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79–436 2002

2002 TAX RETURN FILING SEASON AND THE IRS

BUDGET FOR FISCAL YEAR 2003

HEARING

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

APRIL 9, 2002

Serial No. 107–61

Printed for the use of the Committee on Ways and Means

(

ii

COMMITTEE ON WAYS AND MEANS

BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

AMO HOUGHTON, New York 

WALLY HERGER, California 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

JIM NUSSLE, Iowa 

SAM JOHNSON, Texas 

JENNIFER DUNN, Washington 

MAC COLLINS, Georgia 

ROB PORTMAN, Ohio 

PHIL ENGLISH, Pennsylvania 

WES WATKINS, Oklahoma 

J.D. HAYWORTH, Arizona 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

SCOTT MCINNIS, Colorado 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

ROBERT T. MATSUI, California 

WILLIAM J. COYNE, Pennsylvania 

SANDER M. LEVIN, Michigan 

BENJAMIN L. CARDIN, Maryland 

JIM MCDERMOTT, Washington 

GERALD D. KLECZKA, Wisconsin 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

WILLIAM J. JEFFERSON, Louisiana 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

KAREN L. THURMAN, Florida 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

ALLISON GILES, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON OVERSIGHT

AMO HOUGHTON, New York, Chairman

ROB PORTMAN, Ohio 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

SCOTT MCINNIS, Colorado 

MARK FOLEY, Florida 

SAM JOHNSON, Texas 

JENNIFER DUNN, Washington 

WILLIAM J. COYNE, Pennsylvania 

MICHAEL R. MCNULTY, New York 

JOHN LEWIS, Georgia 

KAREN L. THURMAN, Florida 

EARL POMEROY, North Dakota

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 

iii

C O N T E N T S 

Page 

Advisory of March 28, 2002, announcing the hearing .......................................... 2

WITNESSES 

Internal Revenue Service, Hon. Charles O. Rossotti, Commissioner .................. 6

U.S. General Accounting Office, James R. White, Director, Tax Issues ............. 40

American Institute of Certified Public Accountants, James A. Dougherty ......... 66

H&R Block, Inc.: 

Mark A. Ernst ................................................................................................... 71

Robert Weinberger ............................................................................................ 86

National Association of Enrolled Agents, and Padgett Business Service, Roger 

Harris .................................................................................................................... 80

National Society of Accountants, and National Tax Consultants, William Stevenson ................................................................................................................... 86

National Treasury Employees Union, Colleen M. Kelley ..................................... 55

SUBMISSION FOR THE RECORD 

Kole, Karen, Valparaiso University School of Law Tax Clinic, Valparaiso, 

Indiana, letter ....................................................................................................... 97

(1)

2002 TAX RETURN FILING SEASON AND THE 

IRS BUDGET FOR FISCAL YEAR 2003

Tuesday, April 9, 2002

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON OVERSIGHT, 

Washington, DC.

The Subcommittee met, pursuant to notice, at 2:05 p.m., in room 

1100 Longworth House Office Building, Hon. Amo Houghton 

(Chairman of the Subcommittee) presiding. 

[The advisory announcing the hearing follows:]

2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON OVERSIGHT

FOR IMMEDIATE RELEASE CONTACT: (202) 225–7601

March 28, 2002

No. OV–10

Houghton Announces Hearing on the

2002 Tax Return Filing Season and the

IRS Budget for Fiscal Year 2003

Congressman Amo Houghton (R–NY), Chairman, Subcommittee on Oversight of 

the Committee on Ways and Means, today announced that the Subcommittee will 

hold a hearing on the 2002 tax return filing season and the Administration’s budget 

request for the Internal Revenue Service (IRS) for fiscal year 2003. The hearing 

will take place on Tuesday, April 9, 2002, in the main Committee hearing 

room, 1100 Longworth House Office Building, beginning at 2:00 p.m.

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. Witnesses will include IRS Commissioner Charles Rossotti, James White, Director of Tax Administration and Justice 

Issues, U.S. General Accounting Office, as well as representatives of the National 

Treasury Employees Union and groups involved in tax preparation. However, any 

individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed 

record of the hearing. 

BACKGROUND: 

The 2002 tax return filing season refers to the period from January 1st to April 

15th when U.S. taxpayers will file more than 137 million tax returns, including 44.9 

million e-filed returns. During this period the IRS is expected to issue over 100 million tax refunds, answer 108 million telephone calls from taxpayers asking for assistance, and its homepage will receive 3 billion hits. 

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

2003. This level of funding will support approximately 101,000 employees who will 

collect about $1.9 trillion in taxes, according to Administration estimates. 

Beyond supporting the traditional activities of the filing season, the fiscal year 

2003 budget request addresses three key strategic goals by the Administration, including pre-filing assistance, filing assistance, and taxpayer compliance programs. 

The budget request also includes $450 million for the continued Business Systems 

Modernization effort, as well as $154 million for the Earned Income Tax Credit 

Compliance Initiative. The Business Systems Modernization effort is a continuation 

of the program initiated by the landmark IRS Restructuring and Reform Act of 1998 

(P.L. 105–206). 

In announcing the hearing, Chairman Houghton stated: ‘‘Improved customer service was the promise of the new IRS after the Restructuring and Reform Act of 1998. 

This hearing gives us the opportunity to ensure that the IRS is living up to its 

promise by processing taxpayer questions, returns, and refunds as efficiently as possible. I am looking forward to our annual review of the tax filing season and the 

IRS budget.’’

3

FOCUS OF THE HEARING: 

The Subcommittee will review developments in the 2002 tax filing season, including progress in the customer communications system, electronic filing, and systems 

modernization. In addition, the Subcommittee will review the proposed budget for 

the IRS for fiscal year 2003. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

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

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

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

fax copy to (202) 225–2610 by the close of business, Tuesday, April 23, 2002. Those 

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

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

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

refuse sealed-packaged deliveries to all House Office Buildings. Failure to do so 

may result in the witness being denied the opportunity to testify in person.

FORMATTING REQUIREMENTS: 

Each statement presented for printing to the Committee by a witness, any written statement 

or exhibit submitted for the printed record or any written comments in response to a request 

for written comments must conform to the guidelines listed below. Any statement or exhibit not 

in compliance with these guidelines will not be printed, but will be maintained in the Committee 

files for review and use by the Committee. 

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

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

with a fax copy to (202) 225–2610, in Word Perfect or MS Word format and MUST NOT exceed 

a total of 10 pages including attachments. Witnesses are advised that the Committee will rely 

on electronic submissions for printing the official hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments 

by the Committee, must include on his statement or submission a list of all clients, persons, 

or organizations on whose behalf the witness appears. 

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

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

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

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

226–3411 TTD/TTY in advance of the event (four business days notice is requested). 

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

Good afternoon, Commissioner, glad to see you here. 

Chairman HOUGHTON. Good afternoon, ladies and gentlemen. 

f Let me make an opening statement first, and then I will ask anyone else if they have an opening statement, particularly Mr. Coyne. 

As we all know, voluntary compliance is the foundation of our 

tax system. I cannot tell you how troubled I am about recent reports that show an erosion of trust in its fairness. This apparent 

erosion coincides with the persistent decline in enforcement statistics. The percentage of taxpayers who are audited has declined, and 

some say tax professionals can no longer convince clients to fear 

4

the Internal Revenue Service (IRS). One tax adviser has taken to 

posing a depiction of heaven and hell on her wall to supply the fortitude that fear of an IRS audit once supplied. 

I don’t want to add to this problem by failing to observe that the 

vast majority of taxpayers are indeed honest and comply faithfully 

and with great integrity. But we do need to address this problem, 

and I will ask each of our witnesses today what we can do to turn 

the situation around. 

Our witnesses have specific knowledge or experience with different aspects of IRS operations. In addition to sharing their views 

on tax compliance, they will focus on the 2002 filing season, the 

President’s budget request, and also current developments at the 

IRS. 

Despite the progress of the IRS is making in customer service, 

as highlighted in the Commissioner’s testimony, there is still troubling reports that IRS performance is lagging in some areas. For 

example, taxpayers continue to complain about various aspects of 

the Offer in Compromise Program, and independent reviewers have 

expressed concerns about the quality of telephone assistance and 

walk-in assistance to taxpayers. 

On the other hand, the IRS appears to be doing better this year 

to encourage electronic filing and a whole variety of other things. 

On Wednesday, I hope, the House is scheduled to consider the 

Taxpayer Protection and IRS Accountability Act of 2002, legislation 

that some of us have sponsored. Commissioner Rossotti played an 

important role in advocating the modification we are making to the 

so-called 10 deadly sins—I guess there are 11 of them now—provisions of the 1998 IRS Restructuring Act; and the President, in his 

budget request, proposed a 15-day extension for electronic filers 

that we are adopting. I hope that that 15-day extension will further 

accelerate the pace of electronic filing and that the change of the 

10 deadly sins improves morale at the IRS while continuing to protect taxpayers from arbitrary and unlawful conduct. 

Additionally, I would like to note that the Administration will be 

submitting to Congress a series of recommendations on individual 

tax simplification in the next several weeks. I look forward to reviewing those recommendations, and I hope we can act on them in 

the near future. 

Now, let me turn to Commissioner Rossotti for a moment. The 

Commissioner has transformed the IRS. He has transformed it 

from an outdated structure based on geography into a modern customer-focused agency organized around the tax needs of American 

citizens. He has also laid the groundwork for technological change 

that will carry the IRS into the 21st century. We are just beginning 

to see the fruits of those innovations today. For example, the electronic funds transfer payment system has greatly simplified payroll 

taxes. 

I understand, sir, that your term will expire in November and 

that you have announced your intention to move back to the private sector. I want to thank you on behalf of all of us for your exemplary public service; and I wish you success, obviously, in reentering the private sector. 

I am pleased now to yield to our Ranking Democrat, Mr. Coyne. 

[The opening statement of Chairman Houghton follows:]

5

Opening Statement of the Hon. Amo Houghton, a Representative in Congress from the State of New York, and Chairman, Subcommittee on Oversight 

Good afternoon. Voluntary compliance is the foundation of our tax system, and 

I can’t tell you how troubled I am about recent reports that show an erosion of trust 

in its fairness. This apparent erosion coincides with a persistent decline in enforcement statistics; the percentage of taxpayers who are audited has declined, and some 

tax professionals say they can no longer convince clients to fear the IRS. One tax 

advisor has taken to posting a depiction of heaven and hell on her wall to supply 

the fortitude that fear of an IRS audit once supplied. 

I don’t want to add to this problem by failing to observe that the vast majority 

of taxpayers are indeed honest and comply faithfully and with great integrity, but 

we need to address the problem. I will ask each of our witnesses today what we 

can do to turn this situation around. 

Our witnesses have specific knowledge or experience with different aspects of IRS 

operations. In addition to sharing their views on tax compliance, they will focus on 

the 2002 filing season, the President’s budget request, and current developments at 

the IRS. 

Despite the progress the IRS is making in customer service, as highlighted in the 

Commissioner’s testimony, there are still troubling reports that IRS performance is 

lagging in some areas. For example, taxpayers continue to complain about various 

aspects of the offer in compromise program, and independent reviewers have expressed concerns about the quality of telephone assistance and walk-in assistance 

to taxpayers. On the other hand, the IRS appears to be doing better this year to 

encourage electronic filing. 

On Wednesday, the House is scheduled to consider the Taxpayer Protection and 

IRS Accountability Act of 2002, legislation that I sponsored. Commissioner Rossotti 

played an important role in advocating the modification we are making to the socalled ‘‘Ten Deadly Sins’’ provision of the 1998 IRS Restructuring Act, and the President, in his budget request, proposed a 15 day extension for electronic filers that 

we are adopting. I hope that the 15 day extension further accelerates the pace of 

electronic filing, and that the change to the Ten Deadly Sins improves morale at 

the IRS while continuing to protect taxpayers from arbitrary and unlawful conduct. 

Additionally, I note that the Administration will be submitting to Congress a series of recommendations on individual tax simplification in the next several weeks. 

I look forward to reviewing those recommendations, and I hope we can act on them 

in the near future. 

During his tenure, Commissioner Rossotti has transformed the IRS from an outdated structure, based on geography, into a modern, customer-focused agency organized around the tax needs of American citizens. He has also laid the groundwork 

for technological changes that will carry the IRS far into the 21st century. We are 

just beginning to see the fruits of those innovations today, for example, in the Electronic Funds Transfer Payment System that has greatly simplified the remittance 

of payroll taxes. I understand your term will expire in November and that you have 

announced your intention to move back to the private sector. Thank you, Commissioner, for your exemplary public service, and I wish you success in your future endeavors. 

I am pleased to yield to our ranking Democrat, Mr. Coyne.

Mr. C

Once again this year, the Subcommittee on Oversight is holding 

OYNE. Thank you, Mr. Chairman. 

f a hearing on the current tax return filing season and the pending 

IRS budget. I thank Subcommittee Chairman Houghton for conducting this important annual oversight review of the Internal Revenue Service. 

More than 137 million tax returns will be filed during the 2002 

tax return filing season, which ends in 6 days from today. During 

the filing season, the IRS will issue over 100 million tax refunds 

and answer over 100 million telephone calls from taxpayers seeking assistance. I want to commend IRS Commissioner Rossotti and 

all IRS employees for a job well done. 

6

Of particular interest to this Subcommittee is the proposed budget for the IRS for the year 2003. The Administration’s IRS request is $10.4 billion for funding general operations plus additional 

amounts to continue systems modernization and Earned Income 

Tax Credit (EITC) compliance initiatives. We need to make sure 

that such funding is adequate. 

I look forward to the views of the witnesses scheduled to testify 

before us here today. With Commissioner Rossotti, as the Chairman pointed out, planning to finish his term and leave the IRS at 

the end of the year, I would hope that we could use today’s hearing 

to solicit his advice about what Congress needs to do to keep the 

IRS on track in implementing the IRS reform legislation 1998. 

I want to also commend the Commissioner on a job well done. 

His outstanding service as Commissioner of the IRS has set a high 

mark against which future commissioners will be judged. I want to 

thank Mr. Rossotti and wish him the best in his future endeavors. 

[The opening statement of Mr. Coyne follows:]

Opening Statement of the Hon. William J. Coyne, a Representative in 

Congress from the State of Pennsylvania 

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

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

Chairman Houghton for conducting this important annual oversight review of the 

Internal Revenue Service. 

More than 137 million tax returns will be filed during the 2002 tax return filing 

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

100 million tax refunds and answer over 100 million telephone calls from taxpayers 

seeking assistance. I want to commend IRS Commissioner Rossotti and all IRS employees for a job well done. 

Of particular interest to this Subcommittee is the proposed budget for the IRS for 

fiscal year 2003. The Administration’s IRS request is $10.4 billion for funding general operations, plus additional amounts to continue systems modernization and 

earned income tax credit compliance initiatives. We need to make sure that such 

funding is adequate. I look forward to the views of the witnesses scheduled to testify 

before us today. 

With Commissioner Rossotti planning to finish his term and leave the IRS at the 

end of the year, I would hope that we could use today’s hearing to solicit his advice 

about what the Congress needs to do to keep the IRS ‘‘on track’’ in implementing 

the IRS reform legislation of 1998. 

I want to also commend the Commissioner on a job well done. His outstanding 

service as Commissioner of the IRS has set a high mark against which future Commissioners will be judged. I want to thank Mr. Rossotti and wish him the best in 

his future endeavors.

is there anyone else on the Committee who would like to make an 

Chairman HOUGHTON. Thank you very much, Mr. Coyne. Now, 

f opening statement? 

All right, Mr. Commissioner, you are on. 

STATEMENT OF THE HON. CHARLES O. ROSSOTTI, 

COMMISSIONER, INTERNAL REVENUE SERVICE 

Mr. ROSSOTTI. Thank you very much. I want to thank you and 

Mr. Coyne for the kind comments you made about me. It has been 

a great honor coming before you each of these years and serving 

in this position, I can assure you of that. 

I will comment on the topic of the filing season and the budget, 

which is the scheduled topic, but I would be more than happy to 

7

come back and answer your questions about the compliance and 

enforcement issues during the hearing. 

I want to also say that I think the progress that we have made, 

which I think has been significant, has been in no small measure 

due to the support that you and your Committee have provided 

over this period; and in particular I want to thank Chairman 

Thomas as well as Congressmen Portman and Coyne for sponsoring 

the amendments that were made to the most recent act. We think 

those will be very, very helpful. 

I am pleased to report, with respect to the current filing season, 

that we are, I believe, improving performance across the board; and 

I think it is important to note that over the last few years our improvement in performance has been recognized by the most important judge of our performance, which is the American public. We 

are going to put up a chart here which just shows the trend in how 

the public thinks about the IRS, as measured by two very well respected surveys, one of which is the Roper Starch survey, which 

showed our rating, as you can see on that bottom line there, increasing in each of the last 3 years quite significantly, after regrettably reaching an all-time low in 1998. 

The top line is a more recent survey done by the University of 

Michigan, which also measures customer satisfaction for a number 

of agencies, in this case the IRS; and it showed the largest gain of 

any Federal agency in the last 2 years. 

I don’t mean to put too much focus just on surveys, but I do believe that the public’s rating of the IRS is fundamentally important 

to the health of a tax system. I really don’t believe it is acceptable 

for a government agency that affects more Americans than any 

other institution to be also rated, as we were in 1998, as the lowest-rated institution that they deal with. Changing that rating, 

that point of view of the public, was one of the mandates of the restructuring act which the Congress passed; and I think, as noted 

here, we are beginning, but I do stress beginning, to deliver on that 

mandate. The trend is positive, but, as I will note, there is a lot 

more to be done. 

Turning to the specific details of the current filing season, it has 

been smooth, with returns being processed on time, electronic filing 

increasing substantially, and improved quality of phone service. So 

I think this demonstrates how we can build on positive trends for 

service to taxpayers, especially as our technology and organizational initiatives take effect. 

We have encountered a significant number of taxpayer errors 

concerning one particular item on the return having to do with the 

rate reduction credit, but despite encountering a number of these 

problems, about 6 percent of the returns are having this error, we 

have nevertheless been able to meet our schedules and get our refunds out in time. I actually view this as a clear demonstration of 

how our new organization enables us to respond rapidly, identify 

and fix problems which inevitably occur from time to time during 

the filing season. 

Chairman HOUGHTON. Could I interrupt a minute? I know my 

eyes are old, but I cannot see that. Maybe if someone could sort of 

bring it up part way, in this lower level desk. 

8

Mr. ROSSOTTI. I think we have copies of this, which we will provide for you. 

The basic idea is to show the trend lines, as opposed to any specific numbers on this chart. This chart shows some of the trends 

over the last 2 years on a number of the key indicators of service 

that taxpayers are receiving during the filing season, and of course 

it is during the filing season that most individual taxpayers do 

interact with the IRS. 

You will notice there is a couple of lines up there on the left 

which are literally going off the chart, and those reflect the use by 

taxpayers of our Web site, which is IRS.gov. In January, at the beginning of the season, we introduced the newly designed Web site, 

which was designed to be more accessible and easier to navigate 

for taxpayers, and that has helped the usage of this great resource 

really grow dramatically. 

What it means to taxpayers is that there is less time and effort 

getting the information they need to file their returns. They can get 

forms, for example, without having to make last-minute trips down 

to the post office; and they can get information about almost any 

aspect of the tax system with just a few clicks on their home computer. 

The second line up there that is growing quite nicely is the 

growth in electronically filed individual returns. For this fiscal 

year, 2002, we set an aggressive goal of receiving 46 million 1040 

returns, which would be a 15-percent increase over last year; and 

I am pleased to say that, as of this time, we project we will even 

exceed the 46 million goal. As a matter of fact, as of yesterday, we 

actually already exceeded the total number of electronically filed 

returns that we received all year last year. So we are doing quite 

well. 

I want to note that the provision that this Committee reported 

out to extend the filing date and the paying date for those that file 

and pay electronically will be of great help in continuing, maybe 

even accelerating this trend which should help us reach the congressional goal of 80 percent filing by 2007. 

There are some other charts on there that show both the quality 

and accessibility of phone service, which is the way that most taxpayers who need help get it during the filing season. And I want 

to show one other chart here, which just shows by month how 

many calls we were receiving and what the level of accessibility 

was. I think what you can see is that we had, as a result of the 

issues I mentioned about the rate reduction credit, a bump-up in 

demand well above what was expected during February, which did 

temporarily, for a few weeks, drive down our service. But we quickly recovered and we have now, since then, been reaching more than 

our goal of a 71-percent level of access. 

I should also note that another measure that is important to taxpayers is how long they have to wait to get through. On tax law 

calls, for example, we were down to a 2.58-minute wait, which is 

down from 4.27 minutes last year. So we are making a significant 

improvement in making it faster for taxpayers to get through. 

The other very important dimension of our service, if you want 

to put the other chart back for this, is quality. It is very, very important that when taxpayers call in and ask a tax law question or 

9

ask us to update their account that it be done accurately. That is 

not an easy thing to do, given the complexity of the subject matter. 

There are a couple of those lines up there that you can see that 

reflect inequality of tax law and tax account service, and they, in 

particular, have improved substantially this year. For tax law and 

tax account questions we are up to 83 and 89 percent accuracy this 

year, as compared with 75 to 88 percent last year. 

I also should note that, since September 24, only 13 days after 

the September 11 attack, we established a special phone line for 

victims of the terrorist attacks, and we have provided over 90 percent service to taxpayers on that. 

So I think as we conclude the home stretch of this filing season, 

we do take pride in the improvement in the service that we have 

offered. But I also note that, while we are headed in the right direction, we are not at the end of the journey by any means. We still 

have a lot of work to do. We have improved service, but we were 

starting from a very low level, very honestly, as I noted at the beginning. And even now, a 71-percent level, which is our goal for 

this year, and an 89 percent accuracy rate does not meet our longterm standard of being as good as the private sector delivers. 

So the continuation of modernization, adequate funding for operations and our own internal aggressive performance improvement 

goals are all going to be necessary year by year in order to achieve 

ultimately the level of service that the public expects and that we 

aim to deliver. I do believe that if we stay focused on these goals 

and that we get consistent funding and support from the Congress, 

we can achieve them; and I believe the main point I want to make 

today is that we are on the path of doing that. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Rossotti follows:]

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

Service 

INTRODUCTION 

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

on the 2002 tax filing season, our FY 2003 budget request and some of the initiatives we are undertaking on behalf of America’s taxpayers. 

On a personal note, let me also thank you for your continued leadership and guidance. The progress we have enjoyed to date is due in no small measure to your active support of our modernization program and what we must do to provide quality 

service to America’s taxpayers while meeting our other critical goals and responsibilities. I particularly want to thank Chairman Thomas, Chairman Houghton and 

Representatives Coyne, Portman and Cardin for your support in passing the President’s proposed modifications to the IRS Restructuring and Reform Act of 1998 

(RRA 98). 

Mr. Chairman, I am pleased to report that we are gradually improving our performance across the board. As demonstrated by the 2002 filing season results, we 

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

service. It is important to note that our most important judge of the IRS, the American public, has begun to respond to our efforts. 

As illustrated in the attached chart, two respected surveys show a strong turnaround in IRS public approval. The Roper Starch Surveys found our rating increased each of the past three years after an all time low in 1998. And the University of Michigan’s American Customer Satisfaction survey showed greatly improved 

customer satisfaction among individual taxpayers—the largest favorable gain of the 

30 Federal agencies surveyed. 

Mr. Chairman, the turnaround in the public’s rating of the IRS is fundamentally 

important to the health of the tax system. It is not acceptable for the government 

agency that affects more Americans than any other to also be the lowest rated. 

10

Changing this was a mandate incorporated in the RRA 98, and we are beginning, 

and I stress beginning, to deliver on it. While the trend is positive, much more remains to be done. 

2002 FILING SEASON 

Mr. Chairman, the 2002 tax filing season has been smooth, with returns being 

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

build on positive trends in service to taxpayers, especially as our major technology 

and organizational initiatives take effect. We have encountered some confusion and 

a significant number of errors concerning the rate reduction credit, but we have 

been able to keep up with these and get taxpayers their refunds on time. Projected net collections for FY 2002 will be approximately $2 trillion. During FY 

2002, we also project to receive 231 million returns, including over 132 million individual returns, and expect to issue over 99 million individual refunds—3 million 

more than the previous year. As of March 23, 2002, the average dollar amount per 

refund is up over 12 percent over last year, and the average refund is $1,980. 

Mr. Chairman, so far, we discovered 3.1 million Rate Reduction Credit errors. The 

credit is on line 47 of Form 1040, line 30 of Form 1040A, and line 7 of Form 

1040EZ. The credit is for those taxpayers who did not get the maximum benefit 

through last summer’s Advance payments, and whose 2001 income or tax amounts 

qualify them for an additional amount. 

We are checking all returns to see that the Rate Reduction Credit line is handled 

properly and will notify taxpayers of any changes we make. We are also rejecting 

e-file returns that show the Advance Payment amount on this line, or that show a 

dependent claiming this credit, so that the taxpayer or return preparer may quickly 

fix the problem and transmit a corrected return. 

Although it is not directly related to the filing season, let me also note that we 

corrected a problem for taxpayers trying to obtain an Employer Identification Number (EIN) through our new toll-free service. This was a start-up glitch that was 

quickly resolved and we are now enjoying an 85 percent level of service (success rate 

of taxpayers seeking assistance for toll-free EIN service). 

Electronic Tax Administration 

In 2001, a little more than 40 million taxpayers filed electronically—a 13.7 percent rise from last year. Since 1997, e-filing increased by 110 percent, and on-line 

filing grew by a staggering 1,700 percent. Clearly, the value taxpayers receive from 

all our e-programs is one reason behind the growth. Faster refunds, positive acknowledgement of receipt and fewer errors that require time consuming letters and 

telephone calls to correct are key benefits to taxpayers. 

One of the important reasons for the IRS’ strong showing in the ACSI survey was 

the very high satisfaction rate among electronic filers. It was 77.2 points (out of 

100)—higher than the previous year and the third year in a row that e-file taxpayers expressed increased satisfaction. 

The 2002 filing season statistics underscore that an increasing number of taxpayers are taking advantage of filing their returns, receiving their refunds or paying 

their taxes electronically. Through April 4, 2002, almost 39 million individual taxpayers filed using one of the three e-file options; a 14.4 percent increase over the 

same period last year. Let me point out that the number of taxpayers e-filing from 

their home computers is up a very impressive 39 percent over last year. 

For the fiscal year, we set an aggressive goal of receiving 46 million returns electronically, a 15 percent increase over last year, and I am pleased to say that we 

are on track to meet or exceed this goal. 

The following are some of the key 2002 filing season e-file statistics through April 

4, 2002 except where noted.

• Nearly 28.6 million taxpayers have e-filed their tax returns electronically 

through an IRS-authorized Electronic Return Originator (ERO), a 12.6 percent 

increase over the same period last year. 

• Approximately 7.2 million taxpayers have filed their tax returns on-line via 

their home computer through a third party transmitter. OnLine filing is running 40 percent ahead of last year and as of April 4, 2002 is already well over 

the 2001 total volume of 6.8 million. 

• Almost 5.3 million taxpayers have chosen to use the OnLine Self-Select PINs, 

up 60.3 percent over last year. 

• Over 3.6 million taxpayers have filed their returns over the telephone using the 

award winning TeleFile system. 

• Overall, as of April 4, over 16 million taxpayers have chosen to file both their 

Federal and State tax returns simultaneously in a single electronic transVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 E:\HR\OC\B436.XXX pfrm17 PsN: B436
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mission, up 23.8 percent from last year’s 13.1 million at this time last year. 

This year, 37 States and the District of Columbia are participating in the program. 

New for Individuals for the 2002 Filing Season 

In order to improve our ETA program and ease taxpayer burden, the IRS created 

a series of enhancements for the 2002 filing season and the remainder of the fiscal 

year. These initiatives include:

• Adding 29 forms and schedules to allow for even greater taxpayer participation 

in the IRS e-file program. This meant we opened up e-file eligibility to over 99 

percent of all taxpayers, potentially adding 38 million new e-filers. 

• Continuing the Self-Select Personal Identification Number (PIN) Program that 

in 2001 enabled approximately nine million taxpayers to file paperless returns 

without having to submit paper signature jurats. The Self-Select PIN is a fivedigit PIN that taxpayers can create to sign their returns electronically. 

• Continuing the Extension of Time to File by Phone. Anyone who filed a tax return last year can request over the telephone an automatic extension of time 

(to August 15, 2002) to file his or her tax returns. Form 4868, Application for 

Automatic Extension of Time to File U.S. Individual Income Tax return, has details on required information and explains how to pay a balance by telephone. 

• Continuing the Debt Indicator Program and providing the Debt Indicator on 

every acknowledgment report. This information will be provided for every electronically-filed return for customer service purposes or for approval of financial 

products. 

• Expanding the electronic payment options available to taxpayers by accepting 

credit cards for payment of installment agreements and delinquent taxes. As of 

April 4, approximately 46,449 payments averaging $2,459 were made via credit 

card and another 84,671 payments averaging $979 were made by Automated 

Clearing House (ACH) Direct Debit where taxpayers can authorize either their 

checking or savings account to be debited. 

• Adding Maryland, Oregon and West Virginia to the FedState TeleFile program 

that already includes Indiana, Kentucky, Oklahoma and Georgia. 

• Releasing the initial series of Web-based services for practitioners including registration and application capabilities, requesting and receiving taxpayer transcripts on-line, submitting disclosure authorization requests electronically, 

verifying Taxpayer Identification Numbers, and getting personal assistance to 

resolve taxpayer problems. 

ETA Also Easing Business Taxpayer Burden 

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

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

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

These requirements add up to a lot of transactions between businesses and the 

IRS—23 million employers’ quarterly tax returns; 5.5 million employers annual unemployment tax returns; 5.5 million corporate tax returns and 2 million partnership 

returns, including the processing of over 11 million K–1s. That is an enormous 

amount of paper and it does not include the millions of checks that accompany 

them. 

We want to eliminate this blizzard of paper and convert all of these transactions 

to fast, accurate, paper free electronic methods. In 2002, the IRS continues to make 

progress serving the electronic tax administration needs of this important sector. 

Mr. Chairman, to promote business e-filing, we have placed advertisements in 

publications, including Fortune Magazine. Businesses can now file electronically 

both their 940 and 941 employment tax returns. Some businesses may even qualify 

to file using a telephone. We have also opened the door for a number of other key 

forms to be filed electronically, such as Form 1099 to report other income. We are 

particularly pleased that we can now offer electronic filing of Form 1065, to report 

partnership income, and the K–1s that accompany them. We are also hard at work 

designing Form 1120, Corporate Tax Return e-file program. Implementation is slated for a year from now. 

I mentioned that payments from businesses, especially payroll deposits and quarterly returns are the most common transactions businesses have with the IRS. The 

Electronic Federal Tax Payment System (EFTPS) is an enormous success story in 

this regard. Through EFTPS, both businesses and individuals can make Federal tax 

12

payments electronically. Since its inception in November 1996, businesses have used 

it to pay more than $5.7 trillion in Federal taxes. 

On September 6, 2001, we successfully launched IRS’ first on-line payment system—EFTPS-OnLine. It provides a convenient and secure method for paying all 

Federal taxes through a secure Web site. Let me stress that confidentiality and privacy of taxpayer information are our highest priorities. EFTPS-OnLine users can 

feel confident that their private information will be protected. 

Spurring Further e-file Growth 

Mr. Chairman, in its December 21, 2001 report to you, ‘‘Assessment of IRS’ Tax 

Filing Season,’’ the GAO observed that in spite of the growth in electronic filing and 

our efforts to identify and eliminate impediments, the 13.7 percent growth in 2001 

was still below our goal of 20 percent. Of particular concern to both the GAO and 

IRS is why approximately 40 million individual income tax returns were prepared 

on computer but filed on paper in 2001. The IRS and the Administration are taking 

and proposing actions to address the problem. 

This year, we focused our e-file marketing campaign on taxpayers who prepare 

their returns by computer but file on paper, and taxpayers who use the services of 

tax professionals but file on paper. We also agree with GAO on the need to further 

survey these filers to determine why they did not file electronically and how we can 

overcome these barriers. 

In addition, the President proposed in his FY 2003 budget that the due date for 

returns filed and paid electronically be extended. During the March 20th mark up 

of the ‘‘Taxpayer Protection and IRS Accountability Act of 2002,’’ the House Ways 

and Means Committee included a provision that will extend next year’s filing date 

for electronic returns to April 30. 

The Administration also proposes in its budget submission ‘‘an easy, no-cost option for taxpayers to file their tax return online.’’ Unfortunately, there has been 

some confusion regarding this proposal. The Administration’s proposal to give taxpayers the option to file their tax returns on-line without charge is based on two 

principles: no one should be forced to pay extra just to file his or her tax return, 

and the IRS should not get into the software business. 

In a statement issued on January 30, 2002, Treasury Secretary O’Neill stated, ‘‘I 

don’t intend for the IRS to get into the software business, but rather to open a constructive dialogue with those who already have established expertise in this field. 

In the end, this effort should come up with a better way to save time and money 

for both taxpayers and the government.’’ The IRS totally concurs with the cooperative approach enunciated by the Secretary and we will follow it to the letter. 

Web-Based Help 

The IRS Web site at www.irs.gov continues to be extremely popular with taxpayers. As of March 14, the IRS Web site was listed as Number 3 in the Lycos Top 

50 searches. In 2001, it posted 2.7 billion hits with more than 336 million forms 

and publications downloaded. For fiscal year 2002 through March 31, there were 

1.95 billion Web site hits, up 36 percent over the same period last year. 

I should note that in January, the IRS introduced a newly designed Web site, 

aimed at making it easier for taxpayers to find the information they want on the 

Web. Following our overall strategy of making the IRS customer-focused, the home 

page immediately provides taxpayers a way to find information based simply on 

whether you are an individual or business taxpayer. 

The Small Business/Self-Employed Community section on our Web site is an excellent example. It is dedicated to the needs of this important taxpayer group who 

often confront more complex tax issues than those who have their taxes withheld 

by an employer. 

Our ultimate goal is to transform our Web site from an information-only portal 

to a world-class transaction based gateway. However, some things have not 

changed. Anyone with Internet access can receive: tax forms, instructions, and publications; the latest tax information and tax law changes; tax tables and rate schedules; and hypertext versions of all taxpayer information publications, including the 

very popular Publication 17, ‘‘Your Federal Income Tax’’; all TeleTax topics; answers 

to the most frequently asked tax questions; a library of tax regulations; and the 

weekly Internal Revenue Bulletin that contains all the latest revenue rulings, revenue procedures, notices, announcements, proposed regulations and final regulations. 

Mr. Chairman, let me point to another benefit of our Web site. It is an excellent 

tool for alerting taxpayers and the media to various fraudulent schemes, including 

the slavery reparations scam, being perpetrated upon them by unscrupulous promoters. There is a quick link from our portal page to IRS Criminal Investigation 

13

‘‘Tax Frauds Alert’’ page that provides in one place a comprehensive overview of the 

different schemes and what we are doing to combat them. It also lists the number 

(1–800–829–0433) for taxpayers to report suspected tax fraud activity. 

Telephone Assistance 

To improve customer service, and based on an AT&T usage study, the IRS aligned 

its toll-free service hours last year to meet customer demand. Beginning October 7, 

2001, IRS assistors are available 7 a.m. to 10 p.m. Monday through Friday local 

time. During the filing season (January 2 through April 15, 2002), assistor services 

are available on Saturdays from 9 a.m. to 5 p.m. Assistor services are also available 

on President’s Day and Sunday April 7 and April 14, 2002. IRS automated assistance systems continue to be available 24 hours a day, 7 days a week. 

Primarily because of increased calls concerning refunds and the rate reduction 

credit, the total volume of incoming calls on our toll-free lines for the fiscal year 

through March 30 has been up 13 percent over last year, totaling 51.1 million calls 

for the first half of the fiscal year. 

Despite this substantial increase in the volume of calls, for the first half of the 

year through March 30, 2002 approximately 66 percent of taxpayers who wanted to 

talk to a customer service representative got through, compared to 68 percent last 

year. In the last four weeks, service improved further, with 74 percent of taxpayers 

getting through to customer service representatives. We have set a goal for the 

whole year of 71 percent. 

Of great interest to taxpayers, the average wait time for questions on tax law was 

2.58 minutes—down from 4.27 minutes last year. Wait time for calls on account 

questions was 4.76 minutes compared to 6.11 minutes last year. 

In addition, 45.3 million taxpayers used our automated services to get information, including refund status, an increase of 8 percent since last year, and the upward trend continues. 

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

their account and tax questions. Here too we have made substantial progress towards providing better service to taxpayers. The telephone correct response rates for 

tax law and tax account questions showed a marked improvement in FY 2002. They 

were up to 83 percent and 89 percent respectively as compared to 75 percent and 

88 percent over the same period last year. 

Let me note too, that by September 24, 2001, we established a special telephone 

line for victims of the terrorist attacks and since then, we have provided over 90 

percent level of service on this line. 

Mr. Chairman, to increase productivity and quality of service, we must give our 

employees the technology and tools they need to do their jobs at a high level. In 

this regard, our Business Systems Modernization (BSM) program is delivering both 

short- and long-term improvements. 

The first of the BSM projects, Customer Communications 2001, was deployed in 

July 2001, which allows us to route calls more precisely to assistors with the necessary expertise. We must also give our assistors specialized knowledge so they can 

better answer taxpayer questions about a very complex, difficult and changing Tax 

Code. Our new technology will allow us to route calls more precisely to assistors 

with the necessary expertise. 

Practitioner Priority Service 

This new nationwide toll-free, accounts-related service for all tax practitioners is 

being rolled out in three phases at 45-day intervals; the first was launched on January 2, 2002. This service, which will replace the former Practitioner Hotline, will 

be the practitioners’ first point of contact for assistance regarding taxpayers’ account-related issues. 

Calls will be routed to one of five IRS campus sites (Brookhaven, NY; Cincinnati, 

OH; Memphis, TN; Ogden, UT; and Philadelphia, PA) based on the practitioner’s 

area code. All sites will handle both individual and business inquiries, and any 

issues outside the scope of the employees’ authority will be priority routed to other 

IRS functions. 

Expected benefits for practitioners include improvements in overall consistency 

and quality of service; improved accessibility into the system and reduced wait 

times; and dealing with the employees who are specially trained to handle practitioner issues. 

Forms By Fax and Phone 

Taxpayers can receive more than 100 frequently used tax forms 7 days a week, 

24-hours-a-day from IRS TaxFax. Taxpayers can request up to three items per call. 

Taxpayers use their fax machine to dial the service at 703–368–9694. The only cost 

14

to the taxpayer is the cost of the call. Taxpayers can also request forms and publications by calling 1–800–TAX–FORM. 

Recorded Tax Information 

TeleTax has 150 topics available 24 hours a day using a Touch-tone phone. Taxpayers can call (toll-free) 1–800–829–4477 to hear recorded information on tax subjects such as earned income credit, child care/elderly credit, and dependents or other 

topics, such as electronic filing, which form to use, or what to do if you cannot pay 

your taxes. As of March 30, 2002, over 1.9 million have taken advantage of the recorded tax information features of TeleTax this fiscal year. 

Automated Refund Information 

In FY 2001, more than 54 million taxpayers used the Automated Refund Information system on TeleTax to check on the issuance of their refund checks. As of March 

30, 2002, the number stands at over 35.8 million—up .5 million from this time last 

year. Taxpayers may call 1–800–829–4477 to check on their refund 24 hours a day, 

7 days a week. 

Filing Burden Reduction 

In addition to our many popular electronic programs, such as e-file, the IRS is also 

making other efforts to reduce the time and effort it takes taxpayers to file and pay 

their taxes. For example, Schedule D, the form that millions of taxpayers use to calculate their capital gains and losses, was redesigned for the 2002 tax-filing season. 

The goal of the revision, which cuts 14 lines from the schedule, is to reduce the difficulty that individuals face when filling out their return. As noted in our press release announcing the change, ‘‘Calculating capital gains and losses should not be a 

capital pain.’’

This year’s tax form for individuals also contains a small change that we hope 

will make a big difference to the millions of Americans who make minor errors filling out their returns. Taxpayers who fill out a new Form 1040 box selecting a third 

party designee will enable that person—be it friend, family member or paid preparer—to talk directly with the IRS to correct questions during the processing of 

the return. 

Such errors include simple math errors and data omissions, such as an incorrect 

Social Security Number. The designation also enables the third party to discuss the 

status of a refund, payment or other notice with IRS representatives. 

This new option balances the taxpayer’s need for privacy with the reality that for 

millions of people a friend, family member or tax professional plays a key role in 

the preparation of their return. The taxpayer retains privacy but has the ability to 

make it easier to resolve routine problems. The bottom line is this improves customer service and reduces headaches for taxpayers, practitioners and the IRS. 

The new third party designation, located just above the signature line of Form 

1040, expands on the success of the paid-preparer checkbox on last year’s Form 

1040 by enabling the taxpayer to designate a friend or a family member as well. 

More than 37 million taxpayers marked the checkbox option during last year’s tax 

season. However, the third party designation does not eliminate the need for a 

Power of Attorney for issues dealing with examinations, under reported income, appeals and collection notices. 

CD–ROMs 

The IRS has also developed a number of innovative products for small business 

taxpayers. The Small Business Resource Guide 2002 on CD–ROM is a must for 

every small-business owner, or any taxpayer about to start a business. This handy, 

interactive CD contains all the business tax forms, instructions and publications to 

manage a business successfully. It also includes valuable information concerning the 

IRS Disaster Relief Efforts and the Welfare-to-Work Credit. Up to five free copies 

can be ordered on-line from the IRS. 

The IRS has developed two new CD–ROMs to help educate small business owners 

on their tax responsibilities. The first, Introduction to Federal Taxes for Small Business/Self-Employed, introduces business students, new small business owners, and 

self-employed entrepreneurs to IRS tax law in an easy to understand format. 

The second CD–ROM is A Virtual Small Business Workshop. This powerful tool 

replicates the best of the IRS’ years of presentations of workshops for small businesses. It provides information on all the key aspects of the tax implications involved in establishing and running a small business. The user sees the instructor 

along with an outline of the presentation. In addition, the closed caption option provides the instruction in English, Spanish, and Mandarin Chinese. 

15

These two CD–ROMs are also free and can be ordered by calling 1–800–829–3676 

(no on-line ordering at this time). 

Taxpayer Assistance Centers 

For those taxpayers who prefer to visit an IRS office, walk-in service is available 

at more than 400 locations nationwide. At many sites, walk-in service will be offered 

on 12 Saturdays between January 27 and April 14. As of March 16, 2002, we have 

served over 3.3 million taxpayers at all Taxpayer Assistance Centers—slightly more 

than at this time last year. 

The Saturday Service sites were selected based on their weekend accessibility, 

year-round operational status, and high traffic volume. They include non-traditional 

locations, such as shopping malls, community centers and post offices. 

Mr. Chairman, in the past, the IRS did not place as high priority as it should 

have on what were called, ‘‘walk-in’’ sites. The services offered at them was limited 

and often of poor quality. However, through our new Field Assistance Concept of 

Operations, we will better serve taxpayers at our taxpayer assistance centers. We 

will help them meet their filing and paying responsibilities including answering 

their tax law questions and providing forms and limited courtesy return preparation. 

Taxpayers with incomes of $33,000 or less can receive help filing their individual 

income tax returns. This courtesy return preparation ensures assistance for all taxpayers qualifying for the Earned Income Tax Credit, without placing the government in competition with private industry. Taxpayers whose income or preparation 

needs exceed the basic service will receive service options, such as referrals. 

Free tax preparation is available through the Volunteer Income Tax Assistance 

(VITA) and Tax Counseling for the Elderly (TCE) programs in most communities. 

Volunteers help prepare basic tax returns for low-income taxpayers, persons with 

disabilities, the elderly, and non-English speaking people. Taxpayers can call 1– 800–829–1040 to find their nearest VITA or TCE site. They may also call AARP— the largest TCE participant—at 1–877–227–7844 to see if there is a Tax Aide site 

in their community. 

Throughout the year, and at a variety of locations, we also schedule the highly 

acclaimed Problem Solving Days—the last was held on November 3, 2001 at 46 Taxpayer Assistance Centers—to resolve long-standing taxpayer issues for those who 

cannot take advantage of weekday problem solving services. 

Problem Solving Days have an excellent track record. But we must bring what 

we learn from them to our daily operations. Every day should be problem solving 

day at the IRS, not just three or four times a year. That means using a cross-functional approach to resolve most tax account issues with a single visit or phone call 

at any time throughout the year. 

To help us meet this need, we created a new job at the IRS, ‘‘Tax Resolution Representative.’’ These IRS employees will receive the training and authority to provide 

‘‘one-stop-service’’ for a broad range of issues ranging from answering tax questions 

to resolving payment problems. 

Mr. Chairman, I want to make one more important point about out Taxpayer Assistance Centers. In its assessment of the 2001 filing season, the GAO noted that 

the IRS did not previously measure TAC quality; the 2002 filing season is the first 

year we will measure it. Indeed, this process is just beginning, much as it was for 

telephone service several years ago. 

The Treasury Inspector General for Tax Administration (TIGTA) was also asked 

by Congress to perform accuracy reviews. It is our sincere desire to work closely 

with TIGTA to analyze their data to help us meet the challenges we confront at our 

Taxpayer Assistance Centers. 

Tax Materials and Assistance in Spanish 

Spanish-speaking taxpayers can receive information through recorded tax topics, 

free tax publications, toll-free telephone assistance, our Web site, and at Taxpayer 

Assistance Centers. 

TeleTax provides the same helpful 151 tax topics and refund information in Spanish and is available 24 hours a day, 7 days a week at 1–800–829–4477. Free Spanish publications are also available by calling 1–800–TAX–FORM (1–800–829–3676). 

Some of the more popular ones are:

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

Publication 579SP, ‘‘Como Preparar la Declaracio ́n de Impuesto,’’ explains who 

has to file a Federal tax return and other important topics, such as which form 

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

some of the more common tax credits are. 

16

Publication 596SP, ‘‘Cre ́dito por Ingreso del Trabajo,’’ provides details on the 

Earned Income Tax Credit.

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

toll free 1–800–829–1040 between the hours of 7:00 a.m. and 10:00 p.m. on weekdays and 9:00 a.m. and 5:00 p.m. on Saturdays through April 13. This year we provided our Customer Service Representatives with both Spanish Language supplemental training and a new Spanish language Probe and Response Guide and glossary of Spanish language technical terms. Spanish-speaking taxpayers can also go 

to a new special Spanish section on our Web site. Spanish and English services are 

available too at all IRS kiosks, as well as Russian, Korean and Chinese at our 

Flushing, NY kiosk in the Queens Public Library. 

In addition, we offer Spanish language services in every one of our approximately 

416 Taxpayer Assistance Centers nationwide. Many are located in areas with highdensity Spanish-speaking populations and include employees recruited from these 

same communities. We offer this in-person service as a matter of routine. 

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

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

common language in the world. 

MODIFICATIONS TO THE IRS RESTRUCTURING

AND REFORM ACT OF 1998 (RRA 98) 

Mr. Chairman, in the FY 2003 budget submission, the Administration proposed 

modifications to RRA 98. On March 20, 2002, the House Ways and Means Committee reported out the ‘‘Taxpayer Protection and IRS Accountability Act of 2002’’ that contains five of these proposals. We commend the Committee for its actions and 

believe that these modifications preserve the intent of the Act while allowing us to 

administer it more efficiently and effectively. 

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

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

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

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

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

allows IRS to terminate installment agreements when taxpayers fail to make timely 

tax deposits and file tax returns on current liabilities. (This provision was not contained in the Committee-reported bill.) The fourth part streamlines jurisdiction over 

collection due process cases in the Tax Court, thereby reducing the cycle time for 

certain collection due process cases. 

The fifth part permits taxpayers to enter installment agreements that do not 

guarantee full payment of liability over the life of the agreement. It allows the IRS 

to enter agreements with taxpayers who desire to resolve their tax obligations but 

cannot make payments large enough to satisfy their entire liability and for whom 

an offer in compromise is not a viable alternative. The sixth and last provision 

would eliminate the monetary threshold for IRS Chief Counsel reviews of offers in 

compromise. 

NATIONAL RESEARCH PROGRAM 

Earlier this year, the IRS proposed to reestablish a key component of its ongoing 

compliance effort to help ensure fairness for America’s taxpayers. The National Research Program (NRP) is designed to accurately measure tax compliance while minimizing the need to contact taxpayers during the process. 

The NRP is developing innovative approaches to measure taxpayer compliance 

with the tax law. It will: (1) be far less intrusive and burdensome on taxpayers than 

previous compliance studies; (2) help the IRS build better compliance programs to 

more effectively catch tax cheating and help ensure all taxpayers pay a fair share; 

and (3) help reduce audits of taxpayers who filed an accurate return by at least 

15,000 tax returns a year. 

As part of ongoing compliance operations, NRP will focus on measuring three key 

areas of tax administration—filing compliance, payment compliance and reporting 

compliance. A key element involves measuring the accuracy of reporting information 

on tax returns. The IRS has overhauled the reporting component to minimize disruptions to taxpayers during the study. 

Ultimately, this project will help all taxpayers by giving the agency timely, accurate information about tax compliance. This information will allow the IRS to reVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00020 Fmt 6633 Sfmt 6621 E:\HR\OC\B436.XXX pfrm17 PsN: B436
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place outdated audit selection formulas and develop compliance efforts directed toward the tax returns most likely to have errors, rather than those from honest taxpayers. 

In late fall of this year, the NRP will begin reviewing a small, statistically valid 

sample of individual returns from the 1040 family. The IRS will work closely with 

tax practitioners, Members of Congress and other key stakeholders to finalize the 

project. 

FY 2003 RESOURCE REQUEST 

Mr. Chairman, the IRS budget request for FY 2003 is $10.418 billion and fulltime equivalent employment (FTE) of 101,080. The request is $482 million more 

than last year’s $9.936 billion appropriation. The largest programmatic component 

of this increase is $259 million to enhance customer service and compliance, of 

which $196 million will be funded through a redeployment of resources within our 

base budget. 

Overall as shown in the attached chart, the IRS is proposing to achieve $259 million in increased program resources and program delivery at a net requested increase of only $63 million. Therefore, 76 percent of the improvement is being 

achieved by improved internal efficiency and redeployments. 

The funding increase request also maintains momentum in the IRS Business Systems Modernization projects with $58 million. The budget increase for FY 2003 will 

allow us to fund these critical projects as they move from the planning and design 

phase to development and implementation. The remaining increase would fund pay 

raises, and inflation, $10 million for Tier B Projects and adjustments for Homeland 

Security funds appropriated in FY 2002. 

In addition, $39 million of the total increase is requested as part of a legislative 

proposal to change the accounting of pension and retiree benefits costs. Please note 

that although the increase of $39 million is the incremental change from the FY 

2002 appropriation (as adjusted), the actual increase to our FY 2002 base for this 

proposal will be $503 million. These costs are transfers of funds that were previously included in other agency budgets and do not represent any net increases in 

IRS programs. 

To help create a ‘‘World Class Treasury Department,’’ Secretary O’Neill challenged each bureau to review all programs on a continual basis and redirect resources to meet needs, rather than asking for funding increases. Budget and performance integration, as part of the President’s Management Agenda, requires this 

kind of business review, with an emphasis on best results at the lowest total cost. 

Indeed, let me stress the process that underlies the FY 2003 request. For the first 

time, we fully integrated the development of our budget with the establishment of 

performance measures. First, we determined the highest priority resources needed 

to increase customer service and compliance. In addition, as part of the budget process, IRS’ senior team conducted a review and prioritization of agency-wide needs for 

FY 2003 and searched for the most efficient allocation of resources. The realignment 

of resources woven throughout the FY 2003 budget comes through reengineering, efficiencies and investment in modernized systems. To this end, the review developed 

2,287 FTE that could be re-deployed to high priority areas in customer service and 

compliance. 

OPERATIONS

Highest Priority Resource Needs 

Customer Service and Workload Increases (+1,595 FTE, $91M) 

In FY 2003, the IRS must build on the gains it has made in customer service if 

we are to achieve our first strategic goal, ‘‘top quality service to each taxpayer in 

every interaction.’’ We are still not providing a consistent high level of service that 

taxpayers expect and deserve. We must continue to improve taxpayer access to our 

toll-free telephone lines and the accuracy of the responses we give to tax law and 

account questions. We must continue to improve the service at our taxpayer assistance centers. We must further reduce taxpayer burden. We must continue to increase e-file options. We must better administer the RRA 98 taxpayer rights provisions. And we must give our employees the training and tools to meet these needs. 

The highlights of some of the following initiatives will help us meet our goals.

• Increased Offer in Compromise (OIC) Cases. This initiative is designed to address the escalating OIC inventory by centralizing and streamlining the processing. Cases sent to the field will include all background financial data needed 

to conduct the investigation, thereby reducing the amount of time that revenue 

officers must spend on gathering this information. 

18

• Telephone Level of Service. Taxpayers must still speak to live assistors to answer tax law and account questions as well as Automated Collection System 

(ACS) inquiries. Additional FTE are necessary to address current demand and 

to meet taxpayers’ legitimate expectations that they receive service comparable 

to what is offered by the best private sector companies. • Multi-Lingual ACS. The Multi-Lingual Automated Collection Service (ACS) will 

help meet taxpayer growing demands for timely, accurate and efficient services 

in languages other than English. • Improving Correspondence. We are improving the clarity of our communications 

with taxpayers through a redesign of 24 of our notices over the next two years. • Filing Services. We must continue to provide filing services—from e-filing to 

submission processing to timeliness of refunds—and handle a projected increase 

in the number of returns filed. 

Enhanced Compliance Strategies (+1,857 FTE, $125M) 

In 2001, we began to stabilize the long-term decline in compliance activities while 

beginning to focus effectively and efficiently on the four key areas of non-compliance 

and maintaining adequate coverage of other areas. However, we still must address 

a number of challenges. For example, from 1993 to 2001, the number of returns reporting adjusted gross income in excess of $100,000 grew by 163 percent. We must 

keep pace with this increase by expanding the number of these returns that are examined in IRS field and office programs. We must also tackle the $66 billion in our 

total potentially collectable inventory. And we must focus on the proliferation of tax 

scams ranging from sophisticated illegal offshore trust programs to the slavery reparations scheme being perpetrated upon African-Americans. The following are the 

highlights of our enhanced compliance strategies for FY 2003. A detailed description 

can be found in our congressional justification.

• Stabilize Audit Rates. The IRS will devote resources to stop the overall declining audit rates and will dedicate more resources to auditing partnerships and 

other passthrough entities. • Abusive Trusts. Experts estimate that the revenue loss to our nation due to abusive trusts could run into the tens of billions of dollars. We now have a coordinated strategy to deal with this growing problem using a full range of tools 

from public education to civil and criminal enforcement against both promoters 

and participants. • High-Income Returns. From 1993 to 2001, the number of returns over $100,000 

and $1 million dollars grew by 163 and 259 percent respectively. However, IRS 

examination of these returns has not kept pace and we must now narrow the 

gap. • Highest Priority Collection. To address the mounting employment and income 

tax gaps, the IRS will dedicate more resources to high priority compliance and 

collection cases involving unpaid employment taxes. 

• Fraud Referral. Referrals and leads generated from the Lead Development Centers and the Fraud Detection Centers will produce more quality criminal investigations cases and help ensure public confidence in the fairness of our of tax 

administration system. 

• Automated Underreporter. To improve voluntary reporting on individual income 

tax returns, the Remote Automated Underreporter Program will utilize a national rotational inventory approach for case selection. 

• Employment Tax. To combat non-compliance with employment tax laws, the 

IRS will boost resources for legal source tax crime cases with a special emphasis 

on emerging problems, such as the use of temporary employment agencies/employee leasing agencies to evade employment and income taxes. 

• Money Laundering. IRS Criminal Investigation (CI) was delegated primary investigative jurisdiction in all money laundering investigations where the underlying conduct is a violation of the income tax laws. 

• e-Crimes. CI must continue to develop investigative knowledge and techniques 

to keep pace with the growing number of e-crimes, such as fraud and theft. 

• Criminal Tax Cases. Continued development of a close relationship between 

Chief Counsel Criminal Tax and CI will help to ensure that legal errors in the 

investigative process are minimized and the chances for successful prosecution 

are maximized. 

Contract Services (+$44M) 

The IRS must also pay for a number of non-labor program increases, many of 

which are mandated by Executive Order or departmental regulations. For example, 

in response to concerns raised by GAO and TIGTA, we must provide for enhanced 

guard services at our submission processing and computer centers. In addition, we 

19

are requesting funding for physical security upgrades such as more secure gates and 

entrances, and barriers that can be raised and lowered. Other items include the 

Public Transportation Subsidy, which was increased from $65 to $100/month. 

RESOURCES RE-DEPLOYED THROUGH INCREASED

EFFICIENCY AND PRODUCTIVITY 

A combination of strategic redeployment of staff and labor saving programs will 

allow the IRS to improve its level of taxpayer service without commensurate increases in the number of FTE applied. Targeted improvement projects, such as Reengineering/Quality efforts and labor savings from e-file and e-Services can be reapplied to other high priority programs. Technology modernization programs will 

generate the bulk of the FTE savings. 

Improvement Projects (Redeployment of 1,779 FTE, $107M)

The IRS identified FTE redeployments from improvement projects that are expected to come to fruition in FY 2003 and are highlighted below. The FTE will be 

reinvested to fund the top priority needs identified below:

• Reengineering/Quality Improvements. Reengineering and Quality Improvement 

projects and programs will focus on redesigning internal processes, policies, and 

procedures. Updating the antiquated workload selection system will, for example, reduce/eliminate the substantial number of returns that are ordered, classified, and never worked. 

• e-file. In addition to the many taxpayer benefits, e-file also provides clear cost 

savings and burden reductions for the IRS, enabling us to redirect precious resources from processing to customer service and compliance programs. In addition to expanding electronic filing for individual taxpayers, the IRS will promote 

the electronic filing of all business tax returns in FY 2003. Our ultimate goal 

is to convert all business transactions with the IRS to fast, accurate, paper-free 

electronic methods. Through e-Services, we will also provide to tax practitioners 

easy-to-use electronic products and services. 

• Customer Relationship Management. The funding for this project will pay for 

training travel, operating travel and support costs related to bringing IRS staff 

quickly up to speed on the newly improved Corporate Tax Analysis software. 

The software’s main strengths are its capacity to do carryback/carryover calculations for net operating losses (and other losses), the interaction of losses 

and charitable contributions, alternative minimum tax calculations and the foreign tax credit calculations—including carrybacks and carryforwards. 

• Information Technology Projects. Two projects are expected to begin realizing 

savings in FY 2003: the Employee Plan Determination System Redesign (EDSR) 

and the Remittance Transaction Register (RTR). EDSR is expected to reduce 

cycle time and improve quality of determination letters. RTR is projected to improve efficiency in submission processing by providing all Lockbox payment information online soon after receipt, reducing from one month to just three days 

response time for reconciling payment information and responding to payment 

information queries. 

Workload Decreases (Redeployment of 508 FTE, $50.5M)

• Reduced Field Innocent Spouse. The initial high inventory of Innocent Spouse 

cases is expected to decline to a point where they can be processed without significant delays on our part. Revenue Agents and Tax Auditor FTEs assigned to 

this program will be re-deployed to address compliance in other areas. 

• Reduced Filing Season Support. We will reduce the FTEs in the Small Business 

and Self-Employed operating division planned for customer service details. 

• Narcotics Program. With redeployments realized from the narcotics program realignment, 67 FTE will be used in the Fraud Referral Program and 18 FTE will 

be used in the Money Laundering Strategy Program. 

• Reduced Tax Court Cases. The number of cases filed in the Tax Court is declining. Emphasis on pre-filing resolution of cases through programs such as Advance Pricing Agreements is also expected to moderate increases in Tax Court 

litigation in the future, as well as Refund and Appellate litigation. 

Targeted Efficiency Improvements (Redeployment of $39M)

Redeployment is expected from the Treasury’s approach to better business practices to remove or reduce current efforts that do not have significant programmatic 

value. This is targeted to produce $39 million in redeployments. 

20

MAINTAIN CURRENT OPERATIONS 

The IRS is still a labor-intensive organization and a stable workforce is critical 

to carrying out our mission. We must maintain current operations, protect the integrity of the tax filing season, oversee tax administration programs and continue to 

implement organizational modernization. To do so, the IRS must have the resources 

to pay for the inflationary costs associated with statutory pay and other mandatory 

increases described below.

• Maintaining Current Services Level (+$295M). Needed to maintain FY 2002 program levels in FY 2003 by funding pay, benefits, and non-labor inflationary 

costs. 

• Within-Grade Increases (+$37M). To cover the costs of within-grade pay increases for on-board employees. 

• Homeland Security (+$10M). For the enhanced security arrangements required 

by the Homeland Security supplemental. These funds were appropriated as a 

consequence of the September 11, 2001 terrorist attacks and other related security concerns. 

• Homeland Security Non-Recur (¥$31M). Funding in the amount of $31 million 

from the FY 2002 will be non-recurred in the FY 2003 budget. 

EARNED INCOME TAX CREDIT INITIATIVES 

In FY 2003, funding requirements for the Earned Income Tax Credit (EITC) Compliance Initiative Appropriation are projected to be $154,346,000, an increase of 

$406,000 over the FY 2002 funding level of $153,940,000. The FTE level of 2,353 

is unchanged from FY 2002. 

This appropriation provides for customer service and public outreach programs, 

enforcement activities and research efforts to reduce overclaims and erroneous filings associated with the EITC. 

BUSINESS SYSTEMS MODERNIZATION AND

OTHER INFORMATION TECHNOLOGY PROJECTS 

The IRS’ antiquated computer systems do not efficiently or effectively serve America’s taxpayers, nor meet today’s business needs. They are one of the fundamental 

obstacles to providing consistent top-quality service. Failing to modernize IRS’ tax 

administration business systems would require a significant increase in resources 

to maintain the old legacy systems while not addressing their underlying deficiencies that will only worsen with time. 

Business Systems Modernization will update our antiquated technology and 

change the entire way the IRS interacts and conducts business with taxpayers and 

stakeholders. Indeed, we do not view systems modernization as a separate entity, 

but rather as one of the major ways we can achieve all of RRA 98’s goals within 

realistic budget resources. 

Over the past two years, BSM graduated from strategic planning and systems design to business results. As shown in the attached chart—the green blocks in FY 

2001 and FY 2002—the IRS will put in place three critical building blocks. In 2001, 

we established a communications infrastructure to manage the enormous volume of 

taxpayer phone calls. In 2002, we will move the records of some taxpayers out of 

the 1960’s tape-based system to a modern, reliable database. And we will establish 

an IRS-wide security system providing internal and external secure access and communications to our systems. 

These three deliveries are some of the most essential and difficult building blocks 

of the modernization program. Their lack severely impeded our ability to modernize 

our systems and imposed enormous risks and costs on the entire tax administration 

system. As BSM progresses, these programs will continue to be enhanced and deployed on an ever-increasing scale until they eventually support the entire tax system. 

Valuable lessons were learned as we developed and implemented these projects, 

and we are giving equal attention to improving the quality and rigor of our management processes. Completing the first two versions of the Enterprise Architecture, as 

shown in the chart, was a major step. Based on my 28 years experience in the IT 

business, I believe that this Enterprise Architecture is the most complete and useful 

of such architecture in industry or government. 

We are also utilizing the rigorous management processes of the Enterprise Life 

Cycle, while at the same time ensuring that all BSM projects adhere to the Enterprise Architecture. In addition, we are addressing remaining management weaknesses, including those identified by GAO and we are striving to achieve a standard 

21

know as the Software Acquisition Capability Maturity Model Level 2—a recognized 

standard that has not been achieved in any Federal Agency with the exception of 

DoD’s Abrams Tank Division. 

I want to stress, Mr. Chairman, that we will continue to use a formal methodology 

to prioritize, approve, fund and evaluate our portfolio of BSM investments. This 

methodology enforces a documented, repeatable and measurable process for managing investments throughout their life cycle. Investment decisions are approved by 

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

FY 2003 BSM Request 

The proposed $450 million FY 2003 BSM budget request includes an increase of 

$58.4 million over last year’s appropriation. Let me summarize the key BSM 

projects that are addressed in the funding request. A complete description of each 

can be found in our congressional justification. 

Customer Account Data Engine (CADE) 

CADE is the foundation for all of IRS’ tax administration systems. It will replace 

the tape-based Master Files that currently contain the only authoritative information on all individual and business tax accounts. The IRS dependence on this 1960s 

Master File system today constitutes an insurmountable barrier to efficient service 

and compliance operations and is a very serious risk to the whole tax system. 

CADE will incrementally move individual filers from the 1960s tape system to a 

modernized database. CADE Individual Master File (IMF) will build the database 

that will replace the existing IMF processing systems. CADE will create applications 

for daily posting, settlement, maintenance, refunds processing and issue detection 

for taxpayer tax accounts and return data. The database and applications developed 

by CADE will also enable the development of subsequent modernized systems that 

improve customer service and compliance. Once implemented, modernized applications, such as Customer Account Management (CAM), will allow on-line posting of 

data in addition to daily batch processing. 

CADE will be deployed over time in five releases, each related to a specific taxpayer segment, phased in over a period of six years. At the conclusion of Release 

5, CADE will have replaced IMF. 

Integrated Financial System (IFS) 

IFS has three clear goals: (1) provide core financial capabilities and financial reporting; (2) meet Joint Financial Improvement Program requirements; and (3) provide an integrated framework for retirement of current financial systems. 

IFS will be accomplished in two releases, each representing a distinct usable segment. Release 1 will replace the Core Financial Systems (CFS) as defined by the 

Joint Financial Management Improvement Program (JFMIP). In addition to CFS, 

Release 1 will include budget formulation as well as implementation of a Cost Accounting System to allow the IRS to move into compliance with Statement of Federal Financial Accounting Standard Number 4. Release 1 creates a logical design 

for the core financial applications including Cost Accounting. The core financial applications consist of General Ledger (G/L), Accounts Payable (A/P), Accounts Receivable (A/R), Cost Management, Funds Management, Core Financial Management and 

Financial Reporting. 

Custodial Accounting Project (CAP) 

GAO identified the lack of an acceptable accounting system for the $2 trillion collected in tax revenue as one of the most significant material weaknesses in IRS’ financial management. CAP will provide the IRS with the critical control and reporting capabilities mandated by Federal financial management laws. 

It will also support the appropriate custodial subledgers containing data from tax 

operations and help the IRS meet compliance issues with both the Federal Financial 

Management Improvement Act (FFMIA) and Federal mandates related to custodial 

revenue management. CAP will also help us to better manage, control and focus resources. 

Enterprise Data Warehouse (EDW) 

The ability of the IRS to make effective use of information about its operations 

is limited by the numerous fragmented databases that evolved over time. EDW provides the foundation for data mining and decision analytic tools. In addition, it enables risk-based analysis for case selection and provides the tools to report on IRS 

balanced performance measures. 

22

e-Services 

The e-Services project will support our ability to meet the overall goal of conducting most transactions with taxpayers and their representatives in an electronic 

format, as required by RRA ’98. e-Services will provide to third parties over the 

Internet the four most requested applications: electronic taxpayer identification 

number matching, electronic transcript delivery, disclosure authorization and Electronic Account Resolution. e-Services also directly supports the President’s Management Agenda’s governmentwide initiative to expand electronic government. 

Customer Account Management (CAM) 

The Customer Account Data Engine cannot be deployed beyond its initial limited 

releases without Customer Account Management. CAM allows us to go into CADE 

and update the data and will help taxpayers to receive timely and accurate responses to requests and inquiries. 

The CAM Individual Assistance and Self Assistance Operating Models will provide improved technology and business processes that will enable the IRS to: (1) better manage customer service functions; (2) maintain and utilize customer data to 

improve taxpayer interactions with the IRS; (3) provide comprehensive account and 

tax law assistance to taxpayers and practitioners; and (4) manage the case work 

flow of customer inquiries. 

Delivering customer assistance through a live IRS Customer Service Representative (CSR) is the Individual Assistance operating model’s main function. In order 

to provide world-class service, CSRs must be equipped with the tools to access taxpayer information quickly and accurately in response to complex customer inquiries. 

Individual Assistance will provide this capability from a desktop information system. 

By being able to access and update comprehensive, current account information, 

CSRs will be able to respond quickly and accurately to customer inquiries. 

Workflow management tools and processes will also allow them to automatically 

inform relevant parties throughout the organization of actions taken on a particular 

customer’s account and manage outstanding cases for follow-up work or to identify 

the status of an inquiry for a taxpayer. 

The CAM Self-Assistance operating model delivers many of the same capabilities. 

The main objective, however, is to provide taxpayers with the flexibility and convenience of accessing by telephone or the Internet on a 24/7 basis IRS-related information to resolve relatively simple inquiries. 

Filing and Payment Compliance (FPC) 

FPC is an end-to-end strategy to resolve collection issues quickly and fairly. Using 

industry best practices, it augments, refines and replaces existing processes and 

technology to enable the IRS to interact with taxpayers in a seamless and efficient 

manner. Protection of taxpayer rights is an important component of this strategy. 

The ultimate goals are to resolve all balance due cases above a minimum threshold, 

shorten the filing compliance lifecycle to ensure resolution before the next filing due 

date and shorten the payment compliance lifecycle to six-months for non-enforcement cases. 

Information Technology Projects 

The Business Systems Modernization program is aimed at developing major, IRSwide systems that are the underpinnings of overall tax administration. BSM also 

sets forth the enterprise architecture that defines required standards of equipment, 

software, communications and data. This program is not intended to meet every 

need for every business application in the IRS, even in the long term. However, by 

establishing a well-defined architecture, it assures that specific business applications developed for specific business purposes will operate consistently and use common equipment while meeting required standards, such as security. 

Through the strategic planning process, the IRS operating units identify specific 

business needs and prepare business cases for business applications that will not 

be met through the overall BSM process. There are many more projects with high 

returns than can possibly be funded. Therefore through the strategic planning process, these are then evaluated and those with the highest returns are selected. Many 

of the gains in performance projected in FY 2003 and FY 2004 are enabled by these 

so-called Tier B projects. Tier B project implementation time is two to three years 

and the projects are monitored within the Business Performance Review process. 

The President’s FY 2003 budget includes a $10 million increase for Tier B projects 

beyond the FY 2002 operating level of $39.8 million. They cut across the entire spectrum of IRS activities and functions. For example, Information Systems projects will 

23

support Criminal Investigation’s activities by modernizing the equipment used to 

analyze forensic evidence. They will support the electronic filing of business forms 

and schedules and e-Services will provide products and services to practitioner as 

well as the foundation for safe and secure electronic customer account management. 

Other projects will redesign and consolidate systems to support casework and the 

Taxpayer Advocate Service. Correspondence will be imaged and we will be able to 

convert existing collection systems to electronic case processing. The Employee Plan 

Determination System Redesign will also reduce cycle time and improve the quality 

of determination letters from our Tax Exempt and Government Entities operating 

division. The Remittance Transaction Register will improve submission processing 

efficiency by providing information payment online. 

LEGISLATIVE PROPOSALS AND PROPOSED ADJUSTMENTS

(No Net Increase in IRS Programs)

The President’s budget requests $503 million (a $39 million increase over the FY 

2002 appropriation as adjusted) for proposed legislative changes that change the accounting of certain pension and retiree benefit costs. These costs are transfers of 

funds that were previously included in other agency budgets and do not represent 

any net increases in IRS programs. The $39 million increase will be used as follows:

• Federal Employees’ Compensation Act (FECA) Surcharge (+$3M). The FY 2003 

President’s Budget includes language in the General Provisions of the TreasuryPostal Appropriations bill to permit the Department of Labor to add an administrative surcharge to the amount it charges each agency for its Federal Employees’ Compensation Act (FECA) benefits. Previously this administrative cost 

was borne by the Department of Labor. 

• Legislative Proposal on Full Costing of Retirement and Health Benefits (+$32M).

The budget also proposes legislation to require agencies, beginning in FY 2003, 

to pay the full government share of the accruing cost of retirement for current 

CSRS, CIA and Foreign Service employees, and the Coast Guard, Public Health 

Service and NOAA Commissioned Corps. 

• Inter-Departmental Reimbursements (+$5M). This adjustment will allow permanent transfers of funds from the General Services Administration, the National 

Archives and Records Administration and the Department of Agriculture for 

services provided to IRS. 

CONCLUSION 

Mr. Chairman, in conclusion, I believe that we are making steady progress on our 

goals. We are providing improved service to America’s taxpayer. We have begun to 

stem the decline in compliance activities. And we are doing our job more efficiently 

and effectively enabling us to better leverage our precious resources. Of course, we 

must measure our progress against the larger goals that RRA 98 and we have set 

for ourselves. We still have along way to go. 

So, what must we do to ensure the success of IRS modernization for next year 

and the years beyond? I believe that we must stay focused and committed to the 

intent of the Restructuring Act, making adjustments as necessary; but not losing 

sight of the goal. If we do, I am convinced we will succeed. 

24


79436a.001 79436a.002
25


79436a.003 79436a.004
26

Coyne if he would like to ask the first question, but let me ask a 

Chairman HOUGHTON. Thank you, very much. I will ask Mr. 

f preliminary one. 

Why do the charts dive south in 2001, particularly in the tax law 

wait and the time index? What happened then? 

Mr. ROSSOTTI. During that period we had an increase in the wait 

time that was due to just the volume of calls relative to how fast 

we were answering them. That drove down service for a period of 

time during 2001. But, as you can see, we have dramatically improved that back in 2002. 

Chairman HOUGHTON. Now, the accounts wait time index is a little below 100 percent. Now, 100 percent was your goal, is that 

right, for 2000? 

Mr. ROSSOTTI. No, 100 percent is just basically taking fiscal year 

2000 as the base. This chart shows the increase and the decrease 

from year to year. So in both accounts, wait time and account quality had a decrease in fiscal year 2001. It was a goal, obviously for 

this year, to get that back up. It would have gone up even more 

if it were not for the fact, which is displayed on the other chart, 

that the volume of calls in February was way over what we expected due to the rate reduction credit. 

Chairman HOUGHTON. Thank you very much. Mr. Coyne. 

Mr. COYNE. Thank you, Mr. Chairman. Commissioner, thank you 

for your testimony. 

As was pointed out, you will be leaving toward the end of the 

year the position that you hold now, and I was wondering if there 


79436a.005
27

was a way you could provide for us any recommendations of what 

the next Commissioner ought to possess in the way of qualifications to be picked as the next Commissioner. What would you advise to be able to continue the work that has been going on at the 

IRS under your tenure? 

Mr. ROSSOTTI. Actually, I think, as has been publicly stated and 

as is consistent with the Restructuring Reform Act (RRA), the IRS 

Oversight Board, together with the Treasury Department, is actually conducting a search, and they have laid out criteria for the 

next Commissioner, and they are well under way of doing that. I 

think the criteria they have put out I would agree with. 

They tend to focus on management and leadership qualifications 

predominantly, work in change management in a large organization and experience with technology. Those are some of the key 

things that I think they have laid out, and I think those are, from 

my perspective, quite appropriate. 

Mr. COYNE. Based on your experience, would you care to comment on what priorities you think a new Commissioner ought to 

emphasize? 

Mr. ROSSOTTI. Well, of course I have a little prejudice here, but 

I really think and I have often said to myself that the problem at 

the IRS is not so much coming up with a vision or a concept. As 

a matter of fact, the commission that Congressman Portman cochaired did an excellent job of laying out a vision. I think others 

have similarly laid it out. It is more an implementation problem. 

It is getting it done. I think that that is a big job. 

There are a lot of changes that need to be made and a lot of technology that is quite complex. We have made some of those changes. 

I think the results are showing that those changes have an effect, 

but they are far from complete. So my view is that what is needed 

is someone who will continue along that path and I believe will be 

able to make way more progress than I have been able to make because we had sort of a startup period we had to cope with. 

What I think is most important is not to be diverted from the 

task of keeping this vision in mind and really achieving the IRS 

of the future. 

Again, I refer back frequently to the commission report because 

I thought it really laid out what needed to be done. I think we are 

doing that. They are not strange things. They are reasonable, obvious things in sort of a broad sense. They involve understanding 

who your customer is, delivering the services those customers need, 

achieving accountability internally, and modernizing technology. 

On the enforcement and compliance end, a lot of that has to do 

with making sure you target your resources where the problems 

are and not wasting them on things that are not necessary, that 

you leverage your enforcement people with technology. Those 

things are all laid out. They are all, I think, quite powerful. But 

implementing them is not a small job and it does require sustained 

attention over a period of time. 

So I think over the next Commissioner’s term there will be some 

opportunities that will be very exciting to continue on this path 

and to realize the benefits of some of this modernization, which I 

think will deliver. Those lines will continue to go up. We didn’t 

have lines on this chart for compliance activities and enforcement 

28

and the degree to which we are being effective in that area, but I 

think we would show some up trends in those areas, too, over the 

next few years. 

Mr. COYNE. You seem to be recommending implementation of 

things that are already laid out; and, relative to that, I would like 

to ask about the current proposed budget for the IRS, where it is 

at a level of $10.4 billion, a $482 million increase over last year. 

On the other hand, it is $92 million lower than what the Oversight 

Board had recommended. Are there things that the Oversight 

Board saw in recommending that additional $92 million that will 

not be able to be accomplished as a result of not having that funding? 

Mr. ROSSOTTI. I think I would be lacking in plausibility if I denied we could do more if we had $92 million more. Any agency 

head would say that, and the speed with which we could accomplish things would obviously be improved to the extent we had 

more funding. 

On the other hand, I have to say that Secretary O’Neill, in a 

tight budget year, went to bat for us to get us increases in both 

operational funding and modernization funding, and I really am 

appreciative of that. 

The other thing that I want to stress, and I want to put a chart 

up—and I am sorry to be using so many charts, but I hope they 

help to convey some information—one of the key things we are trying to do in the IRS, recognizing the budget is always going to be 

significantly limited, is to figure out how we can make use of the 

resources we have, to apply them in a more productive way, to free 

up resources through technology especially but also through other 

management improvements. 

What you can see here from this chart is that what we are doing 

is identifying the highest priority needs for 3,452 full-time equivalent personnel, which would cost $259 million. That is at the top 

of the chart, and they are just summarized into compliance and 

customer service, primarily. But we knew it would be very hard to 

get that much money in new money, so what we have done is identified specifically 2,287 full-time equivalent personnel, for a total of 

$196 million that we are going to be able to free up from tasks to 

apply and to improve efficiency to meet those needs. So, basically, 

that means that 76 percent of the need is being met through improved efficiency and only 24 percent from new resources. 

When we talk about improved efficiency, what do we mean? A lot 

of that is the fruits of modernization and what the modernization 

is all about. E-filing is one example. That is an easy one to understand, but not by any means all of it. If you get more E-filed returns, you free up people that would otherwise just be processing 

returns and you can use those resources for something such as providing better phone service. There are dozens of other examples 

like that. 

As we begin over the next 3 years to realize some of the bigger 

projects that we have in the business of modernization, we will continue to improve efficiency. Our strategy is to meet most of the 

needs that we think we will have for additional operational resources in order to provide adequate service to compliant taxpayers 

29

and focus on all those cases of people who are not paying what they 

owe or not reporting what they owe. 

How do we get the resources to do this? Well, part is in additional budgetary resources, part of it is freeing up resources we already have and to make them more efficient. That is what we are 

attempting to do in this budget. Obviously, the more we have, the 

faster we could get there. But we think we have a strategy that 

will move us on the right path. 

Mr. COYNE. Thank you. 

Chairman HOUGHTON. Thank you, Mr. Coyne. Mr. Portman. 

Mr. PORTMAN. Thank you, Mr. Chairman. 

This is your last testimony before us in this capacity, Mr. Commissioner, I understand, and this will be your last filing season. 

You are smiling broadly. 

Chairman HOUGHTON. Well, wait a minute. Let us not be too 

fast. We might ask him to come back. 

Mr. PORTMAN. Maybe we will ask you to come back in your private sector capacity and tell us what is really going on. 

I have to say, just to have survived almost 5 years as Commissioner of the IRS, you deserve a medal. It is a tough job. You took 

on an agency that was in disrepair. You said it started at a low 

ebb. I think that is an underestimate. We saw that earlier by the 

chart in terms of the public perception, but, more importantly, in 

terms of the actual inefficiencies, the lack of computer technology, 

software, hardware, the lack of organizational morale, and an agency that was fraught with problems and had been for years. So you 

have done a good job, I believe, in the last 41⁄2 years in beginning 

to move the agency toward a higher level of service to the taxpayer. 

There are still considerable problems, and you have outlined 

some of them today. My first question to you would be, what do you 

think the single biggest problem is that your successor will face? 

Mr. ROSSOTTI. Well, you are limiting me to one, so—I answer in 

terms of our mission, as opposed to the internal management. 

Where we really have significant problems, as the Chairman alluded to in his opening statement, is with a substantial number of 

taxpayers who are simply not paying what they owe, not reporting 

what they owe and, in some cases, just hiding income. I don’t 

know, because we have not had statistics, whether it is worse than 

it was a few years ago or not. But I can tell you that we are getting 

better and better data all the time that tells us this is a very significant problem, and it really is something that needs to be addressed, not only because of the money that is being lost to the 

Treasury but because of the health of the tax system. 

While addressing this compliance problem, I think we need to 

continue to deliver the proper service to the 90 percent or so of the 

taxpayers who are compliant. 

So I think that being more effective in addressing some of these 

compliance issues is an important goal. 

Now, that is in terms of mission. If I go back and say what do 

we need to do to accomplish those compliance goals, I come back 

to the fact that modernization really does have something to do 

with that. Some people have a perception that technology modernization is only useful as a way of supporting improvements in 

service to taxpayers, to compliance services, to telephone service 

30

and electronic filing. I think that is not a correct perception. Because some of the very same modernization projects that we are 

working on are going to support improvement in our ability to conduct compliance operations as well as service operations. I could go 

into more detail about it, but they really support more effectiveness 

and more efficiency across the board in the whole agency. 

Mr. PORTMAN. The fruits of modernization, which is one of the 

three or four key pillars of your tenure, as you look back on your 

legacy, would probably be the restructuring itself, literally restructuring the IRS to focus on the individual taxpayer. It would be the 

entirely new formulation of how to measure performance rather 

than how much money you squeeze out of the taxpayer, how much 

service you are providing. It would probably be the modernization, 

as we said, of the computer system? 

Mr. ROSSOTTI. Those are the three. 

Mr. PORTMAN. And that will relate not just to better taxpayer 

service—and we still have a ways to go there, but we have made 

substantial improvements—but also being able to target enforcement and to be able to use existing enforcement personnel more efficiently? 

Mr. ROSSOTTI. Exactly. 

Mr. PORTMAN. That seems to me to be probably the biggest challenge. 

Just a couple of recent reports trouble all of us. As you know, the 

Oversight Board recently did a survey which indicated that from 

1999 until today there has been a substantial erosion in people’s 

sense as to the acceptability of cheating on taxes. We have also got 

a recent report that there are 2 million taxpayers who have offshore credit cards who are trying to hide income through that. So 

I think it is more than a perception problem. 

Although that is out there, it may be that there are some noncompliance problems that need to be focused on. But what I hope 

we will not take from this is that the improvements that have been 

made in terms of taxpayer service, modernization, and restructuring are mutually exclusive with increased compliance enforcement. I think, as you do, that they go hand-in-hand. 

I am also disturbed by some of the analysis recently indicating 

that somehow you cannot have decent service for the taxpayers and 

at the same time have a system which enforces this voluntary compliance system in an appropriate way. I think the two go hand-inhand, and I think the fruits of your labor may not be seen for a 

couple of years. 

You said in response to Mr. Coyne that you expect to see up 

trends over the next few years on enforcement and compliance. 

Mr. ROSSOTTI. Yes. 

Mr. PORTMAN. Is that correct? 

Mr. ROSSOTTI. I do. Of course, part of that is dependent on budget resources. But, actually, our goal last year was to stabilize. They 

had been going down not just for the last 2 years but for many 

years, all of the indicators, audit rates and all the statistical indicators. We knew that, obviously, couldn’t continue, and we were successful in most cases, not in all, to generally level those off last 

year. We hope to see some modest increases on a purely statistical 

31

basis this year and next year due partly to this reallocation of resources. 

But I do want to stress—and I think this is important in your 

statement, Mr. Portman—it is not just statistics. People ask what 

is the right audit rate. Well, how do we know whether 1⁄2 of 1 percent is the right number or 1 percent? We really don’t. But what 

we do know is when we can identify, which we are now starting 

to be able to do much more specifically, where are the cases, do we 

have names of people that are not paying or underreporting, 

whether that be because they have not paid what is owed or they 

have not reported or they have hidden income. We are starting to 

get this information. When we do, we will be able to use our enforcement resources very effectively to target those who are really 

not complying. 

I agree with you that it is a false dilemma to believe that you 

are either providing good service to taxpayers or you are doing good 

enforcement. Most of the taxpayers that are wanting to comply, 

which is where we get most of our money, we do not need enforcement for them because they are already complying, with maybe a 

modest amount of encouragement, sometimes in the form of a notice or a phone call, they will pay and comply. But there are other 

taxpayers, fortunately a small percentage but still a large number 

in absolute terms, who are not complying, who are not paying or 

are hiding income or are using various kinds of abusive devices or 

who are just basically cutting corners. 

I think, while we need to respect the rights of those taxpayers, 

as is indicated in the RRA, I think we view that when we take enforcement action against those taxpayers we are on the side of the 

honest taxpayer. 

So the important thing is to understand your customer base and 

understand what is the appropriate treatment for each type of customer, and that is where the new restructuring of our organization 

is making us more effective. 

Mr. PORTMAN. Thank you, Mr. Commissioner. My time is up, but 

I hope that thinking succeeds you. We look forward to working 

with you over the next several months. 

It should be noted that this Subcommittee worked on the Restructuring Reform Act and came up with a system where there 

would be an oversight board that had 5-year staggered terms, so 

there is expertise on that board as well as accountability with that 

board, but also importantly, as you transition, continuity. So there 

will be people on that board who have gone through this process 

with you, at least through the last few years, once they finally got 

up and going, and those people will continue. We hope that you will 

work with them to be sure the transition is indeed smooth. 

Thank you, Mr. Chairman. 

Chairman HOUGHTON. Thank you. Mrs. Thurman. 

Mrs. THURMAN. Thank you, Commissioner, for being here, and 

thank you for your service. I know that you personally have tried 

to continue to bring the IRS into this new decade here, and we appreciate that. I know it has been tough, because you have not always been given the resources necessary. 

In fact, I have to tell you in one of our papers at home today they 

actually said we ought to be helping you with some resources. But 

32

at the same time they actually also are editorializing and asking 

some questions about the New York Times article, that was, I 

guess, on Sunday, specifically, ‘‘Wealthy Taxpayers Avoiding IRS 

Audits Despite Warnings That Cheating Is on the Rise.’’ Something we have heard about over and over in this Committee 

is the Earned Income Tax Credit, and I noticed in the suggestions 

by The Taxpayers Advocate and yourselves on the bill we will potentially be taking up tomorrow is that there will be recommendations as to how do you define, what do we do differently, and how 

do we get better compliance. So I guess the question I have for you 

is, if we can bring compliance or talk about compliance from the 

standpoint of what we are going to do with the Earned Income Tax 

Credit, can you give me suggestions as to how we might get to the 

lost taxes on this partnership income, which has not been included 

in this Taxpayers Bill of Rights tomorrow? 

I think it is important for us to understand that and know that, 

because it is my understanding that if we just spent an additional 

$9 million in auditing tax returns from these partnerships we could 

recover somewhere around $1.8 billion, if this number is correct. 

But I would be curious if you could give us any ideas of what we 

ought to be doing in tomorrow’s bill to help us. 

Mr. ROSSOTTI. As a matter of fact, that is one of our top priorities. Because you are quite right and the article is right. I don’t 

know about those specific numbers, but there has been an enormous growth in the last 10 or 15 years in the use of partnerships, 

trusts and S corporations, which are flow-through type organizations. But they all have the same type of characteristics, where the 

taxes are paid not at the entity level but by the owners. There has 

been growth not only in the number of these pass through organizations but also the total amount of income that flows through 

them, and it is really quite substantial. 

It is also accurate that the IRS was not keeping up with that on 

the whole. We really recognized that point about 2 years ago; and, 

in fact, in the budget request for 2001, there was some request specifically for some additional funding to take one of the steps that 

we think is necessary, which is to begin matching the K–1 documents. The K–1s are the documents that are reported to the shareholders or the partners of these entities. 

Mrs. THURMAN. Did you receive those dollars? I don’t recall. 

Mr. ROSSOTTI. Pardon me? 

Mrs. THURMAN. Are you doing that now? 

Mr. ROSSOTTI. Yes. We got that money, and we have started to 

do that. I do stress it was only the starter kit for the money, because it was only what we needed for the matching, and we will 

have more cases that flow out of the information we gain from this 

program. 

In fact, I was out at one of our centers just 2 weeks ago where 

they are starting to do K–1 matching, and we will begin to get 

cases out of that which will show us whether people are not reporting some of that pass through income. 

This is only one technique. The other thing we are doing is focusing on another part of this problem, which is use of devices, especially trusts, as an abusive tax evasion device. People set up and 

promote, in some cases, various schemes where the idea is that if 

33

you are, let’s say, a businessperson or a professional of some sort, 

for example a medical professional or even a lawyer, you allegedly 

transfer your business to one of these trusts and have multiple layers of them taking out various kinds of expenses at each layer. In 

some cases, people actually incorporate the trust in a tax haven, 

which is more aggressive aspect of tax avoidance, so that the income is actually moved offshore completely. This is, we think, one 

of the most significant of the actively promoted schemes that people are using to hide income. 

We began about 2 years ago, as was laid out in our strategy, to 

reallocate resources to this problem. This means not only the K– 1 matching, which is one strategy, one technique, but also training 

field agents. We, frankly, had a small number of agents trained to 

do this work. So we began to train people to do this. 

We also tried some techniques that are now starting to pay off, 

such as issuing summonses to get at the money hidden offshore. 

We issued a summons, initially, to one of the major credit card 

companies to give us records that had been issued by banks in 

some of these tax havens to people who were spending money in 

the United States. This was one of the techniques being used to repatriate the money. We started that 2 years ago, and we are now 

starting to get some rather substantial information out of it. 

Also, if you have seen the papers, we issued some additional 

summonses to other credit card companies, and we are finding that 

there are very significant numbers of taxpayers who seem to be 

taking advantage of this device to put income overseas in tax havens. 

I don’t mean to imply that everybody using a trust or an S corp, 

by any means, is using them to hide income, but there are some 

who are. And even the ones who are not have a lot of income going 

through there, which we had not been paying as much attention to 

as we should have. 

It is unfortunate that it takes a little bit of time to crank up 

these initiatives. It just does not happen overnight, because there 

are quite a few steps that you have to go through. But I am, I 

think, pleased that we are now at a point where we are starting 

to see some of the things come out of the pipeline on this; and over 

the next 2 years, if we can continue this, I think this will be a very, 

very important compliance initiative. 

Mrs. THURMAN. I am trying to help you give a response to this, 

too, but, in saying all of that, one of the things that the paper reported was that, ‘‘When unreported partnership income is found, 

the IRS will send notices demanding taxes or an explanation, but 

the IRS was given no additional money for the actual casework,’’

I guess to follow up, ‘‘when unreported income is found.’’

Is that accurate? And if it is, are there recommendations? 

We are going to take this bill to the floor tomorrow. I don’t know 

how much we can change tomorrow, but certainly it has another 

body to go through that we should be expediting this. 

This is my concern. These are the kinds of articles that, when 

people don’t feel that they are being treated fairly, will undo everything that you have tried to do. And when you have got somebody 

out there working, who doesn’t get to take their health care expenses off, who doesn’t get to take their travel expenses off, who 

34

doesn’t get their lunch expensed, but gets hit 1 out of every 45 

times, versus somebody who is having that advantage, that is not 

going to be a good report. And I don’t want that to be the report 

that we hear about IRS. I would rather hear the other issues. 

But I am concerned that some of these low and middle income 

payers are going to feel like their government is working only for 

those that have more than those who have less. 

Mr. ROSSOTTI. I could not agree with you more. I have stated 

that numerous times. We feel we are on the side of the honest taxpayer, the ones you are talking about, the person who really does 

pay their taxes. That is why we have taken the resources that we 

have and begun to refocus them as strongly as we can on these 

larger amounts and, in some cases, more egregious forms of noncompliance and the use of these trusts and partnerships as a technique to do that. 

Again, I want to stress that most of them are very legitimate, 

and most people that use partnerships are doing them very appropriately, but there is a significant amount that are not. 

Mrs. THURMAN. We agreed with you on that on the Earned Income Tax Credit. But it always seems every time we get in this debate, the Earned Income Tax Credit was the bad guy. Now we are 

hearing there is another story out there. 

Mr. ROSSOTTI. The truth is, as I see it after being in this job, 

there is noncompliance at all levels and of all kinds. Taxpayers at 

all levels comply, and there is a minority of taxpayers who abuse 

the system at all levels, too. What I believe we should do is be as 

effective as we can in finding those cases at all levels and especially those that are more egregious and are larger and use our resources for them. 

Now, on the question about our not getting more money for these 

cases, initially this was in the 2001 budget. We went for the money 

necessary in order to do the matching. We didn’t know how many 

cases were going to come out of that. We did not specifically request the money for that. However, in the 2003 budget, there is 

money in this highest priority needs. 

You will notice the biggest part of this, this 1857 (FTEs, full-time 

employees) for compliance, some of these will be what we would 

use to do those kinds of cases. 

Mrs. THURMAN. Thank you. 

Chairman HOUGHTON. Mr. Weller. 

Mr. WELLER. Thank you, Mr. Chairman. 

Commissioner, good to see you today. Welcome back before our 

Subcommittee. I would like to focus on the Electronic Tax Administration. 

Of course, the Restructuring Reform Act of 1998 set a goal for 

the IRS to have 80 percent of returns filed electronically by the 

year 2007; and, while you have made progress, the U.S. General 

Accounting Office (GAO) and the Electronic Tax Administration’s 

Advisory Committee said you may not be on track to achieve that 

80 percent goal. Can you report on what kind of progress you are 

making toward this 80 percent goal, where you are today and 

where you expect to be? 

Mr. ROSSOTTI. Yes, I can; and let me tell you exactly. We set a 

goal this fiscal year—and I am going to speak of the 1040s now, 

35

the individual returns—of 46 million electronically filed, which was 

a 15-percent increase over last year and which was actually a million more if you just did a statistical trend line. And I am pleased 

to say that, based on the results as late as yesterday, that I think 

we will not only meet the 46 million but we expect to go over the 

46 million. So 46 million would be a 15-percent increase, and we 

will probably come close to a 16-percent increase, which is a greater increase than we had last year. 

Now, if you extrapolate that all the way out to 2007, we would 

actually need a little bit higher rate of increase to reach 80 percent. 

We would actually need 19 percent. The reason for that is because 

we not only have to reach 80 percent of the returns currently being 

filed but the number of returns grows every year. There is about 

a 1.8 percent a year growth in the number of returns. So between 

1998 and 2007, where Congress set the goal at 2007, when this 

goal comes in there will be actually 20 more million returns filed 

than in 1997, due to the increase in the number of filers. 

The bottom line is, we are close to the track but not quite on the 

track; and I think that is why the provision that this Committee 

reported out concerning setting the filing date, which the Administration had proposed and the Committee supported, I think is an 

important step. We need some steps like that to give us that little 

more boost we need to get up to the 80 percent level. We are close 

to it with the percentage that we have this year. 

Mr. WELLER. As you pointed out, the President proposed extending the deadline to April 30, essentially 2 weeks beyond the deadline, if you file electronically. We, of course, had moved legislation 

a few weeks ago out of this Committee for that purpose, and I expect we will be voting on it within the week. From your standpoint 

of administering this, how will that help you? 

Mr. ROSSOTTI. I think it will help us and the taxpayer, by giving 

an incentive, for the taxpayers who file late, to file electronically. 

See, if you were to look at the percentage of returns we have gotten in today, we are already getting a majority. If you looked at 

it as of this minute, April 9th, the majority of returns that have 

come in so far have been filed electronically. The problem is the 

ones that come in late are usually filed on paper, and those are 

also the most expensive ones to handle. 

Why do the later returns come in on paper predominantly? One 

of the reasons is because more of them, obviously, have balances 

due with the returns, as opposed to refunds. Clearly, there is more 

of an incentive to get in quicker if you get a refund. So that is one 

reason. 

Well, the later filing date and the payment date would give an 

incentive for those people. 

Finally, there are just procrastinators. Some of us will procrastinate even when we are getting a refund. And the fact this gives 

you 2 weeks more to file gives you an opportunity to get your return in on time even later. So I think those are the reasons. It 

would give an incentive for people who would file in the last, say, 

week of the filing season and who have balance due returns to file 

electronically. 

We have done analysis of this and have, through market research, determined that we would tap a significant block of taxVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00039 Fmt 6633 Sfmt 6602 E:\HR\OC\B436.XXX pfrm17 PsN: B436
36

payers that would otherwise not be tapped. And I think by adding 

that to the growth that we otherwise would have, it would definitely boost it, and it would also be a benefit to the taxpayers because they would have that much longer. 

Mr. WELLER. It will be interesting to see how this experiment 

works come May. 

Mr. ROSSOTTI. I am quite confident it will work. I think there are 

a few practitioners who are concerned about extending the filing 

season, but I think from the point of view of the taxpayer it will 

be a benefit. 

Mr. WELLER. Commissioner, in talking about the issue of convenience, some State agencies allow tax filings based on a Web-based 

application, which means that the taxpayer has no need to purchase software or to download software; and, of course, there is no 

cost in doing that. I was wondering, is the IRS considering offering 

any similar Web-based filing options? 

Mr. ROSSOTTI. First, let me point out one thing. There are a 

number of options that a taxpayer can use for filing on the Web 

from various commercial providers that then transmit to us, although they usually charge a fee, usually about $10 or so to do 

that. So the service is available, but it is available through tax 

preparation software companies. And in the Administration’s budget for this year, proposed by the President, there is an initiative to 

try to find a way to work with the private sector, to find a way to 

offer that service to at least some block of taxpayers in a way that 

will be either at no cost to the taxpayer or more accessible to the 

taxpayer. 

As a matter of fact, we have an active program under way right 

now working with the software industry, some of whose members 

are here, I know, in the audience, to try to find a way to implement 

the Administration’s proposal. The objective of that would be to do 

exactly as you say, without stepping into the problem that we really don’t want to step into of getting the IRS into being a software 

provider. We have enough trouble with our own software. 

Mr. WELLER. Well, Commissioner, there would be, I believe, certainly in the House, would be significant concern, if you were to 

put yourself in a position where you are competing with the private 

sector which is offering this service. And I would note that at least 

one company I know of who does provide this software at no cost 

to low income families to help them. I know they have done that 

in communities that I represent. 

Mr. ROSSOTTI. What we are trying to do is exactly build on those 

kind of offerings, but make them something that we could make a 

little bit more accessible and maybe something that the IRS could 

join with the industry in publicizing. Right now we are very limited 

in what we can do to let them know about it. 

Mr. WELLER. I would ask if you could keep us informed if you 

move forward on any initiative and keep the Members of this Subcommittee informed on what you may be doing. 

Mr. Chairman, may I have one additional question? 

Chairman HOUGHTON. Yes. 

Mr. WELLER. Thank you, Mr. Chairman. 

It has also been reported that the IRS may be delaying refunds 

on electronically filed returns. And, of course, as we have just disVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00040 Fmt 6633 Sfmt 6602 E:\HR\OC\B436.XXX pfrm17 PsN: B436
37

cussed, many taxpayers find it convenient to file electronically, and 

we want to encourage taxpayers to file electronically. 

Can you explain why there is a delay in providing refunds to 

those who filed electronically? 

Mr. ROSSOTTI. The answer is there is no difference in the way 

that we evaluate filings, whether they are filed on paper or electronically. We have made that commitment many times because we 

don’t want to discriminate in any way between people that file electronically or that file on paper. 

We do have various screening devices to hold certain refunds 

based on the risk that there could be a problem with those refunds. 

But those screening tools are applied equally to paper and electronic returns. I know that some people get the impression that if 

they had a refund that was frozen for a compliance reason, and it 

happened to be filed electronically, people will sometimes include 

that, the refund was held because the return was filed electronically. 

If the same exact return had been filed on paper, it would have 

been held for the same reasons, because we apply the same filters, 

if you will, to those returns. 

Mr. WELLER. So you are saying that refunds for paper filing 

versus electronic filing are essentially treated the same if received 

in the same period of time? 

Mr. ROSSOTTI. Well, it takes a while longer for the paper to go 

through the system. But, I mean, we have—as part of our processing in order to identify potentially invalid or incorrect refunds, 

we have various screening devices. And that includes some that are 

aimed at finding potential fraudulent refunds, because we do get 

submissions for fraudulent refunds. We have a set of techniques 

that we apply to try to identify those. But those techniques are applied after the return is submitted. They are applied equally to 

both kinds. 

Mr. WELLER. What is the average period of time between electronic filing and someone receiving a refund? 

Mr. ROSSOTTI. On an electronic filing, you typically get your refund in 10 to 14 days. On paper it is about 6 weeks. 

Mr. WELLER. Thank you, Mr. Chairman. Thanks for the courtesy 

of an additional couple of minutes. 

Chairman HOUGHTON. Mr. Commissioner, I would like to ask you 

a couple of questions. The reason, I understand it, that the lower 

income returns are monitored more than the higher income returns 

is because it is easy to match. Now, the question is, in terms of real 

estate trusts, in terms of partnerships and things like that, is it 

going to be easier to be able to put your hands on those issues? 

Whereas, you have never been able to get information as far as the 

K–1 or the forms sent to partnerships? Talk a little bit about that. 

Mr. ROSSOTTI. Could I clarify a few terms here, because I think 

one of the things that gets a little confusing is what is an examination. 

We publish statistics on what percentage of people are examined. 

And an examination has a specific definition in the Code, in our 

Internal Revenue manual. It basically has to do with us requesting 

or requiring a taxpayer to submit books and records to us. But we 

have a huge range of what we call an examination. Most of the exVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 E:\HR\OC\B436.XXX pfrm17 PsN: B436
38

aminations, almost all of the examinations of the earned income 

tax credit population, which is funded under a separate appropriation, I should note, are very, very simple exams, which have to do 

with—basically can be conducted by letter, almost all cases. We call 

them correspondence exams. They are very simple and usually they 

involve us sending a letter to the taxpayer and requesting them to 

send us substantiation for certain information about why they 

claimed a certain child as a qualifying child under the earned income credit or why they claimed, for example, head of household 

status, you know. 

Those examinations are relatively low cost to do, because all they 

involve is sending a letter and getting information back. And we 

do a significant number of those in quantity because we have a 

large number of earned income tax credit claims that come in. 

One of those is counted as an exam the same as an exam where 

we might send a revenue agent out to audit a high income individual and spend several weeks in their office actually auditing 

their books and records. They are still counted as one exam. So 

when you look at these statistics, they really are not necessarily revealing in and of themselves. You have to look behind them. 

We do audit, in terms of pure numbers, a significant number of 

earned income tax credit taxpayers. But, in terms of the use of our 

resources it represents, I believe it is something like 6 percent of 

our total audit resources. 

Chairman HOUGHTON. Can I just interrupt here a minute? 

Maybe I am not making myself clear. I guess what I am getting 

at is, you have the source of income which is taxable, and another 

way of checking it, that it is easy to sort of monitor so that there 

is a trust, a truthfulness going on here. If you have only have one 

statement, it is very difficult to do that. I mean, for example, with 

gross receipts on the Schedule C, or cost of assets sold or things 

like that. So how do you get around that? 

Mr. ROSSOTTI. Well, basically, if you look at individual returns, 

about 75 to 80 percent of the total income, and I am only looking 

at income now that is reported on individual returns, is reported 

by a third party, what you are referring to. Okay? So for that purpose we can use matching techniques and other kinds of techniques 

for that. 

The business income, and this includes some income that comes 

in through Schedule Cs as well as other sources, there is no third 

party source. 

So the only way that you can verify that income is to go out and 

check the books and records of the taxpayer, which is one of the 

reasons we need audits, to be able to check those kinds of records. 

Now, some of the income that has increased that is coming in, and 

this is heavily concentrated in upper income individuals, does come 

in through partnerships and trusts on these K–1s. That is an opportunity. It is reported through a third party. And we can match 

that. It was not previously being matched until starting fairly recently. But we are now starting to use that. So the answer is that 

we need a variety of techniques. We use obviously the most efficient one. Where we can match documents, we do. And that is a 

very efficient way to verify income. Where we cannot match documents, we need to go out and check books and records. 

39

Chairman HOUGHTON. Let me—the overall question which I 

wanted to ask you is this, and then maybe some of the others will 

have some additional questions. In terms of your priorities, if I 

were sitting in your seat, there would be three issues. One would 

be tax simplification. Two is moving from a pencil and pad form to 

an electronic system. The third is buttressing up this concept of 

trust and truth. 

And, you know, it has been touched upon by so many people. And 

I guess the thing that worries me is that I don’t know whether we 

are leveling off, if the trend is going to go up or we are continuing 

down, because the difference between the survey information in 

1999, I guess it was, and what it was in 2001 is a big difference, 

big drop. 

And I think one of the things that has always impressed me 

about our system is that there is an understanding of the value literally of paying taxes in order to be able to supply those things 

which our government needs and our people need. And there is a 

trusting relationship there. And I just don’t know what the underlying erosion is. You may want to make a comment. 

Mr. ROSSOTTI. Well, let me just say that I think I totally agree 

with you that the total system depends on trust, and it depends on 

the belief that people who are paying are not getting victimized or 

taken for suckers by someone who is getting away with it. There 

is indication, you know, that although I don’t know how reliable 

that is, that there may be some erosion in that. 

I do want to point out that we began an initiative called the National Research Program which we have briefed many Members of 

the Committee on, which was sorely needed, in my opinion, to actually to get a real handle quantitatively and to measure who is paying and who is not paying, who is reporting, I should say, and who 

is not reporting. And that, you know, was long overdue. The last 

time that was done was in 1988. It will take us about 2 years. We 

are starting it this year. But it will take us to the end of next year, 

end of 2003 to get that. That information, I think, will be extremely 

valuable in helping us to measure whether there is an erosion, not 

only in sort of surveys, but in actual behavior of taxpayers and will 

also help us to pinpoint where the most serious problems are. I 

must say we are not waiting for this survey. We know there are 

compliance problems. We have got cases, and we have got millions 

of them that we can work right now. So we are not waiting for the 

survey. But, in order to get the point of what the trend is and 

whether there is an erosion, I think we do need some information 

that we don’t have right now. And we are going to get it. We are 

going to get it reasonably soon by our standards, which means possibly by the end of 2003. 

Chairman HOUGHTON. All right. Let me ask you, have you got 

any questions, Mrs. Thurman? 

Mrs. THURMAN. Commissioner, just—based on just what the 

Chairman said and your response to me, and looking at the budget 

and particularly where you put the highest priority resource needs 

in compliance, and to help build this trust with the American public that we are talking about, would it be safe to say then that 

under the 2003 budget that we might see an increased auditing 

and/or individuals on partnerships and overseas trusts similar to 

40

what we see in the 1 out of every 45 working poor that are subjected? Can we get to those numbers? 

Mr. ROSSOTTI. Well, I got—you are definitely going to see an increase. But we are not going to wait until 2003. We are actually 

going to see an increase this year. The statistics, frankly, are not 

comparable, because we are talking about a letter audit versus 

something much more complicated. To give you an example, it can 

take us 300 to 500 hours of actual direct audit time to audit an individual with an offshore account. That can be a couple of hundred 

times as long as it takes to do this other audit. So these are not 

the same. There is a lot more money at stake. Frankly, just counting audits doesn’t tell you a whole lot. 

But I think what is important is looking at what we are doing 

with that audit and what we are targeting. I could not agree with 

you more. We need to target those resources where people are really abusing the system. 

Mrs. THURMAN. I think that once we target some of them, we 

may not have so much abuse in the system. 

Mr. ROSSOTTI. I hope not. 

Mrs. THURMAN. Thank you. 

Chairman HOUGHTON. Just one final question. 

You know, this is such an important time. Not only in terms of 

what you have done, the way the IRS has turned, but some of 

these huge problems out there. I am going to request that we 

might have another go at this thing prior to you leaving, maybe in 

October, so that you can give your final swan song and we can 

make—make absolutely sure what you think are important as you 

move along these next 5 years. 

Mr. ROSSOTTI. I would be delighted, Mr. Chairman. I would be 

honored to do that. 

Chairman HOUGHTON. Thank you very much. Appreciate it. 

We will now have the next panel. Mr. James L. White, Director 

of Tax Policy and Administration Issues, U.S. General Accounting 

Office, and Colleen Kelly, National President, National Treasury 

Employees Union. Will you please come to the stand? Thank you. 

All right. Well, Mr. White, will you begin your testimony. Thank 

you very much. And, Ms. Kelly, nice to see you.

STATEMENT OF JAMES R. WHITE, DIRECTOR, TAX ISSUES,

U.S. GENERAL ACCOUNTING OFFICE

Mr. WHITE. Mr. Chairman and Members of the Subcommittee. I 

am pleased to participate in your review of IRS’ budget request and 

filing season performance. I would like to begin by commending 

IRS for several actions. 

First, IRS used its new strategic planning, budgeting and performance management process to identify internal savings that it 

expects will allow it to redirect over 2000 staff to higher priorities. 

Second, unlike past years, IRS’ request for business systems 

modernization funding is grounded in analyses that meet the requirements for such capital investment funding. 

Third, with one major exception, the processing of returns this 

filing season has gone smoothly and there have been some improvements in telephone service. 

41

Having said that, we have several cautions and concerns regarding both the budget request and filing season performance. One important caution about the budget request is that it is based on a 

series of assumptions that can prove optimistic, a result, to some 

extent, of the fact that budgets are prepared in advance. 

The assumptions include the likelihood that the savings of over 

2000 staff years that I just mentioned will be realized and there 

will be no major unexpected expenses. Unrealized savings or unexpected expenses could lead to cutbacks in planned hiring; cutbacks 

that historically have hit IRS’ enforcement programs the hardest. 

In addition, IRS’ budget request does not always provide an adequate link between the resources requested and what IRS proposes 

to accomplish with its resources. In some cases, such as telephone 

service, good links exist. IRS asked for $14 million for additional 

staff and projects to increase the percentage of callers getting assistance by about 5 percentage points. 

However, in other areas linkages are not adequate. For example, 

IRS asked for additional resources to fight systematic noncompliance such as abusive trusts and failure to pay employment taxes. 

But it is unclear how many resources will be devoted to each problem or what results are expected. Thus, it will be difficult to judge 

progress or hold IRS accountable. Consequently, the Subcommittee 

may want to ask IRS for more specifics about spending in areas 

with inadequate linkages to projected results. 

In addition, IRS requests a continuation of the separate appropriation for earned income credit compliance. Considering other 

compliance problems facing IRS, the Subcommittee may want to 

ask IRS for its views on the value of this separate appropriation 

for the credit versus a combined appropriation for all compliance 

programs. 

A third concern about the budget is the lack of justification for $1.63 billion for operation and maintenance of information systems. 

Rather than assess the costs, benefits and risks of specific projects, 

an approach taken by leading private and public organizations, IRS 

officials said they simply took last years spending and added an 

amount to fund cost of living and salary increases. 

While we cannot tell from the budget information whether any 

spending cuts are justified, we are recommending that future information system budget requests be in accordance with leading organization practices. 

On a related matter, this year’s investment and business systems 

modernization, we have reported our concerns about the number 

and complexity of systems acquisition projects and the continued 

lack of certain management controls and capabilities. In response, 

IRS has committed to align the pace of the program with the maturity of management controls and is reassessing projects it plans to 

deploy in 2002. 

Now, I want to discuss the filing season. This year, the one exception to the smooth processing of returns has been the large 

number of errors taxpayers are making related to the rate reduction credit and advance refund checks sent out last summer and 

fall. Although the errors have not affected the timeliness of processing, they have resulted in a significant error correction workload 

for IRS, the rejection of some electronically filed returns, and an 

42

1Some of our analysis is based on data provided by IRS that we did not verify. These data 

generally came from management information systems that we have used in the past to assess 

IRS operations. 2These dollar amounts include funding for the legislative proposal on full costing of retirement and health benefits. Absent that legislation, the fiscal year 2003 budget would be $9.9 billion, an increase of $445 million over fiscal year 2002.

increased demand for telephone assistance that is affecting taxpayers’ access to IRS’ assisters. 

So far, about 7 percent, or over 3 million of the returns filed to 

date, contain such errors. Although IRS took steps to deal with the 

problem, in retrospect, IRS may have been able to prevent some of 

the errors if the instructions on tax returns had been clearer. 

A key question related to filing season performance is whether 

IRS is improving its performance management so it will be better 

able to improve future performance. To this end, IRS has some useful performance measures but misses certain important aspects of 

service to taxpayers. For example, IRS does not have a measure of 

the service it provides to about 70 million callers who use its automated telephone services. At your request, Mr. Chairman, we are 

reviewing IRS’ filing season performance measures and plan to 

issue a separate report on our results. 

Mr. Chairman, that concludes my statement. I would be happy 

to answer any questions. 

[The prepared statement of Mr. White follows:]

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

Office 

Mr. Chairman and Members of the Subcommittee: 

We are pleased to participate in the Subcommittee’s inquiry into the fiscal year 

2003 budget request for the Internal Revenue Service (IRS) and the 2002 tax filing 

season. 

As you requested, our statement assesses the support for various aspects of IRS’

budget request, including the linkage between resources requested and expected results, and IRS’ performance in processing returns and providing assistance to taxpayers during this filing season. 

Our assessment is based on (1) our review of IRS’ fiscal year 2003 budget request 

and supporting documentation; (2) the preliminary results of our review of the 2002 

tax filing season; and (3) past and ongoing reviews of various IRS activities, including those related to information systems and performance measures.1

IRS is requesting about $10.4 billion for fiscal year 2003, an increase of about 

$500 million, or about 5 percent, over its appropriated level of about $9.9 billion for 

fiscal year 2002.2 The proposed request is expected to fund 101,080 full-time equivalent (FTE) staff years, an increase of 1,179 FTEs over 2002. In addition to the increase of 1,179 FTEs, IRS identified internal savings that it expects will allow 2,287 

FTEs to be redirected to higher-priority areas. To identify these savings, IRS used 

its recently implemented strategic planning, budgeting, and performance management process. This process is designed to reconcile competing priorities and initiatives with the realities of available resources. We commend IRS for using this process to reassess the allocation of resources in its base budget for 2003. With respect 

to IRS’ request, our statement makes the following points: 

• IRS’ plans for hiring and redirecting staff depend on several assumptions that 

could be optimistic—a natural result, to some extent, of the fact that budgets 

are prepared so far in advance of the fiscal year involved. These assumptions 

include (1) labor and nonlabor savings of 2,287 staff years and $157.5 million 

identified by IRS operating units and (2) additional savings of $38.5 million resulting from better business practices that have not yet been identified. Also, 

IRS may face some unanticipated expenses, such as a larger civilian pay raise 

than proposed by the Administration, that could, if not funded, affect IRS’ financial plan for 2003. Unrealized savings or unexpected expenses could lead to 

cutbacks in planned hiring—cutbacks that historically have hit IRS’ enforcement programs the hardest. 

43

• IRS’ congressional justification does not always provide an adequate link between the resources being requested and IRS’ performance goals. In some respects, such as with telephone service, good links exist. In other areas, however, 

there are either no performance goals against which Congress can hold IRS accountable or there appear to be inconsistencies between the resources being requested and the expected change in performance or workload. The Subcommittee may want to pursue these issues with IRS. 

• Although IRS provided adequate support to justify the $450 million request for 

its multiyear capital account for business systems modernization, it did not adequately support $1.63 billion of the $1.68 billion requested for its information 

systems. The $1.63 billion is for the operation and maintenance of existing (legacy) systems. We are recommending to IRS that it prepare its fiscal year 2004 

information systems budget request in accordance with the practices of leading 

private and public sector organizations.

Our testimony on the 2002 filing season presents interim data on IRS’ performance in processing returns and helping taxpayers who call IRS or walk into an IRS 

office. The following two themes predominate:

• So far this filing season, IRS has processed returns smoothly, with one major 

exception, and seen continued growth in electronic filing. The one exception to 

smooth processing has been the large number of errors taxpayers are making 

related to the rate reduction credit. IRS has had to correct millions of returns 

with errors related to the credit, and taxpayers’ calls about the credit have 

greatly increased the demand on IRS’ toll-free assistance lines, likely causing 

IRS’ overall level of telephone service to dip significantly for a few weeks during 

the filing season. Some of these errors may have been avoided if the instructions for the income tax forms had been clearer. 

• IRS’ performance measures provide useful information on which both IRS and 

we rely to assess its success in assisting taxpayers. However, some measures 

of telephone service are constructed in a way that miss important aspects of the 

activity being measured, and plans to begin measuring some important aspects 

of IRS’ walk-in service have been delayed. 

IRS’ Budget Request for Fiscal Year 2003

If IRS’ budget request is approved, IRS will have more than 3,400 staff years that 

can be assigned to new or existing activities in fiscal year 2003. These include the 

1,179 additional staff years requested in the budget and the 2,287 staff years that 

IRS determined could be redirected elsewhere in the organization due to projected 

savings from several improvement projects and workload decreases. These 3,400 

staff years can make a real impact on IRS’ performance if they are targeted to selected areas. However, the availability of these staff years depends on the projected 

savings being realized and no significant unanticipated expenses. In addition, it is 

difficult to evaluate the effect that these additional and redirected staff years will 

have on IRS’ operations because the budget is not well-linked to performance goals 

in some important areas. 

With respect to that part of the budget request for information technology, IRS 

(1) did not adequately support the $1.63 billion requested for operation and maintenance of its information systems but (2) did adequately support its $450 million request for business systems modernization. 

IRS’ Budget Request Is Based on Several Assumptions 

IRS’ fiscal year 2003 budget request is based on several assumptions that could 

prove optimistic. These include (1) labor and nonlabor savings of 2,287 staff years 

and $157.5 million from various improvement projects and workload decreases that 

IRS plans to use elsewhere in the organization, and (2) additional savings of $38.5 

million resulting from better business practices that have not yet been identified. 

Also, IRS may face some unanticipated expenses that, if not funded, could cause it 

to revise its financial plan for fiscal year 2003. In many respects, this kind of uncertainty is the natural result of a process that requires the development of budget estimates many months before the fiscal year in question. No matter the reason, the 

end result could be unrealized savings or unexpected expenses that, as in the past, 

lead to cutbacks in planned hiring—cutbacks that historically have hit IRS’ enforcement programs the hardest. 

Through use of its strategic planning, budgeting, and performance management 

process, IRS identified a myriad of expected efficiency improvements, technological 

enhancements, labor-saving initiatives, and workload decreases that it projects will 

enable it to redirect $157.5 million in its base budget to higher-priority areas. Examples include (1) saving over $67 million from re-engineering and quality improveVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00047 Fmt 6633 Sfmt 6621 E:\HR\OC\B436.XXX pfrm17 PsN: B436
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3The Administration proposed a 2.6-percent pay increase for civilian employees in fiscal year 

2003, which is the percentage IRS used in developing its budget, and a 4.1-percent pay raise 

for military personnel. 

ment efforts, such as consolidating form printing and distribution operations and 

updating an antiquated workload selection system to reduce or eliminate the substantial number of tax returns that are ordered but never audited, and (2) reducing 

the resources used for the innocent spouse program by $13.8 million due to an expected decrease in caseload. 

We commend IRS for taking the initiative to reassess the allocation of resources 

in its base budget. However, the congressional justification submitted by IRS in support of its budget request does not explain how IRS developed the labor and 

nonlabor savings. IRS provided us with information on the overall method used to 

develop the savings and explained that, in a change from IRS’ previously used topdown process, operating units determined the resource increases and decreases their 

programs needed. However, IRS did not provide details on how specific savings were 

computed, such as information on any assumptions used in developing specific estimates. 

In response to the secretary of the Treasury’s challenge for each Treasury bureau 

to review all programmatic efforts and reduce or remove those producing little or 

no value, IRS officials estimated that such a review could save $38.5 million. IRS’

congressional justification notes that the secretary considers this review to be a 

work in progress and expects bureau heads and financial plan managers ‘‘to work 

creatively on mid-course adjustments’’ until the final quarter of fiscal year 2003. Accordingly, the congressional justification provides no details on how the $38.5 million will be achieved. 

Any shortfall in the estimated labor and nonlabor savings or in savings from efforts to reduce or eliminate programs will only be exacerbated if IRS has to absorb 

unanticipated budget increases. For example, IRS officials estimated that it would 

cost an additional $69 million if the civilian pay raise included in this budget was 

increased to achieve parity with the proposed pay raise for the military.3 In fiscal 

year 2002, IRS faced unbudgeted cost increases related to rent, pay raises, security, 

and postage rate increases. As a result, IRS had to delay hiring revenue agents and 

officers, tax compliance officers, and tax specialists. According to IRS, ‘‘the lack of 

full funding for non-labor inflation over the years has greatly reduced the IRS ability to cover pay raise costs and other legitimate cost increases by reducing non-labor 

costs, leaving the IRS with the sole alternative of reducing staff.’’ IRS noted that 

‘‘these budget constraints forced the IRS to reduce 1,364 FTEs in the [fiscal year] 

2002 plan.’’ Although we do not have specific evidence of how this FTE reduction 

affected IRS’ operations, IRS data does indicate that the number of revenue agent 

FTEs in its current financial plan for fiscal year 2002 (11,836) is 691 fewer than 

the actual revenue agent FTEs in fiscal year 2000 (12,527)—despite funding of an 

initiative in fiscal years 2001 and 2002 that, among other things, was to increase 

the number of revenue agent FTEs. 

Congressional Justification Not Always Well-Linked to Performance Goals 

The Government Performance and Results Act of 1993 requires agencies to establish linkages between resources and results. With this requirement, Congress hoped 

to focus agencies on achieving better results for the American public. Congress also 

hoped to gain a better understanding of what is being achieved in relation to what 

is being spent. 

In some respects, IRS’ congressional justification has good links between the resources being requested and IRS’ performance goals. For example, IRS’ budget includes an increase of 213 FTEs and $14.1 million to improve its telephone level of 

service, and its performance measures show an expected increase in toll-free telephone level of service from 71.5 percent in fiscal year 2002 to 76.3 percent in fiscal 

year 2003. 

However, in other important areas, the congressional justification is not welllinked to performance goals. In some instances, there are no performance goals 

against which Congress can hold IRS accountable. In other instances, there seem 

to be inconsistencies between the amount of resources being requested and the expected change in performance or workload. 

Missing Performance Goals 

A significant example of missing performance goals involves IRS’ efforts to address major areas of systematic noncompliance. In February 2002, the commissioner 

of Internal Revenue identified four such areas: (1) misuse of devices, such as trusts 

and passthroughs, to hide income; (2) use of complex and abusive corporate tax shelVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00048 Fmt 6633 Sfmt 6621 E:\HR\OC\B436.XXX pfrm17 PsN: B436
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4 U.S. General Accounting Office, Tax Administration: IRS Should Evaluate the Changes to 

its Offer in Compromise Program, GAO–02–311 (Washington, D.C.: Mar. 15, 2002). 

ters to reduce taxes improperly; (3) failure to file and pay large accumulations of 

employment taxes; and (4) erroneous refund claims, which include claims made 

under the Earned Income Credit (EIC) program. The budget request includes increased resources for compliance but, except for the EIC program, it is unclear from 

IRS’ congressional justification how many resources IRS intends to devote to each 

of these problems. And, for none of these areas, including the EIC program, does 

the congressional justification include performance measures and goals that Congress can use to assess IRS’ progress in addressing these major compliance problems. 

IRS’ congressional justification is clear about the amount of resources IRS plans 

to devote to EIC compliance efforts because the budget request calls for the continuation of a separate appropriation for that program. If approved, it will be the sixth 

year of targeted funding for the EIC program. IRS’ compliance efforts under this 

program have prevented the payment of hundreds of millions of dollars of improper 

EIC claims. However, the most recent IRS information shows that the rate of EIC 

noncompliance is still very high. According to IRS’ report on its analysis of EIC compliance rates on tax year 1999 returns filed in 2000, (1) about one-half of the 18.8 

million returns on which taxpayers claimed the EIC involved overclaims and (2) of 

the estimated $31.3 billion in EIC claims made by taxpayers who filed returns in 

2000, between $8.5 billion and $9.9 billion should not have been paid. 

Audit coverage is another area where performance goals would help Congress assess IRS’ progress. IRS states in its congressional justification that it will increase the resources for stabilizing audit rates by 368 FTEs and $24 million. Although the 

congressional justification states that audit rates have fallen, the justification does 

not include any information about current audit rates or what rates IRS expects to 

achieve in 2003. 

Issue for Congressional Oversight 

Given the amount of resources that could be involved in dealing with the four 

major compliance problems cited by the commissioner and increasing overall audit 

coverage, the Subcommittee may want to ask IRS to provide (1) more specifics on 

the level of resources it plans to devote to each of these areas and its performance 

measures and goals for each area and (2) its views on maintaining a separate appropriation for the EIC versus combining in one appropriation those resources with the 

resources being requested for other compliance work, which could give IRS more 

flexibility in deciding how best to allocate its resources among all of its compliance 

needs. 

Inconsistencies between Budget Request and Performance Goals 

The budget request and performance goals included in the congressional justification are, at times, inconsistent. Some of those inconsistencies might suggest that additional resources beyond those identified by IRS are available for redirection. Specific examples of inconsistencies include the following:

• A requested increase of 476 staff years and $20.7 million for ‘‘increased Offerin-Compromise cases’’ is inconsistent with IRS’ performance goal for that program, which shows that the number of cases processed is expected to decrease 

from 185,000 in 2002 to 104,600 in fiscal year 2003. This requested increase 

also conflicts with our recent evaluation of the program that shows that IRS 

projected that the number of staff years needed would decrease from 1,818 in 

fiscal year 2002 to 1,224 in fiscal year 2003.4 In response to our question about 

this, IRS officials said that the staff year increase is to replace revenue officers 

who currently handle the cases so there is not a net increase in staff years for 

the offer program. This does not help explain why IRS is asking for an increase 

in resources when the workload is expected to decline and IRS had projected 

a decreased need for staff in the program. • According to IRS’ budget request, the field and electronic/correspondence exam 

units will receive about the same number of staff years as the year before, while 

in terms of dollars, the field exam unit will receive an increase of less than 3 

percent and the electronic/correspondence unit will receive an increase of about 

7 percent. However, IRS’ performance measures show the field exam unit is expected to examine 33 percent more individual returns and almost 35 percent 

more business returns while the electronic/correspondence unit is expected to 

increase the number of correspondence examinations by 32 percent. It is not 

clear from the congressional justification how IRS expects to do so much more 

work with just a small increase in resources. IRS told us that one reason for 

46

5 U.S. General Accounting Office, Tax Administration: IRS’ 2000 Tax Filing Season and Fiscal 

Year 2001 Budget Request, GAO/T–GGD/AIMD–00–133 (Washington, D.C.: Mar. 28, 2000); Tax 

Administration: IRS’ Fiscal Year 2000 Budget Request and 1999 Tax Filing Season, GAO/T– GGD/AIMD–99–140 (Washington, D.C.: Apr. 13, 1999); Tax Administration: IRS’ Fiscal Year 

1999 Budget Request and Fiscal Year 1998 Filing Season, GAO/T–GGD/AIMD–98–114 (Washington, D.C.: Mar. 31, 1998); Tax Administration: IRS’ Fiscal Year 1997 Spending, 1997 Filing 

Season, and Fiscal Year 1998 Budget Request, GAO/T–GGD/AIMD–97–66 (Washington, D.C.: 

Mar. 18, 1997). 6See, for example, GAO/T–GGD/AIMD–97–66; U.S. General Accounting Office, Tax Systems 

Modernization: Blueprint Is a Good Start But Not Yet Sufficiently Complete to Build or Acquire 

Systems, GAO/AIMD/GGD–98–54 (Washington, D.C.: Feb. 24, 1998); and GAO/T–GGD/AIMD–

00–133. 

7 An enterprise architecture provides an institutional ‘‘blueprint’’ for defining how an organization operates today (baseline environment), in both business and technological terms, and how 

it wants to operate in the future (target environment). It also includes a sequencing plan that 

provides a roadmap for transitioning between these environments. 

the apparent inconsistency is that correspondence audits run on a 2-year cycle, 

with a high number of case starts in one year and a large number of case closures in the next year. • IRS’ budget request includes an additional 197 staff years and $8.3 million for 

processing a projected growth in the total number of primary returns filed from 

about 225.9 million returns in fiscal year 2202 to about 230.0 returns in fiscal 

year 2003. However, according to IRS’ performance measures, that projected 

growth is the net of an increase of about 7.6 million returns filed electronically 

and a decrease of about 3.4 million returns filed on paper. That decline in the 

more costly to process paper returns would seem to argue against the need for 

additional processing resources. In response to our question about this, IRS acknowledged that the number of paper returns was expected to decline but said, 

nonetheless, that its computation of the number of additional FTEs needed was 

‘‘based on an estimate of direct hours needed to process expected paper returns.’’

Issue for Congressional Oversight 

Because the congressional justification provides inadequate information to explain 

the apparent inconsistencies discussed in the preceding section and because, in some 

respects, those inconsistencies suggest that additional resources might be available 

for redirection to other purposes, the Subcommittee may want to ask IRS for additional information in support of those parts of its budget request. 

Justification for Information Technology Budget Request Needs Improvement 

IRS is requesting $2.13 billion and 7,449 staff years in information technology (IT) resources for fiscal year 2003. This includes (1) $450 million for the agency’s multiyear capital account that funds contractor costs for the Business Systems Modernization (BSM) Program, which is adequately justified, and (2) $1.68 billion and 

7,449 staff years for information systems, of which $1.63 billion for operations and 

maintenance is not adequately justified. With respect to the $1.63 billion request 

for operations and maintenance, IRS was unable to provide sufficient support for us 

to identify possible budget reductions. 

Fiscal Year 2003 BSM Request Is Adequately Justified 

Key provisions of the Clinger-Cohen Act, the Government Performance and Results Act, and Office of Management and Budget (OMB) guidance on budget preparation and submission (e.g., Circular No. A–11) require that, before requesting 

multiyear funding for capital asset acquisitions, agencies develop sufficient justification for these investments. This justification should reasonably demonstrate how 

proposed investments support agency mission operations and provide positive business value in terms of expected costs, benefits, and risks. 

Since the BSM appropriation was established in fiscal year 1998, we have consistently reported that IRS has not developed adequate justification for its budget requests, and we have proposed that Congress consider reducing them.5 During this 

same time, we have repeatedly recommended 6 that IRS put in place an enterprise 

architecture (modernization blueprint) to guide and constrain its business system investments.7 Use of such a blueprint is a practice of leading public and private sector 

organizations. Simply stated, this architecture provides a high-level roadmap for 

business and technological change from which agencies can logically and justifiably 

derive their budget requests and capital investment plans. In response, IRS has developed various versions of an enterprise architecture, which we have continued to 

review and make recommendations for improvement in. IRS recently approved a 

new version of this architecture (version 2.0), which, based on a briefing to us and 

47

8The Treasury and General Government Appropriations Act of 2002 (P.L. 107–67). 9 IRS’ BSM expenditure plans are required to (1) meet OMB capital planning and investment 

control review requirements; (2) comply with IRS’ enterprise architecture; (3) conform with IRS’

enterprise life cycle methodology; (4) be approved by IRS, Treasury, and OMB; (5) be reviewed 

by us; and (6) comply with the acquisition rules, requirements, guidelines, and systems acquisition management practices of the Federal Government. 10See, for example, U.S. General Accounting Office, Information Technology Investment Management: A Framework for Assessing and Improving Process Maturity, Exposure Draft, GAO/

AIMD–10.1.23 (Washington, D.C., May 2000, Version 1). 

others, appears to provide robust descriptions of IRS’ current and target business 

and technology environments. IRS has also drafted, and executive management is 

reviewing, the associated high-level transition plan that identifies and conceptually 

justifies needed investments to guide the agency’s transition over many years from 

its current to its target architectural state. 

IRS’ $450 million request is based on its enterprise architecture as well as related 

life cycle management and investment management process disciplines for its ongoing project investments. As such, this request is grounded in analyses that meet the 

statutory and regulatory requirements for requesting multiyear capital investment 

funding. 

Pursuant to statute,8 funds from the BSM account are not available for obligation 

until IRS submits to the congressional appropriations committees for approval an 

expenditure plan that meets certain conditions.9 In November 2001, IRS submitted 

its fifth expenditure plan seeking approval to obligate the $391 million remaining 

in the BSM account at that time. In briefings to the relevant appropriations subcommittees and IRS, we reported our concerns about the escalating risk that IRS 

will be unable to deliver promised BSM system capabilities on time and within 

budget due to the number and complexity of ongoing and planned systems acquisition projects and the continued lack of certain key modernization management controls and capabilities. 

In approving the expenditure plan, the appropriations subcommittees directed IRS 

to reconsider the scope and pace specified in the November 2001 expenditure plan 

to ensure that the number and complexity of modernization projects underway is 

commensurate with IRS’ management capacity and fully establish and implement 

all process controls needed to effectively manage the modernization effort prior to 

the submission of IRS’ next expenditure plan. 

In response to these and other concerns raised by the appropriations committees 

and us, IRS has committed to aligning the pace of the BSM program with the maturity of the organization’s management controls and management capacity and is 

currently conducting a reassessment of the projects it plans to deploy during fiscal 

year 2002. In addition, IRS has taken appropriate steps toward implementing missing management controls. 

IRS’ Information Systems Request for Operations

and Maintenance Is Not Adequately Justified 

Leading private and public sector organizations have taken a project or systemcentric approach to managing not only new investments but also operations and 

maintenance of existing systems. As such, these organizations:

• identify operations and maintenance projects and systems for inclusion in budget requests; • assess these projects or systems on the basis of expected costs, benefits, and 

risks to the organization; • analyze these projects as a portfolio of competing funding options; • and use this information to develop and support budget requests.

This focus on projects, their outcomes, and risks as the basic elements of analysis 

and decisionmaking is incorporated in the IT investment management approach recommended by OMB and us.10 By using these proven investment management approaches for budget formulation, agencies have a systematic method, based on risk 

and return on investment, to justify what are typically very substantial operations 

and maintenance budget requests. These approaches also provide a way to hold IT 

managers accountable for operations and maintenance spending and the ongoing efficiency and efficacy of existing systems. 

IRS did not develop its information systems request in accordance with these best 

practices of leading organizations. In particular, the largest elements of IRS’ budget 

request are not projects or systems. Rather, they are requests for staffing levels or 

other services. For example, IRS is requesting $240 million for staff and equipment 

supporting operations and maintenance of desktop computers agencywide, as well 

as $111 million for staff and equipment supporting its major computing centers’ opVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00051 Fmt 6633 Sfmt 6621 E:\HR\OC\B436.XXX pfrm17 PsN: B436
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11GAO/AIMD–10.1.23. 

erations. Further, it is requesting $266 million for telecommunications services contracts. Taken together, these three initiatives constitute about 38 percent of the 

total $1.63 billion being requested for operations and maintenance, but the budget 

request gives no indication regarding how these initiatives are allocated to systems. 

In addition, in developing these requests, IRS did not identify and assess the relative costs, benefits, and risks of specific projects or systems in these areas. Instead, 

according to IRS officials, they simply took what was spent last year in the categories and added the money to fund cost-of-living and salary increases. 

IRS officials responsible for developing the IT operations and maintenance budget 

attributed the differences between IRS practices and those followed by leading organizations to the lack of an adequate cost accounting system, cultural resistance to 

change, and a previous lack of management priority. To better justify future budget 

requests, these officials said that they have assessed the strengths and weaknesses 

of IRS’ budgeting and investment management processes against our IT investment 

management framework 11 and found significant weaknesses in 15 critical areas. To 

address the weaknesses, IRS is currently developing capital planning guidance 

based on our IT investment management framework. This guidance is to be issued 

by late summer 2002, but a schedule for implementing it has yet to be determined. 

In addition, IRS has adopted and is in the process of implementing a cost model 

that is to enable it to account for the full costs of operations and maintenance 

projects and determine how effectively IRS projects are achieving program goals and 

mission needs. IRS plans to have the cost model in place and operational by June 

30 of this year so that it can validate its fiscal year 2003 information systems appropriation request and begin using it to develop the fiscal year 2004 request. 

The key to making these plans reality is overcoming the very reasons that have 

allowed this budgetary formulation and justification weakness to continue 

unabated—accounting system limitations, cultural resistance, and low management 

priority. Although IRS has initiated actions to address these weaknesses, we are 

concerned whether they will be implemented in time to have meaningful impact on 

formulation of the fiscal year 2004 budget request. For example, IRS has not yet 

developed a plan and schedule for implementing its IT capital planning guidance. 

In addition, IRS officials told us that they are already beginning the process to develop the fiscal year 2004 budget. Consequently, until IRS overcomes its obstacles, 

its future information systems appropriation requests, like its fiscal year 2003 request, will not be adequately justified. 

Recommendation for Executive Action 

To aid IRS in overcoming the barriers to changing how it develops and justifies 

its information systems appropriation request, we recommend to the commissioner 

of internal revenue that IRS prepare its fiscal year 2004 information systems budget 

request in accordance with leading organizations’ best practices. 

Interim Results of IRS’ 2002 Filing Season

Show Impact of the Rate Reduction Credit 

So far this filing season, IRS has processed returns smoothly with one major exception, seen continued growth in electronic filing, and achieved some improvements 

in telephone service. The one exception to smooth processing has been the large 

number of errors taxpayers are making related to the rate reduction credit. Although the errors have not affected the timeliness of processing, they have resulted 

in a significant error correction workload for IRS, the rejection of some electronically 

filed returns, and an increased demand for telephone assistance that, according to 

agency officials, is affecting taxpayers’ access to IRS’ telephone assistors. One issue 

that continues to affect IRS’ ability to assess its filing season performance is missing 

performance measures. While IRS has measures that provide useful information on 

some aspects of its service and is making efforts to improve its performance measures, some measures of telephone service are constructed in a way that misses important aspects of the activity being measured and IRS has delayed implementation 

of some accuracy measures for services provided at walk-in offices. 

Errors Related to the Rate Reduction Credit Have Adversely

Affected an Otherwise Smooth Processing Season 

This filing season, IRS experienced very few of the kinds of processing problems, 

such as those caused by computer programming errors, that it has often experienced 

at the beginning of a filing season, and the number of returns filed electronically 

continues to grow. The one major negative in this otherwise positive picture has 

49

been the significant number of returns IRS has received with errors related to the 

rate reduction credit. 

The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. No. 107–

16) directed the Secretary of the Treasury to issue advance tax refunds to eligible 

taxpayers. Accordingly millions of taxpayers received checks of up to $600 between 

July and December 2001. Taxpayers who did not receive an advance refund as part 

of that process or who received less than the maximum allowed by law may have 

been entitled to a rate reduction credit when filing their tax year 2001 returns in 

2002. Accordingly, IRS added a line to the individual income tax forms for eligible 

taxpayers to enter a credit amount and provided a worksheet for taxpayers to use 

in determining if they were eligible. So far, during the 2002 filing season, the rate 

reduction credit has led to millions of tax returns with errors. 

The result has been significant error-correction workloads for IRS and a large increase in the number of error notices sent to taxpayers. In retrospect, at least some 

of these errors might have been avoided if IRS had taken certain steps to better 

help taxpayers deal with this new tax return line item. One of the steps IRS took 

to deal with the large number of errors related to rate reduction credit was to reject 

certain electronic submissions involving rate reduction credit errors. Even so, electronic filing has continued to grow—although not at a rate that would allow IRS 

to meet its long-term goal. 

Millions of Returns Filed with Errors Related to the Rate Reduction Credit 

As Table 1 shows, of the approximate 46 million returns that IRS had processed 

as of March 15, 2002, about 4.7 million, or 10 percent, had errors made by taxpayers 

or their return preparers—more than twice the error rate at the same time last year 

but roughly comparable to the error rate IRS expected. Of the approximate 4.7 million returns with errors, about two-thirds, or 3.1 million, had errors related to the 

rate reduction credit.

TABLE 1: PROCESSED RETURNS WITH RATE REDUCTION CREDIT ERRORS MADE BY TAXPAYERS OR RETURN 

PREPARERS AS OF MARCH 15, 2002

Returns

prepared by 

Number

of returns 

processed 

Number

of returns

with

errors 

Percentage 

of returns

with

errors 

Number

of returns 

with rate 

reduction 

credit

errors 

Percentage 

of returns 

with rate 

reduction 

credit

errors 

Rate reduction credit 

errors as

a percent

of returns

with errors 

Taxpayers 17,778,234 2,638,705 14.8 1,506,932 8.5 57.1

Tax return 

preparers 28,172,854 2,042,626 7.3 1,613,689 5.7 79.0

Total 45,951,088 4,681,331 10.2 3,120,621 6.8 66.7

Note: Because some returns could contain errors related to the rate reduction credit as well as other errors, 

a decrease in the number of rate reduction errors would not necessarily equate to a like decrease in the overall number of returns with errors. 

Source: GAO-generated from IRS data. 

Taxpayers and return preparers are making various types of errors related to the 

rate reduction credit. Many taxpayers who did not receive an advance of their rate 

reduction credit in 2001 and thus should be claiming the credit on this year’s return, are not. Other taxpayers are recording the amount of the credit they received 

in 2001 on the rate reduction credit line of this year’s return instead of recording 

zero. And other taxpayers, who are entitled to a credit and are claiming one, are 

incorrectly computing the amount to which they are entitled. 

Once IRS recognized that taxpayers and preparers were having problems with the 

rate reduction credit, it took immediate action in an attempt to minimize future errors and avoid refund delays. IRS posted information to its Web site, began a public 

awareness campaign that included news releases to media outlets, and provided 

clarifying information to preparers who file returns electronically. Despite IRS’ efforts, the rate at which taxpayers and return preparers are making errors related 

to the rate reduction credit has remained relatively constant. 

Because IRS anticipated an increase in errors this year and because IRS has been 

able to correct the rate reduction errors relatively quickly, we are not aware of any 

adverse impact on IRS’ ability to process returns and refunds in a timely manner 

as a result of the increased error-correction workload. IRS is treating these errors 

as ‘‘math errors’’; that is, it corrects the mistake and either adjusts the taxpayer’s 

50

12 As noted in our report on the 2001 filing season, assuming annual growth rates of 13.7 percent for individual income tax returns filed electronically and 1.85 percent for the total number 

of individual income tax returns filed (the growth rates experienced in 2001), about 60 percent 

of all individual income tax returns will be filed electronically in 2007. See U.S. General Accounting Office, Tax Administration: Assessment of IRS’ 2001 Tax Filing Season, GAO–02–144 

(Washington, D.C.: Dec. 21, 2001).

refund or notifies the taxpayer of additional tax owed. However, it remains to be 

seen what happens around April 15, when the largest volume of paper returns are 

filed. Even if IRS is able to effectively correct the large volumes of erroneous returns 

throughout the filing season, there are costs involved, including the cost of generating and mailing several million error notices to affected taxpayers and the costs 

of the resources IRS had to devote to working the increased error-correction workload. 

IRS May Have Been Able To Prevent Some Rate Reduction Credit Errors 

Although IRS took several steps after the filing season began in response to the 

large number of rate reduction credit errors, we believe, in retrospect, that some of 

those errors might have been prevented if the instructions for Forms 1040, 1040A, 

and 1040EZ had been more clear. For example, IRS did not highlight the rate reduction credit or the new line on the tax form related to the rate reduction credit on 

the cover page of the instructions, where IRS alerts taxpayers to changes from the 

prior year. Instead, IRS highlighted the fact that tax rates were reduced. Only if 

taxpayers read the paragraph under the highlighted caption ‘‘Tax Rates Reduced’’ would they see mention of the credit. 

The instructions for Forms 1040, 1040A, and 1040EZ might have also been clearer 

if IRS had included some information that was included on its Web site. In that regard, the instructions indicate that if a taxpayer received—before any offset—an amount equal to either $600, $500, or $300 based on his or her filing status, the 

taxpayer is not entitled to a rate reduction credit. There is no further explanation 

of the term ‘‘before any offset’’—a term that may be unclear to many taxpayers. 

However, IRS’ Web site spells out more clearly what is meant by this term, explaining that if taxpayers had their advance payment offset to pay back taxes, other government debts, or past due child support, they cannot claim the rate reduction credit for the amount that was offset. Although the Web site includes this more descriptive information, there is no guarantee that a given taxpayer either has access to 

or will use the Web site. In retrospect, including the same explanation of ‘‘before 

any offset’’ in the instructions would have made the instructions clearer. 

Use of Electronic Filing Continues to Grow, but

not at a Pace to Achieve IRS’ Long-Range Goal 

Another step IRS took that has reduced its error-correction workload due to the 

rate reduction credit was to begin rejecting electronic submissions that involved certain types of errors related to the credit. By doing so, IRS required the taxpayer 

or return preparer to correct the error before IRS would accept the electronic return. 

This is consistent with IRS’ traditional practice of rejecting electronic submissions 

that contain other errors, such as incorrect Social Security numbers. IRS began rejecting electronic submissions with errors involving the rate reduction credit around 

the beginning of February. As of March 24, 2002, IRS had rejected about 226,000 

such submissions. 

We do not know whether these rejected submissions caused potential electronic 

filers to file instead on paper. However, as shown in Table 2, the number of individual income tax returns filed electronically as of March 29, 2002, has grown by 

14.0 percent—an increase over the rate of growth at the same time last year. While 

this kind of increase is not insignificant, IRS will need larger increases in the future 

if it is to achieve its goal of having 80 percent of all individual income tax returns 

filed electronically by 2007.12

TABLE 2: INDIVIDUAL INCOME TAX RETURNS RECEIVED BY IRS 

(Number of returns in millions) 

Filing type 

1/1/00 to

3/31/00

1/1/01 to

3/30/01

Percentage 

change: 2000 to 20011/1/02 to

3/29/02

Percentage 

change: 2001 to 2002

Paper 40.9 37.2 ¥9.1 35.5 ¥4.7

Electronic 

51

13 IRS efforts to increase the use of PINs and thus avoid the need for electronic filers to send 

signature documents to IRS has had a positive effect. As of March 14, 2002, about 17.1 million 

individual returns were filed using a PIN—about 180 percent more than the 6.1 million filed 

for the same time period in 2001. 14GAO–02–144. 

TABLE 2: INDIVIDUAL INCOME TAX RETURNS RECEIVED BY IRS—Continued

(Number of returns in millions) 

Filing type 

1/1/00 to

3/31/00

1/1/01 to

3/30/01

Percentage 

change:

2000 to 2001

1/1/02 to

3/29/02

Percentage 

change:

2001 to 2002

Traditional a 21.4 24.0 12.3 26.9 12.1

On-line b 3.5 4.8 36.4 6.7 39.4

TeleFile c 4.4 3.7 ¥14.7 3.5 ¥6.6

Subtotal 29.3 32.6 11.2 37.1 14.0

Total 70.2 69.7 Ø0.6 72.6 4.1

Note: Subtotals, totals, and percentages may not compute due to rounding. 

aTraditional electronic filing involves the transmission of returns over communication lines through a third 

party, such as a tax return preparer, to an IRS processing center. bOn-line returns are prepared and transmitted by the taxpayer through an on-line intermediary using a personal computer and commercial software. c Under TeleFile, certain taxpayers who are eligible to file a Form 1040EZ are allowed to file using a tollfree number on touch-tone telephones. 

Source: IRS data. 

To encourage more electronic filing in 2002, IRS, among other things:

• mailed letters to about 250,000 tax professionals, asking those who had been 

filing electronically to continue supporting the program and encouraging others 

to file electronically; 

• mailed about 23 million postcards to certain taxpayers, such as those who had 

received TeleFile packages in the past 2 years but did not file their tax returns 

via TeleFile, alerting them to the benefits of electronic filing; and 

• made changes to one program that enabled electronic filers to sign their returns 

using a personal identification number (PIN) and reinstituted another PINbased signature program.13

IRS also redirected its marketing efforts to encourage persons who have been preparing tax returns on a computer but filing on paper to file electronically. Considering that about 40 million computer-prepared returns were filed on paper in 2001, 

conversion of those returns to electronic filings could go a long way toward helping 

IRS achieve its 80-percent goal. In our report on the 2001 filing season, we recommended that IRS directly survey tax professionals and taxpayers who file computer-prepared returns on paper to get more specific information on why they are 

not filing electronically.14 We have been told that IRS will be undertaking such a 

survey in the near future. 

IRS Has Experienced Some Improvements in Telephone Service, but the Rate Reduction Credit Is Likely Affecting Taxpayers’ Access 

So far this filing season, taxpayers in the queue for telephone assistance are 

spending less time waiting to talk with an assistor and are getting accurate answers 

to their tax law questions more often than last year. At the same time, however, 

the overall rate at which callers are reaching an assistor is lower because many callers are unable to get into the queue for assistance. 

Telephone assistance is a significant part of IRS’ work. This fiscal year, IRS expects to answer about 108 million telephone calls, about 72 million to be answered 

via automated services and about 34 million to be answered by about 10,000 fulland part-time telephone assistors, called customer service representatives. Accordingly, the ease with which taxpayers reach IRS by telephone and the accuracy of 

the assistance they receive are important indicators of how well IRS is performing. 

IRS’ performance in providing this service has been a perennial problem, and its 

struggles to improve service have been a topic at hearings held by this Subcommittee for many years. As we reported in December 2001, IRS has made limited 

52

15 U.S. General Accounting Office, IRS Telephone Assistance: Limited Progress and Missed Opportunities to Analyze Performance in the 2001 Filing Season, GAO–02–212 (Washington, D.C.: 

Dec. 7, 2001). 

progress toward its long-term goal of providing taxpayers ‘‘world-class customer 

service’’—service comparable to the best provided by other organizations.15

Some Improvements in Accessibility and Accuracy 

In recent years, IRS has made significant strides in developing performance measures to tell how well it is serving taxpayers by telephone. IRS has established a set 

of measures to focus efforts on enhancing taxpayers’ access to accurate assistance. 

As shown in Table 3, some of these measures indicate significant improvements in 

taxpayer service when compared to the same period last year. For example, during 

the first 11 weeks of the 2002 filing season:

• taxpayers, on average, waited a minute-and-a-half less to speak to an assistor, 

• there was an 18 percentage point improvement in taxpayers reaching assistors 

in 30 seconds or less, and 

• the quality of tax law assistance, which involves following IRS procedures and 

providing accurate responses, improved about 11 percentage points.

However, there was a 5-point decline in the percentage of callers that attempted 

to reach an assistor and actually got through and received service (referred to as 

the customer service representive (CSR) level of service). According to IRS officials, 

an increased demand for assistance related to the rate reduction credit has been a 

key factor affecting taxpayer access to assistors. (See Appendix I for more detail on 

the level of access this filing season compared to last and the likely impact of the 

rate reduction credit.) The increased call volume was not allowed to lengthen the 

queue. Instead, taxpayers were provided access to automated services, which often 

results in callers hanging up, or were advised by a recorded message that IRS could 

not provide assistance.

Table 3: Telephone Assistance Performance in the First Weeks of the 2001 and 2002 Filing Seasons 

Measure a 2001 2002

Accessibility measures

CSR level of service b 71% 66%

Assistor response level c 39% 57%

Abandon rate d 16% 13%

Average speed of answer e 299 seconds 209 seconds

Accuracy measures

Tax law quality rate f 70% ± 2% 81% ± 1%

Accounts quality rate f 71% ± 2% 74% ± 2%

Tax law correct response rate g 75% ± 2% 84% ± 1%

Accounts correct response rate g 87% ± 2% 88% ± 1%

a Accessibility measures are based on actual counts from January 1 through March 16. Accuracy measures 

are based on representative samples and are estimated at the 90-percent confidence level from January 

through February. bThis measure is intended to show the percentage of callers who wanted to speak to an assistor that got 

through and received service. cThe percentage of callers that waited 30 seconds or less before speaking to an assistor. 

dThe percentage of callers that hung up while waiting to speak to an assistor. 

eThe average number of seconds callers waited before speaking to an assistor. 

fThe percentage of calls in which assistors followed all IRS procedures for the call type and provided correct answers. gThe percentage of calls in which assistors provided correct answers for the call type, discounting procedural 

errors. 

Source: IRS data. 

53

16TeleTax provides automated account information and recorded information on about 150 tax 

topics. 17 At the beginning of the 2002 filing season, IRS made changes to the TeleTax system that 

allowed IRS to count abandoned calls, which, as of March 2, 2002, were about 31 percent of 

total TeleTax calls. Before the 2002 filing season, because IRS could not count abandoned calls, 

it assumed all calls into TeleTax were served. 18There were about 780,000 of these calls during the 2001 filing season.

IRS Officials Attribute Improvements in

Telephone Service to Several IRS Efforts 

According to IRS officials, several IRS efforts have contributed to improvements 

in telephone performance. For example, IRS implemented a strategy to improve tax 

law accuracy that included hiring and training assistors earlier than in past years 

and putting them on the telephones in December to help hone their skills before 

the filing season began. IRS also required assistors to be certified that they successfully completed necessary training and could accurately answer calls in their assigned topics and used its computer-based call routing system to help ensure that 

assistors answered calls only in those topics for which they had been certified. 

Some officials opined that improvements in accessibility may be linked to IRS’ efforts to establish new performance measures and goals for the call sites this year. 

For example, each site has a goal for the total number of calls its assistors are to 

answer in a fiscal year. IRS officials say the new measures have led to improved 

performance by giving the call sites a clearer understanding of what they are expected to achieve and how their performance helps IRS achieve its goals. IRS executives in the Wage and Investment and Small Business/Self-Employed divisions said 

that they believe that IRS has been successful in getting employees at all levels of 

the telephone service organizations to understand and accept the measures and contribute to achieving the goals. 

IRS officials cited several other service improvement efforts as potentially boosting performance, including initiatives to bring more highly skilled employees on 

board, increased specialization at the assistor and call site levels, and reduced hours 

of service to increase the number of assistors available to answer phone calls during 

the hours when most taxpayers call IRS. We will monitor these and other factors 

that may have affected IRS’ telephone service as we continue to assess the 2002 filing season. 

IRS’ Performance Measures Provide Useful Information on

Some Aspects of Its Telephone Service but Not on Others 

Although IRS’ telephone performance measures provide useful information on 

some aspects of service to taxpayers, the measures miss other aspects. For example:

• None of the measures currently reflect how many callers hung up while listening to the menu they hear when calling IRS—although IRS has that data. For 

example, as of March 16, 2002, according to IRS data, over 7.2 million callers 

had hung up when listening to the menu this filing season—almost three times 

greater than the number that hung up last year. IRS officials said it is unclear 

why more taxpayers were hanging up. However, when IRS streamlined the 

menu in mid-February, it noted a decline in the hang-up rate, which may indicate that taxpayers were frustrated or confused by the menu. 

• Although IRS assists many callers through automated services—almost 18.2 

million calls were answered by automation on the three main assistance lines 

and the TeleTax line as of March 2, 2002—IRS’ measures only deal with the 

service provided by assistors.16 IRS discontinued measuring the level of service 

provided through automation because this year’s data are not comparable to 

2001.17

• Contrary to what its name implies, the CSR level of service measure does not 

reflect only those calls handled by assistors. Some calls handled through automation are counted as having been answered in computing this measure.18 Because it includes calls answered through automation, the CSR level of service 

measure may be overestimating the rate at which assistors are responding to 

taxpayers. 

Because we recognize that it is important to limit the number of performance 

measures to the vital few, we are not recommending that IRS take any action at 

this time with respect to the matters discussed above. At your request, Mr. Chairman, we are reviewing IRS’ filing season performance measures, including its telephone measures, and plan to issue a report later this year on our results. 

54

19Field assistance is using the toll-free database to identify these categories until such time 

as it has its own database of the tax law categories causing the most questions from TAC customers. 20We have not assessed these results or the methodology being followed by the contract reviewers. 

IRS Is Measuring Tax Law Accuracy at Its Taxpayer Assistance Centers;

Implementation of Two Other Accuracy Measures Has Been Delayed 

Taxpayers who visit any one of IRS’ 400 plus Taxpayer Assistance Centers (TAC) 

can make payments, obtain tax forms and publications, get answers to tax law questions, and get help resolving tax account issues and preparing tax returns. In the 

past, IRS has used its employees to measure the accuracy of tax law assistance provided by its TACs. In fiscal year 2002, IRS began using contract reviewers in lieu 

of its employees. Although the accuracy rate reported through mid-March 2002 is 

encouragingly high, the use of different measurement methodologies precludes valid 

comparison to the low accuracy rates reported by IRS and the Treasury Inspector 

General for Tax Administration (TIGTA) in 2000 and 2001, respectively. IRS had 

planned to begin measuring the accuracy of account and return-preparation assistance in January 2002, but those plans have been delayed until June. 

Tax Law Accuracy Rates are Encouraging, but Cannot

Be Compared to the Low Accuracy Reported in 2000 and 2001

Contract reviewers, posing as taxpayers, reported making 388 random visits to 

TACs between January 1 and March 15, 2002. During each visit, the reviewers 

asked two tax law questions from the slate of four questions that IRS developed for 

use this year. One question and a related scenario was developed from each of four 

tax law categories that most prompted taxpayers to call IRS’ toll-free assistance 

lines in fiscal year 2001.19 The contract reviewers reported receiving accurate responses for 652 of the 776 questions or 84 percent.20 Although this could indicate 

that accuracy is improving compared to the low accuracy rates reported by IRS in 

2000 (24 percent) and TIGTA in 2001 (51 percent), the use of different accuracy 

measurement methods in the last three filing seasons does not afford a valid basis 

for comparison. Although the results in each of the 3 years were based on visits to 

TACs by persons posing as taxpayers, there were differences in such things as the 

questions the persons asked, the number of weeks covered by the reviews, and the 

number of sites visited and how they were selected. 

Implementation of Account- and Return-Preparation

Accuracy Measures Has Been Delayed 

IRS had planned to begin measuring the accuracy of account- and return-preparation services provided by TACS in January 2002. However, according to field assistance officials, staffing of eight new positions for doing these reviews was initially 

delayed by an oversight in the announcement process and then by a hiring freeze. 

Officials now expect to fill the eight positions by June 2002, which, they believe, will 

still allow time to complete enough quality reviews to establish meaningful fiscal 

year 2002 baselines for both measures. According to the Director, Field Assistance, 

the new staff would first complete post-reviews of returns prepared during the filing 

season. Because most account assistance occurs after the filing season, they would 

then begin reviewing the accuracy of account assistance provided over the remainder of the year. 

Mr. Chairman, that concludes our statement. We would be pleased to respond to 

any questions that you or other Members of the Subcommittee may have at this 

time. 

Appendix I

Increased Demand Related to the Rate Reduction

Credit Has Likely Affected Accessibility 

As noted earlier, despite some significant improvements in telephone service, the 

customer service representative (CSR) level of service as of March 16, 2002, was 

lower than at the same point in time last year. The week-to-week comparisons in 

Figure 1 show that CSR level of service during the first 6 weeks of this filing season 

was significantly better than or about the same as during the first 6 weeks of the 

2001 filing season but was significantly worse during the next 3 weeks. In the following 2 weeks, CSR level of service returned to levels comparable to last year’s performance. 

55

Figure 1: CSR Level of Service in the First 11 Weeks of the 2001 and 2002 

Filing Seasons

Note: Beginning the week ending March 2, IRS revised its formula for calculating CRS level 

of service for both 2001 and 2002. Data in the graph prior to March 2 are based on the previous 

formula. Our analysis of IRS data showed the change had positive but minimal impact on the 

values, averaging 0.6 percent but never more than 1.89 percent. 

Source: IRS data.

According to IRS officials, a key factor that may be negatively affecting telephone 

accessibility this year is an increase in the demand for assistance, specifically demand related to the rate reduction credit. According to IRS officials, demand was 

lower than expected in January 2002, which contributed to an increase in level of 

service. However, as the filing season progressed, demand for assistance related to 

the rate reduction credit increased significantly and unexpectedly. IRS officials said 

that taxpayer access to service began declining in early February as more taxpayers 

called in response to publicity about the filing problems related to the rate reduction 

credit and as taxpayers began receiving error notices from IRS. IRS data on the 

amount of demand for telephone assistance generated by the rate reduction credit 

is incomplete, and, therefore, the effect on telephone level of service is uncertain.

Chairman HOUGHTON. Thanks very much. Ms. Kelly. 

f STATEMENT OF COLLEEN M. KELLEY, NATIONAL PRESIDENT, 

NATIONAL TREASURY EMPLOYEES UNION 

Ms. KELLY. Thank you. Chairman Houghton, Ranking Member 

Coyne and Member Thurman, as the National President of the National Treasury Employees Union (NTEU), representing over 

97,000 IRS employees, I very much appreciate having the opportunity to appear before you today. 

The past 7 months have been a very trying time for the American public. Never before has it been so clear how vulnerable our 

Nation is to a variety of attacks. And never before has the need to 


79436a.006
56

invest in a highly trained, highly skilled, and dedicated Federal 

workforce been so clear. 

There are nearly 20,000 fewer employees at the IRS today than 

there were just 10 years ago. But as the size of the IRS workforce 

has decreased, the workload has grown and become more complex. 

The number of total tax returns filed each year continues to increase, and the Tax Code continues to undergo congressionally 

mandated changes. The good news is that the American taxpayers 

are receiving better service from the IRS and this past filing season 

has improved even further on that service to taxpayers. 

Unfortunately, it is no coincidence that the examination coverage 

of tax returns has declined during this same period, due to decreased staffing and increased workloads. NTEU urges your support for increased funding for the IRS in the fiscal year 2003 budget so that the workforce has the resources necessary to continue to 

perform current operations while simultaneously meeting its modernization goals. 

Unless funding or staffing levels are increased, the IRS will not 

be able to increase tax compliance and enforcement activity while 

at the same time continuing to improve customer service to taxpayers. 

In addition to increased staffing and funding for the IRS, I would 

also like to make some additional recommendations that will help 

to improve the efficiency and the effectiveness of the IRS. 

As we all know, audit rates and tax compliance are down. One 

reason is lack of staff. Another is Section 1203 of the IRS Restructuring and Reform Act which has had a chilling effect on the ability 

of the IRS employees to do their jobs. 

Employees continue to work in fear of Section 1203, commonly 

known as the 10 Deadly Sins. The Administration’s fiscal year 

2003 budget endorsed a package of proposals that includes changing the mandatory termination provisions of Section 1203 to allow 

the IRS Commissioner to provide appropriate discipline for offenses, up to and including termination. 

The President, the Secretary of the Treasury, Commissioner 

Rossotti, the IRS Oversight Board, and NTEU all agree that this 

package of changes will make Section 1203 fairer. NTEU is very 

appreciative of the efforts of this Committee and all of you for the 

modifications that were included in H.R. 3991, the Taxpayer Protection and IRS Accountability Act of 2002. Without your help, I 

know that those changes would not have been included in H.R. 

3991. 

In addition to changes to Section 1203, NTEU urges this Subcommittee to reject the Administration’s competitive sourcing initiative which sets arbitrary quotas for the IRS and other Federal 

agencies to open up thousands of jobs to the private sector. 

The Office of Management and Budget has directed every agency 

to open up to the private sector in fiscal year 2002, 5 percent of 

the work on the Fair Act inventory list and an additional 10 percent in 2003 with a final goal of 50 percent. 

The arbitrary privatization quotas are wrong. The one-size-fitsall quotas give no consideration whatsoever to unique circumstances at agencies like the IRS who are still in the middle of 

a sweeping reorganization that was mandated by Congress. 

57

And this directive is having a negative impact on the morale of 

the IRS workforce. Contracting out government work does not in 

and of itself improve government operations. For example, last year 

we learned that Mellon Bank, a contractor hired by the IRS, lost 

or shredded 70,000 tax returns and checks worth $1.2 billion in tax 

revenues for the government. 

Fortunately, that contract has been terminated by the IRS. But 

we urge this Committee to reject the use of these quotas so that 

the IRS can focus on achieving its mission in the most reliable, 

most cost-effective and efficient manner. 

And finally, recent changes in the estate and gift tax laws will 

lead to fewer estate and gift tax attorneys, because there will be 

fewer returns filed each year. This will mean that most of the estate and gift tax attorney jobs at the IRS will be eliminated over 

the next 10 years. All of the attorneys who work on estate and gift 

tax returns at the IRS are in what is called excepted service, and 

as a result, they are not eligible to transfer into other competitive 

service jobs even within the IRS, which would be an excellent redeployment of resources similar to what Commissioner Rossotti already testified to. 

NTEU urges this Subcommittee to work to retain these valuable 

employees who bring a wealth of experience to the IRS by providing them with competitive service status so that they are given 

fair opportunities to transfer to other jobs in the Federal Government. 

The bottom line is that IRS employees are committed to delivering first class customer service to the taxpayers, and they are 

committed to enforcing the Tax Code in a fair manner. But without 

some important changes, including adequate funding, they will continue to have a difficult time meeting these goals. 

And I thank you again for the opportunity to be here and look 

forward to any questions you may have. 

[The prepared statement of Ms. Kelly follows:]

Statement of Colleen M. Kelley, National President, National Treasury 

Employees Union 

Chairman Houghton, Ranking Member Coyne, and other distinguished Members 

of this Subcommittee, my name is Colleen Kelley and I am the National President 

of the National Treasury Employees Union. As you know, NTEU represents more 

than 150,000 Federal employees across the Federal Government, including the men 

and women who work at the Internal Revenue Service. I want to thank you for giving me the opportunity to present testimony on behalf of these dedicated employees 

who play such a vital role in maintaining and strengthening our democracy. 

The past seven months have been a very trying time for the American public. 

Never before has it been so clear how vulnerable our nation is to such a wide variety of attacks. And never before has the need to invest in a highly trained, highly 

skilled, dedicated Federal workforce been so clear. If any American didn’t appreciate 

the national value of our Federal employees before the tragic events of September 

11th, then they sure recognize their work now. Our Nation depends on these patriots who work for the Federal Government. 

That is why it is incumbent upon Congress and the Administration to ensure that 

the dedicated employees who perform these vital functions for America day in and 

day out—during times of war and times of peace—have the tools and resources they 

need to do their jobs. 

There are nearly twenty thousand fewer employees at the IRS than there were 

just ten years ago. But as the size of the IRS workforce has decreased, the workload 

has grown and become more complex. For example, in 1988, 140 million tax returns 

were filed; in 2002 the IRS expects to receive 231 million returns. In 1999, taxVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00061 Fmt 6633 Sfmt 6621 E:\HR\OC\B436.XXX pfrm17 PsN: B436
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payers contacted the IRS for assistance approximately 117 million times, up from 

105 million contacts in 1996. 

And in 2001, IRS employees responded to new challenges, first expeditiously 

issuing millions of tax rebate checks and answering record numbers of phone calls 

related to the rebate. Then after the tragic events of September 11th, employees 

worked to provide administrative relief to the victims and their families, and 

worked to foster taxpayer giving to charitable organizations. 

Yet, even as the number of total tax returns filed each year continues to increase 

and the tax code continues to undergo sweeping changes from Congress, the American taxpayers are receiving better service from the IRS. Unfortunately, it is no coincidence that examination coverage of tax returns has declined during this period 

of staffing cuts and increased workloads. Unless the downward trend in staffing levels is turned around, the IRS will not be able to increase tax compliance and enforcement activity, while continuing to deliver better services to the taxpayers. 

In addition to increased staffing at the IRS, NTEU would like to make some additional recommendations to this Subcommittee on how Congress can help improve 

the efficiency and effectiveness of the IRS workforce. 

One issue in particular that has had a chilling effect on the ability of IRS employees to do their jobs is Section 1203 of the IRS Restructuring and Reform Act. As 

mentioned earlier, audit rates are down. One reason is the lack of staff; another is 

Section 1203, which I believe has also contributed to the declining rates of audits 

and tax compliance. IRS employees continue to work in fear of Section 1203. Commonly known as the ‘‘Ten Deadly Sins,’’ Section 1203 outlines ten infractions for 

which IRS employees must be fired. One of those infractions is the untimely filing 

of Federal income taxes even when a refund is due. 

The Administration’s FY 03 budget endorses a package of proposals that includes 

changing the mandatory termination provisions to allow the IRS Commissioner to 

provide appropriate punishment for offenses, ‘‘up to and including termination.’’ In 

its budget request, the Administration noted that an IRS employee who fails to file 

a refund return is subject to termination even though any other taxpayer who files 

a refund return late is not subject to any penalty. 

NTEU is very appreciative of the efforts of Members of this Subcommittee in supporting an amendment to include modifications of Section 1203 in H.R. 3991, the 

‘‘Taxpayer Protection and IRS Accountability Act of 2002.’’ We are hopeful the full 

House will vote on this legislation soon, and that Members of this Subcommittee 

will continue to press for these changes until they are signed into law. 

The President, the Secretary of the Treasury, the IRS Commissioner, the IRS 

Oversight Board and NTEU all agree that this package of changes would make Section 1203 fairer. Violations of any of the ten offenses should be taken seriously, but 

mandatory termination in every instance should not be the only disciplinary action 

available. No other Federal or congressional employee is subject to similar mandatory termination and fairness demands that IRS employees not be subject to this 

uniquely harsh standard. 

In addition to changes to Section 1203, NTEU also seeks more funding for the IRS 

for staffing and modernization. Unfortunately, the Administration’s budget for FY 

2003 does not provide the IRS with the resources necessary for the Service to continue to perform current operations, while simultaneously meeting its modernization 

goals. Because the IRS continues to redirect employees from tax compliance functions to help with customer service, including answering taxpayers’ questions, and 

providing walk-in assistance to taxpayers, the Administration’s budget comes up far 

short. 

While the Administration’s $10.4 billion request for IRS operations may appear 

to be slightly higher than last year’s funding level, the funding is essentially flat 

in ‘‘real’’ dollar terms because of a budget gimmick suggested by the Administration, 

that would, for the first time, require agencies to pre-fund future retiree health and 

retirement costs from current appropriations. Fortunately, both the House and Senate Budget Committees rejected the Administration’s proposal. Furthermore, the 

budget ignores the need to hire enough additional employees to stop the decline in 

audits and enforcement activities. And the budget fails to provide enough funds for 

additional equipment and better training for the employees. 

Improving customer service, enhancing tax return processing, and increasing tax 

compliance can only happen if the Administration and Congress support increased 

funding for staffing, more advanced technology and equipment, and better training. 

Employees at the IRS have responded to the mandates from Congress in the IRS 

Restructuring and Reform Act and are making tremendous progress. However, the 

current IRS workforce can only do so much with its limited resources. 

Next, NTEU urges this Subcommittee to take steps to reject the Administration’s 

‘‘competitive sourcing’’ initiative which sets arbitrary quotas for the IRS and other 

59

agencies to open up thousands of Federal employee jobs to the private sector. The 

Office of Management and Budget has directed every department and agency to 

open up to the private sector in fiscal year 2002 the work of five percent of the Federal jobs on their FAIR Act inventories and an additional ten percent in FY 2003. 

The Administration will be directing agencies and departments to ultimately open 

up to the private sector fifty percent—more than 425,000—of these Federal jobs considered commercial in nature. 

The arbitrary privatization quotas will significantly disrupt operations at the IRS, 

which, as you know, is in the middle of its sweeping reorganization plan. The onesize-fits-all quotas give no consideration whatsoever to unique circumstances at the 

IRS or other agencies. And we know this directive is already having a negative impact on the morale of the IRS workforce. 

Contracting out government work does not, in and of itself, improve government 

operations. In fact, NTEU believes that in most cases, the taxpayers lose when government work is contracted out. For example, last year we learned that Mellon 

Bank, a contractor hired by the IRS, lost, shredded, and removed 70,000 taxpayer 

checks worth $1.2 billion in revenues for the government. Fortunately, the IRS 

eventually terminated the contract and is conducting an investigation to determine 

the level of criminal wrongdoing. However, this issue begs the question, ‘‘how could 

we let this fraud go on for so long—70,000 lost checks—before we realized there was 

a problem?’’ The answer is quite simply that Congress and the Administration have 

never put in place reliable government-wide systems or provided adequate staffing 

to track the work of contractors. There is nowhere near the same level of transparency and accountability of the work performed by contractors as there is of the 

work performed by Federal employees. 

NTEU believes the Administration’s contracting out quotas will lead to more contractor waste at the IRS and other agencies. We urge this Subcommittee to reject 

the use of these arbitrary quotas so that the IRS can focus on achieving its mission 

in the most reliable, cost effective, and efficient manner. 

Finally, NTEU urges this Subcommittee to take steps to correct an issue affecting 

estate and gift tax attorneys at the IRS. All of the attorneys who work on estate 

and gift tax returns at the IRS are in the ‘‘excepted service.’’ Regular competitive 

civil service hiring procedures do not cover positions in the excepted service. As a 

result, estate tax attorneys are not eligible to be transferred to other competitive 

service jobs, even within the IRS. So even though they have the expertise and qualifications to work on trusts, partnerships, or countless other jobs at the IRS, because 

of their ‘‘excepted service’’ status, if their jobs are eliminated they will be treated 

as any other outside job seeker. 

Recent changes in the estate and gift tax laws will lead to fewer estate and gift 

tax returns filed each year, which will mean that most of the estate and gift tax 

attorney jobs at the IRS will be eliminated over the next ten years. These employees 

bring a wealth of experience to the IRS and are real assets to the Federal Government. NTEU urges you to provide competitive status for estate and gift tax attorneys so that these valuable employees are given fair opportunities to transfer to 

other jobs in the Federal Government. 

In closing, I have outlined just some of the areas where I believe Congress can 

help to make improvements at the IRS. IRS employees are committed to delivering 

first-class customer service to the taxpayers and they are committed to enforcing the 

tax code in a fair manner. But without some changes, they will continue to have 

a difficult time meeting these goals. The full benefits of a more efficient, more effective and higher performing IRS workforce will not be realized unless Congress and 

the Administration provide more funding and more staffing, and remove many of 

the barriers to improving morale and productivity at the IRS. 

I thank you for holding this important hearing today, and I would be happy to 

like to ask Mr. Coyne if he would like to inquire. 

answer any questions you may have.

Chairman HOUGHTON. Thank you very much, Ms. Kelly. I would 

f Mr. COYNE. Thank you, Mr. Chairman. Mr. White, according to 

IRS statistics, more than 20 percent of callers to the IRS received 

legally incorrect answers to tax questions. 

Why, in your judgment and your agency’s judgment, is this happening? 

60

Mr. WHITE. This has been a longstanding problem at IRS, not 

just the accuracy of the answers but also the access to the telephones. This year service on the accuracy side has actually improved considerably compared to last year. You are correct, they 

still have a long way to go. And I think essentially it is a matter 

of better management across the board. One issue we found, for example, is that managers of telephone assistance often miss opportunities to evaluate the performance of their own operations. And 

the advantages of doing those kind of evaluations mean that they 

get a better understanding of the reasons for performance. And 

armed with that understanding of the reasons for performance, 

then they would be in a better position to take actions to improve 

performance in the future. 

Mr. COYNE. Ms. Kelly correctly points out that there is 20,000 

fewer employees at the IRS currently. In your agency’s assessment 

of the operations of the IRS, is that a contributing factor to some 

of the problems that still exist? 

Mr. WHITE. It is undoubtedly a contributing factor. The question 

is the extent to which it contributes. As I indicated, there is an 

issue of how well you are managing the resources you have, as well 

as the question about the level of the resources. And right now, because of those missed opportunities to evaluate the reasons for performance, we don’t have and IRS does not have as good an understanding of the reasons for the performance right now as you would 

like to have. 

Mr. COYNE. I find it quite strange that the EITC has a separate 

allocation for its performance. And you ask why—you let us know 

that we should ask the Commissioner about that or ask someone 

at the IRS about that. What is your idea about why that exists? 

What have you been able to find out about why that separate allocation exists? 

Mr. WHITE. Well, I don’t know the history. I know it has existed 

for the last 5 years. So this—the continuation that is requested 

now would be the 6th year of this separate allocation. And I think 

it does raise the question, given the compliance issues that are 

there across the board, why for this one area of compliance there 

is a separate appropriation. And that is the reason why we felt the 

Subcommittee might want to ask IRS if they see any advantages 

to the separate appropriation. 

Mr. COYNE. Now you don’t in your examinations find any good 

reason for it? 

Mr. WHITE. We don’t have a position one way or the other on it. 

We did think the Subcommittee might want to ask IRS whether 

they see any advantages to combining all of the compliance appropriations into one appropriation. 

Mr. COYNE. Ms. Kelly, are you confident that the taxpayers will 

be protected from any, quote, bad apples at the IRS under the Taxpayer Rights Bill scheduled for floor action this week? 

Ms. KELLY. Yes. I am very confident of that. I believe that the 

issues that are on the list to be amended in Section 1203, for example, are all issues that identified behavior that was unacceptable of 

IRS employees before the restructuring act was ever passed. They 

were serious offenses, and when they were identified, they were 

dealt with appropriately. 

61

The problem with Section 1203 is it just allows no consideration, 

if you will, of any alternative discipline should the Commissioner 

deem that to be appropriate. It is an automatic proposal to termination. And the mere threat of that is what is having the chilling 

effect on employees. But I do believe that it will be, as it was before 

Section 1203, appropriately administered by the IRS. 

Mr. COYNE. Under the current regulations, and since the implementation of the restructuring, how many employees have been 

fired under current law? 

Ms. KELLY. There have been very, very few. I could not even give 

you an exact number. I am sure that Commissioner Rossotti could 

because he tracks this very closely. The bottom line is there have 

been very few. That is because of the way in which Commissioner 

Rossotti, as the Commissioner, has implemented the language of 

Section 1203. 

But the problem, if you step back from the termination, is the 

mere threat. And the threat itself has been issued to over 1,200 

employees who were accused of something that proved to have no 

merit to it. But the mere fact that they were under an allegation 

let them know that they would face termination unless they could 

prove the allegation false. That is a terribly frightening threat to 

live under. 

Now, as I said, Commissioner Rossotti has been very level-handed about this and has gone to great lengths, I think far and above 

what he had to do, which NTEU and IRS employees really appreciate. 

But with that language in there, if someone else were the Commissioner and chose not to do it, did not make it a priority on behalf of employees, it could have a devastating effect. 

Mr. COYNE. I had asked Mr. White earlier about the incorrect information that was going out to taxpayers. What do you think of 

this problem? Why do you think that incorrect information is being 

disseminated? 

Ms. KELLY. I think there is not any one easy answer. I think it 

is about staffing. I think it is about training. I think it is about the 

ability of front line managers to interact with employees. I think 

it is about steps the IRS has taken successfully, but with more 

work that needs to be done to be able to direct phone calls to employees who are specifically trained on an issue. 

That is an ideal situation, if every taxpayer calls with one question so they can be routed to an employee who has had that specific 

training. Very few taxpayers call with only one question, they often 

have a variety of questions. And sometimes, that could lead to 

error that employees want to correct through more training. They 

want nothing more than the reports to show a high accuracy rate 

and accountability and dependability. 

Mr. COYNE. Thank you. 

Chairman HOUGHTON. Thank you, Mr. Coyne. Mrs. Thurman. 

Mrs. THURMAN. Thank you, Mr. Chairman. And thank both of 

you for being here today. Mr. White, were you at all surprised by 

this New York Times article at all, as far as ‘‘Poorly Aimed Audits’’ is the name of one of them? This was the one that talked about— gosh, what did I do with it? I love it when my Chairman comes to 

my rescue. 

62

Wealthy taxpayers avoiding IRS despite warnings that cheating 

is on the rise. Does that surprise you at all? 

Mr. WHITE. I don’t know that I have enough information to be 

surprised or not. One of the fundamental problems with IRS in the 

compliance area, and one they are working very hard to address, 

is the lack of information about compliance. So they have a national research program underway right now which, if successfully 

implemented, should give them much better compliance information than they have had for a decade and a half. And with that 

kind of information, they will be—they will have a much better 

sense of what is going on with different categories of taxpayers and 

how well they are targeting noncompliance in those different 

groups. 

Mrs. THURMAN. Okay. I noticed on your report on page 8, you basically talk about, there is an example of missing performance 

goals, involves IRS efforts to address major areas of systematic 

noncompliance. Is there something that we can do congressionally 

or through the bill that may be up today or tomorrow that we are 

not doing that we could have helped in bringing these performance 

goals into reality for the IRS or to help us to track what is going 

on? 

Mr. WHITE. I think the main thing is continued oversight, hearings like this, attention to IRS’ budget, and demands to see linkages between the resources that IRS is requesting for particular 

areas of their operation and the results they expect to get. And 

they are getting better at developing those linkages. But they are 

not there in the compliance and collection area yet. 

I gave as an example telephones where they are asking for additional money this year, and in the performance plan they showed 

that that should increase accessibility by 5 percent. That is the 

kind of linkage that would be helpful. 

Mrs. THURMAN. Okay. So then if we have a hearing next year at 

the same time, we should be asking did you have that 5 percent 

or better compliance? 

Mr. WHITE. Yes. Exactly. It is a method that can be used to hold 

them accountable for performance. Up front they tell you what performance should be expected given the resources they are going to 

get. And then they can be held accountable for that. 

Mrs. THURMAN. Ms. Kelly, I notice that you were pleased with 

some of the changes that we have made in the bill for tomorrow 

on the floor. Are there some other suggestions you would have 

given based on—I know you also talk about the morale at the department, what is going on because of all of the people that are 

gone. Also, then you hear about not getting the right answers to 

taxpayers, those kinds of things. 

Are there some other things that we should have been doing that 

would have also been beneficial to the taxpayers that would have 

also solved some of these problems? 

Ms. KELLY. You know, in my experience both as the National 

President of NTEU, but also as a former revenue agent—I was a 

revenue agent in Pittsburgh for almost 15 years for the IRS. So my 

answer to that is really not about legislation, but it is more about 

the message that is sent by Congress on the support that they provide to the agency. And over the past couple of years that has defiVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00066 Fmt 6633 Sfmt 6602 E:\HR\OC\B436.XXX pfrm17 PsN: B436
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nitely been a positive one. It is an important message for taxpayers 

to hear, to know that not because you are going to rubber-stamp 

everything that the IRS does, but that you are supportive of its 

mission, acknowledge it as a respected institution, and are going to 

provide it with the resources it needs to do the tax collection work 

that our country needs to be done. 

So I think that message is important for taxpayers, but it is also 

important for employees. On the heels of the Senate hearings back 

in the late 1990s, employee morale was in a very bad place because 

they felt very unsupported, unvalued in the work that they were 

striving to do every day. So that would be the one thing that consistently I know employees watch for, whether it is in newspaper 

articles or in statements made from congressional offices, it is very 

important. 

Mrs. THURMAN. Ms. Kelly, also you talked about the outsourcing 

a little bit here. And I am curious. And you said that the Mellon 

Bank actually was—I guess basically terminated their contract. Do 

you know of any things that we—that IRS has done to eliminate 

this kind of a problem if they were continuing to do the outsourcing 

or could we see some more of these kinds of things take place? 

Have you seen any changes? 

Ms. KELLY. I actually have not seen many changes. But I would 

say it is not just about the IRS. The oversight and accountability 

of contracts that are let by the Federal Government are something 

that I believe, and NTEU believes, needs much more accountability 

and oversight. And I think we need to focus on this more and more 

as the Administration’s initiative to competitively source more 

work to outside contractors is implemented. What will the accountability be, what will the oversight be, what will the requirements 

be of the contractor versus what they would be of Federal employees? 

There is legislation pending that addresses all of those things. 

The Truthfulness, Responsibility, and Accountability in Contracting 

(TRAC) Act is one of the things out there that would put more accountability in place, and I think would support agencies in their 

interests in overseeing better the contractors. I can tell you I am 

taking a very personal interest these days in what kind of oversight does exist in all of the Federal agencies. And, in my opinion, 

it is not where it needs to be. And that is in large part because 

there is not a requirement for it through any kind of legislation 

and I am hoping that will change in the future. 

Mrs. THURMAN. What do you think the objective of outsourcing 

was? And have we met that objective? And maybe Mr. White can 

tell us also in looking at the IRS. 

Ms. KELLY. I really don’t know what the objective was. What 

many will say is that the object is to see if the work can be done 

cheaper by someone other than Federal employees. I believe that 

if Federal employees are provided with the resources, the support 

and the encouragement to do the work, there is no one who can do 

the work of the Federal Government better than Federal employees, and them having the opportunity to do that is something that 

has to be there. 

I have heard it is about cost, that is about the only thing that 

I hear. And in some cases that doesn’t prove to be the case. It 

64

might start off cheaper, but very shortly ends up being more expensive. Then it is very difficult to bring the work back into the Federal Government. You don’t hear many stories about work coming 

back in, only going out. 

Mrs. THURMAN. Explain this to me. It said, for example, last year 

we learned that Mellon Bank, a contractor has lost, shredded and 

removed 70,000 taxpayer checks worth 1.2 billion in revenues for 

the government. I am not sure I understand what that means. 

Ms. KELLY. The contractor was serving as a lockbox operation for 

the IRS and the Finance Management Service, and taxpayers were 

mailing their tax payments in to Mellon Bank. And the records as 

well as the payments—in the numbers that I identified in my testimony—disappeared. Employees of the contractor were shredding 

returns, removing them from the work place, destroying them. I 

never interviewed the contractor or the employees. But all of the 

reports talked about employees of the contractor doing this, I guess 

because they either couldn’t get the work done or didn’t choose to 

do it. So they were just disposing of the work. 

Mrs. THURMAN. So we could have then lost like $1.2 billion. 

Ms. KELLY. Yes. 

Mrs. THURMAN. Mr. White, do you know what that contract was 

worth to the Mellon Bank, what they were paid? 

Mr. WHITE. We have some work that we are doing at the request 

of the Senate Finance Committee looking at the management of 

IRS’ lockbox program, the entire program. We have started that 

work, but we are not finished developing our findings. So I will be 

in a better position to answer that question when we are done with 

that work. 

Mrs. THURMAN. Mr. Chairman, I would hope that, and Mr. 

White, I will certainly hopefully stay in contact with the Senate Finance, but I think that would be very important for us to understand and know. Because $1.2 billion is a lot of money, in my book. 

Plus we don’t know how much money we were paying outside just for this contract in itself. So not only is it the $1.2 billion, but it 

is also what the costs might have been for them to have this contract. And so I think that is a very important area for us to look 

at as we move on and listen to more of this lockbox area. 

Mr. WHITE. I don’t believe that the $1.2 billion was lost. I believe 

that IRS became aware of the situation and is aware of the taxpayers that were affected. This occurred last filing season and they 

took some steps to deal with the problem then. As I said, I will 

have more details when we are done with this work that we are 

doing with Senate Finance. 

Mrs. THURMAN. We appreciate that. Thank you very much. 

Chairman HOUGHTON. Thanks, Mrs. Thurman. 

I think one of the reasons that I suggested that Mr. Rossotti 

come back is because there are certain things that are going on 

that he has put into place and we would like to get a measure of 

them before he leaves. And I think what you said, Mr. White, is 

true. It is the linkages between the resources and the management 

here. What they are—as a matter of fact, it is sort of difficult for 

this Committee because you got different layers. I mean the IRS 

reports to Treasury and obviously they give them the signals. And 

then on top of that you have the IRS Oversight Board which Larry 

65

Levitan is the head of, and then our board. And we don’t want to 

sort of superimpose our own feelings, but we ought to know and we 

have got to be able to have those linkages and understand it very 

clearly before the next person comes on. 

Let me just move off here, because there are two issues. One is 

the internal issue and the other is the external issue. Internally, 

are we dancing as well as we know how? That is what we keep 

talking about. The other thing is—that I am worried about is that 

as you look out over the next hill, you can see more and more opportunities to go overseas or to expand the international market. 

That is going to make it very difficult. So the question, I think, for 

you, Mr. White and Ms. Kelly, as we look at that, are we structured properly? Because there is going to be more emphasis on this 

than ever, next year, the year after, the year after. Or, is this just 

going to be a matter of better electronic equipment or more employees? Tell us a little bit about that, the structure versus just more 

resources. 

Mr. WHITE. IRS has reorganized itself to focus on individual taxpayer groups. That is one important aspect of their overall modernization effort. That part has been implemented. There are a 

number of other aspects to the overall modernization effort that are 

still ongoing. For example, information systems modernization is 

another key aspect. Also, performance management and improving 

performance management are key aspects of IRS’ structure and 

how well they are able to manage themselves. They have made 

some progress in that area. They still have a lot more to do to develop measures that will be useful both internally for management 

purposes and outside for purposes such as this, oversight purposes. 

Chairman HOUGHTON. Would you like to make a comment, Ms. 

Kelly? 

Ms. KELLY. I believe that the structure that is in place now with 

LMSB for the large and mid-size businesses and small business 

and self-employed, those two divisions will need to coordinate and 

communicate very effectively so that what you described that is 

most likely to happen doesn’t get lost between the divisions and 

functions. And that is from a structure standpoint. 

From an employee standpoint, I believe that employees of the 

IRS are highly trained, accountants by education, and they are 

very interested in looking at more complex issues. They would welcome the opportunity, as they are with the partnerships that Commissioner Rossotti talked about, and in the complex partnership 

schemes that we are seeing. But I also believe that it is going to 

be about staffing and it is going to be about the right training and 

identification of issues. 

The IRS has recently started looking at a number of processes, 

one of which is the examination process. And they have a project 

that NTEU is working jointly with them on called examination reengineering. It is looking at just this. Moving employees, their 

audit skills as well as their training and technical tax skills into 

areas to be able to do the partnership schemes that didn’t exist 10 

years ago, and as they will exist in the future with the international schemes you described. 

66

So I think employees are very up to the challenge. I think that 

the structure, as long as the communication continues, will support 

it. 

Chairman HOUGHTON. Okay. Any other questions? Thank you 

very much. It has been very helpful testimony. And we hope to see 

you again. Thank you. 

Now I would like to call the next panel, the last panel. There are 

four panelists. James Dougherty, Chairman, Relations with the 

IRS Committee, American Institute of Certified Public Accountants; Mark Ernst, President and Chief Executive Officer of H&R 

Block. Welcome back, Mr. Ernst. Roger Harris, President of the 

Padgett Business Services in Georgia, and Chair of the Legislative 

Affairs Subcommittee of the National Association of Enrolled 

Agents; and William Stevenson, President of the National Tax Consultants in Merrick, New York, and Chairman of the Federal Taxation Area, Right to Practice Committee, and also the National Society of Accountants in Virginia. 

So thank you very much for coming. And maybe, Mr. Dougherty, 

you would like to begin your testimony. 

STATEMENT OF JAMES A. DOUGHERTY, CHAIRMAN, RELATIONS WITH THE IRS COMMITTEE, AMERICAN INSTITUTE OF 

CERTIFIED PUBLIC ACCOUNTANTS 

Mr. DOUGHERTY. Thank you. 

Mr. Chairman and Members of the House Ways and Means Subcommittee on Oversight, the American Institute of Certified Public 

Accountants (AICPA) thanks you for the opportunity to appear 

here today. I am James Dougherty, Chairman of the AICPA, Relations with the IRS Committee. The AICPA is a national professional organization that certifies public accountants with over 

350,000 members. 

Before discussing the feedback we have received about the 2002 

filing season, we would like to urge Congress to support full funding of the Internal Revenue Service fiscal year 2003 budget. 

The AICPA has long advocated funding levels that would allow 

the IRS to efficiently and effectively administer the tax laws and 

collect taxes. Without sufficient funding, taxpayers and practitioners will encounter unnecessary problems and frustrations. The 

American taxpaying public is just beginning to benefit from the Internal Revenue Service that the Congress envisioned when it 

passed the 1998 IRS restructuring legislation. 

While the preliminary results are promising, it is critical that 

Congress move the reform process ahead without delay by providing the necessary funding. As regarding the 2002 filing season, 

the IRS has implemented a number of improvements in the electronic filing program for 2002 filing season. 

The AICPA especially appreciates nearly all 1040 forms and 

schedules have been made available to electronic filing; two, the 

electronic filers are no longer required to use a paper signature 

document and, three, the electronic payment options have been expanded. Similarly, the IRS has expanded electronic filing options 

for business taxpayers over the last year. 

The AICPA looks forward to being a positive partner in the electronic filing system and to that end has recently formed a task 

67

force. We appreciate the many hurdles on the roads to achieving 

the goals established by Congress for the electronic filing program. 

For example, last year’s struggles to implement the mandated electronic filing of large partnerships ought to provide a road map of 

things to avoid in future implementations. The IRS and its constituency can improve significantly on future electronic initiatives, 

but only through collaboration with critical stakeholders, collaboration that begins early and which is taken seriously by the agency. 

On March 9, 2002, President Bush signed into law the Job Creation and Workers Assistance Act. The retroactive provisions of the 

2002 act have contributed significantly to making this a difficult 

filing season for taxpayers and practitioners. Some provisions that 

have been problematic are, one, an additional first-year depreciation deduction equal to 30 percent for qualified property purchased 

after September 10th, 2000; and two, an extension in the general 

net operating loss carry back for 2 to 5 years. In order to take advantage of the depreciation and Net Operating Loss provision, 

many taxpayers and practitioners found it necessary to file extensions on business returns otherwise due on March 15, 2002. 

Also we expect to see more individuals file on extensions as well 

as many taxpayers will have to consider amending returns that 

they already have filed. The IRS has done a commendable job in 

releasing guidance and tax forms on 2002 tax law. Nevertheless, 

we believe Congress should remain cognizant of the difficult task 

it imposed on the Service as a result of complex and constant 

changes in the law, particularly with respect to effective dates that 

do not permit adequate time to adjust. 

Advance consultation with the IRS and the practitioners could do 

much to improve the quality and administration of our tax laws. 

The IRS announced a few months that the taxpayers and practitioners could obtain employer identification numbers (EINs) by 

calling one toll-free number or they could fax requests 24 hours a 

day, 7 days a week. Similarly, the IRS announced last fall to the 

practitioners hotline program changes that were made effective 

January 2002. 

Since the implementation of these changes were announced, two 

very important administrative programs, taxpayers and practitioners have experienced significant busy signals with the toll-free 

numbers involved as taxpayer demand has exceeded the IRS capacity to answer these calls. 

While the IRS has announced steps to address these problems, 

we must point out the extreme urgency in fixing the EIN and the 

practitioner hot line programs. 

During the filing season, the AICPA has received numerous complaints from certified public accountant (CPA) members who have 

encountered problems in obtaining taxpayer account information 

from the IRS. This appears to be a direct result of the IRS difficulties with computer modernization and its inability or effect on IRS 

when trying to access taxpayers accounts. 

This a clear contrast to the ability of financial institutions to access customer financial transactions immediately based on up-tothe-minute data, regarding the customers. 

The IRS must continue to foster access to taxpayer account information through improvements in telephone services and by making 

68

secure Internet access available, with the ultimate goal of providing one-stop shopping for taxpayers so they can resolve the tax 

accounts in a timely, efficient way. 

The AICPA appreciates this opportunity to offer our comments to 

the Subcommittee and would be happy to discuss any of these matters in further detail with you. 

[The prepared statement of Mr. Dougherty follows:]

Statement of James A. Dougherty, Chairman, Relations with the IRS 

Committee, American Institute of Certified Public Accountants 

Mr. Chairman and Members of the House Ways and Means Subcommittee on 

Oversight, the American Institute of Certified Public Accountants thanks you for the 

opportunity to appear before you today. I am James A. Dougherty, Chair of the 

AICPA’s Relations with the IRS Committee. The AICPA is the national, professional 

organization of certified public accountants comprised of more than 350,000 members. Our members advise clients on Federal, State, and international tax matters, 

and prepare income and other tax returns for millions of Americans. They provide 

services to individuals, not-for-profit organizations, small and medium-sized businesses, as well as America’s largest businesses. It is from this broad base of experience that we offer our comments today on the 2002 tax filing season and the IRS 

budget.

The IRS Budget 

Before discussing the feedback we have received from taxpayers and tax practitioners about the 2002 filing season, we would like to urge Congress to support full 

funding of the Internal Revenue Service’s fiscal year 2003 budget. The AICPA has 

long advocated funding levels which would allow the IRS to efficiently and effectively administer the tax laws and collect taxes. Without sufficient funding, taxpayers and practitioners will encounter unnecessary problems and frustrations. 

Recently, the National Taxpayer Advocate noted that taxpayers have inadequate 

access to IRS assistance. The AICPA believes any shortfall in budgetary support for 

the IRS will worsen this situation. We are also concerned that lack of funds will 

impede the planned modernization of the IRS’ equipment and electronic capabilities. 

Steady progress on this front is absolutely essential to sound tax administration. 

The IRS performs an essential, although unpopular, role by collecting the revenue 

needed to operate our government. To continue improving collection efficiency, the 

IRS needs adequate funding. This does not eliminate the need to implement and 

monitor reforms to address the problems which exist within the Service. However, 

budget cuts should not be used to penalize the IRS. 

Many AICPA members are tax practitioners. As such, we have seen first-hand the 

problems caused by an IRS that is not responsive to the taxpaying public as customers. We have also witnessed the improvements initiated by Commissioner 

Rossotti and the reorganization mandated by Congress in the IRS Restructuring and 

Reform Act of 1998. Reducing the IRS appropriation can only delay implementation 

of the improvements Congress expects and we believe the nation’s taxpayers will 

suffer as a direct result. 

The AICPA has long advocated that funding for the IRS must be sufficient for the 

Service to efficiently and effectively administer the tax laws and collect tax. It is 

vital to our voluntary compliance tax system that the Service have the resources 

necessary to properly enforce the tax laws. When the IRS is, or appears to be, unable or unwilling to actively administer and enforce the tax law, serious damage to 

the effectiveness of our tax system results. Therefore, we encourage Congress to 

strongly support the IRS’ budget needs. Obviously, we expect the Service to identify 

responsible ways to allocate any additional resources it receives over prior years, 

and Congress will through its oversight responsibilities ensure that those resources 

are properly utilized. We also believe Congress should pursue multi-year funding 

(i.e., budgeting for multiple years at once) to ensure stable funding for the IRS in 

the future. 

The American taxpaying public is just beginning to benefit from the Internal Revenue Service that Congress envisioned when it passed the IRS restructuring legislation. While, the preliminary results are promising, it is critical that Congress facilitate moving the reform process ahead without delay by providing the necessary 

funding. 

69

2002 FILING SEASON 

In previous testimony before Congress, the AICPA would often report that, having 

heard little from our members by early April, we presumed that the filing season 

was progressing largely without any significant problems. Unfortunately, we cannot 

make the same report for the 2002 filing season. 

Our comments reflect concerns raised by our member CPA practitioners about: (1) 

electronic filing; (2) the retroactive effect of the Job Creation and Worker Assistance 

Act of 2002; (3) the difficulties in obtaining Employer Identification Numbers; (4) 

the revamped practitioner hotline service; (5) problems in accessing taxpayer accounts; and (6) difficulties in contacting specific IRS personnel.

Electronic Filing

The IRS has implemented a number of improvements in the electronic filing program (ELF) for the 2002 filing season. The AICPA especially appreciates that (1) 

nearly all Form 1040 forms and schedules have been made available to electronic 

filers; (2) electronic filers are no longer required to use a paper signature document; 

and (3) the electronic payment options have been expanded. Similarly, the IRS has 

expanded electronic filing options for business taxpayers over the last year. 

The AICPA supports electronic tax administration in general, and ELF in particular. Although we have yet to hear from our members about their experiences 

with ELF during the current filing season, we hope that the ELF improvements will 

mitigate our members’ past concerns about electronic filing. 

During previous filing seasons, the AICPA had expressed that the Service’s inability to accept all forms and all schedules, including white paper schedules, elections 

and related compliance disclosures, had been the greatest barrier to widespread use 

of electronic filing by the Institute’s members, especially for those practitioners who 

tend to work with the more complex returns. Because effective disclosure is the key 

to the modern reporting system, effective electronic filing of the more complex returns could not be expected until all forms and schedules could be filed electronically—including ‘‘white paper’’ schedules, elections, and compliance disclosures. 

Although we support the long-range goal of converting manual processes to electronic formats, the AICPA remains frustrated by the Service’s response to our attempts both to partner with the IRS in promoting ELF to our membership and in 

explaining to the IRS the effects of the current systems’ limitations on our constituency. As the IRS shifts its electronic filing focus from individual returns to business 

returns, the importance of involving, listening to, and responding to the various 

stakeholder groups will become all the more critical. Unfortunately, our experience 

as a stakeholder group in this matter has not been positive to date. 

The AICPA looks forward to being a positive partner in the ELF system and to 

that end has recently formed an Electronic Filing Task Force. We appreciate the 

many hurdles on the road to achieving the goals established for the electronic filing 

program by Congress. For example, last year’s struggles to implement the mandated 

electronic filing of large partnerships ought to provide a ‘‘road map’’ of things to 

avoid in future implementations. As we enter the second year of this mandate there 

remain many circumstances in which a related schedule or form must be supplied 

to the IRS on paper—sometimes triggering the entire Form 1065 to be filed on 

paper. The IRS and its constituencies can improve significantly on future electronic 

initiatives, but only if there is collaboration that begins early and is truly valued 

by the IRS.

Job Creation and Worker Assistance Act of 2002

On March 9, 2002, President Bush signed into law the Job Creation and Worker 

Assistance Act of 2002. The retroactive provisions of the 2002 Act have contributed 

significantly to making this a difficult filing season for taxpayers and practitioners. 

These measures include (1) an additional first-year depreciation deduction equal to 

30 percent for qualified property purchased after September 10, 2001 and (2) an extension in the general net operating loss (‘‘NOL’’) carryback period from two years 

to five years for NOLs arising in taxable years ending in 2001 and 2002. 

In order to take advantage of the depreciation and NOL (and other) provisions, 

many taxpayers and practitioners found it necessary to file for extensions on business returns otherwise due on March 15, 2002. The IRS has done a commendable 

job in releasing guidance and tax forms on the 2002 tax law; the agency released 

a brief summary of the Act on March 12 and provided further guidance and tax 

forms several days after the March 15 filing deadline for business returns. Businesses that have already filed their returns prior to March 15 might find it necessary to amend their tax returns in order to take advantage of the new tax incentives. We expect to see more individual returns filed on extension as well, reflecting 

70

those returns that are affected by these retroactive provisions (e.g., those with 

Schedules C and F could be affected). Finally, there will be ongoing issues regarding 

the differences between Federal and State laws in the tax treatment of various 

items or tax benefits—as a result of passage of the 2002 Act. 

While reducing taxes retroactively for taxpayers, the 2002 tax law has clearly 

added additional complexities, compliance costs, and administrative burdens for taxpayers and practitioners during the current filing season. Congress recognized the 

complexity of the tax administration issue when it included Section 4021 in the IRS 

Restructuring and Reform Act of 1998 (RRA ’98), which states ‘‘It is the sense of 

Congress that the Internal Revenue Service should provide the Congress with an 

independent view of tax administration, and that during the legislative process, the 

tax-writing committees of Congress should hear from front-line technical experts at 

the Internal Revenue Service with respect to the administrability of pending amendments to the Internal Revenue Code of 1986.’’ We ask Congress to remain cognizant 

of the difficult task it imposes on the Service, tax practitioners and taxpayers when 

it continues to enact complex and constantly changing tax laws, especially with effective dates that do not permit adequate time to adjust. Advance consultation with 

the IRS and practitioners could do much to improve the quality and administrability 

of our tax laws.

Employer Identification Numbers

The IRS has recently announced a number of changes designed to improve the 

processing of requests for new Employer Identification Numbers (EINs). These 

modifications were developed late last year in response to concerns raised by the 

AICPA and other practitioner groups. For example, the AICPA detailed the difficulty taxpayers and practitioners were having in obtaining EINs to National Taxpayer Advocate Nina Olson. We also informed the IRS about problems taxpayers 

were having with submitting Forms SS–4, Application for Employer Identification 

Number, to the Service through the use of the Tele-Tin program and by fax. 

In our April 5, 2001 letter to Nina Olson, the AICPA recommended that the IRS: 

(1) increase the number of hours the call-in procedure is available each day; (2) create a system for the Service to take taxpayer messages to facilitate EIN assignments; (3) acknowledge faxed EIN requests; and (4) commit to assigning an EIN 

within a specified time period. 

In response, the IRS announced that beginning on December 1, 2001, practitioners can now obtain an EIN on a client’s behalf by completing the new Third 

Party Designee section on Form SS–4, thereby eliminating the need to obtain a separate Form 2848, Power of Attorney. Also, beginning on January 2, 2002, taxpayers 

and practitioners can call one toll-free number or fax EIN requests 24 hours a day, 

seven days a week. 

However, taxpayer demand has exceeded the IRS’ capacity to promptly answer 

calls, resulting in a significant number of busy signals. We have also received complaints that taxpayers were not receiving EIN numbers in a timely fashion after 

sending requests in by fax or mail. Although the IRS is responding to these filing 

problems and resulting EIN application backlog, we must report that taxpayers and 

practitioners are still reporting problems. Fortunately, the number of complaints is 

reduced compared to the number voiced in January 2002 when the phone and fax 

systems were changed. 

The IRS has promptly acknowledged the EIN program’s shortcomings problems, 

and we commend this responsiveness. Nevertheless, we urge the Service to continue 

focusing on fixing the remaining problems taxpayers and practitioners are experiencing. Because of the importance of the EIN program to the overall tax administration process, its effective functioning must be of the highest priority.

Practitioner Hotline

Beginning in January 2002, the IRS modified its toll-free practitioner hotline, renamed the ‘‘Practitioner Priority Service.’’ This new (centralized) program is promoted as the first point of assistance for taxpayer account-related issues. Through 

this revised practitioner hotline, the IRS intends to offer practitioners an opportunity to obtain fast, accurate, consistent, and comprehensive answers from specially trained IRS employees during the hours of 7:30 a.m. to 5:30 p.m. local time. 

However, the AICPA has received complaints from practitioners who consistently 

experience busy signals when calling the hotline, because practitioner demand has 

exceeded the Service’s ability to promptly answer calls. The IRS must address the 

problems that have resulted from the centralization of the hotline under the new 

Practitioner Priority Service. A viable and prompt response to hotline calls is imperVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00074 Fmt 6633 Sfmt 6621 E:\HR\OC\B436.XXX pfrm17 PsN: B436
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ative for fostering successful relationships with a key stakeholder constituency and 

effective tax administration.

Access to Taxpayer Accounts

During this filing season, the AICPA has received numerous complaints from CPA 

members who have encountered problems in obtaining taxpayer account information 

from the IRS. We believe these complaints are an outgrowth of the IRS’ difficulties 

with computer modernization. For example, taxpayers and practitioners continue to 

have problems accessing estimated tax payment information. This is in clear contrast to the ability of financial institutions to access up-to-the-minute customer 

transaction information. In 2001, the IRS reported that it could take the agency up 

to 16 days to make an adjustment to a taxpayer’s account due to incompatible internal computer systems—a standard that would not be tolerated by any private company or its customers. 

Even a modest improvement in accessing taxpayer account information would significantly reduce needless correspondence between taxpayers and the IRS. The Service must continue to improve its telephone services toward the ultimate goal of ‘‘one 

stop shopping’’—enabling taxpayers to resolve all their problems with a single IRS 

representative. 

The AICPA also urges the IRS to develop ways for their employees to access taxpayer information using secure, privacy-protected Internet connections. Taxpayers 

should similarly be able to view their own tax account information using secure 

Internet connections.

Difficulty in Contacting Specific IRS Employees

Practitioners encounter problems when attempting to contact specific IRS employees, even those contact persons listed on IRS notices to taxpayers. The AICPA has 

learned about numerous Revenue Officers (ROs) who will not provide taxpayers 

with a ‘‘live’’ telephone number, but instead their messages only provide pager and 

voice mail numbers. Even though the message may state that the RO will call back 

as soon as possible, taxpayers and practitioners are encountering great difficulty in 

actually contacting the specified RO. 

The AICPA recommends that all ‘‘front-line’’ IRS employees should be required to 

give their manager’s name and telephone number as part of their voice mail message. We also strongly recommend that the IRS upgrade the quality of its Web site’s 

Interactive Telephone Directory, to assist taxpayers and practitioners in identifying 

the most appropriate IRS employee to contact. 

Conclusion 

The AICPA is encouraged by today’s hearing by the House Ways and Means Subcommittee on Oversight. We remain strongly committed to working closely with 

Congress to obtain proper funding for the IRS and to ensure continued improvements in future tax filing seasons. We are optimistic that—with the proper plan and 

funding levels in place—the IRS can achieve an appropriate balance between taxpayer service and enforcement. We hope that this hearing will serve as the catalyst 

to spur improvement in IRS service to its taxpaying ‘‘customers’’ and in the agency’s 

overall operations. 

The AICPA appreciates this opportunity to offer our comments to the Subcommittee and would be happy to discuss any of these matters in further detail with 

Mr. Ernst. 

Subcommittee Members.

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

f STATEMENT OF MARK A. ERNST, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, H&R BLOCK, INC., KANSAS CITY, 

MISSOURI 

Mr. ERNST. Thank you, Mr. Chairman, Mr. Coyne, Mrs. Thurman. 

Thank you for the opportunity to our present our views. 

72

From our perspective, the good news is the filing season has gone 

smoothly with a few exceptions. Overall the IRS and the tax preparation industry are working very well together. 

The IRS is likely to beat this year’s target of 46 million electronically filed returns. But increasing effort will be needed to advance 

from this year’s 35 percent of all filers to Congress’s target of 80 

percent by 2007. 

H&R Block has electronically filed 90 percent of the 12 million 

returns we prepared as of March 15th. 

This has been an especially challenging year for the IRS, sending 

millions of advance refund checks, quickly responding to families 

affected by September 11th, and planning for return processing 

contingencies in case of terrorism. 

The IRS, from our perspective, has earned praise for simplification of Schedule D, innovative E-filing promotions, improved communication with practitioners, and making personal identification 

number (PIN) signature alternatives easier to use. 

Commissioner Rossotti deserves a special salute for his leadership. He has made a profound contribution for which all citizens 

should be grateful. 

At H&R Block we continue to provide financial as well as tax advice to help clients meet their goals and we are integrating on-line 

and off-line tax services. Combining services is an increasing trend. 

All in all, the tax season is going well. 

The bad news is that it is not glitch-free. Two new tax laws have 

caused some problems. 

This year’s main problem is the rate reduction credit which 

caused confusion and over 3 million errors. The ordering rules applicable to the newly refundable child tax credit has also caused 

confusion and IRS errors. The economic stimulus package made 

retroactive tax law changes that required new forms, software updates and amended returns. Midstream changes made implementation of those very difficult. 

Finally, poor IRS enforcement for the second year in a row gave 

an unfair advantage for tax preparers who file returns early without proper W–2s over firms that are in compliance with the rules. 

On budget initiatives, I would make three points. First, we 

strongly support full funding for the IRS. One pay-off of modernization will be faster refunds for electronic filers. 

Second, on E–Z tax filing, we are pleased that the Administration is backing away from an ill-advised proposal to build a free 

IRS on-line tax prep and e-filing system, and instead is working toward a constructive partnership with private-sector firms. 

I believe that one of the reasons IRS customer satisfaction is rising is the effective public-private partnership delivering electronic 

filing. Let’s not lose the important progress that we have been 

making. 

Third, on extending the filing deadline to April 30th for taxpayers who file and pay electronically, we are concerned about losing focus on April 15th, creating compliance difficulties, and imposing extra costs on the tax preparation industry, all to attract only 

an estimated 3 percent of tax filers in the first year. 

73

What is really needed to stimulate a massive shift to e-filing is 

the incentive of a tax credit available to all tax filers, not just those 

who have a balance due. 

Briefly, on several other issues. On simplification, we welcome 

simplification efforts and submit for the record our annual ‘‘top 10’’

suggestions. 

On the earned income tax credit, industry hopes to work with 

Congress and the Treasury to improve due diligence and simplify 

the law to reduce noncompliance. 

On the national research audits, we commend the IRS for its design of a new compliance measurement system. Better information 

will lead to a fairer tax system. 

On tax preparer regulation, we look forward to commenting on 

coming proposals. Our own training, continuing education and code 

of ethics reflect our longstanding commitment to integrity and professionalism and support for a system requiring meaningful minimum standards. 

On helping low-income taxpayers, we support well-focused government assistance. If expanded services are needed, we hope that 

outsourcing tax preparation and electronic filing to private sector 

tax professionals will be considered. 

On privacy, consideration should be given to updating 30-year 

old rules. The standards for tax preparation firms’ use of client information should be consistent with the 1999 rules Congress adopted for financial firms. The IRS should also clarify that electronic 

signatures can be used for online consent. 

Finally, on accounting reforms, the vast majority of the accounting profession reflects competence and ethical behavior. In crafting 

post-Enron reforms, care should be taken to ensure that audit 

firms can continue to provide tax compliance and most tax planning services and that small privately-owned business and family 

firms without large executive staffs should continue to be able to 

use CPAs to advise on a broad range of tax and business issues. 

We appreciate the chance to testify, Mr. Chairman, and would be 

happy to respond to questions. 

[The prepared statement of Mr. Ernst follows:]

Statement of Mark A. Ernst, President and Chief Executive Officer, H&R 

Block, Inc., Kansas City, Missouri 

Mr. Chairman, Rep. Coyne, and Members of the Subcommittee: 

Thank you for the opportunity to present our views on the tax filing season, the 

IRS budget, and other issues facing our tax system.

Filing Season Success

The good news is that the filing season has gone smoothly with few exceptions. 

Overall, the IRS and the tax preparation industry are working well together. 

With electronic filing up over 14%, the IRS is likely to beat this year’s target of 

46 million e-filed returns, 35% of all filed, compared to 40 million, or 31%, last year. 

H&R Block has contributed about one third of those returns, electronically filing 

90% of the 12 million returns we prepared as of March 15. 

This has been an especially challenging tax year for the IRS. It sent out over 200 

million notices or advance payments in connection with last summer’s tax cut, it 

quickly made special allowances for taxpayers affected by the September 11 tragedy, 

and it planned for mail and processing contingencies in the face of terrorism risks. 

The IRS deserves praise for improvements to Schedule D (capital gains and 

losses), innovative e-filing promotions, improved communication with practitioners, 

and making PIN signature alternatives easier to use. 

74

Commissioner Rossotti, whose term ends in November, deserves a special salute 

for his leadership. He has made a profound contribution for which all citizens 

should be grateful. 

At H&R Block, we are increasingly providing financial as well as tax counsel to 

our clients, tailoring advice to individual circumstances, to help our clients meet 

their financial goals. We expect this trend to continue across the industry. For many 

clients, Tax Day is an opportunity for an annual financial check-up. 

We are also integrating our online and offline capabilities to serve taxpayers 

across the spectrum from ‘‘do it yourselfers’’ to those needing more personal assistance. Online or software users can get questions answered by a tax advisor or have 

their return professionally prepared, reviewed, or transferred to a tax office to meet 

their individual needs.

Filing Season Problems

The bad news is that the IRS still must administer an overly complex tax code 

and the filing season is not glitch-free. 

Let me highlight eight items, several resulting from two new tax laws. 

This year’s main problem is the Rate Reduction Credit, where multiple terms (‘‘rebates,’’ ‘‘advance payments,’’ ‘‘refund advances,’’ ‘‘rate reduction credits’’) and instructions that confused taxpayers and even tax preparers resulted in many rejected 

e-files and over three million errors. 

The ordering rules applicable to the newly refundable Child Tax Credit caused 

confusion. The complex interaction of forms and worksheets resulted in IRS errors. 

Our IRS liaison has been especially helpful in the extra casework needed to resolve 

them. 

Both items came from the ‘‘Economic Growth and Tax Relief Reconciliation Act 

of 2001’’ (EGTRRA), signed into law June 7, 2001. It also made welcome changes 

to the Earned Income Tax Credit’s tie-breaker rules but the changes still require 

technical corrections and clarifications before 2003. 

The economic stimulus package, the ‘‘Job Creation and Worker Assistance Act of 

2002,’’ signed into law March 9, made mid-filing-season retroactive tax law changes 

that required new forms, software updates, and amended returns. Guidance and 

technical corrections will also be needed. 

In implementing the stimulus act’s changes, one service center began accepting 

revised Form 4562s on April 4, and the other centers began only yesterday, requiring tax preparers to use two versions of the same form at a critical period. 

Some States are not allowing e-filing of returns claiming the 30% accelerated depreciation for assets placed into service after September 10, 2001, and many States 

have yet to issue rulings regarding the changes, adding further complications. 

Although we patiently explain the political realities of writing tax law to them, 

our tax professionals respectfully ask Congress to complete new tax laws by midSeptember. The IRS and tax practitioners need time to create clear forms and instructions, update software, train field staff, and prepare properly to minimize problems. 

Another problem this year was the late loading of student loan data, which briefly 

impaired the Debt Indicator, delaying delivery of many refunds. 

Finally, poor enforcement, for the second year in a row, against tax preparers who 

file returns early without proper W–2s gave them an unfair advantage over firms 

that comply with the regulations.

IRS Budget and Policy

On the budget, we share the concern of the IRS Oversight Board that the IRS 

have adequate funds for modernization, one benefit of which will be faster refunds 

for electronic filers. We strongly support full funding for that as well as for customer 

service and compliance programs. 

Two initiatives in the budget are of additional interest.

• ‘‘EZ Tax Filing.’’ We are pleased that the Administration is backing away from 

an ill-advised proposal to build a ‘‘free’’ IRS online tax prep and e-filing system 

and is instead working toward a partnership with private-sector firms. 

Putting the government in the tax return preparation business would be costly, would detract from more important modernization priorities, would create a 

conflict of interest if the tax auditor also became the tax preparer, and would 

raise questions of privacy and security. 

Industry already provides low-cost, high-quality software and online tax preparation programs that are well received by the public. It makes available free

tax prep and e-filing online to half of taxpayers. Absent compelling circumVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00078 Fmt 6633 Sfmt 6621 E:\HR\OC\B436.XXX pfrm17 PsN: B436
75

stances, government should not compete with the private sector—an established 

policy followed by the last nine Administrations. 

OMB’s initiative has bruised the trust and cooperative partnership that industry and the IRS had forged to increase e-filing. We hope that the current 

Treasury-IRS-industry discussions will put us back on a constructive path. 

• Tax Filing Deadline. We believe the IRS may be too optimistic about the benefits of its proposal to extend the tax filing deadline to April 30 for those who 

file and pay electronically. 

Less than one in five taxpayers pays a balance due and only 3% of taxpayers 

are expected to take advantage of the program in its first year. If we aim only 

at the margin, alternative consideration should be given to delaying deadlines 

for payment but not filing. That would create a nearly equal incentive without 

diminishing national focus on April 15, without contributing to confusion and 

compliance difficulties, and without imposing extra costs on tax preparers who 

would otherwise reduce staff or close seasonal locations after April 15. 

What is really needed to stimulate a massive shift to e-filing is the incentive 

of a e-filing tax credit available to all filers.

Other Policy Issues

A brief comment on several other issues:

1. Simplification. We believe both the study of the Joint Committee on Taxation 

and the Taxpayer Advocate’s annual report make excellent recommendations. We 

welcome the prospect of simplification legislation such as that Mr. Portman is preparing and the simplification white papers expected shortly from the Treasury. Our 

annual ‘‘top ten’’ simplification suggestions are attached. 

2. EITC. We are concerned over reports that nearly a third of EITC claims did 

not comply with the rules in 1999. Changes made by EGTRRA may create more 

compliance problems. This requires more cooperation between Congress, Treasury, 

and industry to improve diligence and simplify the law. 

3. National Research Program Audits. We commend the IRS for its care in 

designing new compliance measurement audits to capture needed information with 

minimal intrusion. Compliant taxpayers will benefit if the program results in better 

targeting of future enforcement. 

4. Shelters. Abusive tax shelters are a growing problem and we recognize the 

need to deter them through increased disclosure and tougher penalties. 

5. Preparer Regulation. The IRS and the Taxpayer Advocate are considering 

new regulation of unlicensed tax preparers. We believe need, enforcement of existing 

laws, costs, budget implications, administrative burdens, and alternatives should all 

be considered. Our own training, continuing education requirements, and Code of 

Business Ethics and Conduct reflect our longstanding commitment to integrity and 

professionalism. We look forward to a dialogue on any proposals. 

6. Low-Income Taxpayers. Over 5 million low-income taxpayers receive assistance from the IRS and volunteer groups through programs we support. We welcome 

the IRS’ efforts to focus aid on those most in need at its walk-in sites and this Committee’s clarification that IRS-subsidized tax clinics are intended to resolve post-filing controversies, not prepare returns. If expanded services are needed, we hope the 

IRS will consider vouchers to outsource tax prep and e-filing to qualified privatesector tax professionals whose training, existing e-filing systems, and convenient locations may provide significant advantages. 

7. Privacy. For 30 years, advance written client consent has been required to use 

or disclose tax return information. In 1999, Congress established different rules to 

enable financial firms to share customer data with affiliates or third parties, subject 

to customer notice and the opportunity to opt out of certain disclosures. Consideration should be given to updating rules for tax preparers to make the standards consistent. The IRS should also clarify that electronic signatures apply to tax preparation software and online transactions, as the 2000 E–SIGN law intended and as is 

common in e-commerce. 

8. Accounting Reforms. The vast majority of the accounting profession reflects 

high professionalism, competence, and ethical behavior. In the wake of Enron’s failure, SEC Chairman Pitt and others have proposed many useful reforms. But some 

proposals may do more harm than good. Restrictions on non-audit services should 

not prohibit an audit firm from providing tax compliance or most tax planning services. And differences between publicly-traded corporations and smaller, privatelyowned businesses should be recognized. Lacking extensive executive staffs, many 

entrepreneurs and family firms rely on their CPA to provide trusted counsel on a 

broad range of tax and business issues. In such cases, benefits far outweigh risks. 

76

1For earlier H&R Block views on tax code simplification, see ‘‘Statement of Robert A. Weinberger, Vice President, Government Relations, H&R Block, on Tax Code Simplification,’’ before 

the Subcommittee on Oversight of the House Committee on Ways & Means, including H&R 

Block’s 1998 simplification proposals, June 23, 1998 [Serial 105–46]; and ‘‘Statement of Kathy 

T. Burlison, Tax Research and Training Associate, H&R Block, on Complexity of the Individual 

Income Tax,’’ before the Senate Committee on Finance, April 15, 1999.

We appreciate the chance to testify, Mr. Chairman, and would be happy to respond to questions.

TAX SIMPLIFICATION

fPROPOSALS: 2002

Since 1997, H&R Block has annually sent lawmakers, Treasury and IRS officials 

10 suggestions for Federal tax simplification. The recommendations were developed 

by H&R Block’s Training and Research Department which serves more than 80,000 

H&R Block tax professionals who assist over 16 million clients at 9,000 U.S. offices. 

The proposals, distilled from over a million inquiries, are illustrative, not comprehensive. They complement those of the AICPA, ABA, and TEI, as well as those 

in annual reports of the IRS’ Taxpayer Advocate (the latest of which is excellent), 

and those in the three-volume study by the staff of Congress’ Joint Committee on 

Taxation (2001). 

Many of our past recommendations have been adopted. In deference to the excellent work of the JCT and the Taxpayer Advocate, our 2002 proposals support many 

of their recommendations as well as express independent views. Our focus is on 

problems faced by average taxpayers. 

To help ease tax burdens, we have also testified before Congress on simplification 

and tax reform, proposed legislation to restructure payroll taxes, helped the IRS develop simpler forms and clearer instructions, led efforts to increase the number of 

electronically-filed returns, and suggested improvements in earned income tax credit 

compliance. 

Several points help keep the issue of tax code simplification in perspective: 1

• The burden of complexity falls most sharply on about 20% of taxpayers, the 

small but significant fraction with higher incomes and more complicated financial lives—the self-employed, small business owners, those with income from 

passive activities or in the form of capital gains, rent, and pension or annuity 

disbursements. Low-income taxpayers who claim an earned income tax credit 

(16%) also face unusual complexity. • For many other Americans, the tax system is relatively simple. Over 80% of tax 

code provisions relate to business, not individual tax returns. Two-thirds of individual filers take a standard deduction and do not itemize. About 40% of individual filers are able to use simplified, 1–2 page, short forms—1040EZs and 

1040As. • The main reasons for complexity arise from defining income, rewarding favored 

activities, and meeting budget needs, not from multiple progressive tax brackets. 

• Much complexity stems from the legislative process which involves compromise, 

pressured last-minute drafting, and tailoring tax provisions to fit the funds 

available, resulting in phase-ins, sunsets, eligibility restrictions, etc. Simplification usually loses out to competing political needs as many voices press for complicating adjustments while there is little constituency for simplification. Since 

1987, Congress has amended the tax code an average of 1.5 times a day. 

• Congress missed an opportunity for major simplifications in 2001 by using 

budget surpluses for large tax rate cuts instead of adopting costly simplification 

proposals, but many low-cost ideas can still be implemented. 

• Some complexity makes the tax code fairer by finely tuning laws to individual 

circumstances and avoiding a one-size-fits-all model. Some complexity comes 

from using the code to advance non-tax social or economic policies, encouraging 

activities like education, retirement savings, child care, home ownership, charity, etc. Some complexity helps reduce the taxes we pay. 

• The IRS is easing complexity administratively by revising forms, notices, and 

instructions. 

• Technology and tax software dramatically reduce the burden of complexity. Half 

of tax filers use professional tax preparers. Over 55% of individual tax returns 

are prepared using online services or software like H&R Block’s TaxCut. Reasons include convenience, faster refunds, and financial planning, as well as comVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00080 Fmt 6633 Sfmt 6621 E:\HR\OC\B436.XXX pfrm17 PsN: B436
77

plexity. Through the private-sector, nearly 60 million taxpayers are eligible for 

free tax preparation and e-filing online. Through the IRS, 15 million taxpayers 

are eligible to file 1040EZ returns free by telephone and aid is available at 400 

IRS sites. Volunteer groups assist another 4 million low-income or elderly taxpayers.

EXECUTIVE SUMMARY

Family Issues 

1. Dependent Care Credit. Conform the dependent care credit’s definition of 

earned income to EGTRRA’s new earned income definition for the earned income credit. 

2. Definition of Qualifying Child. Unify the definition of qualifying child for the dependency exemption, Head of Household filing status, and applicable credits. 

3. AMT. Repeal or reform the alternative minimum tax (AMT). 

Education Issues 

4. Education Credits. Combine the HOPE and Lifetime Learning credits. 

5. Qualified Education Expenses. Unify multiple definitions of qualified education 

expenses. 

6. Savings Bond Interest. Simplify the treatment of savings bond interest used for 

higher education. Eliminate the modifications to AGI for purposes of calculating 

the exclusion of U.S. savings bond interest. 

Investments and Retirement Savings 

7. Long-term Capital Gains. Replace various capital gain tax rates with a capital 

gain deduction. 

8. Early Withdrawal Penalties. Unify penalties for early withdrawals from IRAs 

and employer retirement plans. 

9. Required Minimum Distributions. Eliminate the minimum distribution requirements for IRAs and employer retirement plans. 

10. Deductible IRA Contributions. Eliminate income phaseouts that restrict the 

1. Modify Definition of Earned Income for the Child Care Credit 

number of taxpayers who can make deductible contributions to an IRA.

H&R BLOCK’S 2002 TAX LAW SIMPLIFICATION PROPOSALS 

f Proposal: Conform the definition of earned income for purposes of calculating the 

dependent care credit to the definition of earned income for the EITC as changed 

by EGTRRA.

Current Law: Earned income is a test for the child care credit, refundable child 

tax credit, and the earned income credit. EGTRRA changed the definition for the 

earned income credit (which is also used for the refundable child credit), but it did 

not change the definition in the dependent care credit. 

Prior to 2002, the definitions of earned income for the EITC and dependent care 

credit are essentially the same. In EGTRRA, Congress addressed the complexity and 

compliance issues surrounding the add-back of nontaxable earned income items for 

purposes of calculating the earned income tax credit. As a result, beginning in 2002, 

the definition of an employee’s earned income will include only taxable wages. 

The dependent care credit is calculated on the lesser of (1) the taxpayer’s earned 

income, or (2) the spouse’s earned income for MFJ filers, or (3) qualified expenses, 

limited to $2,400 for one child or $4,800 for two children. No credit is allowed for 

more than two dependent children.

Benefits: The simplification impact of this change is enormous. Eliminating the 

need to consider nontaxable employee compensation for purposes of calculating the 

child tax credit would relieve taxpayers of the burden of obtaining information that 

often is not reported on W–2s. Given the low threshold for qualified expenses and 

the fact that the credit is nonrefundable, it is unlikely that the simplified calculation will result in much, if any, change in the amount of dependent care credit that 

is claimed. 

2. Simplify the Definition of a Qualifying Child 

Proposal: Conform age, relationship, and member of household tests for all definitions of qualifying child.

78

2 Joint Committee on Taxation, General Explanation of the Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (JCS–38–83), December 31, 1982, at 17–18. 

Current Law: Five commonly used provisions benefit taxpayers with children, 

but each has its own definition of qualifying child:

• The dependency exemption. • The child tax credit. • The earned income credit. • The dependent care credit. • Head of household filing status.

The JCT staff recommended a uniform definition of qualifying child that would 

eliminate several tests such as the joint return test and the gross income test that 

appear in only one or two definitions of qualifying child. The JCT staff recommends 

that any child below a specified age that has a specified relationship to the taxpayer 

and lives with the taxpayer more than one half of the taxable year is a qualifying 

child for each of these five benefits.

Benefits: A common definition of qualifying child would greatly simplify the application. Some variations may still be required. 

3. Repeal or Reform the AMT 

Proposal: Repeal the alternative minimum tax or reform it by increasing the exemption amount and simplifying the rules.

Current Law: The minimum tax—a separate, alternative tax system within the 

income tax code—is a major source of complexity. The current version was designed 

to ensure that ‘‘no taxpayer with substantial economic income should be able to 

avoid all tax liability by using exclusions, deductions and credits.’’ 2 The AMT is imposed to the extent that a taxpayer’s tentative minimum tax exceeds his or her regular tax liability. AMT income is the taxpayer’s taxable income increased by certain 

preference items and adjusted for certain items (such as accelerated depreciation 

and incentive stock options) that have the effect of deferring taxation under the regular tax rules. The tentative minimum tax is computed using the amount of alternative minimum taxable income in excess of a phased-out exemption amount. 

One problem that has caused a great deal of concern in the last year is taxation 

of unrealized gains associated with incentive stock options. Although these gains are 

exactly the kinds of ‘‘substantial economic gains’’ the current AMT regime is intended to tax, many taxpayers suffered unintended hardships because they were unable to convert their paper economic gains into realized gains.

Benefits: Repeal of the individual AMT system would remove a major source of 

complexity but be very costly. Increasing the exemption amount, indexing it for inflation, simplifying the rules, and allowing personal credits to offset regular tax liability would eliminate some of the problems associated with the current system—

complex calculations, definitional problems, unintended results, and a perception 

that the system is both unfair and irrational—while minimizing revenue loss and 

maintaining the goal of ensuring that taxpayers with substantial economic income 

incur some tax liability. Some modification is needed to halt expected sharp increases in the number of affected taxpayers over the next decade. 

4. Combine the HOPE and Lifetime Learning Credits 

Proposal: Combine the HOPE credit and Lifetime Learning credit into one education credit. The new credit would be 20% of qualified educational expenses. The 

maximum credit would be $2,000 per-student beginning in 2003. The definition of 

eligible student would be the current definition under the Lifetime Learning credit.

Current Law: The HOPE Credit is a nonrefundable credit against Federal income taxes. The maximum credit amount is $1,500 per-student, representing 100% 

of the first $1,000 of qualified tuition and related expenses and 50% of the next 

$1,000 of qualified expenses. The credit is phased-out for modified adjusted gross 

incomes above $40,000 ($80,000 for joint returns). The credit is available for two 

taxable years, provided that the student has not completed the first two years of 

post-secondary education before the beginning of the second taxable year. The student must be enrolled at least half-time in a degree, certificate, or other program 

leading to a recognized educational credential at an eligible educational institution. 

The Lifetime Learning credit is also a nonrefundable credit but it varies in several 

ways from the HOPE credit. The Lifetime Learning credit is equal to 20% of qualified tuition and related expenses. The maximum credit is $1,000 per return ($2,000 

for expenses paid after Dec. 31, 2002). The educational expenses must be paid to 

an eligible educational institution. The Lifetime Learning credit is not based on a 

79

student’s workload and there is no limit as to the number of years for which the 

credit can be taken. The credit is phased-out over the same range as the HOPE 

credit. The HOPE and Lifetime Learning credits cannot be taken in the same year 

for the same student.

Benefits: The education credits serve similar purposes, but they apply different 

percentages to different base amounts. The HOPE credit can be taken for no more 

than two years. In addition, the HOPE credit is available on a per-student basis and 

the Lifetime Learning credit on a per-return basis. Currently, a student eligible for 

the HOPE credit will always receive a larger credit under the HOPE provisions. 

However, because the HOPE credit may only be claimed for two years, taxpayers 

must often make a choice whether to claim the credit for the first year (which often 

includes only one semester of expenses) or wait and take the credit for the following 

two years. After 2002, when the amount of qualifying expenses for the Lifetime 

Learning credit increases to $10,000, many families will need to calculate both credits to determine which is more advantageous. Combining the credits will eliminate 

all of these issues. Families with two or more qualifying students could benefit substantially. 

5. Establish a Single Definition for Qualified Education Expenses 

Proposal: Adopt a uniform definition of qualified higher education expenses for 

all education incentives. The uniform definition would include expenses for tuition, 

books, fees, supplies, and equipment required for enrollment or attendance. It would 

not include expenses with respect to any course or other education relating to 

sports, games, or hobbies other than as part of a degree program.

Current Law: Several provisions of the Internal Revenue Code refer to ‘‘higher 

education expenses.’’ These provisions include the HOPE and Lifetime Learning 

credits, Coverdell education savings accounts, qualified tuition programs, the exclusion from income for interest on EE bonds, the student loan interest deduction, and 

the exception to the early withdrawal penalty for distributions from IRAs. Most of 

these provisions provide a definition of higher education expenses unique to that 

provision.

Benefits: Establishing a single definition for qualified education expenses reduces 

confusion because taxpayers will no longer have to decipher differences in the tax 

treatment of various expenses. Eliminating multiple definitions reduces the possibility of inadvertent errors by taxpayers and tax professionals. 

6. Simplify Calculation of U.S. Savings Bond Interest Used to Finance 

Higher Education 

Proposal: Simplify the treatment of savings bond interest used for higher education by using adjusted gross income (AGI) rather than modified AGI to calculate 

the exclusion of U.S. savings bond interest.

Current Law: Interest earned on qualified U.S. Series EE and Series I savings 

bonds issued after 1989 is excludable from gross income if the proceeds of the bonds 

do not exceed qualified higher education expenses paid by the taxpayer during the 

taxable year. The exclusion is phased out based on modified adjusted gross income. 

The phaseout range is adjusted annually for inflation. The exclusion is available 

only with respect to savings bonds issued to taxpayers who are at least 24 years 

old. A 14-line form is required to determine the income limitations. Instructions for 

the form include a worksheet for determining modified adjusted gross income. This 

calculation involves modifying total income (all gross income except taxable interest) 

and modifying adjustments to income (all adjustments except the deduction for student loan interest).

Benefits: The proposal eliminates two worksheets which have little effect on the 

exclusion and streamlines the phaseout calculation. 

7. Simplify the Treatment of Capital Gains 

Proposal: In place of multiple capital gains rates, use regular income tax rates 

with a deduction to reduce the effective tax rate on capital gains.

Current Law: In 2001, long-term capital gains may be taxed at a maximum rate 

of 8, 10, 20, 25, or 28% depending on the holding period and the type of investment. 

A taxpayer could have gains on a single year’s return taxed at several of these rates. 

In addition, an 18% rate will be available in 2006.

Benefits: Calculation of the tax on capital gains required 36 lines on the tax year 

2000 Schedule D. As a result of the addition of the 8% rate for tax year 2001, the 

IRS has moved several pieces of the calculation to separate worksheets. Thus, the 

tax calculation on the 2001 Schedule D requires only 22 lines, but several additional 

worksheets may be required. If the various capital gains rates are replaced with a 

80

3 Joint Committee on Taxation, Study of the Overall State of the Federal Tax System and Recommendations for Simplification, Pursuant to Section 8022(3)(B) of the Internal Revenue Code 

of 1986 (JCS–3–01), April 2001, Volume 2, Section III.C.7.(a). 

capital gains deduction, Schedule D will be much shorter. A capital gains deduction 

would simplify the foreign tax credit calculation. 

8. Unify Penalties for Early Retirement Plan Distributions 

Proposal: Unify penalties for early withdrawals from IRAs and employer retirement plans.

Current Law: Taxable distributions from IRAs and from qualified retirement 

plans made before age 591⁄2 are subject to an additional 10% tax unless they qualify 

for an exception. Some exceptions, such as distributions on account of death or disability, apply to all tax-favored retirement plans. However, the exceptions for distributions for higher education expenses and for first-time homebuyers apply only 

to IRAs. The exception for distributions made after separation from service after age 

55 applies only to pension plans.

Benefits: Eliminates a source of confusion and frustration which traps unwary 

taxpayers. For example, if an individual retires under a qualified retirement plan 

at age 55, distributions from that plan are not subject to the early withdrawal penalty. If that individual rolls his money into an IRA and then begins taking distributions before age 591⁄2, the distributions are subject to an early withdrawal penalty 

(unless another exception applies). 

9. Eliminate Minimum Distribution Requirements from Retirement Plans 

Proposal: Eliminate required minimum distributions from IRAs or qualified retirement plans during the lifetime of the recipient.

Current Law: Distributions from IRAs (other than a Roth IRA) must begin no 

later than April 1 of the year following the calendar year in which the IRA owner 

reaches 701⁄2. Similar rules apply to qualified retirement plans, tax-sheltered annuities, and Section 457 plans. A penalty of 50% of the required distribution is imposed for failure to take a required distribution. IRS is allowed to rebate the penalty 

in certain situations.

Benefits: The minimum distribution rules are extremely complicated. The JCT 

staff recommended additional changes designed to simplify these rules.3 We support 

these recommendations. However, our recommendation addresses the most significant trap for the unwary. 

10. Eliminate Phaseouts for Deductible IRA Contributions 

Proposal: Remove income limitations for contributions to IRAs.

Current Law: The allowable deduction for contributions to an IRA is not limited 

by income for unmarried individuals who are not ‘‘active participants’’ in a qualified 

retirement plan. The allowable deduction for unmarried individuals who are active 

participants is phased out based on modified AGI. Deductions for married individuals who are not active participants and whose spouses are not active participants 

are not limited by income. However, if either spouse is an active participant, income 

limitations apply. Different income limitations apply depending on filing status and 

which spouse is an active participant.

Benefits: The rules are extremely complex. The definition of active participant 

can be confusing. Many taxpayers find the rules to be arbitrary and unreasonable. 

Repeal of the income phaseouts should improve compliance and reduce taxpayer 

Harris. 

frustration. We do not have a revenue estimate for the proposal.

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

f STATEMENT OF ROGER HARRIS, EA, PRESIDENT, PADGETT 

BUSINESS SERVICES, ATHENS, GEORGIA, AND CHAIR, LEGISLATIVE AFFAIRS SUBCOMMITTEE, NATIONAL ASSOCIATION 

OF ENROLLED AGENTS, GAITHERSBURG, MARYLAND 

Mr. HARRIS. Good afternoon, Mr. Chairman. Thank you for the 

opportunity to be here. On behalf of the National Association of EnVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00084 Fmt 6633 Sfmt 6602 E:\HR\OC\B436.XXX pfrm17 PsN: B436
81

rolled Agents and its 10,000 members, it is a pleasure to be here 

to talk about the filing season and the upcoming budget. 

I guess the good news is for the most part we would say the filing season has gone well. A couple of observations we have seen 

is that taxpayers are coming in earlier, and also coming in in increasing numbers. I think the people who are coming in early probably are a reflection of the economy and their desire to get their 

refunds back sooner. 

I think the fact that our business is growing is a signal that complexity is still very much an enemy of the average taxpayer, and 

as long as they are uncomfortable preparing their own return they 

are going to seek out professional help. 

I think the IRS has done a good job in what could have been 

some difficult circumstances this filing season. We have had a lot 

of talk about the rebate checks. I think the IRS did a good job in 

anticipating that taxpayers, when they receive their check, would 

take it and spend it and not remember how much it was for, or 

keep the letter that came with it. Anticipation of that the IRS set 

up a toll-free number that has worked extremely well to verify taxpayers rebate amounts. 

Also, we have heard a lot about the stimulus bill and the retroactive changes that it created. I think the IRS reacted as well to 

that situation as we could have expected, given the impact that it 

had. I think we will not know for a while what the real impact on 

the filing season will be. I know there is going to be a tremendous 

amount of amended returns that are going to have to be filed. I 

know I talked to one gentleman whose office alone is going to have 

to review 9,000 returns to see how many of them have to be 

amended, that many returns had already been filed prior to the 

passing of the bill. So the true cost of that we will find out in the 

coming months. 

A couple of specific things. Electronic filing—— Chairman HOUGHTON. Could I interrupt a minute? I may be 

misreading what you are saying. Are you saying that a wave of 

complications are coming in because of the rebates and a variety 

of things this past year which may further complicate what the IRS 

is doing? 

Mr. HARRIS. Well, I am speaking more specifically of the stimulus bill that had some retroactive provisions this year that people 

had already filed, had gone and filed early and now are faced with 

amending to comply with the benefits of the new law. Most of the 

people, obviously, will be better off in terms of their taxes, but 

there will be an offset cost of amending returns. 

A couple of other things on electronic filing. Again, I think we 

are seeing an increase in electronic filing. I think the system is far 

from perfect. The self-selected PIN and the elimination of the signature has gone a long way to helping the system. I would hope 

that we will continue to look for ways in the future to work together, the IRS, practitioners, and Congress, to find ways to reach 

the 80 percent goal. 

As I think the Commissioner said earlier, at the current rate of 

increase, we are not going to make the 80-percent goal. So I think 

we are going to have to look for things that will help us in that 

area. The extension to April 30, and let me caution you first, make 

82

sure all States are going to honor that or this will have no effect, 

because as a practitioner or taxpayer if I have to file by April 15 

through my State I am not probably going to wait 2 weeks to file 

my Federal return. So I hope there is a recognition we need to get 

the States on board here if we want this to have a significant impact. 

And I think it will have an impact, because it will make a practitioner who does not file electronically noncompetitive the last 2 

weeks of the filing system. So I think it may have a surprising effect. 

In reading the other members of my panel’s testimony, and hearing them, I found the complaints were pretty universal in all of our 

testimonies. We all had concerns about the inability to get a Federal ID number, an EIN number, and we had concerns about practitioner hotlines. So I think there are things there that we all agree 

have some issue that needs to be dealt with. 

I think the heart and soul of what we hear about is the future 

and the issue of balancing service and compliance, and I think 

what we all want to see is the pendulum stop swinging, where we 

see compliance getting a lot of emphasis 1 year and the next year 

it is service. We want to have a steady pattern of going forward 

where the IRS is doing their two roles, which is service and compliance, and I think, obviously, that requires an improvement in technology and it requires better staff and training. I would hope we 

could focus more on technology and less on people. People are just 

a very inefficient way to go out and build compliance in the Tax 

Code. 

The interesting discussion I heard today, and I don’t have a lot 

of time left but I would certainly be willing to answer any questions, in my role as a member of the IRS Advisory Council we have 

looked at this K–1 matching program very closely. And while I 

think there is a tremendous opportunity here to catch a lot of unreported income, there is an equal opportunity to embarrass the 

Service if it is not done properly, and I would certainly be willing 

to share my concerns in that area at a later date. 

I could not continue my opening comments without joining all 

the Members of this Committee that have praised Commissioner 

Rossotti’s 5-year term. I think we have seen remarkable change in 

that 5 years, and I think the Service has come a long way. It is 

unfortunate we cannot convince him to stay another 5 years, but 

I hope we can bring someone in with his vision and his understanding of what a good tax administration system should look 

like, because it can be very easily turned back around if we do not 

bring in someone like Commissioner Rossotti. 

So I thank you for the opportunity to be here, and I look forward 

to any questions you might have. 

[The prepared statement of Mr. Harris follows:]

Statement of Roger Harris, EA, President, Padgett Business Services, Athens, Georgia, and Chair, Legislative Affairs Subcommittee, National Association of Enrolled Agents, Gaithersburg, Maryland 

Mr. Chairman and Members of the Oversight Subcommittee, I am honored to 

present this testimony on behalf of the National Association of Enrolled Agents 

(NAEA), which is the professional society of Enrolled Agents. 

83

I am Roger Harris, president of Padgett Business Services, a nationwide organization providing tax and accounting services to small business and self employed taxpayers. I am enrolled to practice before the Internal Revenue Service (IRS) and 

chair NAEA’s Legislative Affairs Subcommittee. The Association’s 10,000 members 

are tax professionals licensed by the U.S. Department of the Treasury to represent 

taxpayers before all administrative levels of the IRS. 

Enrolled Agents were created in 1884 to ensure the ethical and professional representation of claims brought to the Treasury Department. Members of NAEA ascribe to a Code of Ethics and Rules of Professional Conduct and adhere to annual 

continuing professional education standards that exceed IRS requirements for them. 

Like attorneys and certified public accountants, we are governed by Treasury Department Circular Number 230 in our practice before the IRS. We are the only tax 

professionals who are tested by the IRS on our knowledge of tax law and procedure. 

Each year we collectively work with millions of individual and small business taxpayers. Consequently, Enrolled Agents are uniquely positioned to observe and comment on the average American taxpayer’s experience within our system of tax administration. 

As our members are on the front lines of tax administration, we are pleased to 

share with you the views of these practitioners. 

Tax Filing Season Readiness 

It appeared to many of our members that the filing season started earlier than 

usual this year. Under normal circumstances, we don’t see people until the last 

week of January. This year, however, taxpayers showed up around the middle of 

January, two weeks earlier than normal. 

We believe that there may be several factors contributing to this phenomenon. 

First, the downturn in the economy left some jobless taxpayers coming in early to 

collect any refunds they were due. Secondly, there is widespread use of electronically generated W–2s, so taxpayers were getting them earlier from their employers. 

Finally, we are seeing more promotion of the benefits of e-filing by the IRS, as well 

as by commercial return preparer firms, which has had the salutary effect of encouraging taxpayers to file early. 

Overall, the tax season has run smoothly. However, we are seeing more clients 

than ever before. Some of this may be attributed to a gradual rise in consumer confidence and a resulting willingness to spend money on return preparation. Perhaps 

of greater significance is that such willingness is predicated on the fact that more 

and more taxpayers are opting to leave return preparation to the professionals because continued tax law complexity makes it difficult for them to prepare their tax 

returns with confidence. 

Certainly the scaled back economic stimulus package signed into law on March 

9 with retroactive provisions did little to lessen the perception that the tax laws appear too complicated for average taxpayers to figure out. Many of our members had 

already filed the returns of taxpayers who were affected by these changes. Although 

the retroactive provisions were beneficial and well intended, they will result in more 

amended returns, an additional compliance burden on taxpayers and practitioners. 

Another factor is that taxpayers want to be sure they benefit on their tax returns 

from last year’s rebate program, and seem uncomfortable in doing it on their own. 

We commend the IRS for its quick response in providing guidance and revised tax 

forms to deal with the stimulus package provisions. We believe the IRS acted as 

quickly and professionally as possible. Its actions mitigated the uncertainty facing 

many taxpayers and practitioners. 

The IRS also should be commended for the proactive measure it took in providing 

taxpayers information about their rebates. Anticipating that many taxpayers would 

not keep or perhaps misplace the paperwork that accompanied the rebates, the IRS 

established a toll-free number for them to obtain the needed information. Such customer service has been very helpful to taxpayers and their practitioners. 

The Continued Impact of Modernization 

We now are well into the modernization and reorganization of the IRS. The pace 

of change has picked up considerably. Most of the changes instituted were needed 

and commendable. We believe Congressional confidence in the allocation of budget 

resources to the IRS has been warranted. The following are a few examples of good 

forward progress.

• This tax season, for the first time, it is possible to file virtually every tax form 

electronically. This has made it possible for many more practitioners to take advantage of the convenience and efficiency of this modern method of filing taxes. 

We hope that it will accelerate the Congressional target of 80% of tax returns 

filed electronically by 2007. This goal, of course, cannot be reached without adVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00087 Fmt 6633 Sfmt 6621 E:\HR\OC\B436.XXX pfrm17 PsN: B436
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ditional attractions for practitioners and taxpayers to consider e-filing their expectation in filing returns. • At the beginning of the tax season, many of our members were using or planned 

to use the PIN or self-selected Personal Identification Number with clients 

whose returns they e-filed. A typical, enthusiastic response from NAEA’s Member Only message board read, ‘‘PINS are neat!’’ and then continued to praise 

the efficiency of the system. 

Last year when we spoke to you, we noted that as taxpayers and tax practitioners became increasingly familiar with the PIN program, it would be more 

acceptable in future filing seasons. This indeed seems to be happening. It now 

is a matter of reaching a suitable comfort level with this new approach. • Centralization of practitioner hotlines in a practitioner priority service system, 

centralization of the ability to obtain Employer Identification Numbers and centralization of the Power of Attorney function have been started. These initiatives suggest improvements long sought by the practitioner community and 

have the potential of success. For reasons stated later in this statement, there 

are concerns that must be overcome before this can be a reality. • The IRS Web site has been redesigned to make information more readily available to taxpayers and practitioners. Web pages designed to assist specific 

groups of taxpayers, such as the small business community, have been thoughtfully designed to be user-friendly and provide essential information.

There also have been disappointments.

• More than 250 NAEA members have been working with the IRS on a pilot Private Secure Messaging System. We were just informed by the IRS Electronic 

Tax Administration that due to a $120 million budget crisis, the pilot program 

will be discontinued after the filing season. 

It has long been the desire of practitioners to be able to communicate electronically with the IRS. This would be made possible by the Private Secure 

Messaging System. We view this is as an important incentive to bring more 

practitioners into e-filing tax returns. The more comfortable practitioners are in 

dealing with the IRS electronically, the more convenient it will be for them to 

e-file. We are, however, optimistic that what was learned in the pilot program 

will be carried forward into a permanent program. However, due to budget uncertainties, we cannot be assured that this program will be available next filing 

season. So we wonder, will the lessons learned in the pilot program be forgotten, laid on a shelf somewhere to gather dust? • The IRS Web site redesign set to launch on January 2 was delayed. Unfortunately, the launch came later after the tax season had begun in earnest. Practitioners who had bookmarked specific sites found their electronic bookmarks useless. NAEA received scores of complaints from our members who rely upon the 

IRS Web site as a tool during their daily work with taxpayers. 

Strategic Planning Issues 

NAEA believes that strategic planning for fulfilling the IRS mission revolves 

around two important considerations. One is to be taxpayer friendly by providing 

the best customer service to taxpayers and practitioners that money can buy. The 

second concerns compliance. Collecting the correct amount of taxes from non-compliant taxpayers impacts not only the fairness of our tax system, but its very survival. 

Appropriate funding to make that happen is critical. 

We commend IRS employees who, following the restructuring legislation, have experienced a tremendous cultural change and have weathered it well. Many consider 

customer service to be at the forefront in this regard. When an IRS employee may 

not know the answer to a question, he or she typically will go the extra mile to assist in finding someone who can provide the correct answer. Human resources and 

technology are key to making this a continued reality. 

Change is going to be part of the IRS landscape for many years to come. This simply is because the reorganization cannot be accomplished at the snap of the fingers, 

even though we wish that it could.

Customer Service Matters

For the IRS, there is a major challenge: how to go about implementing customer 

service changes. For example, the practitioner priority service (formerly the practitioner hot line)—involving toll-free lines and other accoutrements—was a longawaited improvement in service. However, the implementation has been anything 

but smooth. 

Our members report that local practitioner hotlines that were supposed to be 

staffed for several more months during the transition are barely functioning beVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00088 Fmt 6633 Sfmt 6621 E:\HR\OC\B436.XXX pfrm17 PsN: B436
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cause, in part, employees, concerned that they will lose their jobs, find others within 

the organization and depart. The rollout across the country was a thoughtful, pragmatic approach, but it was timed to coincide with the filing season. This was not 

a good idea. Practitioners don’t know where to call—the national number or the 

local number. When a correct number is reached, it was and continues to be apparent that assistors are not properly trained. We want you to know that this type of 

transition during high-stress tax season is not helpful to the practitioner community. 

NAEA supports an efficient and effective centralization of the service for obtaining 

needed Employer Identification Numbers (EINs). In our view, this has not happened. This in part is due to the toll-free lines having been overwhelmed from the 

start. 

By way of background, the EIN system was shutdown from close of business December 21 until January 2 in order to accommodate essential upgrades. When the 

site reopened on January 2, callers quickly log jammed it. Some practitioners needed EINS to set up trusts or to accommodate year-end tax situations. Its unavailability until after long delays has not been a good thing. 

Seldom have we received the torrent of complaints that we received on the implementation of this particular service. The sustained level of demand for EINs surprised even the IRS. 

We believe two things happened. First, the shutdown in late December meant 

that those who desperately needed EINs in order to carry out year-end transactions 

were more desperate by January 2. Second, the information was available on the 

Web site, far beyond the reaches of just the practitioner community. Everyone saw 

it and more people than expected acted upon this information. 

While the IRS did train and deploy additional staff as quickly as possible, it took 

several weeks to stabilize the service. Practitioners who faxed requests were advised 

to wait two to three weeks for replies. This was difficult for practitioners, faced with 

urgent deadlines, particularly during the stress of tax season. 

On the other hand, we would like to thank IRS staff in the Office of Public Liaison and in SB/SE TEC who responded with a quick fix so those urgently needing 

EINs could be accommodated. Basically, they recommended that the words ‘‘EIN 

Applied For’’ be printed on the top of time-sensitive documents. This common sense 

approach alleviated a great deal of concern for many practitioners faced with absolute deadlines and who had no way to obtain an EIN. 

Hand in hand with the implementation of wide-ranging changes goes training of 

employees. As mentioned earlier, we have been impressed with the cultural shift toward customer service achieved by the IRS. However, the training of personnel to 

implement IRS initiatives and making proper tools available to them are voids in 

the proper functioning of the ‘‘new’’ IRS. Many employees have asked our members 

to explain to them what is going on, have not had access to up-to-date materials, 

and have not understood what they are supposed to do. In some instances, under 

the new practitioner priority service, practitioners have asked to be forwarded to the 

Automated Collection Service. In numerous cases, customer service representatives 

do not know how to do this.

Compliance Matters

As indicated above, collecting the correct amount of taxes owed is important beyond measure to the fairness of our tax system and perhaps its survival. Obviously 

all customer service initiatives focus on that objective. However, there also must be 

compliance initiatives in place. 

Without compliance initiatives, NAEA is concerned that there will be an increased 

lack of compliance. The fact there have been diminished compliance programs in recent years, such as audits, have not gone unnoticed by practitioners and taxpayers. 

It perhaps is beyond conjecture that returns are filed without expectation of review 

and enforcement. This leads to ‘‘sloppy’’ returns and ones taking aggressive positions 

that cannot be supported. In short, it might be said that there no longer is a ‘‘fear’’ of being audited. 

It is in the best interests of our tax system to establish initiatives in the compliance arena. It is our hope that these initiatives would not dwell on compliance 

measures in which taxpayers are directly involved. However, technology must be 

such to accommodate an objective of this nature. In addition, adequate numbers of 

IRS personnel and their training are key to success. 

NAEA acknowledges that establishing indicators and measures are important to 

compliance programs. We await with some trepidation the National Research Program (NRP), the successor to the TCMP audits. Again, well-trained IRS personnel 

will make all the difference in whether this is an incidental exercise or whether it 

becomes the focus of much anger and frustration. Although reportedly only 2,000 

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taxpayers will be subject to a line-by-line audit, some 30,000 others will find themselves in either a correspondence audit or an office audit for some portion of their 

tax returns. While the IRS has made great strides in its ability to interact with taxpayers and practitioners, the NRP may be a real challenge to such strides. 

We wish to note the forward progress made by the IRS Criminal Investigation 

(CI) unit. Our membership has been concerned about the impact of tax cheats on 

our tax system. The improvements to the CI Web site and training examination specialists to look for cases that can be referred to CI for appropriate action are positive 

steps forward in compliance efforts. CI’s outreach to the public and dealing with IRS 

personnel further the goals of sound tax administration. We encourage similar efforts be made with respect to civil tax compliance measures. 

The Impact of Tax Complexity on IRS Employees and Taxpayers 

Again, it is clear to NAEA that having sufficient staff who are well trained and 

with the proper tools to perform their jobs are integral components of sound tax administration. Further, they are key elements to successful implementation of the restructured IRS initiatives. NAEA urges your support in making this happen. 

However, we also believe that tax law complexity is an area that requires your 

attention as it affects both taxpayers and IRS employees. We respectfully urge you 

to press for simplification of the tax code. 

As the National Commission on Restructuring the IRS found, there is a clear connection between the complexity of the Internal Revenue Code and the difficulty of 

tax law administration and taxpayer frustration. Clearly, how the public perceives 

how well the agency is doing its job is tied directly to the level of frustration taxpayers have with the constantly changing tax code. 

As frontline practitioners, NAEA believes Congress could provide significant relief 

and make the job of IRS employees more manageable by making immediate changes 

in three areas. First, Congress needs to repeal (preferably) or to modify the alternative minimum tax (AMT) for individuals. Second, it needs to simplify the rules 

for qualifying for the Earned Income Tax Credit. Third, phase-outs and phase-ins 

need to be standardized. 

These changes would provide significant relief to taxpayers as well as allow the 

IRS to free up resources within the agency for other purposes. Without them, customer service and compliance programs are more important than ever. 

Conclusion 

NAEA believes that the IRS has made good forward progress and, with your help, 

can make even more. It is a tribute to Commissioner Rossotti’s vision and leadership that the changes to the IRS have come about. We are aware that his five-year 

commitment is drawing to a close. If he chooses not to remain at the IRS, we hope 

his successor shares his vision and perpetuates its implementation. Whatever Commissioner Rossotti’s decision might be, NAEA wishes him well. We consider him a 

person dedicated to taxpayers and the tax system, and a friend to tax practitioners. 

Mr. Chairman and Members of the Subcommittee, I am pleased to have shared 

with you the views of NAEA members regarding the filing season and the IRS budget. If I may answer your questions or provide you with any additional information, 

I am happy to do so. 

STATEMENT OF WILLIAM STEVENSON, PRESIDENT, NATIONAL 

Thank you.

Chairman HOUGHTON. Thanks, Mr. Harris. Dr. Stevenson. 

f TAX CONSULTANTS, MERRICK, NEW YORK, AND CHAIRMAN, 

FEDERAL TAXATION AREA, RIGHT TO PRACTICE COMMITTEE, NATIONAL SOCIETY OF ACCOUNTANTS, ALEXANDRIA, 

VIRGINIA 

Mr. STEVENSON. Thank you, Chairman Houghton. My name is 

Bill Stevenson. I represent the National—— Chairman HOUGHTON. Could I just interrupt a minute? Mr. 

Ernst, I understand you have to go, and that Mr. Weinberger is 

going to sit in in your seat. 

Mr. ERNST. If that is okay with you. 

87

Chairman HOUGHTON. Do you have full trust and confidence in 

Mr. Weinberger? 

Mr. ERNST. I have mostly full trust and confidence. 

Chairman HOUGHTON. We appreciate very much your being with 

us. You can go at any time. Mr. Weinberger, we are delighted to 

have you with us. Sorry, Mr. Stevenson. 

Mr. STEVENSON. I am representing the National Society of Accountants and its 30,000 members and affiliates. We are the professional preparers of people’s taxes, and not only their individual 

taxes but their businesses as well. 

The first time I appeared before you was March 24, 1995. I have 

the videotape. I deviated for a moment, as I am going to do now, 

and ask the Committee to address two issues. One of the issues 

was to figure out some way of providing more oversight to the Internal Revenue Service. While my remarks were more prophetic 

than they were influential, history has shown you have done this 

and I think we are a better Nation for it. 

The second issue I asked you to address was the offer-in-compromise program, and we went a long way in trying to straighten 

it out during the Commissioner’s restructuring the IRS, and there 

was some direction in the history of the Committee reports. But I 

must say I was disappointed when I found out that some provisions 

were stripped from your legislation that is going to go to the floor 

tomorrow. I will tell you that we are working with the Senate and, 

hopefully, we will get some of these provisions back in and you will 

have time to revisit that issue. It is a very serious matter. 

But let us get to the shocking story of electronic filing. Our firm 

is fully committed to it. My partner and I process approximately 

800 tax returns one at a time, one person at a time, and this year 

we have fully committed to the program. Ten years ago, the National Society of Accountants asked me to take a look at the electronic filing program and then, with the IRS’ invitation as a stakeholder group, to tell them what our thoughts were. So I took it very 

seriously and I produced a 3-year horizontal case study using a microcosm of 50 tax preparing organizations of large and small practitioners, and I personally processed several hundred tax returns 

myself electronically. 

I met with the IRS every 6 months for 3 years and I presented 

to them what they needed to do to get the practitioner community 

on board with electronic filing. In spite of the fact that they invited 

us to provide them with feedback, not only did they pretty much 

ignore our remarks but they came out with a more restrictive program, and the history will show there are 1 or 2 years where electronic filing instead of going up went down. 

During that period of time, the professional practitioner community took electronic filing off of our radar screen, and we kept it off. 

And that is why the Commissioner said today if we file tax returns 

between April 15 and April 30 we will get more of the big returns 

in. These are the returns that we do. And the only reason that we 

electronically file is not because our clients have asked us to do it, 

it is because we have told them we are going to do it. 

So after 9–11, our organization stepped up to the plate and told 

our membership that, look, this is a tough program to get started 

in, but it is an inconvenience of honor and this is something we can 

88

do to help this Nation defeat some potential terrorist problem. So 

we stepped up to the plate. My firm has prepared 99.9 percent of 

its returns electronically. 

Now I am at the other end of tax season, and I am telling you 

the problem in getting the practitioner community aboard is that 

it takes a lot of extra time. I figured it took my partner and me 

150 extra hours to produce 600 tax returns in a 91⁄2 week period. 

The amount of input that individuals like me have to put into providing an electronic package is very heavy in the first year. And 

if the IRS wants to sell this program, they have to reduce that burden and they have to explain to practitioners that this is a new 

way of doing business. It is not easy. 

It is kind of odd that the National Commission to Restructure 

the IRS sent a team of people, including a commissioner, to my office to learn about electronic filing. It is kind of odd that the Government Accounting Office is sending a team of people to learn 

about electronic filing before they present you with their final report. And it is kind of odd that the director of practice, who doesn’t 

know anything about computerization, has spent a couple of days 

in my office over the last 2 years to learn about the process, but 

not one person from the IRS responsible for writing the program 

has been there to see what the practitioner has to go through with 

it to process this. 

And my time is up. 

[The prepared statement of Mr. Stevenson follows:]

Statement of William Stevenson, President, National Tax Consultants, 

Merrick, New York, and Chairman, Federal Taxation Area, Right to Practice Committee, National Society of Accountants, Alexandria, Virginia 

Mr. Chairman, my name is William Stevenson, D.Ed, EA, CFP. Thank you for the 

opportunity to testify before the Committee today on the 2002 filing season and the 

IRS budget request for fiscal year 2003. I am the President of National Tax Consultants of Merrick, New York and the chairman of the Federal taxation area of the 

Right to Practice Committee of the National Society of Accountants (NSA). It is in 

my capacity as chairman of the NSA tax group that I appear before the Committee 

today. 

The NSA and its affiliated State organizations represent 30,000 accountants, tax 

practitioners, business advisors and financial planners providing services to over 19 

million individuals and small business. Most of our members are sole practitioners 

or partners in small to medium sized firms. NSA represents the accountants on 

Main Street, not those on Wall Street. NSA has not received any Federal grants or 

contracts for this fiscal year or for the preceding two fiscal years. 

In order to place NSA’s remarks in the proper context, we need to explain the 

distinction between the two basic types of tax preparers. Members of the first group 

usually see their walk-in customers once a year—to prepare their tax returns. Members of the second group are tax practitioners/accountants who provide continuing 

services to clients (return preparation, tax planning and IRS representation, and 

other services). NSA’s comments are from the perspective of the second group. 

E–FILING

NSA is committed to electronic filing and has called upon its members to become 

electronic return originators (EROs). In October 2001, NSA issued a Call to Arms 

to encourage the membership to embrace electronic filing and utilize the Electronic 

Federal Tax Payment System (EFTPS) to pay tax liabilities. NSA’s intent was to 

help reduce the risks posed by mail disruptions, lessen the need of the IRS to process paper documents and do our part in helping IRS reach its mandated goal that 

80% of all returns be electronically filed by 2007. 

As the Committee is aware, IRS is lagging behind in reaching this goal. NSA believes that part of the reason is that many tax practitioners have not jumped on 

the e-filing bandwagon. Why have more tax practitioners not committed to electronic filing? Some will not e-file unless it is mandated. Some may be near retireVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00092 Fmt 6633 Sfmt 6621 E:\HR\OC\B436.XXX pfrm17 PsN: B436
89

ment and do not wish to invest in new technology or change long-established business practices. NSA believes the primary reason is that the IRS has designed a system that is not user-friendly and, in fact, increases the workload (and cost) for tax 

practitioners in a business where time literally is money. 

Perhaps the experience of my firm can illustrate the problems. My firm made the 

commitment to e-file as many returns as possible this filing season. This entailed 

capital expenditures to upgrade computers and communications equipment and required that we re-think our entire practice and restructure it to accommodate the 

requirements of the e-filing environment. This we understood and accepted as a cost 

of doing business. 

As we began to prepare and file returns electronically, we quickly realized that 

the time needed to prepare a return had dramatically increased. For a practice such 

as mine that will prepare 800 returns this season, this translates into 200 to 275 

hours of additional work. This required time competes with many other immediate 

time-consuming tasks including the preparation of several hundred-business returns 

and handling IRS CP 2000 notices received by clients. One point should be made 

clear. The actual electronic filing of the return is simple and quick; it is the extra 

steps involved in preparing the return and post filing activities that consume the 

extra time. 

First of all, additional data entry is required to prepare the return. For example, 

on a paper return, the preparer transfers the dollar amounts from a W–2 and enters 

it on the appropriate line. On a return that will be filed electronically, all the data 

from the W–2 including not only data about the taxpayer but also employer data 

(such as name, address and EIN, among other data) must be entered into the computer. Multiple W–2s magnify the time factor. Similar activity occurs for a form 

1099–R. Why the IRS requires this additional information has never adequately explained. In effect, IRS has shifted its data entry process from the return processing 

centers to the practitioner’s office. 

When the preparer signs a paper return, generally the job is finished. This is not 

true with an e-filed return. We transmit the return, wait for acceptance by the IRS 

and the State. Once the acceptance is received we print out a letter notifying the 

client that the return has been received and accepted by the taxing authority. If for 

some reason the return is rejected, we have to investigate the cause and correct the 

return immediately and resubmit. In a paper environment, most of these problems 

would not be discovered until after the filing season and would be handled when 

time pressures are much less. 

The Treasury is advocating that the filing date for electronic returns be extended 

to April 30 and the Ways and Means Committee adopted such a provision in H.R. 

3991. This initiative will not solve the time problem. Tax returns not completed several days before the filing deadline go on extension anyway. This proposal does not 

extend the number of hours in the day early in the filing season. It will extend the 

time for people who already file late. This may be a benefit to the commercial preparers and individuals filing their own returns, but for the tax practitioner, it is of 

marginal value. 

The process to become and remain an ERO is not practitioner friendly. If one is 

not an Enrolled Agent, CPA or attorney, the application process requires a background check, including fingerprinting and a credit check. Preparers of paper returns are not subject to these requirements. Another burden imposed by the IRS 

is a program known as the Revenue Protection Strategy. Under this program, IRS 

will make unannounced visits to practitioner’s offices. The process, which can take 

several hours, involves interviews with the practitioner and staff and a review of 

documents. Having IRS agents appear in the office in the middle of filing season 

and flashing their badges in front of clients is an experience tax practitioners can 

do without. 

Electronic filing is the road of the future. How rough will the ride be? Until the 

IRS does a better job in making the system more practitioner-friendly, tax practitioners will be reluctant to accept this program. The IRS can do better. Not only 

must IRS improve its outreach to the practitioner community, it must listen and act 

on the advice that NSA and other groups are more than willing to provide. 

If a picture is worth a thousand words, than a hands-on demonstration is the 

equivalent of the Encyclopedia Britannica. I invite Members of the Committee and 

their staff to come to my office in New York and experience first-hand a live demonstration of electronic filing from the practitioner perspective. I guarantee it shall 

be an eye opening experience. 

FEIN DEBACLE

IRS implemented a new process for issuing Federal employer identification numbers (FEIN) in early 2002. This included the transfer of workload from ten camVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00093 Fmt 6633 Sfmt 6621 E:\HR\OC\B436.XXX pfrm17 PsN: B436
90

puses to three campuses. The result was a disaster with taxpayers and practitioners 

experiencing both difficulty in reaching the IRS and lengthy delays in receiving a 

FEIN. Sometimes taxpayers received more than one FEIN. 

Another problem we are experiencing in the field is inconsistent handling of the 

program by IRS staff. In many instances, practitioners were advised that a power 

of attorney (POA) needed to be on file before the IRS would speak to the practitioner. This was incorrect. Often, the IRS would refuse to fax a FEIN to the practitioner with a valid POA on file with IRS. Again, this was incorrect. The end result 

has been chaos and confusion in a program that once ran smoothly. 

In a recent letter to IRS Oversight Board Chairman Larry Levitan, Commissioner 

Rossotti stated that IRS is committed to maintaining a level of service at or above 

85%. We believe the 85% service level is unacceptable. The goal should be 100%. 

Obtaining a FEIN is a fundamental need for many businesses and the IRS should 

not fail in delivery of a basic service to taxpayers entering the system. Imagine an 

85% service level in obtaining a telephone number. A FEIN is a critical identification number and, among other purposes, is needed to open a bank account and 

apply for Subchapter S status. The IRS can and should do better. Dealing with this 

type of problem, particularly during filing season, burns up valuable time that could 

be better spent elsewhere. 

On a positive note, the IRS acknowledged they should have had more involvement 

with stakeholders in the planning and development of this initiative, and according 

to the Commissioner, the IRS is ‘‘. . . committed to greater stakeholder involvement 

in the development of future initiatives.’’ NSA hopes that this new attitude will 

carry over to the next Commissioner. 

RETROACTIVE TAX LAW CHANGES DURING FILING SEASON 

Another burden imposed on tax practitioners during filing season are tax bills 

that are enacted during the filing season that have provisions retroactive to the preceding tax year. The software companies scramble to modify their programs, the IRS 

scrambles to put out guidance and the practitioner is left in the lurch. Should returns in progress be filed under previous law and then corrected by filing an amended return? Should you delay processing affected returns until later in the filing season and hope for guidance? Also, previously filed returns must be identified and 

dealt with. 

The Job Creation and Worker Assistance Act of 2002 (H.R. 3090, PL 107–147) 

contain two such provisions: the bonus depreciation provision and the net operating 

loss carry back. We appreciate the concern and are grateful that Congress and the 

Administration acted to provide tax relief to workers and small business. Unfortunately the timing of this legislation has caused problems in the field and dealing 

with these changes consumes time that must be obtained from another activity. We 

ask that Congress carefully weigh the impact on tax administration when considering legislation that contains provisions with effective dates that affect the filing 

season. 

IRS BUDGET REQUEST 

NSA supports full funding for the IRS. Simply stated, certain initiatives like business systems modernization, taxpayer outreach and pre-filing education efforts must 

receive adequate funding—and receive rigorous oversight from this Committee and 

the IRS Oversight Board as part of the deal. We do take exception to the allocation 

of funds to the new National Research Program (NRP) compliance study that will 

go into high gear the fall of 2002. 

The IRS is championing the NRP audits because it says that the current audit 

selection system is yielding too many ‘‘no change’’ audits. It believes that the new 

data harvested from the audits of 50,000 randomly selected taxpayers will enhance 

the audit selection process and result in more productive audits. 

NSA believes that poor audit selection is a result of factors other than poor data. 

The IRS is selecting the nonproductive returns because either the wrong people are 

involved in the selection process or the staff has not been properly trained. Furthermore, management pressures auditors and Revenue Agents to find quick adjustments and close cases as they are measured on cycled time. In other words, there 

is little or no incentive to close cases with adjustments, but a great deal of incentive 

to simply close cases quickly. 

In recent years, the areas of review on a typical taxpayer’s return have become 

far fewer than in years past. Many deductions on the Schedule A (Itemized Deductions), one of the major battlefields, on which the IRS auditors wage their attack, 

have been either eliminated or minimized. For example, we can no longer deduct 

credit card interest or sales taxes. The deduction for medical expenses used to kick 

91

in at 3% of adjusted Gross Income (AGI); now it’s 71⁄2% of AGI for the regular tax 

and 10% for the Alternative Minimum Tax (AMT). 

The deduction for casualty and theft losses must exceed 10% of AGI plus $100. 

Previously, it was 100% of the loss less $100 with no AGI limitations. Not only must 

deductions for job related and investment expenses exceed 2% of AGI, but also, if 

they get too high, the alternative minimum tax (AMT) rears its uninvited head and 

robs the taxpayer of all subsequent deductions. 

Mortgage interest is reported to the IRS by banks and mortgage companies and 

matched with Social Security Numbers and has limitations that affect the wealthy. 

The untouched areas on the Schedule A are charitable deductions and real estate 

taxes. 

Losses that are generated from rental property begin to disappear for those with 

AGIs above $100,000 and completely disappear when the AGI exceeds $150,000. 

Furthermore, the AMT robs most taxpayers of income levels above $50,000 the benefit of a wide variety of credits: low income housing, research and so forth. 

Like mortgage interest, the IRS matches most 1099s and W–2s with taxpayers’

Social Security Numbers making it almost impossible to ‘‘get away with’’ omitting 

income that has been reported by a third party. It will take an initiative far greater 

in scope than the proposed NRP to identify those who under report cash income. 

It is no secret that more taxpayers are retaining the services of skilled professionals who tenaciously fight to protect the interests of their clients. Is it any wonder that more audits are resulting in ‘‘no changes?’’ Randomly pulling 50,000 tax 

returns for audit will do very little to improve the overall audit program. 

On the other hand, the IRS’ ill-advised and ill-timed actions will result in frightening 50,000 citizens. The IRS admits that 50% of the NRP audits will result in 

‘‘no change.’’ Many more audit battles will percolate up to the Division of Appeals 

and even the United States Tax Court. In prior research programs like the Tax 

Compliance Measurement Program (TCMP), the results from an appeal are not included in the data pool, thereby skewing the results. 

It appears that the NRP will affect two major groups of audit victims. The first 

group includes low-income taxpayers who are not exposed to the AMT, are minimally exposed to medical and miscellaneous expense thresholds and who cannot afford to retain competent representation. Naturally, their charitable contributions 

will come under IRS scrutiny. 

The second target group includes small businesses. This area will generate many 

minor changes because many small businesses generally cannot afford to maintain 

efficient bookkeeping systems. In these cases the IRS will actually be auditing the 

work of professional preparers who have attempted to keep their clients in compliance by sculpting reality from a foundation of canceled checks and oral testimony. 

Based on the Service’s current performance, we are convinced that the IRS is not 

in a position to effectively administer its proposed National Research Program. Despite assurance of IRS management to the contrary, we fear that this program is 

ripe for abuse by over zealous IRS agents. Indeed, at a recent hearing of this Subcommittee, the IRS National Taxpayer Advocate in a question and answer session 

remarked that it may be necessary to have a third party monitor these audits to 

protect taxpayers. 

The Service is an agency that is in transition. It has plenty of work ahead without 

deploying its precious assets to an ill-fated and ill-timed National Research Program. The taxpayer deserves better. We ask the Congress to put an end to this proCoyne. 

gram before it gets off the ground.

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

f Mr. COYNE. Thank you, Mr. Chairman. 

Mr. Harris, the EITC program continues to be one of the most 

common errors that both taxpayers and tax preparer professionals 

make in filing individual tax returns. Seems to be still a high percentage. 

Mr. HARRIS. Yes. 

Mr. COYNE. Can you cite any reasons why you think that is the 

case? 

92

Mr. HARRIS. I think probably the best thing that could be done, 

which I guess is the reason we have a problem, is clarifying definitions of something like a dependent, that we all understand who 

that qualifying dependent is. I think if you asked people on this 

panel and the IRS, that would go a long way, just clarification of 

a lot of the rules, at least from the practitioner side. 

I think perhaps from people who self prepare returns, it is just 

another sign of complexity; that they just really do not understand 

it all. 

Mr. COYNE. Do you see the EITC issue largely one of innocent 

errors or intentional fraud, in your experience? 

Mr. HARRIS. Certainly from the people that we deal with it would 

be innocent, but I am aware of many cases where there are intentional claims made. There is no question that that exists. I think 

any time you make money available there are people who will 

abuse that opportunity. 

Mr. COYNE. But could you put a percentage on it? Is it 10 percent 

intentional fraud or 5 percent? 

Mr. HARRIS. It would simply be a guess, but I would say 10 percent is intentional, in my opinion. 

Mr. COYNE. And the rest is just through complexity? 

Mr. HARRIS. Complexity and confusion. 

Mr. COYNE. And definitions, as you point out? 

Mr. HARRIS. Definitions; right. 

Mr. COYNE. Thank you. 

Chairman HOUGHTON. Mrs. Thurman. 

Mrs. THURMAN. Mr. Stevenson, you said you were talking with 

the Senate because there were some things left out of our bill. Can 

you give me what those were? 

Mr. STEVENSON. There was a whole section on the offer-in-compromise program. The House had originally in there items that directed the IRS to consider hardship and be very specific about what 

the rules of hardship was, because the IRS misinterpreted hardship. Their interpretation of hardship for an offer-in-compromise 

program was that if a taxpayer has all the assets to pay for the 

tax but it is inconvenient for them to pay it, that is considered 

hardship. But if the person was poor enough and didn’t have the 

assets to pay for the tax, then they could not be considered as a 

hardship case. It is right on their Form 656 as one of the rules for 

determining an offer-in-compromise. 

Mrs. THURMAN. Maybe to the other three, or to all four, Mr. 

Coyne asked about the EITC, and I think all of us understand why 

that is not getting taken care of, because there are winners and 

losers if you expand it. If you lose, that is a problem there. However, I still think if it is causing problems out there we ought to 

be finding out how to fix it. But in saying that, and since it seems 

we have had an experience with that, we have heard some of the 

situations as I have referred to in this New York Times article and 

you all have been sitting here, what recommendations would you 

make to us in this matching issue the Commissioner has talked 

about? How do we match this money and make sure we are able 

to go over to these offshore trusts that we are not receiving the 

benefit from? 

Any one of you. 

93

Mr. HARRIS. I will be happy to comment since, as I have mentioned, we worked with the Commissioner and the IRS on this in 

some areas. I think you are going about it in the right way, trying 

to match the tax returns of the partnership to the individual tax 

returns. Where the potential for problem is, in our experience, and 

most of us were relating matching to something like a W–2 that 

has a standardized format that goes on a single place on a tax return, when you get into this matching of K–1’s, first of all you have 

a variety of different K–1’s where information can go on many, 

many places on that tax return and in some cases correctly not be 

on the tax return. Our caution to the IRS was while you need to 

catch the underreporting of income, the last thing you want to do 

is send out a lot of erroneous notices where you have not been able 

to find that it was correctly reported. And I think you do a lot more 

harm to the agency by sending out millions of notices proposing assessments of tax when the return was prepared correctly. 

Mrs. THURMAN. Mr. Harris, don’t you also think that at some 

point, as these kinds of reports come out, that we also hurt the IRS 

on the other end of it; that there are specifically, or at least seemingly, instances where the IRS might be targeting lower income, 

middle income people? That is the opposite potential you have, too. 

I think there are two sides to that, and I am very concerned because I agree I think we have moved much further and have really 

taken some steps to help, but I do worry that there will be a feeling 

on either side. Somebody is not going to be happy with this. 

Mr. HARRIS. I think we need to go forward with matching. I 

think it is part technology, in terms of giving the IRS the ability 

to standardize forms. It is a more encompassing problem than I 

think we think it is. We think it is taking K–1’s, matching against 

returns, and we are going to find income, but I think we have to 

look at the bigger picture of form design standardization. 

Clearly, I think this tax system is built on a belief that there is 

compliance being done out there, and if we don’t shore up compliance I think the whole system is at risk. 

Mr. STEVENSON. There is another issue, too, and I am sure Roger 

would agree with this. The problem really is training. The IRS will 

run a computer program, such as matching, and then automatically 

send out notices. But there is nobody really eyeballing the notices 

to say do they make sense. What he is saying is a lot of them, if 

anybody really looked at them, they would say they do not make 

sense. 

But let me give you another foreign issue, which I am sure no 

one has even touched. I got a call about a year ago from a man 

from Belgium. He called me up to say, you know, I have set up 400 

United States corporations in Delaware, and he wanted to know if 

these corporations were required to file a Federal tax return and 

get a Federal ID number. This is one man, 400 corporations in 

Delaware. 

I have a contact in Delaware who sets up corporations all over 

the world, and apparently Delaware sets up a corporation for a foreign company and there is no matching with the IRS that these 

corporations have been set up. So there could be tens of thousands 

or hundreds of thousands of corporations that people set up 

throughout the world, acting under the rubric of an American corVerDate May 23 2002 00:47 Jun 09, 2002 Jkt 079436 PO 00000 Frm 00097 Fmt 6633 Sfmt 6602 E:\HR\OC\B436.XXX pfrm17 PsN: B436
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poration, with all the rights and privileges, but they do not even 

have an ID number. The guy nearly had a heart attack when I told 

him that, yes, you need an ID number and you are out of compliance for not filing these returns. 

And the reason he got caught was because one of his clients was 

using a corporate return and they reported him to the IRS, and the 

IRS said that there was no such corporation. And the fraud people 

from Belgium had contacted him and he was getting quite ill about 

it. 

Mrs. THURMAN. So you are saying that we need to be working 

with the States, who do this corporation set-up, so that we make 

sure that we in fact can do what Mr. Harris and others have said, 

be able to match these corporations with the IRS? Is that what you 

are suggesting? 

Mr. STEVENSON. I am saying, first of all, Delaware seems to be 

the real problematic area in this, and these are not American citizens setting up these corporations. These are foreigners setting up 

American corporations, using our system to their benefit, and we 

are not getting anything out of it. 

Mrs. THURMAN. I don’t know if either one of you want to respond. 

Mr. WEINBERGER. Just on the earned income tax credit. Congress 

gives the Internal Revenue Service about $147 million a year not 

just for increased compliance with respect to that program but also 

for education and outreach, because a number of the taxpayers who 

are eligible for the credit do not claim it, and some who claim it 

do not claim the full amount that they are entitled to. So it is not 

just a question of overpayments; there are in some cases underpayments. 

As you know, it is one of the most effective antipoverty programs 

we have, and Congress has supported it because it gives an incentive for people who are poor to continue to work. It is also one of 

the most complex provisions in the Tax Code. 

Several years ago the Treasury Department worked with us to 

develop due diligence procedures where tax practitioners could 

question claimants to make sure they were properly qualified to 

apply for the earned income tax credit. We believe that tax professional industry, working with Treasury and Congress, should sit 

down to look at the earned income tax credit and ask whether 

there are simplifications or adjustments that can be made. 

Congress recently passed some changes to simplify the tie-breaker rule that helps determine which member of a family is eligible 

to claim a child, for example. Unfortunately, that will require some 

additional clarification, as is often the case when a new law is 

passed. But we think there may be additional simplifications that 

can be enacted and it is worth trying to get that program into a 

better posture of compliance. 

Mrs. THURMAN. I would just say that one of the things in one of 

the articles talked about, and specifically what you talk about with 

regard to the EITC, it says that in the Manhattan tax office, and 

they suggested it is the richest in the Nation, there are only 23 

auditors that remained on a staff that numbered actually 150 just 

a few years ago. So there certainly is a resource issue in trying to 

bring about compliance. 

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Let me ask one last question. I think all of you agreed on this 

issue, and that was that in our making changes so close to the tax 

season and not giving an opportunity to put things in it to work 

before tax season comes out. It is an excellent comment, because 

I think we so often do that thinking we are just going to hurry this 

up and everything is going to be wonderful. 

Let me ask you this, and maybe it is something we can put everybody on notice now. We also know through the stimulus package, which was mentioned, that there will be some new requirements and some additional tax issues that will be coming into effect in 2004, 2005, and 2006. And then all of that goes away and 

we start another whole group of tax issues coming down the road, 

which of course I am very concerned about for a couple of reasons 

other than the complexity, but also the revenue side of it. 

Are you at this time being asked or giving any input, or do you 

believe the rules and regulations which you might have to work 

under when these new tax issues come into effect—are we seeing 

any advance notice as to the way this might work, and would we 

have then a better opportunity to use the tax issue as it was intended by Congress? 

Mr. WEINBERGER. Well, with respect to the stimulus package, of 

course that is a classic example, because that made some changes 

that were retroactive and made them right in the middle of the tax 

season. And as hard as the Internal Revenue Service works to get 

forms ready and so on, it is sometimes——

Mrs. THURMAN. But we also will be going into the tax bill. I 

think there is a new IRA, there are some educational issues, and 

there are some things in there. What you are telling me is that in 

fact we know that there is a problem when we push things too 

quickly or they are retroactive or right in the middle of the season, 

like the depreciation issue that you mentioned from this stimulus 

package. Are we seeing at this time IRS having the rulemaking authority to start putting rules out that would have an effect on these 

new tax issues that will be coming due, or not due but in place in 

the 2004–2005 timeframe? 

Mr. STEVENSON. Well, first of all, the IRS is really historical. 

They are still auditing 2 years ago or year and a half ago. So a 

large percent of the IRS is looking back. Another large percentage 

is just getting ready for the next filing season. 

From our perspective, they are really very—I mean, talk about 

chaos and confusion. They do not have enough people to deal with 

the future. That is really our job. And, frankly, from our perspective, we hope some of the things will change, because we know you 

rush some things through. And we really love the fact that you are 

concerned, and you are trying to do the best we can. We really understand that. 

We are really struggling with this new thing because we are all 

still suffering and reacting to 9–11. I am from New York, as the 

Chairman is, and we really have not recovered from this event, I 

have to tell you right now. So we know that some things that have 

happened will change. And in the last several years, the amount 

of oversight and the fabulous staff that you have in bringing us together and bringing things to your attention, we just feel that 

96

things will change in the future. We cannot do a lot of tax planning 

for it because historically they have changed. 

I don’t know if that answers your question. It is hard to prepare 

for things. How do you prepare for the estate tax that is going to 

disappear in 10 years or maybe come back and be back to $1 million? We know you have to change that. 

Mrs. THURMAN. Can I quote that? 

Mr. STEVENSON. You have to change it. 

Mr. HARRIS. If I could respond a little bit to that. I think the average taxpayer doesn’t do a lot of tax planning, so right now they 

are not really that concerned about the changes. They find out 

when they have their taxes prepared where they won and where 

they lost. 

The IRS is certainly addressing this, but I don’t think there is 

a big demand from the average taxpayer; tell me about the changes 

that are coming this year, next year, the year after. Unfortunately, 

maybe that is an indictment of the taxpayers. They have just given 

up hope on figuring it out. They just gather everything together, 

get their taxes done after the first of the year, and they hope they 

won more than they lost in changes. And sometimes they do, sometimes they do not. 

Mr. WEINBERGER. Two aspects of that. One, the Internal Revenue Service does consult with tax practitioners as it develops new 

forms and instructions and tries to identify areas where the forms 

and instructions are not as clear as they should be. And I am sure 

as they prepare for some of the changes that the Congress has 

mandated for 2003 and 2004, and so on, those forms and schedules 

will come in due course. 

The other aspect that Mr. Harris was just alluding to, however, 

I think is even more significant, and that is that Congress passes 

many, many programs and tax provisions that are beneficial to individuals, and a lot of Americans simply don’t know they are eligible for them. We find that we are increasingly becoming a financial 

counselor to our clients to help them understand provisions that 

may be available to them that they were not aware of. 

So I think there is a financial education component which is important, an additional education component with respect to tax provisions that Congress intends to apply to Americans that they are 

not fully aware of. 

Mr. DOUGHERTY. In the passing of the act, and, of course, everything cannot be perfect in life, so it came along at a time and so 

we are reacting to it. It was a little bit of a problem. We will get 

over that. And I think the Service has done a good job. I didn’t 

mean to tell you that I don’t think the Service has done a good job. 

I think the Service has done a good job. It was late. They have 

come out afterward and said we are going to have to amend some 

returns and that is going to cause some problems. 

But the Service normally does a very good job if the law is there. 

Normally the information does come out. They do consult with you. 

They try to. Sometimes they don’t listen to everything we tell them, 

but everybody in life doesn’t do that. So I think they do do a good 

job. 

And as for the future, are we doing planning? Obviously, we do 

some planning, too, and our clients do look at this law. We do take 

97

it serious, it is on the books to see whether it will affect them in 

the future. So, yes, we do have clients that are looking at the law 

and into the future. 

Mrs. THURMAN. I appreciate your indulgence, Mr. Chairman. So 

I guess the bottom line is it is just us. The IRS is doing fine, if we 

would just quit changing things in midstream. 

Mr. DOUGHERTY. No, we didn’t say that. 

Mr. WEINBERGER. Well, our tax preparers do——

Chairman HOUGHTON. Well, now, wait a minute. We cannot go 

on forever here. I appreciate your comments. This is 15 minutes 

and we are usually on a 5-minute basis. 

I want to thank you very much for being here. It has been very 

helpful, and we will be in touch with you again. Thanks so much. 

[Whereupon, at 4:21 p.m., the hearing was adjourned.] 

[A submission for the record follows:]

Valparaiso University School of Law Tax Clinic 

Valparaiso, Indiana 46383–6493

April 8, 2002

The Honorable Amo Houghton 

Chairman 

Subcommittee on Oversight 

Committee on Ways and Means 

1136 Longworth House Office Bldg.

RE: Statement to be included in the printed record of the April 9, 2002 Subcommittee Hearing on the 2002 Tax Filing Season and the IRS Budget for Fiscal Year 2003.

Mr. Chairman and Distinguished Members of the Subcommittee,

Thank you for the opportunity to offer these views concerning the 2002 fiscal year 

tax filing season and the IRS budget for fiscal year 2003. This statement is provided 

on behalf of the members of the Valparaiso University School of Law Tax Clinic. 

This statement has not been approved by the Valparaiso University School of Law 

and, accordingly, should not be construed as representing the policy of the University. 

The Valparaiso University School of Law Tax Clinic functions as a law office 

whose primary purpose is to provide practical legal skills training for students who 

are close to completing their law school education. The secondary purpose of the 

clinic is to provide supervised legal representation to low-income individuals and 

groups who otherwise would have difficulty in finding affordable representation. 

Specifically, the Tax Clinic represents low-income individuals with Federal tax problems both at the administrative level (IRS) and before the U.S. Tax Court. 

This clinic has had the opportunity to work with a significant number of clients 

who have had issues with the Earned Income Tax Credit (‘‘EITC’’). Through our representation of these individuals, we echo many of the concerns delineated in the National Taxpayer Advocate’s Fiscal Year 2001 Annual Report to Congress. On the National Taxpayer Advocate’s list of the 23 most serious problems, the EITC is a 

prominent component of seven such problems. 

A majority of these problems result from the complexity of the Tax Code as it relates to the EITC, as well as from a lack of access to free tax assistance, accessibility 

and affordability of professional tax assistance, literacy limitations, language barriers, and even fear of contacting the IRS. 

More specifically, taxpayers have a difficult time navigating IRS Publication 596, 

which explains EITC eligibility, and which contains 15 qualification rules and is 

more than 50 pages long. As pointed out by the National Taxpayer Advocate, Form 

886–H, entitled Explanation of Items, is extremely difficult for unsophisticated taxpayers to understand, and many low-income taxpayers usually cannot afford to take 

the time off from work to collect the required documentation, and often do not maintain financial records. Oftentimes, taxpayers are asked to provide documents and 

information already available to IRS employees, such as Social Security numbers. 

The IRS’ standards and processing of documentation create a heavy burden for the 

98

taxpayers least equipped to comply with these requirements. As a result, taxpayers 

find the EITC process intimidating and IRS notices difficult to comprehend. 

The National Taxpayer Advocate’s Report also indicated that one conspicuous 

EITC-related problem was with the access to and answers from the toll-free service 

lines. Internet assistance via the IRS Web site currently does little to alleviate this 

dilemma. For example, for those taxpayers who have the requisite sophistication 

and access to a computer with internet capabilities, a search on the IRS Web site 

to determine what constitutes a ‘‘qualifying child’’ will lead the taxpayer to 2,224 

results. This issue is of special importance to taxpayers who qualify for the EITC, 

who currently have the least access to professional tax advice, and rely on government sponsored programs and resources to assist them with these questions. 

Based upon the foregoing, and our experiences in providing legal representation 

to low-income individuals with EITC concerns, this clinic supports the Administration’s IRS budget requests for fiscal year 2003 and, in particular, the $154 million 

requested for the Earned Income Tax Credit Compliance Initiative. Although this 

clinic firmly believes that substantive changes to the Tax Code are required to more 

completely address the problems posed by the complexity of the EITC, we support 

the Administration’s strong commitment to addressing tax problems as they concern 

low-income taxpayers. The IRS must be given sufficient resources to effectively administer initiatives in improving the quality employee and volunteer training, clarification of printed materials, as well as outreach educational programs. 

In closing, this clinic would like to recognize the efforts and beneficial effects of 

the National Taxpayer Advocate’s presence. The Office of the National Taxpayer Advocate has been an enormous resource, not only in our ability to provide effective 

legal representation to low-income taxpayers, but in our efforts to deepen our understanding of complex tax matters as well. We reiterate our support of the Administration’s commitment to the Earned Income Tax Credit Compliance Initiative, and 

we urge the Members of this Subcommittee and of Congress to provide the IRS with 

the tools necessary to improve its relations with low-income taxpayers, thereby increasing participation among the less-privileged. 

Thank you again for the opportunity to address this Subcommittee. 

Respectfully, 

Karen Kole 

Visiting Professor of Law

Cc: The Honorable Charles O. Rosotti 

Commissioner, Internal Revenue Service 

1111 Constitution Ave., NW 

Washington, DC 20244

The Honorable Nina Olson 

The Office of the National Taxpayer Advocate 

Rm. 3031, C:TA 

Washington, DC 20244

The Honorable Paul O’Neil 

Secretary of the Treasury 

1500 Pennsylvania Ave., NW 

Washington, DC 20220

The Honorable Pamela Olson 

Deputy Assistant of U.S. Treasury 

1500 Pennsylvania Ave., NW 

Washington, DC 20220

David Cay Johnston 

The New York Times 

229 West 43d Street 

New York, NY 10036–3959

Æ