guidance, and taxpayers visited the site over 139 million times last year. 

The site also received an award for being the nation’s most reliable government 

internet site.33 Electronic filing of tax returns is continuing to grow, and the ability 

to check the status of tax refunds online has been a successful IRS project that is 

helpful to taxpayers.34

The following chart shows the customer service goals established by the IRS and 

the actual results in each area as measured by the IRS and TIGTA. 

41 


Insert graphic folio 64 23854A.044
42 

45Treasury Inspector General for Tax Administration, Ref. No. 2003–40–092, Opportunities 

Exist to Expand the Telefile Program (2003). 46Treasury Inspector General for Tax Administration, Draft, Audit No. 200440047, Forms, 

Publications, and Computer Programming Requests Were Adequately Addressed and Updated 

in Most Instances for the 2005 Filing Season (2005). 47Treasury Inspector General for Tax Administration, Ref. No. 2005–40–016, The 2004 Filing 

Season Was Completed Timely and Accurately, but Some Tax Law Changes Have Not Been Effectively Implemented (2004). 48Treasury Inspector General for Tax Administration, Ref. No. 2005–40–077, Taxpayers Identified As Serving in Combat Zones Were Properly Afforded Tax Benefits, but Account Identification and Maintenance Processes Need Improvement (2005). 

Although the IRS is striving to reach its goals in the customer service area, I am 

concerned about plans to reduce customer service in order to provide more funding 

for enforcement initiatives. The IRS recently announced plans to close a significant 

percentage of the TACs, which are the sites that provide face-to-face services to taxpayers. As part of a planned audit, we will review the methodology used by the IRS 

to determine which TACs to close. At this point, I am skeptical that the IRS has 

adequate data to assess the impact that closing these centers will have on customer 

service. I am also concerned that the IRS has insufficient data to draw conclusions 

on the likelihood that taxpayers, who have used these centers in the past, will be 

able to use other methods of seeking help, such as the internet or telephone. I 

strongly recommend that the IRS further research these issues before closing selected TACs. 

Additionally, the IRS has decided to cancel the Telefile project. In 2003, TIGTA 

recommended that the IRS explore other opportunities to expand—not cancel—the 

Telefile program.45 We continue to believe the Telefile program provides services to 

millions of taxpayers and is worth pursuing. However, the IRS has decided to discontinue the Telefile program after the 2005 filing season citing as reasons high 

costs, low demand, and the increased availability of e-filing options. If the IRS follows through with its decision to discontinue the Telefile program, it should at least 

develop a strategy to accommodate Telefilers who are unable to e-file. 

FILING SEASON

In addition to providing customer service to American taxpayers, the IRS must 

coordinate tax law changes, programs, activities, and resources to effectively plan 

and manage each filing season. The tax return filing season impacts every American 

taxpayer and its success affects the entire Federal Government. 

I am pleased to report that the 2005 Filing Season has gone well, and TIGTA has 

identified no major problems. As of April 29, 2005, the IRS had received approximately 121.1 million individual income tax returns with over 66 million filed electronically, an increase of nearly 11 percent compared to the same period last year. 

Additionally, 88 million refunds had been issued, averaging $2,127 per return. Of 

the total refunds, 50 million were issued using the direct deposit option. 

Our audit work for the 2005 filing season is currently in progress, but preliminary 

results indicate that most tax forms and publications were accurately updated to reflect tax law changes. TIGTA found some errors, however, in publications regarding 

the calculation of the child tax credit for certain military personnel.46

The IRS, though, continues to struggle to ensure certain tax law provisions have 

been accurately implemented.47 For example, during the 2004 filing season, the IRS 

did not recover $21 million in overpayments of advanced child tax credits. Additionally, approximately $152 million in advanced child tax credits remained unclaimed 

by taxpayers. Taxpayers also continued to receive erroneous deductions for student 

loan interest and were inappropriately allowed both education credits and deductions for tuition and fees. As a result, over $3.3 million in taxes was not paid. These 

same issues continued in the 2005 filing season. 

Another issue that the IRS has not effectively addressed is ensuring the appropriate handling of accounts of taxpayers with combat zone indicators.48 Over 58 percent of the taxpayers with an active combat zone indicator were incorrectly coded 

(i.e., the taxpayers were no longer serving in a combat zone). This allows taxpayers 

to receive special tax treatment to which they are no longer entitled, such as the 

ability to file late, not be audited, and have collection action suspended. 

The IRS was also not identifying and correcting errors that were created when 

attempting to update the tax accounts of military service members who had entered 

or exited a Combat Zone. These errors could occur for various reasons, such as missing information or mismatches between names or Social Security Numbers. As a result, taxpayers who are serving in a Combat Zone may not have indicators on their 

accounts and would be at risk of not getting the Combat Zone benefits they deserve. 

43 

49TIGTA’s Office of Investigations is evaluating these cases. 50Treasury Inspector General for Tax Administration, Ref. No. 2004–30–094, Additional Efforts Are Needed to Ensure Taxpayer Rights Are Protected When Manual Levies Are Issued 

(2004). 51See 26 U.S.C. §7803(d)(1) (2005). 52Treasury Inspector General for Tax Administration, ref. no. 2004–40–066, fiscal year 2004 

statutory audit of compliance with legal guidelines restricting the use of records of tax enforcement results (2004). 53See 26 U.S.C. § 6321 (2005). 

The IRS did not keep records of errors resulting from mismatches or missing information, which prevented TIGTA from determining the extent of this condition. 

TIGTA has reported these findings to the IRS and will continue to monitor whether 

this and other filing season recommendations have been implemented. 

THE IRS RESTRUCTURING AND REFORM ACT OF 1998

RRA 98 included significant structural changes in management and oversight of 

the IRS, as well as provisions to strengthen and enhance the rights of taxpayers. 

Since the enactment of RRA 98, TIGTA has performed a series of audits to determine the IRS’ progress in implementing and ensuring compliance with these provisions. The law requires TIGTA to review 10 taxpayer rights provisions, as well as 

two other taxpayer rights provisions from prior legislation. TIGTA is currently assessing the IRS’ compliance with these provisions for the seventh consecutive year. 

Our most recent audit results on these taxpayer rights provisions are as follows: 

• Notice of levy—RRA 98 requires the IRS to notify taxpayers at least 30 days 

before initiating any levy action to give taxpayers an opportunity to formally appeal 

the proposed levy. Prior TIGTA reports have recognized that the IRS has implemented tighter controls over the issuance of systemically generated levies. Our testing of these controls indicates that they continue to function effectively. 

However, revenue officers sometimes issue to taxpayers levies that are not systemically generated. In 5 of 40 cases reviewed, we determined that revenue officers 

seized taxpayer assets using manual levies without notifying taxpayers of their appeal rights. Without notification of their appeal rights, taxpayers may not be aware 

that they are entitled to a hearing or other due process safeguards. Not offering appeal rights to taxpayers prior to issuing levies is a potential section 1203 violation 

of RRA 98 and could result in the revenue officer being terminated for misconduct.49

We recommended that the IRS require managers to review and approve all manual 

levies prepared by revenue officers in order to ensure taxpayers are properly advised 

of their appeal rights.50

• Restrictions on the use of enforcement statistics to evaluate employees—Section 

1204(a) of RRA 98 prohibits the IRS from using tax enforcement results to evaluate 

employees or to impose or suggest production quotas or goals. Section 1204(b) requires employees to be evaluated using the fair and equitable treatment of taxpayers as a performance standard. Section 1204(c) requires supervisors to certify 

quarterly whether tax enforcement results were used in a prohibited manner. 

TIGTA is required to evaluate annually the IRS’ compliance with section 1204.51

Our review of performance and supervisory documentation for 75 enforcement employees found the IRS in compliance with sections 1204(a) and (b). In addition, a 

review of a statistical sample of 43 supervisors’ certifications indicated that the IRS 

was in compliance with section 1204(c).52

• Notice of lien—The IRS attempts to collect Federal taxes from taxpayers by 

sending letters, making telephone calls, and meeting face-to-face with taxpayers. 

When initial contacts by the IRS do not result in the successful collection of unpaid 

taxes, the IRS has the authority to attach a claim to the taxpayer’s assets for the 

amount of unpaid tax liabilities.53 The IRS files a Notice of Federal Tax Lien 

(NFTL), which notifies the public that a lien exists. Since January 19, 1999, section 

6320 of the Internal Revenue Code has required the IRS to notify taxpayers in writing within five business days of filing an NFTL. 

We determined the IRS did not completely comply with the law. A statistically 

valid sample of 150 NFTLs identified 7 NFTLs (4.7 percent) for which the IRS did 

not mail lien notices within five business days. In addition, we could not determine 

if the IRS complied with the law for 35 NFTLs (23.3 percent) because it could not 

provide proof of timely mailing. Finally, in 11 of the 150 NFTLs reviewed (7.3 percent), the IRS did not follow its own internal guidelines when issuing lien notices, 

44 

54Treasury Inspector General for Tax Administration, draft, audit no. 200430026, fiscal year 

2005 statutory review of compliance with lien due process procedures (2005). 55Treasury Inspector General for Tax Administration, draft, audit no. 200430025, FY 2005 review of compliance with legal guidelines when conducting seizures of taxpayers’ property (2005). 56The Internal Revenue Manual is the single official source for IRS policies, directives, guidelines, procedures and delegations of authority in the IRS. 57Draft audit report has not yet been issued. 58Treasury Inspector General for Tax Administration, ref. no. 2003–40–098, fiscal year 2003 

statutory audit of compliance with legal guidelines prohibiting the use of illegal tax protester 

and similar designations (2003). 59Treasury Inspector General for Tax Administration, ref. no. 2004–40–108, fiscal year 2004 

statutory audit of compliance with notifying taxpayers of their rights when requested to extend 

the assessment statute (2004). 60 5 U.S.C. § 552(b)(7) (2005). 61 5 U.S.C. § 552a (2005). 62Treasury Inspector General for Tax Administration, ref. no. 2004–40–064, improvements are 

needed to ensure compliance with the freedom of information act (2004). 

including the guidelines for notifying taxpayer representatives and resending notices when they are returned as undeliverable.54

• Seizures—To ensure taxpayers’ rights are protected, RRA 98 amended the 

property seizure provisions in sections 6330 through 6344 of the Internal Revenue 

Code. Our review of a random sample of 50 of 375 seizures conducted between July 

1, 2003, and June 30, 2004, determined that the IRS did not comply with all legal 

and internal guidelines when conducting seizures. We identified 17 instances in 12 

seizures in which the IRS did not fully comply with the law. For example, in seven 

instances all required forms relating to the sales of seized property were not provided to taxpayers, and in two instances proceeds resulting from seizures were not 

properly applied to taxpayer accounts. Although the instances we identified were 

technical in nature and did not adversely affect the taxpayers involved, not following legal and internal guidelines could result in abuses of taxpayer rights.55

• Illegal Tax Protestor (ITP) designations—Section 3707 of RRA 98 prohibits the 

IRS from referring to taxpayers as ITPs or any similar designations. The IRS has 

not reintroduced past ITP designations on the Master File, and formerly coded ITP 

taxpayer accounts have not been assigned similar Master File designations. In addition, the IRS does not have any current publications with ITP references and has 

initiated actions to remove ITP references from the various forms of the Internal 

Revenue Manual.56

However, in 309 isolated instances, IRS employees continued to make references 

to taxpayers as ITPs and other similar designations in case narratives.57 TIGTA 

raised this issue in our FY 2003 report; however, the IRS disagreed with our determination that compliance with this provision prohibits IRS employees from using 

such designations in case narratives.58

• Assessment statute of limitations—The IRS is required to advise taxpayers of 

their rights when the IRS requests an extension of the statute of limitations on the 

assessment of additional tax and penalties. TIGTA found that 21 percent of the case 

files reviewed did not contain any documentation to support that taxpayers had 

been advised of their rights. In instances in which taxpayers filed a joint tax return, 

47 percent of the case files did not contain any documentation that each taxpayer 

listed on the tax return was separately informed of his or her rights (i.e., dual notification). In addition, when a taxpayer made a declaration of representation, 40 percent of the case files did not contain any documentation that the IRS provided both 

the taxpayers and their representatives with the advisement of rights. Also, current 

consent forms do not provide an explanation of taxpayer rights to limit or refuse 

to extend the statute of limitations. 

Although the IRS has revised its internal procedures over the last few years to 

help enhance controls, our reviews continue to identify instances in which there is 

no documentation that taxpayers were advised of their rights. Therefore, TIGTA recommended that the Deputy Commissioner for Services and Enforcement revise the 

various consent forms to include a statement that taxpayers have been informed of 

their rights regarding assessment statute extensions and have been provided a copy 

of Extending the Tax Assessment Period (Publication 1035).59

• Denials of requests for information under the Freedom of Information Act 

(FOIA)—Under section 1102(d)(3)(A) of RRA 98, TIGTA is required to conduct periodic audits of IRS denials of taxpayer requests to disclose information on the basis 

of Internal Revenue Code section 6103 and/or FOIA exemption (b)(7).60 In 7.1 percent (6 of 84) of the FOIA and Privacy Act 61 cases sampled, the IRS improperly 

withheld information from requestors. This represents a higher percentage of improper withholdings than reported in FY 2004, where only 4.4 percent of the requests were improperly handled.62

45 

63Treasury Inspector General for Tax Administration, draft, audit no. 200410032, some improvements have been made to better comply with freedom of information act requirements 

(2004). 64Treasury Inspector General for Tax Administration, ref. no. 2004–40–067, appeals complied 

with the provisions of the law for the collection due process (2004). 65Treasury Inspector General for Tax Administration, ref. no. 2004–40–176, restructuring and 

reform act of 1998 section 1203 allegations were properly controlled (2004). 66Treasury Inspector General for Tax Administration, ref. no. 2005–40–040, fiscal year 2005 

statutory review of restrictions on directly contacting taxpayers (2005). 67Treasury Inspector General for Tax Administration, ref. no. 2005–40–041, fiscal year 2005 

statutory review of disclosure of collection activity with respect to joint returns (2005). 68The IRS tracks potential FDCPA violations, but TIGTA cannot be certain that all violations 

are tracked. Treasury Inspector General for Tax administration, ref. no. 2005–10–051, there 

were no administrative or civil actions with respect to violations of fair tax collection practices 

in calendar year 2004 (2005). 

In addition, the IRS improperly withheld tax return information from requestors 

in 3.1 percent of the Internal Revenue Code section 6103 cases sampled. This represents a significantly lower percentage of improper withholdings than the 14.6 percent we reported last year. The percentage of untimely responses to FOIA and Privacy Act requestors also decreased significantly to 13.1 percent of the cases, as compared with percentages in previous years’ audits ranging from 20 to 43 percent.63

• Collection due process—The Appeals Officers and Settlement Officers (hearing 

officers) substantially complied with the requirements of the law when conducting 

Collection Due Process hearings. The hearing officers verified that the IRS followed 

applicable laws or administrative procedures during the lien and levy process. They 

determined if the proposed collection actions properly balanced the need for efficient 

collection of taxes with any legitimate taxpayer concerns. In addition, the hearing 

officers followed appeals procedures by including information, such as the court in 

which taxpayers must file requests for judicial review, any relief given to taxpayers, 

and any subsequent actions to be taken by the IRS and the taxpayer.64

• Section 1203 allegations—Section 1203 of RRA 98 provides the IRS Commissioner with the authority to terminate the employment of IRS employees for committing certain violations in connection with the performance of their official duties. 

The IRS Commissioner also has the sole authority to determine whether mitigating 

factors exist that weigh against termination. 

TIGTA’s Office of Investigations is responsible for the initial investigation of most 

section 1203 allegations. These include allegations related to employee false statements under oath, harassment, falsification or destruction of documents, assault or 

battery of a taxpayer, or threat of examination of a taxpayer for personal gain. 

The IRS’ process for handling section 1203 allegations ensured that they were referred for action and management responses were accounted for and addressed. The 

IRS properly controlled referred allegations and reports of investigation. In addition, 

the IRS and the section 1203 Review Board adequately controlled 141 cases forwarded to the Board for final determination during the 15-month period ending 

March 31, 2004. 

While reviewing case processing, we identified 198 cases as of March 31, 2004, 

that were open for over 180 calendar days without resolution. The IRS Labor Relations Office performed informal monthly reviews of cases over 180 calendar days old, 

but did not document their follow-up activities or reasons for the delay in the case 

histories. We identified some cases where no activity was noted or explanation given 

for the delay in resolving cases that were over 180 days old. In such cases, management oversight is needed to ensure more timely resolution of section 1203 cases to 

eliminate unnecessary stress to employees when cases are needlessly delayed.65

Neither TIGTA nor the IRS could consistently or accurately evaluate the IRS’ 

compliance with the following three provisions since IRS information systems are 

inadequate to track such cases: • Restrictions on directly contacting taxpayers and their authorized representatives; 66

• Requirements for the disclosure of collection activity with respect to joint returns; 67 and, • Fair Debt Collection Practices Act (FDCPA) violations.68

Recommended changes to RRA 98 

As Inspector General, I have a duty to ensure that TIGTA’s resources are effectively allocated to the highest priority, mission-critical work. Along those lines, I 

would like to take this opportunity to note that Congress should review certain requirements established by RRA 98 with the possibility of updating it to reflect 

changes in the IRS environment since the law was passed. The following areas in 

RRA 98 are among those I believe are appropriate for such consideration based on 

46 

69TIGTA is currently required to report each year on the IRS’ compliance with the law in 

the following areas: (1) notice of levy; (2) restrictions on the use of enforcement statistics to 

evaluate employees; (3) notice of lien; (4) seizures; (5) Illegal Tax Protestor designations; (6) extensions of the assessment statute of limitations; (7) denials of requests for information under 

the Freedom of Information Act; (8) collection due process; (9) section 1203 allegations; (10) restrictions on directly contacting taxpayers instead of authorized representatives; (11) requirements for disclosing collection activity related to joint returns; and, (12) violations of the Fair 

Debt Collection Practices Act. 70 26 U.S.C. § 7803(d)(1)(A)(ii). 71 26 U.S.C. § 7803(d)(1)(B). 72 26 U.S.C. § 7803(d)(1)(G). 73 26 U.S.C. § 7803(d)(2). 74 5 U.S.C. app. 3 (2005). 75 5 U.S.C. app. 3 § 8D(k)(1)(C). 

TIGTA’s collective experience gathered from the last seven years of performing 

these audits and investigations. 

First, I recommend changing the annual reporting requirement for evaluating the 

IRS’ compliance with various matters to a biennial requirement.69 After auditing 

the same areas for the last seven years, it has become apparent that, due to the 

frequency of these audits, there is little change in TIGTA’s findings from one year 

to the next. The IRS does not have sufficient time to implement corrective action 

before the next audit begins. Biennial reporting would provide a more meaningful 

picture of the IRS’ progress in meeting congressional expectations. 

Second, RRA 98 requires that TIGTA report on (1) the IRS’ compliance with restrictions on directly contacting taxpayers and their authorized representatives; 70

(2) the IRS’ compliance with provisions regarding the disclosure of information to 

an individual filing a joint return on collection activity involving the other individual filing the return; 71 and, (3) administrative or civil actions with respect to violations of the fair debt collection provisions.72 While I recognize the public interest 

that could be served by these requirements, TIGTA cannot conduct substantive 

audit work because IRS systems do not capture the appropriate data. In the third 

category, fair debt collection, our audit work of incomplete data has identified only 

minor and limited issues. Additionally, RRA 98 created requirements that TIGTA 

report data on allegations and complaints that are received by TIGTA and the 

IRS.73 Although TIGTA has attempted to comply with these requirements, we cannot control the IRS’ activities and data collection. These mandatory reporting requirements should be eliminated in favor of discretionary reviews. 

Third, I strongly urge the Congress to consider reinstating the authority of TIGTA 

to protect IRS employees from individuals who threaten their safety as they work 

to administer the tax laws. TIGTA’s predecessor, the IRS Inspection Service, had 

primary responsibility for providing armed escorts for IRS employees working in potentially dangerous situations. The Inspector General Act of 1978,74 as amended by 

RRA 98, provides that TIGTA ‘‘shall be responsible for protecting the Internal Revenue Service against external attempts to corrupt or threaten employees of the Internal Revenue Service, but shall not be responsible for . . . the providing of physical 

security.’’ 75 TIGTA is not seeking to provide routine security of IRS buildings (i.e., 

guard services) nor is it proposing to take on program operating responsibilities. Instead, TIGTA would provide protection to individual IRS employees who encounter 

potentially dangerous taxpayers (PDTs) when executing their official duties to enable the IRS to fulfill its tax administration responsibilities. TIGTA’s provision of 

armed escort services falls seamlessly in line with the unique mission that Congress 

gave TIGTA—to protect IRS employees against external threats. 

With the IRS Commissioner’s commitment to expand IRS examination and collection activities, TIGTA expects an increased need for armed escorts of IRS personnel 

who work in potentially dangerous environments. The responsibility for conducting 

armed escorts currently lies with the IRS Criminal Investigation (CI) function. In 

preliminary discussions, IRS CI has expressed an interest in having the responsibility for conducting armed escorts that involve PDTs transferred to TIGTA. Thus, 

it would be efficient and effective to expand TIGTA’s statutory protection duties to 

include the authority to provide armed escorts to IRS employees. 

Lastly, subsections 1203(b)(3) and (6) of RRA 98 should be amended to prevent 

IRS employees from using this law to file baseless or frivolous complaints against 

other IRS employees. In general, section 1203(b) of RRA 98 delineates the causes 

for termination of IRS employees who commit one of the offenses described. From 

our experience, IRS employees are misusing section 1203(b) to assert baseless or retaliatory complaints against IRS managers or fellow IRS employees. TIGTA wants 

to divert the resources currently allocated to addressing these complaints to more 

important law enforcement efforts. Outside of section 1203(b), IRS employees with 

47 

complaints against other IRS employees have various methods of recourse including 

the equal employment opportunity complaint process and other personnel support 

resources. This proposal does not include circumscribing the authority of TIGTA to 

investigate assault or battery allegations between IRS employees contained in section 1203(b)(5). 

TIGTA recommends that subsections 1203(b)(3) and (6) be amended so that IRS 

employees may no longer invoke them against other IRS employees. Those subsections, however, would still be available to taxpayers and taxpayers’ representatives for complaints against IRS employees. 

Mr. Chairman and Members of the Joint Review, I appreciate the opportunity to 

share with you today several significant challenges that confront the IRS. TIGTA 

will continue its efforts to provide reliable and objective assessments of the IRS’ 

progress in addressing the security and modernization of its systems, balancing enforcement and customer service, handling the workload of the filing season, and addressing the issues raised by RRA 98. Additionally, TIGTA will continue to investigate employee misconduct and external threats that jeopardize the integrity, efficiency, and effectiveness of the nation’s tax administration system. 

Representative RAMSTAD. Mr. Wagner. 

STATEMENT OF RAYMOND T. WAGNER, JR., CHAIRMAN, IRS 

OVERSIGHT BOARD 

Mr. WAGNER. Thank you, Mr. Chairman, for this opportunity to 

present the views of the Oversight Board on the Service’s progress 

toward meeting the letter and the spirit of RRA 98. I also want to 

thank and commend you and the members of the joint review for 

holding this hearing. 

As a prelude to my remarks, I would like to take a moment to 

invite you to envision how a tax administration system would work 

in an ideal world: 

With such a system, taxpayers fully understand their tax obligations. Burdens on taxpayers are low, filing is efficient and easy and 

enforcement is swift, certain and professional. And voluntary compliance is high. In short, taxpayers would find compliance easy to 

achieve and difficult to avoid. 

If this describes the ideal state, what is the strategy for achieving it? 

Seven years since the passage of RRA 98 is a logical time to ask 

the question we frequently hear when we are on a journey, Are we 

there yet? Well, the answer here is, Not yet. 

But we can get there. And one of the most important ways is to 

use a road map. A strategic plan is that road map. 

The current plan developed by the IRS and approved by the 

Oversight Board has three goals: to improve taxpayer service, to 

enhance enforcement of the tax laws, and to modernize the IRS 

through its people, processes and technology. The IRS must pursue 

those goals with rigor and discipline and must stay balanced between customer service and enforcement. Clearly, both are necessary if high levels of compliance are to be achieved. 

I can illustrate this by restating Commissioner Everson’s equation of ‘‘service plus enforcement equals compliance’’ in other 

terms—‘‘prevention plus correction equals compliance.’’ 

Taxpayer service is prevention, per se. Preventing taxpayer errors is usually cheaper and less painful than correcting them. Enforcement corrects problems by applying appropriate actions to 

noncompliant taxpayers. It can be painful to the taxpayer. Looking 

at the equation in these terms provides greater insight into the importance of service. 

48 

The board is increasingly concerned that cutbacks in customer 

service functions and modernization resources will have a negative 

impact upon the IRS’s ability to deliver quality services to taxpayers and improve overall taxpayer compliance. My written statement provides several examples of possible service cuts that are of 

concern. 

The board has no authority to make tax policy recommendations. 

Yet I would be sadly remiss not to mention the corrosive effect that 

Tax Code complexity has on enforcement and in closing the tax 

gap. The board fully supports the President’s Federal advisory 

panel to simplify the Tax Code. Simplification of the Tax Code will 

be the greatest boost of all for both service and enforcement. 

Modernizing computer systems through the BSM program is one 

of the strategic plan’s goals. The IRS’s once deeply troubled BSM 

program has experienced better performance in 2004. We believe it 

is time to give that program another shot in the arm and to fully 

fund that program for the upcoming year. 

Both GAO and TIGTA have reported on the cost overruns and 

the delays the BSM program has experienced. One cost you won’t 

hear about, however, is the cost to taxpayers by delaying the benefits of a modernized IRS. 

Let me add that individual taxpayers spend approximately $84 

billion a year complying with the Tax Code. IRS modernization 

does more than save the IRS money. It makes taxpayers efficient 

as well. Online banking has revolutionized the banking industry 

and helps taxpayers manage savings and checking accounts, apply 

for loans and pay bills. IRS modernization can do the same for taxpayers. If a modernized IRS makes taxpayers only 5 percent more 

efficient, that would save taxpayers over $4 billion per year. 

Improving its human capital is an important part of the IRS 

strategic plan. The board believes that human capital is the IRS’s 

greatest resource and strength and one of its greatest challenges. 

The IRS possesses an extremely talented and dedicated workforce 

that produces very high-quality work. However, the workforce cannot be taken for granted. It must be carefully selected, trained and 

given the tools it needs to meet the demands of tax administration. 

The board expressed concerns regarding the IRS’s lack of a strategic approach to human capital. 

Mr. Chairman, in my opening remarks I described the ideal 

world of tax administration. If we are to make informed management decisions, we need to establish some meaningful, but achievable, measures for a realistic world. The work of Congress would 

be facilitated if there existed long-range measures for effective tax 

administration that were widely accepted as representing a desirable, but realistic tax administration system. 

The last topic I would like to address is the budget. My written 

statement describes the board’s budget recommendations for 2006. 

The appropriations process has not been able to fund the IRS at 

levels that many people in tax administration, including the board, 

believe is necessary. It is time to step back and look at this with 

a strategic perspective. The board recommends that Congress take 

a hard look at the procedures it uses to appropriate IRS funding. 

My statement shows how investing in the IRS is money well spent. 

49 

I see that my time has run out, so I will conclude my statement 

to say, Mr. Chairman, the board strongly believes that our Nation 

can ill afford to return to the days when the IRS fluctuated between customer service and enforcement. Our goal must to be create a tax administration system where compliance is easy to 

achieve, but difficult to avoid. 

The IRS has been on the right track and making progress toward 

that ultimate goal. We must now give them the tools, guidance and 

resources to finish the job. 

Thank you, Mr. Chairman. And I would be happy to answer any 

questions. 

Representative RAMSTAD. Thank you, Mr. Wagner. 

Just a reminder that all the witnesses statements will appear in 

the record in toto. Thank you again, Mr. Wagner. 

[The statement of Mr. Wagner follows:] 

WRITTEN TESTIMONY OF RAYMOND T. WAGNER, JR., CHAIRMAN, IRS OVERSIGHT

BOARD

INTRODUCTION AND SUMMARY

Thank you, Mr. Chairman for this opportunity to present the views of the IRS 

Oversight Board on the current state of our tax administration system and the Internal Revenue Service’s progress in meeting the letter and spirit of the IRS Restructuring and Reform Act of 1998 (RRA 98). I also want to thank and commend 

you and the members of the Joint Review for your continued leadership, expertise 

and oversight of the IRS. It is greatly appreciated. 

As a prelude to my remarks, I would like to take a minute and invite you to envision how a tax administration system would work in an ideal world. With such a 

system, we would find: 

• Taxpayers fully understand their tax obligations 

• Burden on taxpayers is low 

• Filing is efficient and easy 

• Enforcement is swift, certain and professional 

• Level of voluntary compliance is high 

In short, taxpayers would find compliance easy to achieve and difficult to avoid. 

It is now seven years since the passage of RRA 98. It is a logical time to ask that 

question we frequently hear when we are on a journey: Are we there yet? The answer is: not yet. But we can get there using a roadmap. 

The IRS Strategic Plan is that roadmap. The current Strategic Plan was developed by the IRS and approved by the Oversight board in 2004. It establishes three 

goals for the IRS: 

• Improve Taxpayer Service 

• Enhance Enforcement of the Tax Law 

• Modernize the IRS through its People, Processes and Technology 

The IRS’ first Strategic Plan in the post-RRA 98 era, approved by the Board in 

2001, set the agency’s direction. And during the past seven years, the IRS has 

achieved significant gains on a number of important fronts, although the pace of improvement has been frustrating at times, especially to taxpayers. The quality of telephone service has greatly improved, helping taxpayers navigate and comply with an 

extremely complex tax code. The IRS now estimates that more than half of individual taxpayers will file their returns electronically in 2005 and millions are using 

the IRS web site to download forms, get information on their tax law questions and 

track the status of their refunds. 

The IRS’ computer modernization program met its cost and schedule milestones 

in 2004, and the first taxpayers have finally been moved off the old tape-based system to a modern reliable database. Although the agency’s enforcement effort had 

been suffering from a declining resource base, the IRS was able in FY 2004 to increase its enforcement resources and showed an impressive gain in enforcement revenue. 

Enforcement activities increased substantially in 2004, with a 40 percent jump in 

audits of high-income taxpayers, doubling the number of audits from four years ago. 

Audits of large businesses also increased. And in a major victory against those who 

participated in a particularly abusive tax shelter known as ‘‘Son of Boss,’’ the IRS 

50 

1Senate Finance Committee Chairman Charles Grassley, Opening Statement before the Senate Finance Committee, April 14, 2005. 2P.L. 105–206, Title I, Section 1002. 

3 American Institute of Certified Public Accountants, Statement to the Internal Revenue Service Oversight Board Public Meeting, February 1, 2005. 

offered a very favorable settlement for the government and collected about $3.2 billion so far in back taxes, interest, and penalties from over 1,100 taxpayers. 

What is important about this improved performance is that progress has been 

made in both the service and enforcement functions of the IRS’ mission—something 

the Oversight Board has advocated since its inception. The results achieved clearly 

demonstrate that it is possible to reach the desired balance. 

However, the IRS still confronts a number of challenges, not the least of which is closing the estimated $300 billion plus tax gap. As Senate Finance Committee 

Chairman Charles Grassley said last month, ‘‘[T]he tax gap—like a loaf of bread— 

is made up of many different slices. We need to understand each one better and look 

at several ways to address them. But let me make it clear, we will work to address 

the tax gap—we owe nothing less to the millions of honest working families who 

find tax day the toughest day of the year. It is absolutely wrong that families have 

to tighten their belts and find new ways to keep the family budget balanced because 

others are not paying their fair share.’’1

Other challenges confront the agency. First, although the initial results produced 

by the National Research Program are to be applauded, the IRS still needs to get 

a better handle on understanding noncompliance, particularly underreporting. Second, as I will discuss in greater detail in my testimony, the IRS is making significant cuts in customer service, such as the forthcoming closure of a number of Taxpayer Assistance Centers. The Board is concerned that the IRS has not fully estimated the potential impact of such reductions on taxpayers—the overwhelming majority of whom want to comply with the tax code but need help doing so. Third, despite the Board’s recommendation in its previous annual report, the IRS has not yet 

addressed its near- and long-term human capital issues ranging from employee 

training to a potential wave of retirements beginning next year. 

The IRS Strategic Plan is the vehicle by which the IRS will meet these challenges. 

The IRS would greatly benefit from setting outcome measures to gauge progress in 

achieving its goals. They could have an energizing effect on the agency, improve accountability, help measure progress, and in turn, assist Congress and the Administration in making informed budget decisions. 

Lastly, to achieve the goals established in the Strategic Plan, the IRS needs a realistic budget that not only funds customer service, enforcement and Business Systems Modernization but which provides for the anticipated expenses the agency will 

incur, such as congressionally-mandated pay raises, inflation and rent increases. 

ENSURE BALANCE

Many of the IRS’ well-publicized problems can be traced to shifts between customer service and enforcement. Often compared to a swinging pendulum, the IRS 

would focus almost exclusively on one part of its mission to the detriment of the 

other. 

Achieving a balance between customer service and enforcement has become the 

IRS’ greatest challenge. Indeed, the problems that led to the enactment of RRA 98 

were due in part to a zealous over-reliance on enforcement dollars at the expense 

of taxpayer service. RRA 98 specifically addresses this problem by stating, ‘‘The IRS 

shall review and restate its mission to place a greater emphasis on serving the public and meeting taxpayers’ needs.’’ 2 Only with the passage of RRA 98 has there been 

the recognition that both service and enforcement must be provided. 

RRA 98 called upon the IRS to provide both quality customer service and fair enforcement. The Board has consistently stated that to be truly successful, and compatible with the spirit of RRA 98, the IRS had to succeed in all parts of its mission. 

It could no longer be an either/or proposition. This insistence on balance is also at 

the core of the IRS strategic plan and Commissioner Everson’s formula, ‘‘customer 

service plus enforcement equals compliance.’’ The balanced approach is also shared 

by many others in the larger tax community. 

At the Board’s 2005 annual public meeting, the American Institute of Certified 

Public Accountants observed: ‘‘Commissioner Everson recognizes that any increase 

in enforcement funding must be balanced with positive responses to the taxpaying 

public as customers. We encourage this type of balanced approach and stand ready 

to work with the Service to ensure the needs of America’s taxpayers are fulfilled.’’ 3

These sentiments were also embraced by the Treasury Inspector General for Tax 

Administration Russell George, who said, ‘‘Enhancing enforcement while improving 

51 

4 National Taxpayer Advocate Nina M. Olson, Testimony before the Senate Finance Committee, April 14, 2005. 5 American Customer Satisfaction Index, ‘‘ACSI Overall Federal Government Scores with Historic Scores of Agencies Measured 1999–2004’’, December 15, 2005. 6Senate Finance Committee Ranking Member Max Baucus, Opening Statement before the 

Senate Finance Committee, April 14, 2004. 7 National Association of Enrolled Agents, Statement to the Internal Revenue Service Oversight Board Public Meeting, February 1, 2005. 8 Internal Revenue Service Oversight Board, Annual Taxpayer Attitude Survey, April 2005. 

9 Comptroller General of the United States David M. Walker, Testimony before the Senate Finance Committee, GAO–05–527T, April 14, 2005. 

customer service is the proper direction for the IRS,’’ and the National Taxpayer Advocate who argued that ‘‘taxpayer service and enforcement activities work hand in 

hand to promote high levels of compliance.’’ 4

More than just a strategy or an equation, the balanced approach to tax administration is producing positive results that the Board believes should be further encouraged. As previously noted, the IRS has made considerable strides in improving 

customer service since the passage of RRA 98 and these improvements are reflected 

in taxpayer satisfaction surveys such as the American Customer Satisfaction Index 

(ASCI). In 2004, the overall customer satisfaction score of individual tax filers increased by almost two percent, showing a steady increase since 1999.5

However, now that the tax gap has taken center stage, there is the temptation 

to fall back on old habits, say customer service is fixed and direct all resources to 

enforcing the tax laws. It’s the considered opinion of the Board, that this new slant 

would represent a major setback to achieving RRA 98’s goals. We should stay the 

course set by the balanced approach. 

The Board’s concerns in this regard are shared by Members of Congress, taxpayers and practitioners. At the April 14th Senate Finance Committee hearing on 

closing the tax gap, Ranking Member Baucus observed: 

‘‘But I want to offer a word of caution to the administration and to Commissioner 

Everson. The IRS cannot close the Tax Gap simply by increasing enforcement. 

Issuing more liens. Conducting more seizures. Levying more bank accounts. 

‘‘We do need targeted, appropriate enforcement. If, however, the IRS lets taxpayer 

service slide—If the IRS diminishes the access and accuracy of taxpayer service— 

including the essential need for face-to-face taxpayer service—then we fail to help 

taxpayers comply with the law on the front end. Ensuring up front quality is more 

efficient than back end enforcement.’’ 6

At the Board’s 2005 public meeting, the National Association of Enrolled Agents 

made a statement in a similar vein: 

‘‘NAEA supported the creation of the [IRS Oversight Board] as a defense against 

the tendency of policymakers to swing wildly between two extremes: funding taxpayer service to the exclusion of funding compliance programs on the one hand, and 

funding compliance programs to the exclusion of funding taxpayer service on the 

other. At the end of the day, both of these objectives must be adequately funded 

for the system to work correctly.’’ 7

Taxpayers have also taken notice and want a balanced system too. Almost two 

out of three participating in the Board’s 2004 taxpayer attitude survey supported 

additional IRS funding for enforcement (62 percent) and taxpayer assistance (64 

percent).8

Mr. Chairman, the long-term health of our tax administration system must be our 

overarching goal. To succeed in meeting that goal the IRS must meet the needs of 

all parts of its strategic plan and critical mission on behalf of America’s taxpayers— 

not just one or the other. We must have balance; we must have quality customer 

service and effective enforcement to achieve real compliance. 

CLOSING THE COMPLIANCE GAP

The aforementioned Senate Finance Committee hearing, ‘‘The $350 Billion Question: How to Solve the Tax Gap’’ highlighted the growing seriousness of the tax gap 

problem and the IRS’ difficulty in closing it. David M. Walker, Comptroller General 

of the United States, testified that in spite of the recent turnaround in staffing and 

some enforcement results, ‘‘IRS’s recent compliance estimate indicates that compliance levels have not improved and may be worse than it originally estimated.’’ 9 Indeed, the problem is so severe that ‘‘Tax Law Enforcement’’ has been placed on General Accounting Office (GAO)’s ‘‘high-risk’’ list. 

The IRS National Research Program (NRP) recently completely its assessment of 

individual taxpayer compliance for 2001 and came up with the tax gap estimate— 

actually a range of $312–353 billion. Underreporting noncompliance, e.g., underVerDate Aug 31 2005 02:13 Oct 28, 2005 Jkt 023854 PO 00000 Frm 00061 Fmt 6633 Sfmt 6621 E:\HR\OC\A854.XXX A854
52 

10 IRS Fact Sheet 11Walker, op. cit. 12Olson, op. cit. 13Treasury Inspector General for Tax Administration Russell George, Testimony before the 

Senate Finance Committee, April 14, 2005. 

stated income, improper deductions, overstated expenses and erroneously claimed 

credits, represents the largest component of the tax gap—between $250–292 billion, 

or more than 80 percent.10 However, as the GAO noted, it is important to get behind 

the NRP methodology to get a true picture of the tax gap: 

‘‘[F]or some areas of the tax gap, the estimate relies on outdated data and methodologies, including data from the 1970s and 1980s used to estimate corporate income tax underreporting and some employment tax underreporting. IRS does not 

have firm plans for obtaining more contemporary information on compliance for 

these areas of the tax gap or again measuring individual income reporting compliance.’’ 11

Given these challenges, the Board applauds the IRS for the progress it has made 

in some specific enforcement areas, such as correspondence examinations and the 

40 percent increase last year of audits of high-income individuals. Working in conjunction with the Department of Justice, the agency has also won some important 

victories in high-profile abusive tax shelter cases. Additionally, last May the IRS 

made a settlement offer regarding a particularly abusive tax shelter known as ‘‘Son 

of Boss,’’ and to date, $3.2 billion in taxes, interest and penalties have been collected 

from the more than 1,100 taxpayers who participated in the offer. The number of 

criminal prosecutions is also up, but still fall short of pre-1998 levels. 

In 2004, legislation was enacted allowing the IRS to use private collection agencies (PCAs) to augments its collection efforts. However, expectations should be tempered regarding the PCA initiative; only 10 percent of the tax gap is due to underpayment. Let me also note, Mr. Chairman that the Oversight Board, GAO and 

Treasury Inspector General for Tax Administration (TIGTA) have recently agreed 

to meet quarterly to bring a common perspective to the oversight of the PCA program. 

However, in spite of these successes, it is clear that current IRS enforcement efforts are insufficient to close the tax gap in any meaningful way. They simply will 

not provide the breakthrough that is required; much more is needed across the 

board. 

The Board concurs that a multi-pronged effort must be taken to shrink the tax 

gap. In addition to providing additional enforcement resources, which I will discuss 

in the budget section of my testimony, other actions can and must be taken. 

The Board believes that while the NRP assessment was a good start; it was just 

that—a start. The Board shares the National Taxpayer Advocate’s concern that 

much more and better research is needed. Ms. Olson stated that the IRS should be 

conducting extensive research now to develop a ‘‘long-term and sustained strategy 

for reducing the tax gap. This strategy must focus on the indirect effects as well 

as the direct effects of IRS initiatives.’’ 12

The need for better data to measure the tax gap and the effectiveness of enforcement actions was also voiced by the Treasury Inspector General for Tax Administration J. Russell George. At the Senate Finance Committee hearing, he made a compelling case: 

‘‘Although better data will help the IRS identify non-compliant segments of the 

population, broader strategies and better research are also needed to determine 

what actions are most effective in addressing non-compliance . . . [I]n two recent 

audit reports, TIGTA identified examination programs that the IRS implemented 

nationwide before obtaining results on their possible effectiveness or before implementing an effective strategy to measure the results of the program.’’ 

‘‘The IRS must continue to obtain accurate measures of the various components 

of the tax gap and the effectiveness of actions taken to reduce it. The information 

is critical to the IRS for strategic direction, budgeting and staff allocation. The Department of Treasury also needs these measures for tax policy purposes. Additionally, the Congress needs this information to develop legislation that improves the 

effectiveness of the tax system.’’ 13

The Board is in full agreement with this assessment as we are with TIGTA’s recommendation that delays in Business Systems Modernization (BSM) must be addressed. In addition to helping provide quality customer service to taxpayers, modernizing IRS’ antiquated computer systems will give IRS enforcement personnel the 

tools they need. For example, the Filing and Payment Compliance project will help 

the Private Collection Agency initiative. 

53 

14 Joint Committee on Taxation Chief of Staff George K. Yin, Testimony before the Senate Finance Committee, April 14, 2005. 15George, op. cit. 16 Internal Revenue Service Oversight Board, Annual Taxpayer Attitude Study, April 2005. 17Government Accountability Office Director, Strategic Issues James R. White, Testimony before the House Ways and Means Subcommittee on Oversight, GAO–05–416T, April 7, 2005. 18Treasury Inspector General for Tax Administration J. George Russell, Testimony before the 

House Ways and Means Subcommittee on Oversight, GAO–05–416T, April 7, 2005. 

Although the Board has no authority to make tax policy recommendations, I 

would be sadly remiss not to mention the corrosive effect that tax code complexity 

has on enforcement and closing the tax gap. The complex tax code frustrates honest 

taxpayers who are trying to comply with the law while proving opportunities for 

those who exploit its complexities to devise sophisticated and hard-to-detect illegal 

tax avoidance schemes. 

The Chief of Staff of the Joint Committee on Taxation George Yin made the following well-reasoned argument for simplification at the tax gap hearing: 

‘‘Much has been written about the benefits of simplification. In terms of ways to 

reduce the tax gap, I believe that simplification ranks as the most important. Complex laws spawn many inadvertent errors as well as opportunities for intentional 

non-compliance. Complex laws also contribute to taxpayer confusion and real or perceived unfairness in the tax system. Studies have shown that taxpayers are less 

likely to be compliant if they perceive the system to be inequitable.’’ 14

There are other detrimental consequences stemming from a complex tax code: 

IRS’ enforcement workload has grown both in sheer numbers and complexity because of the code. According to a TIGTA analysis, in FY 2004, hours spent per return on examinations were up 23 percent for individual tax returns and 19 percent 

for corporate returns over the previous year.15 Indeed, as we peel away the layers 

of many of the IRS’ problems—from resources to customer service to enforcement— 

we often find tax code complexity at their core. 

In this regard, the Board fully supports the President’s federal advisory panel to 

simplify the tax code. In addition to reducing taxpayers’ burdens, simplifying the tax 

code would be the greatest boost of all for both service and enforcement. It is an 

essential part of any broad strategy for closing the tax gap. 

STABILIZE CUSTOMER SERVICE

Since the issuance of the IRS Restructuring Commission Report and the passage 

the following year of RRA 98, the IRS has achieved tangible gains in customer service. In 2005, the agency turned in yet another successful filing season. 

Taxpayers can now get through on the IRS toll-free telephone lines and the accuracy and quality of the responses to their tax law and account questions have remained steady and at reasonable levels. Taxpayers are also afforded a number of 

self-serve options over the telephone and the IRS’ web site that help reduce the burden of filing and paying their taxes. There were almost twice as many visits to 

IRS.gov this filing season than last, and more than five million taxpayers took advantage of the innovative Free File program—a more than 40 percent increase from 

the same period last year. 

Taxpayers recognize and value the services the IRS provides to help them understand and comply with the complex and ever changing tax code. The 2004 IRS Oversight Board Tax Compliance Study found that ‘‘the most heavily relied upon source 

of tax information and advice are IRS representatives (82 percent see them as very/ 

somewhat valuable), and IRS printed publications such as brochures (82 percent) 

and the IRS web site (77 percent). The only non-IRS provided information source 

that is nearly as highly rated is a paid tax professional (81 percent). Further, more 

than 90% of those surveyed said that IRS customer service is either very or somewhat important to them.16

However, the Board notes that in spite of these improvements, IRS customer service is still not on a par with private sector financial services organizations. IRS customer service is still a work in progress, and complacency is our worst enemy. At 

a recent hearing of the House Ways and Means Subcommittee on Oversight on the 

2004 filing season and proposed FY2006 IRS budget, Government Accountability Office Director, Strategic Issues James R. White noted that there were ‘‘slippages in 

telephone access such as more abandoned calls and longer wait times.’’ 17 Walk-in 

assistance has proven to be particularly helpful for many taxpayers who do not have 

access to computers and the Internet, or prefer one-on-one personal assistance. Yet, 

according to Treasury Inspector General for Tax Administration Russell George, 

service levels at these sites have improved, but are still not meeting expectations.18

54 

19 Ibid. 20 Chairman Jim Ramstad, Opening Statement before the House Ways and Means Subcommittee on Oversight, April 7, 2005. 21Walker, op. cit. 22George, op. cit. 

It is against this backdrop that the Board raises its concern that reductions in 

customer service and modernization resources in the proposed FY2006 IRS budget 

will have a negative impact on the IRS’ ability to delivery quality service to taxpayers and improve overall taxpayer compliance. The cuts are troubling for a number of reasons. 

The IRS has already announced that it will end its TeleFile service, used by almost four million taxpayers. The Board is concerned that these taxpayers will return to paper filing. Tax return and tax account transcripts provided by Taxpayer 

Assistance Centers (TACs) must now be requested by phone or mail, which requires 

a two-week waiting period. These transcripts are often needed urgently by those applying for mortgages or other loans. This change in procedure burdens taxpayers 

and is counter to the IRS commitment to provide excellent customer service. 

Other possible customer service cuts include: 

• Closing a large number of Taxpayer Assistance Centers, which in total serve 7.5 

million taxpayers each year, many of them elderly and lower-income taxpayers and 

those with limited or no English proficiency; • Reducing hours on the IRS’ toll-free lines; and • Providing fewer paper versions of forms and publications, further burdening 

lower-income taxpayers who do not have ready access to the Internet. 

These proposed reductions in customer service are raising concerns throughout 

the tax community. The GAO warned at the Ways and Means Oversight Subcommittee hearing that ‘‘the risk, as IRS shifts its priorities toward enforcement, 

is that some of the gains in the quality of taxpayer service could be surrendered.’’ 19

And while these real and potential reductions may not signal a return to the days 

of hundreds of millions busy signals and completely unacceptable levels of customer 

service, they are certainly a step in the wrong direction. And as we increasingly 

learn, quality customer service is not an end in itself but an essential part of that 

balance of customer service and enforcement that leads to compliance. 

Ways and Means Oversight Subcommittee Chairman Ramstad correctly observed 

that ‘‘retaining the good will of American taxpayers by providing professional service 

and detailed guidance on how to comply with the law are critical to sustaining voluntary compliance.’’ 20 The GAO Comptroller General David M. Walker testified at 

the Senate Finance Committee hearing that ‘‘providing quality service to taxpayers 

is an important part of any overall strategy to improve compliance and thereby reduce the tax gap.’’ 21 And TIGTA expressed similar views at the Senate hearing: 

‘‘The IRS must exercise great care not to emphasize enforcement at the expense 

of taxpayer rights and customer service. I believe that steps to reduce the current 

level of customer service should be taken only with the utmost thought and consideration of their impact, and only with all the necessary data to support these actions. Customer service goals must be met and even improved upon, or people will 

lose confidence in the IRS’ ability to meet part of its mission of providing America’s 

taxpayers quality service by helping them understand and meet their tax responsibilities.’’ 22

Indeed, as previously noted, the IRS has not provided the information we need 

to measure the short-term impact of these reductions on taxpayers. In the absence 

of such research, the Board urges that no precipitous actions be taken that could 

threaten the hard won improvements in customer service and further expand the 

tax gap. Moreover, until meaningful and substantive tax simplification is enacted 

into law, taxpayers will need all the help they can get to understand the tax code. 

COMMIT TO MODERNIZATION

Modernizing its computer systems through the Business Systems Modernization 

(BSM) program is one of the IRS Strategic Plan’s goals. The IRS’ once deeply troubled BSM program has experienced better performance in 2004. Due to improved 

management focus, BSM delivered on schedule in 2004 important technology products that will generate greater efficiencies throughout the agency and create real 

benefits in both customer service and enforcement. 

For example, the first taxpayers have been moved to a modernized reliable data 

base (Customer Account Data Engine) and corporate taxpayers are now able to conduct many of their transactions with the IRS electronically (Modernized e-File). 

Future BSM deliverables are also critical to improved customer service. As the 

ACSI scores illustrate, there is still a gap between customer satisfaction levels for 

55 

banks and the IRS. Banks offer daily updating of accounts, electronic access by customers to account records, and a full range of electronic transactions—options which 

the IRS cannot yet provide. With the help of modern technology, the IRS must close 

this gap if it is to be perceived by taxpayers as having services on a par with financial institutions. 

But clearly, the IRS has made real progress in managing BSM. Given such 

progress in 2004, if the IRS can continue to demonstrate improvement in 2005, then 

in 2006 it would seem most desirable and logical to increase BSM’s funding. BSM 

funding levels have been severely reduced in the last several years. Indeed, BSM 

funding was $388 million in FY2004, $203 million in FY2005, and is now requested 

at $199 million in FY2006. 

The Board strongly believes that cutting back on modernization will force the program to take longer and cost more than necessary. Of greatest concern is the age 

of IRS’ existing computer systems which will eventually become impossible to maintain. As time passes, a catastrophic disruption in our nation’s tax system becomes 

more likely. 

Therefore, the Board recommends that the BSM program move forward at an accelerated pace. Not only will this allow the IRS to operate more efficiently and effectively, it will strengthen the agency’s efforts to enforce the tax law and improve customer service. 

Both GAO and TIGTA have reported on the cost overruns and delays the BSM 

program has experienced. One cost you won’t hear about, however, is the cost to the 

taxpayers of delaying the benefits of a modernized IRS. 

Let me offer one concrete example. According to the ConsumerAffairs.com web 

site, in the 2003 tax filing season, an estimated 12.1 million taxpayers nationwide 

obtained Refund Anticipation Loans (RALs). Further, the economic burden of RALs 

falls particularly hard on families who can least afford the cost. A report by the National Consumer Law Center (NCLC) and the Consumer Federation of America 

(CFA) found that roughly 57 percent of the families who purchased RALs in 2003— 

6.92 million of the 12.1 million—received the federal Earned Income Tax Credit 

(EITC). The EITC provides financial assistance to the working poor. Those 6.92 million EITC recipients spent a total of $1.74 billion on RAL-related fees, including 

check-cashing fees, according to the NCLC and CFA. 

The Customer Account Data Base (CADE), the largest of the BSM projects, offers 

as a benefit the ability of the IRS to issue an electronic refund to taxpayers who 

electronically file in about three to five days, which I expect will take a major bite 

out of the RAL business. There will be no need for a RAL if the IRS can issue a 

refund in three days. Even if such a capability reduces the number of RALs by only 

60 percent, that will still save EITC taxpayers over $1 billion a year. So, every year 

the IRS delays its ability to issue a three-day refund to electronic filers costs taxpayers over a billion dollars a year. 

Let me offer another taxpayer-focused perspective. Professor Joel Slemrod of the 

University of Michigan testified to the President’s Panel on Tax Reform that individual taxpayers spend approximately $85 billion a year complying with the tax 

code. If a modernized IRS makes taxpayers only five percent more efficient, that 

would still save taxpayers over $4 billion a year. That’s why it pays to complete 

BSM as quickly as the IRS can manage the program. 

HUMAN CAPITAL AND TRAINING

Improving its human capital is in the second half of goal three of the Strategic 

Plan. The Board believes that human capital is the IRS’ greatest resource and 

strength, and one of its greatest challenges. The IRS possesses an extremely talented and dedicated workforce that produces very high-quality work in spite of the 

technological and resource limitations previously described. However, such a workforce cannot be taken for granted. It must be carefully selected, trained and given 

the skills and tools it needs to meet the demands of tax administration in the 21st 

century. Human capital cannot be an afterthought; it must be integrated into any 

IRS strategic plan. 

As we stated in our 2004 annual report, the Board has serious concerns regarding 

the IRS’ lack of a strategic approach to human capital. In 2003, the Board recommended that the IRS focus on its people resources—specifically on the way that 

it hires, trains and retains employees. We called upon the IRS to develop an agencywide human capital strategic plan that focuses on five key areas: 

1. Replace lost critical talent—The IRS has a ‘‘graying’’ workforce with 25 percent 

eligible to retire by 2006. Many of these individuals possess critical skills, such as 

maintaining legacy IT systems, and institutional knowledge that could easily be 

lost. 

56 

23Treasury Inspector General for Tax Administration, Audit Report, ‘‘The Human Resources 

Investment Fund is Not a Cost-Effective method of Providing Tuition Assistance, March 2005. 

2. Build skills for complex work—Tax administration will become more complex 

in the future as demonstrated by the challenges in combating abusive tax avoidance 

transactions that are increasingly more sophisticated and harder to detect. Enhanced IT skills will become more important in this new environment, such as the 

use of technology as the preferred means of doing business. 

3. Manage change—Even though the IRS customer-focused organization is firmly 

in place, change will continue throughout the agency. The IRS is no longer a static 

organization; new technology and process redesign will bring further challenges and 

greater change, and with it, an increased demand for leaders and managers with 

change management skills and experience. 

4. Enhance performance—Given budgetary constraints, the IRS must enhance its 

performance each year to meet greater work demand and improved customer service 

and enforcement goals. Management skills take on greater importance in such a 

high performance, goal-driven environment. 

5. Engage the entire workforce—Workforce engagement remains a challenge. Surveys indicate that upper management levels of the IRS are engaged in its mission 

and strategic goals; but the same cannot be said for front-line managers and rankand-file employees. 

So far, the IRS has yet to develop an agency-wide human capital plan that deals 

with these five concerns, although some are addressed in part in the agency-wide 

strategic plan. 

Nevertheless, there have been some gains. The Board was pleased to see improvements in the IRS’ third annual employee satisfaction survey, conducted by The Gallup Organization, in which approximately 75 percent of the workforce participated. 

According to Gallup, the IRS made ‘‘steady progress increasing employee engagement’’ from 2001 to 2003. It reported that the percentage of employees who saw 

themselves as being engaged rose from 21 percent to 31 percent from 2001 to 2003. 

The ranking of the IRS increased from the 34th to the 50th percentile of comparable 

organizations. 

However, these improvements are dwarfed by the remaining challenges. Sixtynine percent of IRS employees are still not engaged and the Gallup survey also 

showed that less than a majority of employees (43 percent) can strongly agree that 

they know what is expected of them at work. Greater and more focused attention 

is needed on workforce issues. 

Training at the IRS 

At last year’s IRS Nationwide Tax Forums and the Board’s 2005 annual open 

meeting, the Board also heard from stakeholders and dozens of agency employees 

who saw workforce issues as the greatest challenge for the agency over the next five 

years. The lack of adequate training was a dominant issue. 

Stakeholders described an expanding training gap at the IRS, where employees 

often lack the expertise and skills to handle difficult, complex or problem cases. IRS 

employees also reported that they were inadequately or unevenly trained. Stakeholders added that in the operating divisions where employees have helped plan and 

design training programs, employees report higher job satisfaction and empowerment. 

The Oversight Board has studied IRS’ division training programs and determined 

that there is no clear vision for training across the agency, and no real linkage between strategic training planning at the national and operating division level, nor 

is there an agency-wide ‘‘champion’’ for training. Admittedly, reduced budgets have 

had a negative impact on training, such as inconsistent treatment per employee 

across the four operating divisions and the inability to provide leadership training 

and effective management succession across the agency. However, TIGTA also recently reported that the IRS’ Human Resources Investment Fund is so poorly managed that 60 percent of its funds were spent on administrative costs while turning 

away employees for lack of money.23

Inadequate training budgets will not allow the IRS to proceed with plans for hiring, training, and retaining qualified individuals to address the enforcement and 

customer service needs of the agency. Adequate funding for training is critical and 

will allow the IRS to develop and retain a well-trained, well-equipped workforce 

supported by enhanced technologies. The workforce of the future must be prepared 

to deal with not only the approaching gap created by the retirements of senior, experienced employees, but also to deal with the increasingly complex and abusive tax 

avoidance schemes that are contributing to the growing tax gap. 

57 

24Walker, op. cit. 25White, op. cit. 

The ability of the IRS to realize its long-term vision and goals depends upon effective, efficient, well-trained and motivated employees. It also depends upon the IRS’ 

ability to implement effective measures to assess the impact of training, and to plan 

and design new methods of training that address emerging critical compliance 

needs. 

Two years after the IRS Oversight Board raised concerns on human capital issues, 

the same problems persist; the IRS has not adequately addressed them. The agency 

has not yet dealt with the reality of an aging workforce and has failed to provide 

clear guidance, direction and training for its employees. 

The Board recommends that the IRS develop a strategic human capital plan that 

addresses these issues. Faced with pending retirements, the IRS must have a plan 

in place to refresh its workforce, preserve invaluable knowledge, and institute succession planning throughout the agency. The IRS must also have a plan to recruit 

and retain qualified personnel, especially future executives from the private sector 

who can bring to bear best practices and new ideas to the challenges and opportunities that the 21st Century brings. And lastly, the IRS must better train and equip 

its workforce with necessary skills. The IRS will be hard pressed to close the compliance and customer service gaps if the training gap is not closed as well. 

MEASURE LONG-TERM GOALS

Mr. Chairman, in my opening remarks I described an ideal world of tax administration. If we are to make informed management decisions on tax administration, 

we need to establish some meaningful but achievable goals for a realistic world. 

Now that the IRS has made significant gains in many areas, it is important that 

quantifiable long-term goals be set to guide our decision-making, especially in seeking to achieve the critical balance between service and enforcement. 

I believe that there is a general consensus that the IRS must begin to set longterm goals as a way to measure both performance and to help the Administration 

and Congress make informed decisions on resources and budgets. 

This imperative was clear throughout this year’s congressional hearings on the 

IRS. The Comptroller General David M. Walker testified that the IRS ‘‘lacks quantitative long-term goals for improving taxpayer compliance, which would be consistent with results oriented management.’’ 24 James R. White, GAO’s Director, Strategic Issues, took another tack: ‘‘IRS is developing, but currently lacks, long-term 

goals that can help them inform stakeholders including the Congress, and aid them 

in assessing performance and making budget decisions.’’ 25 As previously noted, 

TIGTA came to a similar conclusion about the value of such goals. Indeed, an 

agreed-upon set of long term goals between the IRS and Congress could not only 

help the allocation of resources but prevent the wild swings in the pendulum between customer service and enforcement. 

The Board appreciates the difficulty associated with developing measures and performance goals. Setting long-term goals requires a high level of consultation and 

consensus building. Achieving agreement among Congress, the executive branch, external stakeholders and the public will be particularly challenging. Nevertheless, 

some initial progress has been made. 

As discussed in the Board’s 2004 annual report, during the FY2005 budget formulation process, the IRS took the important step of aligning performance and requested resources. However, the agency must continue to integrate performance into 

its decision-making and resource allocation processes to achieve completely an integrated performance budget. 

Further, the IRS modified its budget and performance plans to include more customer-focused and ‘‘end result’’ measures. The agency also implemented the ‘‘Embedded Quality’’ program/methodology to gauge the accuracy of completed actions. 

As the IRS expands this program to capture even more data, it can better identify 

and resolve specific accuracy problems—thereby, improving the work product and in 

turn, the level of service to taxpayers. 

The work of Congress would be facilitated if there existed a set of long-range 

measures for effective tax administration that were widely accepted as representing 

a desirable but realistic tax administration system the country would like to 

achieve. These goals would set a valuable context for making decisions on the proper 

balance between service and enforcement. They would create an environment of accountability where everyone who is part of the system—taxpayers, the IRS, and decision-makers in the executive and legislative branches—are all aware of overall 

goals and their contributions to goal achievement. 

58 

26 Internal Revenue Service Oversight Board, FY06 Budget/Special Report. 27 Chairman Christopher Bond, Opening Statement before Senate Appropriations Subcommittee on Transportation, Treasury, the Judiciary, Housing and Urban Development and 

Related Agencies, April 7, 2005. 

The Board believes it is imperative to identify the key attributes of an effective 

tax administration system. Such attributes can identify desired outcomes and create 

a road map for the next decade that will complement the IRS’ strategic, budget and 

annual performance plans. In addition, it could be integrated into the governmentwide Key National Indicators Initiative whose purpose is to help assess the overall 

position and progress of our nation, frame strategic issues and chart future directions. 

A REALISTIC BUDGET

The Oversight Board believes there is much to like in President Bush’s FY2006 

budget request for the IRS. First, the Oversight Board recognizes and appreciates 

that at a time when most budgets are being tightened, the President is asking for 

a greater budget increase for the IRS than for other non-defense and non-homeland 

security agencies. The Board is encouraged by the request for additional enforcement funding and is pleased that the Administration acknowledges that investments in IRS enforcement result in increased tax revenue. 

However, the Board recommends even more funding than the President has requested; our recommendation builds on the President’s budget request. The Board 

calls for $11.6 billion in funding for FY2006, a nine percent increase over the Administration’s recommendation. A comparison of the Board’s recommendation and 

the President’s request is shown in the following table: 26

Comparison of Administration’s Request, IRS Oversight Board’s Recommendation, and Enacted 

Appropriations 

[In $ millions] 

FY2005 FY2006 

Administration Oversight board Enacted Administration Oversight board 

10,674 11,206 10,233 10,679 11,629 

The Board believes that the IRS must begin to close the tax gap through greater 

enforcement. For that reason, we recommend an additional $435 million over the 

President’s request for IRS enforcement efforts that could easily generate more than 

a billion and a half dollars in additional tax revenue using the Administration’s return on investment of four-to-one. From its private sector perspective, the Board believes it makes perfect sense to make the additional investments in enforcement 

that will pay for themselves many times over. 

The Board also recommends additional funding towards stabilizing customer service and supporting the BSM program. As I mentioned earlier in my testimony, the 

Board is concerned that proposed reductions in customer service and modernization 

resources in the FY2006 budget request will have a negative impact on the IRS’ 

ability to deliver quality service to taxpayers, which ultimately, will also have an 

adverse effect on taxpayer compliance. 

Clearly both service and enforcement are necessary if high levels of taxpayer compliance are to be achieved. Re-stating Commissioner Everson’s equation in other 

terms illustrates this point: Prevention + Correction = Compliance. 

Taxpayer service is prevention, and designed to prevent non-compliance by informing taxpayers of their tax obligations and offering assistance in filing accurate 

returns. Preventing taxpayer errors is usually cheaper and less painful than correcting them. Enforcement is correction, and is designed to apply appropriate treatments to non-compliant taxpayers based on the severity and cause of their non-compliance. Looking at the equation in these terms provides greater insight into the importance of service. 

Indeed, Senate Appropriations Subcommittee on Transportation, Treasury, the 

Judiciary, Housing and Urban Development, and Related Agencies Chairman Christopher Bond stated at an April 7th hearing that he hears almost daily complaints 

that the tax code has become ‘‘unmanageable and confusing, resulting in excessive 

cost and administrative burdens that far exceed reasonable tax compliance.’’ 27

Given this environment, the Board asks, ‘‘Shouldn’t public policy be tilted in favor 

of assisting taxpayers?’’ We recognize that there can be a tension between affordVerDate Aug 31 2005 02:13 Oct 28, 2005 Jkt 023854 PO 00000 Frm 00068 Fmt 6633 Sfmt 6621 E:\HR\OC\A854.XXX A854
59 

ability and good public policy. However, we must not overlook the overall impact 

on taxpayers when making decisions on federal expenditures. 

For example, the proposed closing of selected TACs, which in total served 7.7 million taxpayers in FY2004, will save about $55 million in federal expenditures, or 

about $7 per taxpayer served. The savings may seem attractive at first but we 

should be conscious of the burdens that this reduction of service imposes on taxpayers and how it affects tax revenues. Therefore, we urge the members of the Joint 

Review to follow the Board’s FY2006 budget recommendations for customer service 

funding. 

We are also aware of the severe limitations that Congress is under in appropriating federal monies to worthwhile needs. For example, Congress may agree with 

the Board’s budget recommendations, but the existing budget evaluation methodology makes it difficult to act on these recommendations because enforcement initiatives are considered simply as an expense, and are not recognized for the amount 

of revenue that will be raised. For that reason, the Board is pleased to see the Administration’s recommendation to adjust Appropriations Subcommittees 302(a) allocations to increase enforcement funding for the IRS. 

However, this recommendation comes with restrictions that could limit the additional funding to enforcement functions. Because enforcement spending would be set 

at a fixed amount, the Board is concerned that these restrictions could result in unintended consequences, such as additional reductions in taxpayer services or modernization, should enforcement not be fully funded or unanticipated costs arise. 

Rather than dwell on the Board’s FY2006 budget recommendations, I believe it 

is more important to recognize the long-term effect of an under-funded IRS, as well 

as the benefits of additional IRS funding. The appropriations process has not been 

able to fund the IRS at all levels many people in tax administration, including the 

Board, but also including many IRS stakeholders, believe is necessary. It is time to 

step back and look at the problem from a more strategic perspective. 

The Board recommends that Congress take a hard look at the procedures it uses 

to appropriate IRS funding. Last year, the IRS produced enforcement revenue of $43 

billion, approximately four times the total IRS budget. This year, the Administration in its proposed budget recognized that there is a four-to-one direct return on 

investment from IRS enforcement. Any indirect effects on voluntary compliance resulting from either customer service or enforcement are in addition to those direct 

effects. 

How can the appropriations process be changed to recognize these realities? Let 

me suggest for your consideration two approaches that have been used in the past, 

one as recently as last year. 

In the late 1990s, Congress set aside approximately $144 million a year for five 

years, outside of the caps on discretionary spending, specifically earmarked for 

Earned Income Tax Credit enforcement. A similar approach could be taken again 

for a broader enforcement initiative. 

Last year, in the JOBS bill, Congress authorized the IRS to use private collection 

agencies and authorized the Secretary of the Treasury to retain part of the money 

collected. This was the first time I can recall that the revenue stream has been used 

to pay for IRS operations. If this is an acceptable approach, perhaps it could be used 

more broadly. A mere one percent of last year’s enforcement revenue of $43 billion 

could pay for an appreciable IRS enforcement effort. Alternatively, it could provide 

adequate funding for the IRS BSM program. Controls could be imposed that would 

still give Congress oversight over how the money was to be spent, but it would relieve the pressure on the appropriations process that seems to be failing the IRS. 

Lastly, I want to raise an issue that the Oversight Board brought to the forefront 

in a special budget report it issued in March 2005. The IRS needs a realistic budget 

that recognizes and provides for the anticipated expenses it will incur, such as congressionally-mandated pay raises, inflation and rent increases. By not fully funding 

these costs, the IRS will be challenged yet again to make other cuts in critical programs to pay for them. 

CONCLUSION

Mr. Chairman, in conclusion, the Board strongly believes that our nation can ill 

afford to return to the days when the IRS fluctuated between customer service and 

enforcement. We cannot shift resources to pursue those who knowingly avoid taxes 

while neglecting the needs of honest taxpayers attempting to comply with a complex 

tax code. 

As I previously stated, our goal must be to create a tax administration system 

where taxpayers would find compliance easy to achieve, but difficult to avoid. Since 

the passage of RRA 98, the IRS has been on the right track and making progress 

60 

toward that ultimate goal. We must now give them the tools, guidance and resources to finish the job. Thank you and I would be happy to answer your questions. 

Representative RAMSTAD. Ms. Olson, please. 

STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER 

ADVOCATE, INTERNAL REVENUE SERVICE 

Ms. OLSON. Mr. Chairman, thank you for inviting me to testify 

today. 

These are challenging times for the IRS. As its 5-year strategic 

plan acknowledges, the IRS must balance the demands of an everincreasing workload with the needs of an increasingly diverse taxpayer population that includes a widening income, information, and 

technology gap. 

At the same time, outmoded IRS business systems negatively impact customer service, taxpayer rights and IRS business results. I 

provide several detailed examples of business systems’ impact in 

my written testimony. 

In meeting these challenges, the IRS is seeking to increase its examination, collection and criminal investigation presence, which I 

applaud. But I am concerned that this growth in enforcement may 

come at the expense of our recent progress in the quality of our 

taxpayer service, both within traditional taxpayer assistance functions and our enforcement divisions. 

Preliminary results from the National Research Project indicate 

that the overall compliance rate in 2001 was about the same as 

that in 1988, the date of our last Taxpayer Compliance Measurement program. During this period, enforcement activities declined 

substantially while taxpayer service significantly improved. From 

1999 to 2004, one leading study found that taxpayer satisfaction 

with the IRS rose from 51 percent to 64 percent. Thus, it is entirely 

possible that robust taxpayer service plays as large a role as, if not 

larger, than robust enforcement in achieving a high level of taxpayer compliance over time. 

True taxpayer service involves figuring out why taxpayers don’t 

comply before determining the appropriate IRS compliance action. 

To date, the IRS has not built this approach into its enforcement 

initiatives or its training of enforcement personnel. 

The IRS should create business performance measures that track 

the appropriateness of the enforcement response to the reasons for 

noncompliance. After all, revenue agents and revenue officers 

aren’t just in the enforcement business. They are actually in the 

compliance business. A failure to understand the reasons why a 

taxpayer is noncompliant may lead to greater short-term enforcement results, but not to a greater long-term compliance. 

In meeting the needs of a diverse taxpayer population, the IRS’s 

current strategic plan relies heavily on self-service and electronic 

options, and gives short shrift to the real information and literacy 

gap in the United States today. For example, the IRS’s current approach to closing Taxpayer Assistance Centers is based on the assumption that taxpayers who need face-to-face services will easily 

migrate to electronic or other self-service products. The IRS overestimates taxpayers’ ability or willingness to conduct complex financial transactions in an electronic or self-service format. 

61 

1Pub. L. No. 105–206, 112 Stat. 685. 

For example, while some in today’s society are comfortable with 

banking online, many are not. As I have stated elsewhere, the IRS 

simply does not know what services various parts of our population 

need delivered in a face-to-face environment. Thus, the IRS has focused single-mindedly on closing Taxpayer Assistance Centers, or 

TACs, without researching taxpayer needs and identifying alternative means of delivering necessary face-to-face taxpayer service. 

I recommend that Congress require the IRS to conduct a comprehensive taxpayer-based needs assessment once every 5 years to 

complement an ongoing National Research Program that measures 

taxpayer compliance. With this taxpayer-centric data in hand, the 

IRS would be able to make resource and technology application allocations that actually reflect taxpayer needs. Without this information, the IRS is making decisions about taxpayer service based 

on its own resource limitations. 

A periodic taxpayer-needs assessment would prove very helpful 

when the IRS has to make difficult program decisions, some of 

which involve irrevocable consequences, such as closing the TACs. 

If the IRS decides a few years down the road that it has made a 

mistake, it will be hard-pressed to obtain the resources required to 

reopen TACs. 

One final word of caution: We must all be very careful about the 

pressure we put on the IRS to produce. A panel of non-IRS senior 

executives, who were appointed by Commissioner Rossotti to review allegations of abuse from the RRA 98 hearings, noted that 

there has historically been considerable pressure on the IRS to improve productivity and that the importance of safeguards should 

not be minimized or lost in the interest of achieving greater productivity. To avoid a repeat of the pre-1998 environment, each of 

the entities and persons with an IRS oversight responsibility 

should take great care to ensure that current IRS efforts to bolster 

enforcement do not, however inadvertently, diminish the hard-won 

improvements to taxpayer service and taxpayer protections that 

are so essential to maintaining overall taxpayer satisfaction and, 

not incidentally, overall taxpayer compliance. 

Thank you. 

Representative RAMSTAD. Thank you, Ms. Olson. 

[The statement of Ms. Olson follows:] 

WRITTEN TESTIMONY OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE, INTERNAL

REVENUE SERVICE

Mr. Chairman and Members of the Joint Review panel: Thank you for inviting 

me to testify before this joint hearing regarding the Internal Revenue Service (IRS) 

strategic plan and its 2006 budget request. My testimony will also discuss the importance of business systems modernization to improved taxpayer service and enforcement as well as certain taxpayer protections provided by the IRS Restructuring 

and Reform Act of 1998 (RRA 98) 1 that the IRS has yet to implement adequately. 

THE IRS MISSION STATEMENT IN TODAY’S ENFORCEMENT ENVIRONMENT

In September 1998, the IRS issued a new mission statement that was designed 

to reflect the priorities of the newly reorganized Service and set a tone for all of 

its employees in fulfilling their duties. The statement was very concise: 

‘‘Provide America’s taxpayers top quality service by helping them understand and 

meet their tax responsibilities and by applying the tax law with integrity and fairness to all.’’ 

62 

2 IRS Strategic Plan 2005–2009, Pub. 3744 (Rev. 6–2004), 5. 

3 Id. at 4. 

4 1995 IRS Data Book, table 11. 

5 Id. table 19. 

6 2000 IRS Data Book, table 10. 

7 Id. table 16. 

8 IRS, Report to Congress: IRS Tax Compliance Activities (July 2003). 

9Section 1203(b) requires the IRS to terminate an employee for certain proven violations committed by the employee in connection with the performance of official duties. The violations include: (1) willful failure to obtain the required approval signatures on documents authorizing 

the seizure of a taxpayer’s home, personal belongings, or business assets; (2) providing a false 

statement under oath material to a matter involving a taxpayer; (3) with respect to a taxpayer, 

taxpayer representative, or other IRS employee, the violation of any right under the U.S. Constitution, or any civil right established under titles VI or VII of the Civil Rights Act of 1964, 

title IX of the Educational Amendments of 1972, the Age Discrimination in Employment Act 

of 1967, the Age Discrimination Act of 1975, sections 501 or 504 of the Rehabilitation Act of 

The IRS’s mission reflects some of the lessons learned from the period preceding 

and subsequent to the enactment of RRA 98, including the role of quality taxpayer 

service in maintaining and even increasing the level of taxpayer compliance. Moreover, while tax law enforcement is not explicitly discussed, the mission statement 

recognizes that enforcement derives from the IRS’s obligation to apply the tax law 

‘‘with integrity and fairness to all.’’ 

Today, as historically, the IRS struggles to maintain the appropriate balance between quality taxpayer service and enforcement. The IRS’s current five-year strategic plan for 2005–2009 recognizes the need for this balance: 

‘‘The mission statement describes our role, as well as the public’s expectation regarding how we should perform that role. In the United States, the Congress passes 

tax laws and requires taxpayers to comply. The taxpayer’s role is to understand and 

meet his or her tax obligations. Our role is to help the large majority of compliant 

taxpayers with the tax law, while ensuring that the minority who are unwilling to 

comply pay their fair share. We must meet the highest standards of service and integrity in performing our role.’’ 2

Under the IRS’s controlling strategic plan, then, the IRS envisions that service 

and enforcement will be ‘‘poised to meet customer expectations and to respond 

quickly to technological and demographic changes.’’ 3 Thus, there should be no conflict between the IRS’s dual mission of providing top-quality taxpayer service and 

enforcing the tax laws. 

THE DECLINE OF IRS EXAMINATION AND COLLECTION ACTIVITIES

In the late 1990s, as the IRS attempted to reverse some of the most significant 

erosions of taxpayer service, its traditional examination and collection activities and 

resources also declined. Although many commentators like to attribute this decline 

to the RRA 98 hearings and certain provisions enacted by Congress in that statute, 

I believe there are many causes for the decline and that ignoring other causes will 

result in many of the same behaviors that got the IRS into trouble in the first place. 

Why the sudden drop in enforcement activities and resources? First, let’s look at 

the numbers. In FY 1995, the IRS conducted 2.1 million examinations,4 filed 

799,000 notices of federal tax liens, and issued 2,722,000 levies.5 By FY 2000, the 

IRS conducted approximately 716,000 examinations,6 filed approximately 288,000 

notices of federal tax liens, and issued approximately 220,000 levies.7

We know that IRS examinations dropped from 2.1 million in FY 1995 to 716,000 

in FY 2000. However, by FY 2000 the IRS also issued approximately 5.8 million 

‘‘math error’’ notices which summarily assess certain adjustments to the taxpayer’s 

return.8 Congress expanded the IRS’s math error authority effective for tax years 

1996 and 1997, and as a result, math error procedures eliminated the need for millions of correspondence and even office exams. So the decline in examinations may 

not be as great as some observers believe, although there is no denying that field 

examinations declined from 2.1 million in FY 1995 to 716,000 in FY 2000. 

Now, let’s examine the reasons for the drop in enforcement activities. The decline 

in collection actions is often attributed to the implementation of Collection Due 

Process (CDP) hearing procedures, by which some taxpayers unduly delay the collection of tax. However, only 1.2 percent of all IRS field and Automated Collection System liens and levies that trigger CDP rights result in a request for a hearing, and 

only 4 percent of those hearings result in litigation. Thus, something else must account for the drop in collection activity. 

Employees often cite the enactment of RRA 98 Section 1203, which provides for 

immediate termination of employment when the employee commits one of ‘‘ten deadly sins.’’ 9 Others cite the inability to evaluate individual or small groups of IRS colVerDate Aug 31 2005 02:13 Oct 28, 2005 Jkt 023854 PO 00000 Frm 00072 Fmt 6633 Sfmt 6621 E:\HR\OC\A854.XXX A854
63 

1973 and title I of the Americans with Disabilities Act of 1990; (4) falsifying or destroying documents to conceal mistakes made by any employee with respect to a matter involving a taxpayer 

or a taxpayer representative; (5) assault or battery on a taxpayer or other IRS employee, but 

only if there is a criminal conviction or a final judgment by a court in a civil case, with respect 

to the assault or battery; (6) violations of the Internal Revenue Code, Treasury Regulations, or 

policies of the IRS (including the Internal Revenue Manual) for the purpose of retaliating or 

harassing a taxpayer or other IRS employee; (7) willful misuse of section 6103 for the purpose 

of concealing data from a Congressional inquiry; (8) willful failure to file any tax return required 

under the Code on or before the due date (including extensions) unless such failure is due to 

reasonable cause; (9) willful understatement of Federal tax liability, unless such understatement 

is due to reasonable cause; and (10) threatening to audit a taxpayer for the purpose of extracting 

personal gain or benefit. Joint Committee on Taxation, General Explanation of Tax Legislation 

Enacted in 1998, at 50 and 51 (JCS–6–98). 10 Commissioner Charles O. Rossotti, Report to the IRS Oversight Board: Assessment of the 

IRS and the Tax System, (Sept. 2002), 12–13 (internal chart and footnote omitted). 11Special Review Panel Report for Charles O. Rossotti, Commissioner, Internal Revenue Service (August 1998), (response of Charles O. Rossotti dated Sept. 14, 1998). 

lection employees on quantitative measures. Still others blame the individual caseload of collection employees and their seemingly endless paperwork requirements. 

I suspect that each of these factors plays a role, although I believe that Section 

1203 is not, or should not be, an excuse for failing to take appropriate actions. After 

all, the IRS has the power—and is now vigorously wielding it—to bar tax professionals from practicing before it, and states have always had the authority to revoke 

licenses of attorneys and accountants for rule violations, thereby depriving these 

professionals of a livelihood. Should we expect less ethical conduct from—and impose lesser sanctions on—IRS employees? 

The most persuasive explanation for the decline in examination and collection resources is the real decline in the IRS’s annual budget over time while the IRS’s 

workload continues to increase. As Commissioner Rossotti noted in his final report 

to the IRS Oversight Board: 

‘‘Despite significant improvements in the management of the IRS, the health of 

the federal tax administration system is on a serious long-term downtrend. This is 

systematically undermining one of the most important foundations of the American 

economy. 

‘‘. . . ‘Trends in Indicators of IRS Workload and Resources,’ from 1992 to 2001, 

weighted average returns filed, a measure of overall IRS workload, increased by 16 

percent because of the economy’s growth. However, during this same period, FTEs 

[full time equivalents] dropped 16 percent from 115,205 in FY 1992 to 95,511 in FY 

2001. Since more and more of the IRS’ declining resources are required to perform 

essential operational functions—such as processing returns, issuing refunds and answering taxpayer mail—a disproportionate reduction occurred in Field Compliance 

personnel, falling 28 percent from 29,730 in FY 1992 to 21,421 in FY 2002. . . . 

‘‘Looking more closely at the most recent five years . . . , we see that the number 

of income tax returns increased by 12 million, while 19 tax bills were passed that 

changed 292 tax code sections and required 515 changes to forms and instructions. 

On the average, IRS workload grows at a compounded rate of 1.8 percent per year. 

Therefore, just to handle this increased workload, the IRS would either have to add 

staff—which is what occurred fairly consistently for the 45–year period from 1950 

through 1995—or would have to increase productivity by 1.8 percent per year just 

to stay even.’’ 10

If budget limitations and increased workload are the real explanation for past declines in enforcement activities, then Commissioner Everson deserves significant 

credit for making a persuasive case for increases in the IRS budget. Without such 

increases, we may find ourselves in the same situation as we were in 1995, with 

declining enforcement activities and even greater deterioration in taxpayer service. 

In January 1998, Commissioner Rossotti appointed three outside members of the 

Senior Executive Service to ‘‘objectively and independently review and assess evidence developed concerning allegations of misuse of enforcement statistics and to 

recommend, if appropriate, disciplinary actions.’’ 11 Attempting to explain the external pressures on the IRS to meet productivity demands, the panel described the 

budget environment in the years leading up to RRA 98: 

‘‘The Administration through the budget process in 1994, called upon Congress 

and the IRS to work together on an approach to both measure and collect more of 

the delinquent taxes that were currently outstanding. The Administration proposed 

that beginning in fiscal year 1995, 5,000 full time equivalents (FTEs) be added to 

assist in improving tax compliance and generating additional revenues. The FY 

1995 Compliance Initiatives were developed to improve compliance, generate additional revenue, and provide for additional staffing. Congress agreed to fund the initiatives by providing $2.025 billion over a five-year period. However, IRS received 

64 

12Special Review Panel Report for Charles O. Rossotti, Commissioner, Internal Revenue Service (August 1998), 16 (internal footnotes omitted). 13 Id. 14 IRS Strategic Plan 2005–2009, Pub. 3744 (Rev. 6–2004), 18. 15 Id. at 14. 16See Statement of Nina E. Olson, National Taxpayer Advocate, before the United States Senate Appropriations Subcommittee on Transportation, Treasury, The Judiciary, Housing and 

Urban Development, and Related Agencies, April 7, 2005; Statement of Nina E. Olson, National 

Taxpayer Advocate, before the United States Senate Committee on Finance on The Tax Gap, 

April 14, 2005. 

only the first installment of $405 million. IRS had committed to generating $331 

million for the first year and promptly hired new [Revenue Officers]. According to 

the IRS, that effort generated $803.3 million during FY 1995. However, in 1996 

Congress chose not to continue funding for the Compliance Initiatives. As a result, 

the thousands of new employees had to be funded out of an already reduced base 

budget. The downsizing efforts already under way because of the reduced base appropriation were made even more complicated.’’ 12

The panel found that budget cuts, along with the Government Performance and 

Results Act of 1993 (GPRA), the Field Office Performance Indicator (FOPI), and 

‘‘IRS’s emphasis on specific statistical targets’’ essentially resulted in ‘‘a competitive 

environment that was driven by statistical data’’ and pressures for greater productivity from examination and collection personnel.13 If we are not careful, we may 

find ourselves operating in a similar environment today. 

THE ROLE OF CUSTOMER SERVICE IN ENFORCEMENT

Customer service—the act of listening to the customer, being professional and ethical in conduct, striving to impose the least burden possible on the customer while 

resolving the problem—should not be limited to the IRS’s taxpayer service functions 

such as the phones or the Taxpayer Assistance Centers. Customer service plays an 

important role in enforcement activities and often makes the difference in resolving 

an issue. Even taxpayers who are noncompliant and are being forced to settle up 

can respond positively to professionalism. In fact, customer service in enforcement 

can save the government resources, because it helps reduce the IRS’s use of more 

expensive enforcement measures such as seizures and sales. Thus, one of our quality measures should track how Examination and Collection employees treat taxpayers. We currently listen in on the toll-free and other phone assistance lines to 

monitor both professionalism and accuracy of responses. The IRS should consider 

expanding the monitoring of Revenue Agents and Revenue Officers along these 

lines. 

There are many reasons why taxpayers are noncompliant with their tax obligations. The IRS acknowledges this fact in its 2005–2009 Strategic Plan: 

‘‘Noncompliance may not be deliberate and can stem from a wide range of causes, 

including the lack of knowledge, confusion, poor record keeping, differing legal interpretations, unexpected emergencies and temporary cash flow problems. However, 

some noncompliance is willful, even to the point of criminal tax evasion.’’ 14

True taxpayer service involves figuring out why taxpayers don’t comply before determining the appropriate IRS compliance action. To date, the IRS has not built this 

approach into its enforcement initiatives or its training of enforcement personnel. 

The IRS should create business performance measures that track the appropriateness of the enforcement response to the reasons for noncompliance. After all, Revenue Agents and Revenue Officers aren’t just in the enforcement business—they are 

actually in the compliance business. A failure to understand the reasons why a taxpayer is noncompliant may lead to greater short-term enforcement results but reduced long-term compliance. 

MAINTAINING AND IMPROVING TAXPAYER SERVICE

The IRS faces formidable challenges in meeting the needs of a diverse taxpayer 

population. The IRS’s current strategic plan relies heavily on self-service and electronic options and gives short-shrift to the real information and literacy gap in the 

United States today.15 For example, the IRS’s current approach to closing Taxpayer 

Assistance Centers (TACs) is based on the assumption that taxpayers who need 

face-to-face services will easily migrate to electronic or other self-service products. 

The IRS overestimates taxpayers’ ability or willingness to conduct complex financial transactions in an electronic or self-service format. While some in today’s society 

are comfortable with banking on line, many are not. As I have stated elsewhere, 

the IRS simply does not know what services various parts of our population need 

delivered in a face-to-face environment.16 Thus, the IRS has focused single-mindedly 

65 

17 IRS Business Systems Modernization Analysis. 

on closing TACs without researching taxpayer needs and identifying alternative 

means of delivering necessary face-to-face taxpayer service. 

I recommend that Congress require IRS to conduct a comprehensive taxpayerbased needs assessment once every five years to complement an ongoing National 

Research Program that measures taxpayer compliance. With this taxpayer-centric 

data in hand, the IRS would be able to make resource and technology allocations 

that actually reflect taxpayer needs. Without this information, the IRS is making 

decisions about taxpayer service based on its own resource needs and general demographic data. A periodic Taxpayer Needs Assessment would prove very helpful when 

the IRS has to make difficult program decisions, some of which involve irrevocable 

consequences such as closing the TACs. The IRS will be hard pressed to obtain the 

resources to reopen TACs if it decides a few years down the line that it made a mistake. 

DECREASES IN TAXPAYER SERVICE DRIVE DECREASES IN COMPLIANCE

Preliminary results from the National Research Project (NRP) indicate that the 

overall compliance rate in 2001 was about the same as that in 1988, the date of 

the last Taxpayer Compliance Measurement Program (TCMP). As discussed above, 

enforcement activities during this period dropped substantially. Taxpayer service, on 

the other hand, improved significantly. Thus, it is entirely possible that improved 

taxpayer service played a major role in maintaining the level of compliance over 

time. 

We may only need a small increase in enforcement activity to capture a significant improvement in compliance. That is, if word spreads on the street that the IRS 

is back in some capacity, we may see a disproportionate increase in the indirect effect of enforcement—what I call the ‘‘ripple effect’’ and economists call the ‘‘multiplier effect.’’ It is also possible that a large enforcement build-up, if coupled with 

a decline in taxpayer service, may result in an overall reduction in compliance. 

MODERNIZATION OF IRS BUSINESS SYSTEMS

Outmoded IRS business systems negatively impact customer service, taxpayer 

rights and IRS business results. By the IRS’s own assessment: 

‘‘The current database architecture inhibits the IRS from delivering the customer 

service expected by the public and experienced in the private sector. Issues such as 

poor customer service to taxpayers, taxpayer non-compliance, poor productivity, and 

job satisfaction by the IRS workforce have received national attention in recent 

years.’’ 17

As the IRS acknowledges, there are many problems with IRS data systems, and 

to address them all would be beyond the scope of this testimony. Three examples 

of the technology challenges facing the IRS will demonstrate how antiquated systems can impact customer service, taxpayer rights, and business results. These examples also demonstrate that the IRS is responding to these challenges but needs 

continued resources and support to ensure that these technology investments reap 

their potential benefits. 

THE ROLE OF BUSINESS SYSTEMS MODERNIZATION IN CUSTOMER SERVICE

Part of the IRS’s information technology problem is that its ‘‘master file’’ systems 

are based on 1960s style business architecture. For example, the age and complexity 

of the Individual Master File (IMF) system causes delays and inaccuracies in providing service to taxpayers. There is lag time in the current IMF system because 

files are updated on a weekly basis. Consequently, taxpayers often cannot obtain 

current account information when they contact the IRS. 

Because current data is not available to IRS employees, taxpayers are often given 

incorrect information on their account status, through both direct contact and notices. In an era when technology allows customers access to real-time information 

in almost every industry, taxpayers expect and deserve some level of sophistication 

from the IRS. 

The cornerstone of the IRS’s response to this problem is the new system known 

as Customer Accounts Data Engine (CADE). CADE is an on-line modernized data 

infrastructure that is being brought on-line in stages and will run in conjunction 

with the Individual Master File (IMF) until it ultimately replaces it. Some of the 

expected benefits of CADE are: 

• Refunds will be issued faster because of daily versus weekly processing; 

66 

18 IRC § 6502(a)(1). See National Taxpayer Advocate 2004 Annual Report to Congress 180 (discussing the CSED problem in detail). 19 IRC §§ 6331(i)(5) and 6331(k)(1). 20 IRC § 6331(k)(2). 21Pub. L. No. 105–206, 112 Stat. 685. 22Pub. L. No. 105–206, § 3461(c)(2), 112 Stat. 685. 23See National Taxpayer Advocate 2004 Annual Report to Congress 185 (citing actual example of taxpayer’s account which should reflect 2 CSEDs but only showed the later CSED). 

• Taxpayers and employees will benefit because they will be working with more 

current information; and 

• The system administers policy and legislative changes easily. 

The IRS can only bring CADE on-line in stages. For example, in July 2004, CADE 

was used to process an initial set of 1040EZ returns. For 2005, CADE is expected 

to process approximately 1.9 million 1040EZ returns. Each year thereafter, CADE 

will handle greater volume and more complexity until it can take the place of the 

existing system for processing individual returns. The benefits of CADE cannot be 

realized, however, unless the IRS is able to fund and properly monitor its continued 

development. 

LACK OF PROGRESS IN BUSINESS SYSTEMS MODERNIZATION IMPACTS TAXPAYER RIGHTS

Because of the slow progress with CADE, the IRS maintained or developed other 

systems to provide IRS personnel with access to tax account and tax return information, such as the Integrated Data Retrieval System (IDRS). These stand-alone systems are not integrated for cross-functional use. The IDRS is also hampered by systemic limitations that prevent the IRS from keeping pace with changes to the tax 

law. 

The failure of the IDRS systems to fully process the changes to the tax laws that 

affected taxpayers’ collection statute expiration dates (CSEDs) demonstrates how 

systems limitations can impact taxpayer rights. The IRS has 10 years from the assessment date of a tax to collect that tax.18 Certain actions can suspend the running 

of the CSED such as a taxpayer’s submission of an offer in compromise 19 or an installment agreement.20 RRA 98 made several important changes to the calculation 

of CSEDs, including the following: 

• The IRS can no longer seek extensions of the collection statute of limitations 

period unless the extension is sought in conjunction with an installment agreement 

or in conjunction with a release of levy; 21

• In the case of an offer in compromise submitted by a taxpayer, the period for 

which IRS could suspend the running of the CSED was changed from the time that 

the offer is being considered plus one year to the time that the offer is being considered plus 30 days; and 

• In cases where the extensions were entered into before December 31, 1999, the 

extensions would terminate on the later of the running of the original CSED or December 31, 2002, except that in the case of installment agreements the extensions 

terminate on the 90th day after the expiration of the extension.22

These changes to the laws applicable to the calculation of CSEDs require IRS systems to perform the necessary CSED calculations to ensure that the IRS is not collecting from taxpayers after the date beyond which it is permitted by law to do so. 

The IRS master file systems are unable to fully process all of these changes in the 

law. The Taxpayer Advocate Service (TAS) detected increasing numbers of cases 

where IRS systems failed to properly calculate the CSED for taxpayers. TAS is 

working with the IRS to identify and correct thousands of inaccurate CSEDs on existing taxpayer accounts. However, these systemic problems will continue to occur 

if the IRS does not update its systems with functionalities that can make the necessary CSED calculations. 

CSED problems also arise because the current IDRS and master file systems cannot accommodate more than one CSED per tax module. Multiple CSEDs can occur, 

for example, when the taxpayer files a balance-due tax return, which generates a 

CSED for that amount, and the IRS subsequently audits the taxpayer, resulting in 

a second CSED for a newly assessed amount. IRS systems will only show the most 

recent CSED, allowing for the possibility that unlawful collection action could be 

taken against the taxpayer after the first CSED expires.23

Other CSED problems arise because IRS systems cannot separate the joint account of spouses when only one spouse files a request for relief from the liability 

(e.g., the spouse files an offer in compromise or requests an installment agreement). 

This situation requires the IRS to separate the joint account into separate accounts 

so that the applicable limitations period is suspended only for the requesting spouse. 

67 

24See National Taxpayer Advocate 2003 Annual Report to Congress 170. 25General Accounting Office, Tax Administration—New Delinquent Tax Collection Methods 

for IRS, 1 (May 1993); see National Taxpayer Advocate 2004 Annual Report to Congress 226 

(discussing the history of the IRS’s collection strategy and offering suggestions for implementation of a modern compliance-based collection strategy); Leslie Book, The Poor and Tax Compliance: One Size Does Not Fit All, 51 Kan. L. Rev. 1145 (2003). 26On average, the passage of time results in diminishing collection returns for the IRS, such 

that after 6 months the IRS loses 47¢ on the dollar, after 24 months it loses 87¢ on the dollar, 

and after 3 years the debt is nearly uncollectible. IRS Automated Collection System Operating 

Model Team, Collectibility Curve (August 5, 2002). 27The IRS is already using decision analytics to a limited extent. See Treasury Inspector General for Tax Administration, Ref. No. 2004–30–165, The New Risk-Based Collection Initiative 

Has the Potential to Increase Revenue and Improve Future Collection Design Enhancement 

(September 2004). The F&PC initiative contemplates a more comprehensive and sophisticated 

use of risk assessment software. 28Pub. L. No. 105–206 § 1001(a)(4). 29 IRS Document 7225, ‘‘History of Appeals,’’ 7–8 (Nov. 1987). 

Inherent limitations in the IRS systems make it cumbersome to separate out the 

accounts of the spouses and can lead to improper collection actions.24

IRS BUSINESS RESULTS AND BUSINESS SYSTEMS MODERNIZATION

The IRS’s collection strategy provides one example of the potential for business 

systems modernization to improve business results while at the same time increasing tax compliance. Commentators inside and outside the IRS have long criticized 

the IRS approach to tax collection as a ‘‘one size fits all’’ approach that applies the 

same collection strategy to all taxpayers regardless of the reasons for the taxpayer’s 

noncompliance.25 Timeliness in contacting debtors is crucial to all debt collection efforts.26 Yet, the IRS collection system keeps all taxpayers in a 6-month notice 

stream before taking any steps to make person-to-person contact, and it treats all 

taxpayers the same, levying on taxpayers who may comply after a phone call and 

ignoring chronically noncompliant taxpayers whose assets should be levied upon. 

With the development of the Filing & Payment Compliance (F&PC) initiative, the 

IRS is making progress toward establishing a modern compliance-based collection 

strategy. The F&PC initiative is a multi-pronged collection strategy that would 

make changes to work processes, organization, and technology to increase payment 

compliance. The cornerstone of the technology piece of F&PC is the use of ‘‘decision 

analytics,’’ which utilize data about the taxpayer to better assess the risk of the account.27 While the IRS employs decision analytics currently, the applications are 

limited in part because data is limited to internal IRS information about the taxpayer. F&PC plans to procure software that will use both external data (such as 

credit ratings) and internal data on taxpayer characteristics to assess risk. Most importantly, the new commercially developed software will then be used to select the 

optimal treatment for any given taxpayer based on that taxpayer’s characteristics. 

This process should improve business results by enabling the IRS to assign the optimal collection treatment in a timely fashion. At the same time, this process should 

improve taxpayer payment compliance and protect taxpayer rights by applying the 

right collection touch to each taxpayer. 

The above examples demonstrate that technology has a profound impact on customer service, taxpayer rights, and business results. In each of these examples, the 

IRS has plans to address the problem with enhanced technological capabilities. 

However, the complex nature of these problems does not allow for a one-time technological fix. The IRS will be able to steadily improve its customer service, the protection of taxpayer rights, and its business results only if it sustains a long-term 

commitment to modernize IRS business systems and receives adequate funding and 

Congressional oversight. 

DISTURBING TRENDS SINCE RRA 98

INDEPENDENCE OF APPEALS

RRA 98 requires the IRS to ‘‘ensure an independent appeals function within the 

[IRS].’’ 28 This requirement recognizes that independence is the critical ingredient 

of a healthy and successful IRS Appeals function. The Appeals Office itself has historically recognized that it must be independent of IRS enforcement in both fact and 

appearance.29 In fact, independence is central to Appeals’ mission to ‘‘resolve tax 

controversies, without litigation, on a basis which is fair and impartial to both the 

government and the taxpayer in a manner that will enhance voluntary compliance 

68 

30 IRM 8.1.1(2) (Feb. 1, 2003). 31 IRS Document 7225, ‘‘History of Appeals,’’ 7–8 (Nov. 1987). 32 A 1987 IRS document summarized Appeals’ history: ‘‘A 1952 reorganization established the 

structure of the Appeals organization along the lines we see today [i.e., 1987]. Prior to the 1952 

reorganization, the Appeals function (Technical Staff) reported directly to the Commissioner 

through the Head of the Technical Staff. The reorganization brought about the establishment 

of a system of regional administration of districts under Regional Commissioners of Internal 

Revenue. However, to maintain the independent status of Appeals and preserve the principle 

of separating the Audit and Appeals operations, the Appeals function was carved out and placed 

under the office of the Assistant Regional Commissioner (Appellate), who had final settlement 

authority. . . . In 1982, the Chief Counsel was delegated line supervisory authority over Appeals by the Commissioner. The transfer of Appeals to Chief Counsel facilitates the flow of information and assistance between appeals officers and counsel attorneys.’’ See IRS Document 7225, 

‘‘History of Appeals’’ (Nov. 1987). 

In 1995, the IRS moved the reporting structure of the Office of Appeals from Chief Counsel 

back to the Commissioner and Regional Commissioners. See IRS Appeals to be Under Commissioner in Chief Counsel Reorganization, 95 TNT 117–4, June 16, 1995; Linda B. Burke, TEI 

Says IRS Appeals Function Should Report to Deputy Commissioner, Not Chief Counsel, 95–TNT 

108–89, June 5, 1995. (‘‘The current structure of Appeals, reflecting the 1982 decision to shift 

Appeals to the Chief Counsel’s ‘‘side of the house,’’ has contributed to a perceived diminution 

in Appeals’’ independence. Given Counsel’s role as the adviser to Examination personnel, it is 

hardly surprising that taxpayers are less than sanguine about Appeals’ reporting to Counsel. 

Indeed, anecdotal evidence suggests that Counsel has generally become more involved in the 

management and oversight of Appeals’ workload and that this involvement has affected Appeals’ 

attitude toward settlement.’’) 

In 1998, Congress enacted legislation to ‘‘ensure an independent appeals function within the 

[IRS]’’. Pub. L. No. 105–206 § 1001(a)(4). For examples of Congressional concerns with Appeals 

independence, see 144 Cong. Rec. S4182 (1998) (‘‘One of the main concerns we’ve listened to 

throughout our oversight initiative—a theme that repeated itself over and over again—was that 

the taxpayers who get caught in the IRS hall of mirrors have no place to turn that is truly independent and structured to represent their concerns. With this legislation, we require the agency 

to establish an independent Office of Appeals—one that may not be influenced by tax collection 

employees and auditors’’) and 144 Cong. Rec. S7639 (1998) (‘‘the bill mandates that the Commissioner’s restructuring of the IRS include an independent appeals function. This appeals unit is 

intended to provide a place for taxpayers to turn when they disagree with the determination 

of front-line employees. A truly independent appeals unit will assure that someone takes a fresh 

look at taxpayers’ cases, rather than merely rubber-stamping the earlier determination’’). 33See National Taxpayer Advocate 2004 Annual Report to Congress 264–89. 34S cases stem from compliance issues totaling less than $50,000 under IRC § 7463. 35The Taxpayer Advocate Service is currently developing this issue as a possible Most Serious 

Taxpayer Problem for the National Taxpayer Advocate’s 2005 Annual Report to Congress. 36FY 2005 Congressional Submission. 37See National Taxpayer Advocate 2004 Annual Report to Congress 290–310. 38See IRC § 7123(b)(1) (directing the Secretary to ‘‘prescribe procedures under which a taxpayer or the Internal Revenue Service Office of Appeals may request non-binding mediation on 

any issue unresolved at the conclusion of—(A) appeals procedures; or (B) unsuccessful attempts 

to enter into a closing agreement under section 7121 or a compromise under 7122.’’). 39See S. Rep. 105–174 (April 22, 1998) (‘‘The Committee also believes that mediation . . . 

would foster more timely resolution of taxpayers’ problems with the IRS. In addition, the Comand confidence in integrity and efficiency of the [IRS].’’ 30 Without independence, 

taxpayers will view Appeals as an ‘‘arm of the Examination function or an adversary 

seeking to strengthen the government’s case.’’ 31 As a result of concern about Appeals’ independence, the IRS has altered the Appeals reporting structure several 

times over the last 50 years.32

As I discussed in my 2004 Annual Report to Congress, several recent developments in Appeals raise concerns about its independence from the IRS enforcement 

function—in both perception and reality: 33

• Appeals is centralizing most of its inventory (including Tax Court docketed ‘‘S’’ 

cases 34) at IRS campuses—limiting taxpayer access to face-to-face Appeals conferences and reassigning cases to campus employees that have traditionally worked 

in enforcement; 35

• Appeals participation in certain IRS settlement initiatives and various exceptions to the prohibition against ex parte communications by Appeals erodes the protection afforded taxpayers by that prohibition; 

• Appeals actively participates with IRS enforcement in developing IRS enforcement settlement initiatives; and 

• The IRS currently categorizes more than 90 percent of Appeals budget as enforcement activity.36

I also have concerns about the current state of Appeals’ mediation programs.37

Congress directed the IRS in RRA 98 to establish certain mediation procedures.38

The legislative history states that mediation fosters more timely resolution of taxpayer problems and should be extended to all taxpayers.39 However, the IRS’ mediVerDate Aug 31 2005 02:13 Oct 28, 2005 Jkt 023854 PO 00000 Frm 00078 Fmt 6633 Sfmt 6621 E:\HR\OC\A854.XXX A854
69 

mittee believes that the ADR process is valuable to the IRS and taxpayers and should be extended to all taxpayers.’’). 40See National Taxpayer Advocate 2004 Annual Report to Congress 294. 41See Fast-Track Settlement Now Available to Small Business, 2005 TNT 82–2 (April 29, 

2005). 42See Treas. Reg. § 301.7122–1, et. seq.; Form 656, Offer in Compromise (Rev. 7–2004). 43Policy Statement P–5–100, IRM 1.2.1.5.18 (Rev. 1–30–1992). 44Form 656, Offer in Compromise (Rev. 7–2004). 45 H.R. Conf. Rep. 599, 105th Cong., 2d Sess., 288–289 (1998) (stating that ‘‘[t]he Senate 

amendment provides that the IRS will adopt a liberal acceptance policy for offers-in-compromise 

to provide an incentive for taxpayers to continue to file tax returns and continue to pay their 

taxes. . . . The conferees believe that the ability to compromise tax liability . . . enhances taxpayer compliance.’’). 46 RRA 98, Pub. L. No. 105–206 (1998). 47 H.R. Conf. Rep. 599, 105th Cong., 2d Sess. 289 (1998). 48 National Taxpayer Advocate 2004 Annual Report to Congress 311–341 (describing problems 

in the offer-in-compromise program) and 433–450 (proposing a legislative recommendation to 

mitigate some of the problems). 49SB/SE Payment Compliance and Office of Program Evaluation and Risk Analysis (OPERA), 

IRS Offers in Compromise Program, Analysis of Various Aspects of the OIC Program (September 2004). 50For more detail, see National Taxpayer Advocate 2004 Annual Report to Congress 433–450. 

ation programs, Fast Track Mediation (FTM) and post-Appeals mediation are rarely 

used.40 Rather than improve its mediation programs to meet taxpayer concerns and 

educate taxpayers about the benefits of mediation, Appeals has announced that it 

is reallocating its FTM program resources to its popular Fast Track Settlement program.41

OFFER-IN-COMPROMISE PROGRAM

The ‘‘offer in compromise’’ (OIC) program allows for the compromise of tax liabilities based upon ‘‘doubt as to liability’’ or ‘‘doubt as to collectibility,’’ or in furtherance of ‘‘effective tax administration.’’ 42 The IRS’ goal for the OIC program is to 

achieve collection of what is reasonably collectible at the least cost and at the earliest possible time and to promote future compliance by providing taxpayers with 

a ‘‘fresh start.’’ 43 OICs also promote future compliance by requiring, as a condition 

of the OIC agreement, that the taxpayer file returns and pay taxes for the following 

five years.44 In RRA 98, Congress expanded the bases for compromise to include ‘‘effective tax administration’’ based on its belief that OICs promote voluntary compliance.45 The intended effect of this expansion was generally to increase the IRS’ 

flexibility in accepting OICs.46 The conference report for this legislation explained: 

‘‘The conferees believe that the IRS should be flexible in finding ways to work 

with taxpayers who are sincerely trying to meet their obligations and remain in the 

tax system. Accordingly, the conferees believe that the IRS should make it easier 

for taxpayers to enter into offer-in-compromise agreements, and should do more to 

educate the taxpaying public about the availability of such agreements.’’ 47

Appropriate revisions to the IRS approach to evaluating offers in compromise, as 

I discussed in my 2004 Annual Report to Congress, would increase revenues collected and bring more taxpayers back into compliance.48 IRS’s own research shows 

that for more than half of the offers from individual taxpayers that it rejected or 

returned, it eventually collected less than 80 percent of what taxpayers were offering, and it collected nothing in more than 20 percent of those cases.49 The same 

study also shows that 80 percent of the taxpayers whose offers were accepted remained in compliance with their tax obligations over the five-year period following 

offer acceptance, as required by the terms of the offer. Thus, the offer in compromise 

program converts noncompliant taxpayers into compliant ones and brings in enforcement revenue that the IRS would not otherwise collect. 

In 1998, Congress authorized the IRS to compromise tax debts based upon factors 

such as equity, public policy and hardship in cases where doing so would promote 

the effective administration of the tax laws (ETA offers). However, the IRS has interpreted the congressional authorization so narrowly that, for example, the IRS 

group charged with evaluating such offers accepted only a single ETA offer based 

upon equity or public policy in FY 2004. We believe that the IRS’ reluctance to compromise in inequitable situations may lead taxpayers to disregard the law or erode 

their faith in the fairness of the income tax system. As I described in my 2004 Annual Report to Congress, I am not confident that the IRS will, on its own, use its 

ETA authority in the manner I believe Congress intended. I therefore recommend 

that Congress provide more specific guidance to the IRS to ensure that a new ‘‘equitable consideration’’ standard be applied in a broader array of cases.50

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51 IRC § 7803(c). 

TAXPAYER ADVOCATE SERVICE MISSION

The statutory mission of the Taxpayer Advocate Service is to help taxpayers resolve their problems with the IRS and make administrative and legislative recommendations to mitigate those problems.51 The Taxpayer Advocate Service (TAS) 

was never intended to become a ‘‘shadow IRS’’ or to take on core IRS functions. 

Today, however, TAS is increasingly asked to meet taxpayer service needs that the 

IRS no longer wants to meet or is providing for inadequately. 

I anticipate that TAS will be asked to provide more taxpayer service to fill needs 

that arise as a result of IRS cuts in that area. To illustrate, IRS Taxpayer Assistance Centers (TACs) last year stopped issuing transcripts to taxpayers. For the first 

six months of FY 2005, TAS cases involving requests for copies of tax returns and 

account transcripts have consequently increased by 58.4 percent as compared with 

the same period last year. TAS offices that are co-located with TACs subject to closure are particularly likely to see an upsurge in taxpayer requests as taxpayers 

seeking face-to-face assistance from IRS employees come to TAS instead. In fact, 

TAS cases resulting from referrals from TACs increased by 29.7 percent for the first 

six months of FY 2005 over the same period last year due to reduced TAC hours 

and reduced scope of services. Unless we turn away taxpayers who require assistance, we will increasingly be handling cases that other IRS functions have handled 

in the past. This situation constitutes a significant deviation from TAS’s statutory 

mission. It is not TAS’s role to provide core IRS services. 

Instead of learning from how TAS resolves both individual and systemic problems—as was the intent of the RRA 98 restructuring and creation of TAS—the IRS 

is simply allowing TAS to pick up the slack for the services it doesn’t want to provide. Ultimately, either TAS may become unable to fulfill its statutory mission or 

it will have to pick and choose cases, which will harm taxpayers. Continued Congressional oversight and emphasis on the importance of IRS providing core taxpayer 

service will ensure that TAS resources are applied to its Congressionally mandated 

mission—to help taxpayers resolve their problems with the IRS and to recommend 

systemic solutions to mitigate taxpayer problems. 

Representative RAMSTAD. Mr. White, please. 

STATEMENT OF JAMES R. WHITE, DIRECTOR, STRATEGIC 

ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. WHITE. Thank you. Mr. Chairman and members of the committee. We are glad to participate in today’s hearing. I want to 

cover two topics: IRS’s recent progress and looking forward to challenges in managing resources to continue progress. 

First, IRS has made progress in recent years in improving taxpayer service and modernizing operations, but the gains have not 

been uniform. The most noticeable progress has been in service. 

Over the last several years, both access to IRS by telephone and 

the accuracy of IRS answers to telephone—to taxpayers’ telephone 

questions have noticeably improved. 

IRS’s Web site, a relatively new service, is heavily used and provides a variety of services including form and publication 

downloads, refund status checks and access to free return preparation and electronic filing. 

The progress has been less clear in enforcement. The net tax gap, 

the uncollected part, is now estimated to be over $257 billion per 

year. 

IRS saw declines in enforcement staffing after 1998, but has recently stopped the declines and begun to show some increases. At 

the same time, IRS’s workload measured by, for example, the number of high-income tax returns or the emergence of sophisticated 

tax shelters and schemes has been increasing. Combining the 

trends and staffing and workload, nearly every indicator of IRS’s 

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coverage of its enforcement workload has declined in recent years. 

As a result, tax law enforcement remains on our high-risk list. 

As for system modernization, IRS has made significant progress 

in establishing long-overdue management controls and bringing 

some new systems online. New systems include the call router, 

which has improved telephone service, and the first phase of the 

customer account data engine, which has been processing very simple tax returns this year. 

However, BSM remains high risk because of the scope and complexity of the program and the history of schedule delays and cost 

overruns. 

Also of concern are serious information security weaknesses. In 

a recently issued report, we identify 39 new information security 

control weaknesses. IRS generally agreed with our recommendations to fix problems. 

Looking ahead, IRS faces a number of resource management 

challenges, but also has opportunities to better manage resources 

to continue its progress. First, long-term goals would help Congress 

and others assess IRS’s performance, evaluate budget requests and 

hold IRS management more accountable. For example, long-term 

goals would provide a framework for assessing budgetary trade-offs 

between service and enforcement and whether IRS is making satisfactory progress toward goals. 

Second, IRS’s funding might be enhanced, albeit modestly, by additional user fees which now account for less than 1 percent of 

IRS’s budget. Additional leveraging of non-Federal partners might 

also enhance IRS’s effectiveness at little additional cost. Currently, 

IRS partners with the States on enforcement and with volunteers 

on tax return preparation. 

Third, efficiency gains from several sources could provide a bigger bang per dollar spent on IRS. Productivity gains from reengineering processes or from new technology are one source. Another source is better targeting of resources. 

For example, IRS provides a menu of services, including telephone, Internet and walk-in services, as well as return preparation 

at volunteer sites. In light of recent service improvements, it may 

now be possible for IRS to consider reducing some items provided 

on the menu without reducing the quality of service received by 

taxpayers. Cuts in selected services might be offset by other new 

and improved services. Doing so would require prioritizing the 

services that IRS offers. 

My statement offers some criteria for setting priorities such as 

demand for services by taxpayers. Similarly, with better data about 

noncompliance, IRS might better target its enforcement resources 

on suspected noncompliance. 

Fourth, creating the system to enable IRS to develop accurate 

cost estimates could result in better resource allocations. 

Fifth, succeeding in implementing recommended management 

improvements would help IRS bring planned new information systems on line in a timely and cost-effective manner. The new system 

should improve service and enforcement and reduce costs. 

In addition, IRS is adjusting the BSM program in response to 

budget reductions resulting from concerns about cost overruns and 

delays. It is too soon to tell what effect the adjustment, such as 

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shifting more management responsibility from the prime contractor 

to IRS staff, will have, but they are not without risk. 

Finally, making the recommended improvements to assure information system security is essential for maintaining the public’s 

trust in our tax system. 

Mr. Chairman, this concludes my statement. I would be happy 

to answer questions. 

Representative RAMSTAD. Thank you very much, Mr. White. 

[The statement of Mr. White follows:] 

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Representative RAMSTAD. I want to thank all of the witnesses for 

your excellent testimony and for staying within the 5–minute rule. 

The first question I have is for you, Mr. George. 

It is upsetting, to say the least, to hear you say that some of our 

men and women serving in combat zones are not receiving the tax 

benefits to which they are entitled because of administrative problems at the IRS. In response to TIGTA’s report that you mentioned, 

has the Service taken the necessary steps to address this problem? 

Mr. GEORGE. While I cannot give a definitive response to that, 

Mr. Chairman, the report was issued last month, and from all indications, the IRS has indicated that it is working both with the Department of Defense to update computer systems so that the two 

can have more accurate information, as well as IRS implementing 

a program internally to clean up the information in the records 

that it has on this issue. 

We will certainly follow up and report to this committee our findings in due time. 

Representative RAMSTAD. We would appreciate that followthrough because certainly the last group of taxpayers that should 

not receive tax benefits would be those men and women in harm’s 

way and those brave troops risking their lives in combat zones. So, 

we appreciate your attention to that. 

I have a question for Ms. Olson. 

Ms. Olson, with reference to your needs assessment recommendation, I certainly agree that the IRS should study taxpayer needs before making changes in the way services are delivered. That is only 

common sense. 

In your judgment, is legislation required, or does the IRS, under 

current law, have such authority? 

Ms. OLSON. I think that the IRS has the authority to do it now. 

It is a question of their willingness to allocate resources to it. 

You know, when we talk about the model for the walk-in centers, 

the Taxpayer Assistance Centers, the IRS talks about how they use 

as a factor the—what services were demanded from the walk-in 

sites currently. But the IRS has been reducing and limiting the 

number of services over years, so their data is flawed. 

I visited my New Orleans office, and they said that there were 

taxpayers during filing season who were literally in line, outside 

the walk-in site, around the entire building. The IRS only counts 

the taxpayers who make it through the doors in the walk-in sites. 

They only do 10 returns a day during filing season, and that is the 

data that got plugged into the model. 

So I don’t think the model reflects the need. And I believe that 

there was another need to measure what taxpayers want or need, 

rather than just the IRS data. IRS can do it. It is a question of 

whether they need some nudging. 

Representative RAMSTAD. Thank you, Ms. Olson. 

I would like to ask you, Chairman Wagner, in your testimony 

you said that in the ideal tax system, taxpayers will find ‘‘compliance easy to achieve and difficult to avoid,’’ to quote your words. 

To move closer to that ideal, you say that Congress and the IRS 

should work together and establish measurable performance criteria. 

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Could you just elaborate on the measurements that you would 

recommend? What are the criteria? 

Mr. WAGNER. Well, I think, Mr. Chairman, that there would be 

a whole host of measures and criteria that should be considered. 

It would be something that would be developed jointly between 

stakeholders, the IRS, various interested parties such as the board 

and representatives from this group. 

Strategically, the electronic filing goal was certainly a very worthy goal that was set by Congress a few years ago. That strategic 

thinking needs to be continued and expanded. 

There needs to be a focus on strategic and outcome measurement 

compliance, such as voluntary compliance rates, administrative 

burden, and end results of interactions with taxpayers that include 

customer service and compliance activities. You know, I think that 

there would be a whole range of measures that need to be considered and collaboration with stakeholders and partners would yield 

a better array of measures. 

Representative RAMSTAD. Well, again I want to thank all of the 

witnesses. 

At this time, the Chair recognizes Mr. Olver for questions. 

Representative OLVER. Thank you very much, Mr. Chairman. 

In one way or another, each of the four of you has raised some 

question about the closure of service centers. I think I am correct 

in that. And the—from my position in Appropriations, the two most 

important issues that we have to deal with are those closures of 

the service centers, and it seems to me, the private collections program. 

I don’t know whether you have seen Mr. Everson’s testimony, his 

written testimony. Almost all of page 3, except for a couple of lines 

at the top, and the first paragraph on page 4 of that testimony go 

through a fairly coherent, very neat description of things that the 

changes in the use of electronic filings and such mean. 

I would appreciate it very much if, from your point of view—for 

my edification and for the work that I do, if you could address 

yourselves in written form to that one page of his description. 

And I know some of you said the information isn’t yet available, 

isn’t complete. What would be needed to decide whether what is 

appropriate is there? It would be great if you could do that. 

Now, I would like to—if we look at the data for how we function, 

it is quite remarkable, actually. Compliance is voluntary up to the 

85 percent level. We are getting $6 out of $7 involuntarily, essentially; the rest is a tax gap. It is a $300 billion, roughly, tax gap. 

And Mr. Everson has been very eloquent about how corrosive 

that is for voluntary compliance, when people who pay what they 

owe and do so, some very willingly, some maybe just because it is 

the law, do not see their neighbors doing the same thing. 

And so the tax gap is certainly important. If we could get at just 

bringing the compliance, the voluntary compliance, up to 90 percent—of course, that is $100 billion; that would be one-third of the 

tax gap—it would have a major impact on both the fairness of the 

system, as perceived, in its totality, but also on our deficits. 

Now, I used some data earlier which probably were not fair. The 

actual voluntary input seems to be about $1.8 billion. Well, that is 

about $400 per dollar of tax enforcement money, the account in the 

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IRS budget, which is $4.5 billion for tax enforcement. As I pointed 

out—and I was reading from Mr. Everson’s testimony—he had 

pointed out that the enforcement activities, coupled with late payments, recover about 55 billion of that tax gap and brings it down 

to a net tax gap. 

Well, if you take the 55 billion of those enforcement and late payments and apply just with that 4.5 billion of expenditures for tax 

law enforcement, you get a 12-to-1 margin. 

It seems to me that anything that is less than a 12-to-1 margin, 

which would be 8 percent for debt collectors—for payments to debt 

collectors means fairly clearly that we could do that better by using 

our own well-trained employees, without having any problem of potential harassment, midnight calls, or questions about privacy, 

which have been raised by a number of people — some of them, 

you who are testifying. And there again, that is a very, very rough 

kind of an estimate. 

I pulled out—and this is for you, Mr. Wagner. I pulled out of Mr. 

Rossotti’s document—as he was going out the door, I guess—the 

idea that there was one account, one set—I exaggerated the numbers there a little bit—of field and phone accounts receivable where 

they hadn’t been able, because they didn’t have the staff, to go back 

and get the numbers of dollars that were owed, that everybody 

knew were owed; and that came to $9 billion. And Mr. Rossotti was 

saying that $300 million would be able to collect that. That would 

be—in that kind of a count, in that category; there may be other 

categories, there are other categories—but that would be a 30-to1 value. 

If any of you would like to give me in writing some analysis or 

thoughts on that, on what I am talking about here, that would be 

very helpful to what I do in my committee. 

Thank you. 

Representative RAMSTAD. The gentleman’s time has expired. 

We have a series, as you can hear, of five votes and I don’t want 

to keep these witnesses. That will take 45 minutes at least, if not 

longer. So if we could, limit our questions to a couple of minutes. 

Senator, please. 

Senator AKAKA. Thank you very much, Mr. Chairman. 

Ms. OLSON, as you know, I have been pushing for the authorization of grant program that would link free tax preparation services 

for low-income taxpayers with the establishment of low-cost bank 

and credit union accounts. This year it has been incorporated into 

a bipartisan bill, S.832, the Taxpayer Protection and Assistance 

Act, which was introduced by Senator Bingaman. 

What is your evaluation of this program, and what else can be 

done to reduce the use of RALs? 

Ms. OLSON. Well, sir, I think that funding—linking tax preparation with financial literacy initiatives and creating low-dollar bank 

accounts for taxpayers in this low-income population and immigrant population is just absolutely essential, and I think that your 

legislation really goes a far way to that. 

I will note that the IRS has just recently entered into a letter 

of understanding with the Justice Department in the Weed and 

Feed program, to provide, my understanding is, $1 million in 

grants to volunteer income tax assistance programs that will move 

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into communities that are identified as high-crime or high-drug or 

low-income and actually fund tax preparation in that area in conjunction with financial literacy. And I think that is a wonderful initiative. 

And your program would go further. I have been encouraging 

Treasury and the IRS to look at other means of delivering refunds 

other than through direct deposit or paper checks. The United 

Kingdom delivers their refundable credits through either sponsoring low-dollar savings accounts, that can be accessed through an 

ATM card, or literally delivering the refund on a debit card such 

as we give food stamp benefits today, that taxpayers can go to any 

bank, any post office, get the dollars downloaded onto that card 

after showing identification; and that would just simply cut out the 

refund anticipation loan market without regulating it at all. 

I really am enamored with that idea. I think we should be pursuing that. We do it already in other benefit programs. 

Senator AKAKA. Thank you very much. 

I know we are strapped for time, Mr. Chairman. I have questions, but thank you. 

Representative RAMSTAD. Thank you, Senator, for your courtesy 

to the House Members. The gentleman from New York. 

Representative SWEENEY. Very briefly, Mr. Chairman, thank you; 

and thanks to all the witnesses. 

By no means—this is not a reflection of a lack of appreciation. 

I have a lot of questions actually for each one of you. 

Just in response to you, Chairman Wagner, I understand there 

is concern about the appropriation numbers. As we work with the 

executive branch, trying to pay down the deficit, there are constraints upon us. As you saw by Mr. White’s testimony, there are 

a lot of needs within the IRS that would instill a greater sense of 

confidence in us appropriators to a greater level of funding, and I 

am looking forward to your report because I think that is an important step in that process. 

So I will yield back my time with that. 

Representative RAMSTAD. The Chair thanks the gentleman and 

thanks all the witnesses for your testimony and your good work, 

your important work. 

With no further business before the joint review, the hearing is 

adjourned. 

[Whereupon, at 4:46 p.m., the joint review was adjourned.] 

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