U.S. GOVERNMENT PRINTING OFFICE

60–874 WASHINGTON : 1999

THE 1998 TAX RETURN FILING SEASON AND THE

IRS BUDGET FOR FISCAL YEAR 1999

HEARING

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

SECOND SESSION

MARCH 31, 1998

Serial No. 105–87

Printed for the use of the Committee on Ways and Means

(

(II)

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

JIM BUNNING, Kentucky

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

BARBARA B. KENNELLY, Connecticut

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsion

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

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON OVERSIGHT

NANCY L. JOHNSON, Connecticut, Chairman

ROB PORTMAN, Ohio

JIM RAMSTAD, Minnesota

JENNIFER DUNN, Washington

PHILIP S. ENGLISH, Pennsylvania

WES WATKINS, Oklahoma

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

WILLIAM J. COYNE, Pennsylvania

GERALD D. KLECZKA, Wisconsin

MICHAEL R. MCNULTY, New York

JOHN S. TANNER, Tennessee

KAREN L. THURMAN, Florida

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 24, 1998, announcing the hearing .......................................... 2

WITNESSES

Internal Revenue Service, Hon. Charles O. Rossotti, Commissioner; accompanied by John M. Dalrymple, Chief Operations Officer ................................. 6

U.S. General Accounting Office, Lynda D. Willis, Director, Tax Policy and

Administration Issues, General Government Division; accompanied by

James R. White, Associate Director, Tax Policy and Administration Issues,

General Government Division, and Randolph C. Hite, Associate Director,

Governmentwide and Defense Information Systems, Accounting and Information Management Division ............................................................................. 62

National Association of Enrolled Agents, Joseph F. Lane ................................... 118

National Society of Accountants, and Padgett Business Services, Roger Harris ........................................................................................................................... 133

SUBMISSION FOR THE RECORD

American Bar Association, statement .................................................................... 151

(1)

THE FISCAL YEAR 1999 BUDGET REQUEST

FOR THE INTERNAL REVENUE SERVICE

AND THE 1998 TAX RETURN FILING SEASON

TUESDAY, MARCH 31, 1998

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON OVERSIGHT,

Washington, DC.

The Subcommittee met, pursuant to notice, at 2:07 p.m., in room

1100, Longworth House Office Building, Hon. Nancy L. Johnson

[Chairwoman of the Subcommittee] presiding.

[The advisory announcing the hearing follows:]

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Chairwoman JOHNSON. The hearing will come to order. Good

afternoon, everyone. Today the subcommittee will examine the current tax return filing season and the budget request for the Internal Revenue Service for Fiscal Year 1999.

The IRS is caught up in a whirlwind of change I think it’s fair

to say. Beyond the current filing season, the IRS still must implement the remaining tax code changes contained in last year’s Taxpayers Relief Act. Second, Congress will soon finish legislation to

restructure and reform the IRS. The new Taxpayer Bill of Rights

3 will include the important new taxpayer safeguards, such as expanded relief for innocent spouses and that will require a response

from the Department. Third, the Commissioner has proposed the

most ambitious reorganization of the IRS in 40 years for which we

commend him. Fourth, the IRS must assure that its computer system is compliant with the century date change. And finally, the

IRS must oversee a multibillion dollar contract with the private

sector to upgrade its aging computer system into the 21st Century.

The IRS looks like a juggler trying to keep one too many plates in

the air.

The administration is requesting $8.3 billion for the IRS in Fiscal

Year 1999 to support a workforce of approximately 102,000 employees. These resources should enable the IRS to collect $1.7 trillion

in revenue. The budget request represents a $529 million increase

over the current fiscal year. Part of this increase will fund over

1,400 additional IRS employees in Fiscal Year 1999.

This budget request marks the first real increase in several

years. The increased resources are necessary to meet a growing

workload and to improve customer service. For example, the number of primary tax returns will increase from 203 million to 212

million in just two years. And, the number of telephone inquiries

which the IRS must answer will increase from 104 million to 127

million over the same period.

Beyond the statistical growth in the IRS’ workload, the complexity of the subject matter is becoming more difficult to administer. Some of this may stem from the Taxpayer Relief Act of 1997.

The changes affecting capital gains and the sale of principal residences were effective in 1997 so they are affecting the current filing season. Many more tax law changes became effective in 1998

so they will affect the 1999 filing season. This includes educational

tax credits related to the Hope Scholarship and to the Lifetime

Learning Program, as well as the new deductible Roth IRA.

In addition, the IRS must strive to make sure that its computer

system is compliant with the century date change. The IRS will

spend almost a billion over five years on this effort.

In view of the changes in the next few years, it is a welcome relief that the current filing season appears to be mostly trouble-free.

The IRS is processing tax returns at good pace and issuing refunds

in a timely manner. There also has been a significant increase in

the number of persons filing their tax returns electronically, as

well as receiving their refunds by direct deposit to their bank accounts. This is all very good news. It suggests that the IRS is making good progress towards its goal of promoting electronic filing as

well as significant progress towards better customer service.

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The subcommittee wants to review the IRS’ budget and its operations in order to see if the budget meets all of the challenges in

a balanced and timely manner. I welcome today’s witnesses and I

particularly welcome the new Commissioner, Commissioner

Rossotti.

At this point, I’d like to yield to my Ranking Member, Mr. Coyne.

Mr. COYNE. Thank you, Madam Chairwoman. Today we will hold

the annual hearing to discuss the administration’s proposed Fiscal

Year 1999 budget for the IRS and the status of the 1998 tax return

filing season.

The issues we will discuss today are critically important to the

integrity of our tax collection system and the public’s expectations

of customer service, fairness, and efficiency. While it is easy to attack the IRS and its workforce, such an approach does not solve

any of our problems. What is needed, in my opinion, is: No. 1, better focused IRS management; No. 2, better IRS employee training;

No. 3, better IRS tax administration technology systems.

The President’s proposed budget targets each of these areas and

does so in a very accountable fashion. The President has proposed

$8.2 billion in funding for the IRS in Fiscal Year 1999. This is a

significant increase from IRS funding levels in prior years. The

President’s budget would provide for a net increase of $530 million

over the IRS’ Fiscal Year 1998 operating level. Almost half of this

increase would be for investment in IRS information systems and

organizational modernization.

Further, the administration’s budget request calls for $323 million to fund a second year of the IRS investment technology account. This is seed money which the IRS needs to continue its modernization of IRS computer and technology systems.

The President’s budget also calls for $143 million for EITC activities. This Earned Income Tax Credit account was established last

year outside the budgetary caps to: number one, expand EITC customer service and public outreach programs; number two, to

strengthen EITC enforcement activities; and number three, to research efforts to reduce EITC overclaims and erroneous filings. I

am pleased that we are continuing to improve administration of the

EITC on a bipartisan basis.

Finally, I believe that the administrative actions that IRS Commissioner Rossotti has taken to streamline the way the IRS does

business and to expand the availability of taxpayer services are

fundamental to development of a first-class federal tax system. The

current tax return filing season appears to be going well and, undoubtedly, the Commissioner’s decisions to expand the IRS’ hours

of operation to nights and weekends across the country and to shift

IRS auditors and collection staff to taxpayer assistance activities

have contributed to a problem-free filing season. I commend Commissioner Rossotti for his efforts and I thank the subcommittee

Chairwoman, Mrs. Johnson, for holding this hearing today. Thank

you.

Chairwoman JOHNSON. Thank you.

Commissioner Rossotti.

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STATEMENT OF CHARLES O. ROSSOTTI, COMMISSIONER,

INTERNAL REVENUE SERVICE

Mr. ROSSOTTI. Thank you, Madam Chairwoman and members of

the committee. Before I begin my testimony, I would like to make

one announcement that I think will please the committee, and that

is that our electronic federal tax payment system has made a very

substantial amount of progress with existing business users, and,

therefore, it will not be necessary to impose a penalty on July 1,

1998, as was previously planned and——

Chairwoman JOHNSON. Excellent.

Mr. ROSSOTTI [continuing]. This penalty waiver will extend to

those employers who were first required to use the EFTPS on or

after July 1, 1997, and who continue to make timely deposits by

paper coupons. So, I’m sure that will be good news for your constituents.

Chairwoman JOHNSON. And just to that point, what percentage

of the small businesses required to file under the EFTPS at this

point are filing electronically?

Mr. ROSSOTTI. Well, I believe that there is about 1.1 million that

are required and there’s only about 80,000, if I’m correct, who are

not filing. So, it’s the majority of people that are enrolled. But, I’ll

get you those precise numbers, Madam Chairwoman.

[The following was subsequently received:]

Currently, there are about 1.4 million employers who are required to pay using

EFTPS. (There is no requirement to file electronically). Of that number, about 1.3

million are enrolled to pay using the electronic system. In addition to the required

taxpayers, we have more than 500,000 business taxpayers who are voluntarily enrolled.

Chairwoman JOHNSON. But almost the whole group is filing electronically?

Mr. ROSSOTTI. Of those that were mandated to——

Chairwoman JOHNSON. Right. Well, that’s very good news——

Mr. ROSSOTTI. Yes.

Chairwoman JOHNSON [continuing]. And I think that reflects

well on the small business community, their——

Mr. ROSSOTTI. Yes.

Chairwoman JOHNSON [continuing.] Ability to learn and change,

but it also reflects that the IRS did make quite dramatic change

in its presentation of how to do this and of its information to the

small business community after the program kind of ran

amuck——

Mr. ROSSOTTI. Yes.

Chairwoman JOHNSON [continuing]. And it was those changes

and the improvements in your materials and your outreach to the

small business community that certainly brought about this compliance and in a way that none of us had any—heard from any of

our troubled small businesses about it. I commend you on that and

I think the fact that you did respond to the difficulties that the program was having constructively ought to be noted for the record.

Mr. ROSSOTTI. Yes. Actually, Madam Chairwoman, I’m glad you

mentioned that because it’s one of the first things that I looked into

when I became Commissioner, having heard about it from a number of members, and, you know, it immediately became apparent

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to me that this was an excellent program that had not been presented, as you put it, very well—

Chairwoman JOHNSON. It had not been excellently described and

so it was not beloved——

Mr. ROSSOTTI. And we’re continuing now to actually do some additional things. I mean, the decision we made to waive the penalty

anticipates the results of some additional outreach we’re going to

do——

Chairwoman JOHNSON. Excellent.

Mr. ROSSOTTI [continuing]. To help people use it.

I’m pleased to go on now to discuss the 1998 filing season as well

as our 1999 budget request and some other issues of interest to the

subcommittee, especially the commitment that we’ve made to customer service.

Of course, one of the IRS’ most important responsibilities is to

manage a successful filing season and, as you noted, Madam Chairwoman and Mr. Coyne, we are doing that this year. Total return

receipts are about even with last year but our electronic filing and

TeleFile are up 24 and 26 percent, respectively, over the same time

period, and, as of March 20, refunds are up 6 percent and the average refund is $1,397.

As of March 20, 4.8 million individual taxpayers have filed by

phone and, continuing this approach, this spring small businesses

nationwide will also be able to file the 941 Employers Quarterly

Federal Tax Return by telephone and we expect this year that 1.2

million 941’s will be filed using this option.

Beginning in January, as Mr. Coyne noted, we expanded our

telephone service to 16 hours a day, Monday through Saturday.

And, largely through better scheduling, the overall access, as defined by GAO, for telephone assistance has increased from only 30

percent in 1996 to about 91 percent so far this season. This means

that there have been 12.7 million fewer busy signals experienced

by taxpayers.

We’ve also just very recently begun a pilot technology program

called the ‘‘Intelligent Call Router’’ which will enable us on a realtime basis to route calls to the next available assister anywhere in

the United States which is part of our program to improve access

even more.

We also expanded walk-in service hours during the last six Saturdays of the filing season. Over 150 IRS walk-in offices are open

from 9:00 to 3:00. This recent Saturday was designated as ‘‘EITC

Awareness Day’’ and the last two Saturdays are designated as

‘‘Problem Prevention Days.’’ And I will say that this Saturday I visited one of those cites at a mall in Charles County, Maryland and

found that many taxpayers were, in fact, very pleased at the ability

to get service on a Saturday morning in a location that was convenient to them.

A growing number of taxpayers are also getting the tax information they need from our Internet cite, from IRS CD–ROMs and our

fax system. So far this fiscal year, our Internet site has had over

277 million hits, which is about triple the number for the same period last year, fax traffic is up 63 percent, and over 530,000 successful transmissions of tax forms and information have been made

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by fax. And I would like to say that just today,—the form to claim

innocent spouse relief has gone up on our website.

Chairwoman JOHNSON. Excellent.

Mr. ROSSOTTI. The IRS has also made considerable progress, as

we’ve noted at the beginning, in electronic payment methods. Last

Fiscal Year 1997, more than $655 billion was deposited electronically which was an increase over $416 billion the previous year.

But, as of March 20 of 1998, deposits are already over $520 billion

through 21 million transactions. Enrollment, as we noted, continues to grow in the EFTPS system with 1.8 million taxpayers

currently enrolled, and that includes 500,000 small business volunteers who are not required to use the system. That success, of

course, is why we were able to waive the penalty.

In addition, in Fiscal Year 1997, over $213 billion went through

the Lock-Box payment system which is a $4 billion increase over

the prior year and, as of February 28 of this year, $53.6 billion was

deposited. So, Lock-Box is also growing.

Madam Chairwoman, without exception, the century date change

conversion together with the annual filing season changes are our

highest technology priorities. I stress that we are very aggressively

managing the program so as to identify risks and be able to take

timely actions when necessary to see that our overriding goal—

which, of course, is to maintain continuous service—is realized. As

part of this management process, we do need to adjust on a regular

basis deadlines and timetables to reflect the work in progress. The

program remains not only a high priority but a high risk that will

require continued intense management focus to succeed.

As members of the subcommittee are aware, I’ve also proposed

a large-scale and long-term modernization program for the IRS. Despite the short-term progress we are making, we will only reach

our goal—first quality service to each and every taxpayer—through

changes in five key areas, each complimenting the other. And I’ll

just briefly describe these.

The first is revamped business practices that will focus on understanding, solving and preventing taxpayer problems. The second is

an organization structure that each divides the IRS into four units;

each specializes in serving a particular set of taxpayers with similar needs. Third, the creation of management roles with more clear

responsibility. Fourth, measuring our organizational performance

by balancing customer satisfaction, business results, employee satisfaction and productivity. And fifth, of course, new technology.

The IRS’ current computer systems simply cannot support the

agency’s missions and goals in the long term. We have engaged the

consulting firm of Booz, Allen, and Hamilton to validate this concept in terms of risk, cost, and impact on customers, both external

and internal.

For Fiscal Year 1999, we have prepared a budget that supports

the beginning of the transformation of the IRS that I have outlined

above and that can be also identified into five major priorities.

One, of course, is preparing for the century date change which

is the most critical of all elements and the funds I have requested

are essential to continuing customer service and avoiding the potentially disastrous effects of an uncorrected century date change

problem.

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Second, during Fiscal Year 1999, we will pursue a highly focused

initiative to improve customer service through improved clarity of

notices, forms, and publications, better telephone service, more

walk-in service, expanded electronic filing, improved training of

customer service representatives, strengthened support for small

businesses, increased staffing for the taxpayer advocate’s office,

and creation of citizen advocacy panels.

Third to ensure that customer service remains a top priority, the

budget request also includes some near-term investments that are

necessary in order to enable us to maintain an acceptable level of

service. This includes the Call Router, which I mentioned earlier,

deployment of computers to field collectors who currently have no

computers, and replacement of old computers used by field agents

who depend on them to do examinations of taxpayers.

Fourth, in 1999, the process of modernization will continue with

the strengthening of the IRS’ internal systems management processes and capabilities and the award of the ‘‘Prime Contract.’’ The

Fiscal Year 1999 budget request for long-term technology modernization comes in two parts; IRS capabilities for managing and

supporting modernization and funding for the information technology investment account for the prime contractor itself.

And finally, the Fiscal Year 1999 budget includes $25 million to

support the organizational modernization proposal that I’ve advanced. This money is not yet fully specified in detail but it will

include recruiting, relocation, and retraining of people as well as

development of detailed plans for the reorganization.

I would only note, Madam Chairwoman, that over the last three

years, the IRS budget—when you subtract out the extra cost of the

century date change—has actually declined by 7 percent while the

dollars collected have grown by about 24 percent. Returns processed have increased by 8 percent and, as you know, the Taxpayer

Relief Act of 1997 has added about 800 changes to the Tax Code.

In conclusion, I believe we can transform the IRS into an agency

that helps taxpayers meet the obligations imposed by the tax laws

while ensuring the compliance is fair. And I think we can do this

while increasing productivity and shrinking gradually the size of

the IRS in relation to the economy. It will take time and investments to modernize technology, business practices, and organization. But, with the support of Congress, I’m optimistic that we will

succeed. Thank you, Madam Chairwoman.

[The prepared statements and attachments follow:]

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Chairwoman JOHNSON. Thank you, Commissioner. I’d like to

start with a couple of questions that emanate from preceding hearings and from your testimony.

First of all, in your budget brief, you make the point and you

make it in italics, that the investment in technology—this section

is entitled, ‘‘Inadequate Near-Term Technology Investment Pending

Long-Term Solutions Through Modernization Blueprint’’—and I understand the difference between the modernization blueprint and

the enormous investment in technology that you need to make to

comply with the Year 2000 challenge and also to meet some of your

service goals in the near-term.

Nonetheless, it is a startling statement. You say here, it will—

while this blueprint and the funding that goes with it are essential

for the long-term viability of the IRS, it will provide no improvement in support of current operations for at least three more years.

Now, I would assume that your technology investments that

you’re going to make in the near term to meet the challenge of the

Year 2000 and also to meet some of your service goals and to improve management and all the other things that you have laid out

in your testimony, I would imagine that they would make, (a),

some near-term improvement in operations and in service, but that

they are coordinated with your long-term blueprint and, for the

most part, would not have to be repeated in 2001, except for software changes. Now——

Mr. ROSSOTTI. Yes, Madam Chairwoman; the point that I made

about the three years is that we really are operating on two tracks

here because it’s just the nature of where we are in the technology

in the IRS. The one track which you were mentioning contains

some of the things that are in the budget for this year which have

immediate impact; like the Call Router and computers for collection

agents who don’t have any. Those will be useful for some years to

come.

The blueprint and the longer-term technology modernization

really won’t even begin until 1999. We’ve recently—just within the

last week—issued the final version of the RFP. The ‘‘Prime Contract’’ award is designed to be made right at the end of this year

in December and then the early stages of that—most of the work

will be required to put in some of the sort of management processes—the system’s lifecycle, as it’s called—that GAO, among others, has noted is necessary in order to really have the management

tools to manage a large program like this, along with some relatively limited early releases along the blueprint. By the time those

get rolled out, that will be into about the 2001 timeframe, which

is, you know, almost three years from now and that will be about

the time that we will start to begin to see the impact in terms of

practical use of the investment we’re making in this long-term

blueprint.

Chairwoman JOHNSON. I guess my question went to an issue

that has been an issue for the IRS for as long as I’ve been Chairwoman of the subcommittee. And that is, whether or not your

short-term investments are harmonious with your long-term blueprint and whether the investments we’re making—recently, you

were telling me about the number of computers that have to be reVerDate 20-MAR-2000 08:54 Apr 17, 2000 Jkt 010199 PO 00000 Frm 00050 Fmt 6633 Sfmt 6602 E:\HEARINGS\60874 pfrm02 PsN: 60874
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placed to meet the Year 2000 challenge. Now, are those going to

be useful?

Mr. ROSSOTTI. Yes.

Chairwoman JOHNSON [continuing]. In the new blueprint?

Mr. ROSSOTTI. Yes.

Chairwoman JOHNSON [continuing]. Or are we going to have to

replace them? That’s the kind——

Mr. ROSSOTTI. Yes.

Chairwoman JOHNSON [continuing]. That’s really——

Mr. ROSSOTTI. Yes.

Chairwoman JOHNSON [continuing]. What I’m asking.

Mr. ROSSOTTI. For the most part, they will be useful and that’s

designed—we call that in the buzzwords of technology the phase

zero of the blueprint. In other words, it’s sort of the piece that precedes the major piece. But, if you look at these——

Chairwoman JOHNSON. But the technology investments that

you’re making now are harmonious with your long-term blueprint.

Mr. ROSSOTTI. Yes.

Chairwoman JOHNSON. Isn’t a stop-gap measure that will then

have to be repurchased—different equipment purchased——

Mr. ROSSOTTI. Yes.

Chairwoman JOHNSON. In two or three years?

Mr. ROSSOTTI. Yes, that’s right——

Chairwoman JOHNSON. I don’t——

Mr. ROSSOTTI [continuing]. Although I do have to make one comment and that is when you buy things like personal computers, the

average life of these computers in most places is at most maybe

four or five years. So, you have a normal cycle of replenishment of

these things. The hardware portion of this tends to have a certain

defined life and you have to provide for those replacements in the

normal course.

Chairwoman JOHNSON. Right. I did use that example of personal

computers but in developing your centers and in beginning the

process of reducing the number of centers——

Mr. ROSSOTTI. Yes.

Chairwoman JOHNSON [continuing]. You’re going to be making

some——

Mr. ROSSOTTI. Yes.

Chairwoman JOHNSON [continuing]. Very big investments——

Mr. ROSSOTTI. Yes.

Chairwoman JOHNSON [continuing]. In technology.

Mr. ROSSOTTI. Yes.

Chairwoman JOHNSON. Will those mainframe investments will be

compatible?

Mr. ROSSOTTI. Absolutely.

Chairwoman JOHNSON. Okay.

Mr. ROSSOTTI. The mainframe—in fact, that’s one of the places

that, in the Year 2000, we do get some long-term benefit. That’s

actually one of the bigger pieces of the investment that we are

making and that will absolutely be in the direction that we want

to go because we’ll be boiling the computing centers down to the

two main computing centers which is where we want to be in the

long-term blueprint.

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Chairwoman JOHNSON. Now, one of the really big problems that

came to light in recent years and resulted in various provisions in

the Taxpayers Bill of Rights and various requirements that this

committee has placed on the IRS for reports of one kind of another

was the evidence of uneven behavior among IRS agents and some

agents using a very authoritarian and abusive technique.

You have put a good deal of money in this new budget for training. What do you hope to accomplish? Who is going to get trained?

What kind of training are they going to get? Is this only sort of toplevel management to make your new management program work?

Mr. ROSSOTTI. Oh, no, actually, that’s the least of it. I mean, the

basic focus of the training that we’re proposing in 1999 in this

budget—is for the front-line people that are dealing with taxpayers.

I’ve spent many, many hours talking to front-line employees, both

on video conferences and around the country, and we recently had

a session where we actually had a process to survey front-line

workers who are dealing with taxpayers, saying what are the

things that you think you need most in order to do a better job.

And the number one thing—actually, there were two that were

tied—technology was one which we already noted. The other one

was better training and, in particular, simply better training in

some of the basics, like the tax law changes. I mean, if there’s

going to be 800 tax law changes, they say we feel very uncomfortable when taxpayers are pressing us for an answer and we don’t

get enough training in what has happened in the tax law, we don’t

get necessarily up-to-date materials. So, when we’re talking about

this training in Fiscal Year 1999, we’re talking about very practical

training for front-line employees who are going to be working with

taxpayers, either over the phone or in person.

Chairwoman JOHNSON. Yes. Now, this year you’ve separated out

the cost of administering the Earned Income Tax Credit and it’s

going to cost you, at least you’re requesting $143 million for EITC

administration next year. What is that cost per return?

Mr. ROSSOTTI. Cost per return? That’s a number that I don’t

have—I’ll have to get back to you on that.

[The following was subsequently received:]

Question. What is the cost per return for administering the EITC initiative?

Answer. The IRS is currently developing an Activity Based Costing that will provide the cost per return specifically for administering the operational portion of the

EITC Initiative. This costing will cover the cost of processing the return, issuing notices and/or refunds, and any compliance actions. The EITC Initiative Plan includes

direct work (processing of return, issuing notices, and compliance actions) as well

as items such as taxpayer education and outreach efforts, research project funding,

postage and printing, and EITC systems development that are not traditionally captured in cost per return calculations.

Chairwoman JOHNSON. I hope you will get back to us——

Mr. ROSSOTTI. I will.

Chairwoman JOHNSON [continuing]. I think it’s very useful to

have that——

Mr. ROSSOTTI. I will.

Chairwoman JOHNSON. I also will be very interested to know

what the fraud level is in this round of returns, since we’ve made

a number of changes——

Mr. ROSSOTTI. Right.

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Chairwoman JOHNSON [continuing]. So, I won’t go into that now

but I do want to know the cost per return and I think the committee wants to know promptly what your experience is as the season closes in the area of fraud.

[The following was subsequently received:]

Question. What is the fraud level this year on EITC returns?

Answer. The IRS undertook a study of EITC which involved a statistically valid

random sample of EITC returns filed throughout the 1995 filing season. The study

results showed that EITC claims filed during the 1995 filing season contained errors

that required adjustments both upward and downward. The final study results provided a baseline from which to analyze further studies of the effectiveness of our

EITC administrative efforts. There are several programs which work with a portion

of the EITC returns to determine the correctness of those returns. The largest programs being the math error program which looks for systemic problems, missing or

invalid SSNs, and the examination program where questionable returns may be audited to determine the correctness of the EITC claims. A study on EITC for the 1998

filing season is currently in process. A fully developed and reviewed report including

an EITC level of compliance measurement is expected to be available in 1999.

Chairwoman JOHNSON. Let me turn to Mr. Coyne.

Mr. COYNE. Thank you, Madam Chairwoman. Commissioner,

over the past few years your budget has not been as high as—the

amount of money allocated in the President’s budget for the coming

year and I was just wondering if, as a result of that, there any activities that you were unable to complete or to be involved in as

a result of a reduced budget?

Mr. ROSSOTTI. Well, Mr. Coyne, actually one of the most important was that, in the last two fiscal years—meaning Fiscal Year

1998 and Fiscal Year 1997—almost all of the money that would

have gone to any investment in technology was deferred, was eliminated. I mean, it was all spent. It was used—it’s being used for the

Year 2000 conversion but, of course, that’s pretty much just something you have to do in order to stay even. So, I think in terms of

technology we had a deficit to begin with and it got deeper as a

result of this.

The training was another major area—you know, we used all

available resources to put people on phones and continue to do the

compliance programs but, as reflected in the comments of the employees, the training was cut.

I think those are probably two of the more significant areas. The

other thing that has happened is in some of the compliance areas—

and I’m trying to do more studies of this—while the compliance

programs have been maintained, there’s a certain unevenness

that’s developed, especially geographically and across different segments of the population, because of the fact that where people

came off the payroll, they came off where, you know, attrition took

place or where they would accept buyouts which generally was in

the higher-growth economies geographically speaking. Whereas in

some of the economies that were—segments of the country that

didn’t have as tight a labor market, people didn’t take the buyouts,

didn’t ‘‘attrit.’’ So, we ended up with a sort of uneven balance of

compliance resources.

So, these are some of the things that have happened over the last

three years as a result of the constraint of the budget. Now, I will

say this was before I got here that there were some very difficult

and painful reorganizations that took place that did cut some administrative overhead which I think was an appropriate thing to

51

do and which I think could be justly characterized as an ‘‘efficiency

gain’’ rather than a loss of anything that was necessary. So, there

were some hard decisions made by my predecessor and others to

do that. But, that was not all of it; there were certainly losses—

certainly, the technology, the training, and some of the balance of

where the people are.

Mr. COYNE. Did that transfer into a not-so-ideal situation relative to taxpayer services?

Mr. ROSSOTTI. Well, it would have except that, of course, one of

the things we’ve done in the last two years is to dramatically increase the emphasis on taxpayer service. So, I think, you know, the

balance was struck to be able to try to improve taxpayer service,

even in the face of these other constraints.

Mr. COYNE. Could you give us some sense of what the audit rate

might be under the proposed budget that you brought before us

today?

Mr. ROSSOTTI. I don’t have that number with me but we can get

that for you.

[The following was subsequently received:]

What is the audit rate under the proposed FY 1999 budget?

The audit coverage figure is 1.17%.

Mr. COYNE. All right. Thank you very much.

Mr. ROSSOTTI. Thank you.

Chairwoman JOHNSON. Mr. Portman.

Mr. PORTMAN. Thank you, Madam Chair, and thank you for your

testimony today, Commissioner. We have little time and I have a

lot of questions so I’ll try to be as brief as I can. I would appreciate

your answers being to the point, too, as they always are.

First of all, congratulations on what seems to be a relatively successful and smooth filing season. Following along with Mr. Coyne’s

question with regard to the audit rates and so on, I just have a

general question for you which is, the degree to which the shift to

customer service, which I generally support as you know, is enough

to offset the kind of revenue that the government is likely to lose

from the audit rate which—when you get back to Mr. Coyne—will

probably be revealed to be a lower percentage.

And, how do you deal with that? And how do you feel about that?

Do you think that there’s going to be a payoff from improved customer service that will counter that?

Mr. ROSSOTTI. Yes, well, let me say that that is a complex question and obviously, you know, we don’t have quantitatively,

verifiable data to say what is going to happen.

I think that if you look at what was happening a few years ago,

you know, when the access rates were low and the service was

much lower than it is now, I mean you really had an untenable situation.

As I saw it, you were sending out notices to people telling them

they owed money or that they had to do certain things to comply

and then if they had a question about it, they wouldn’t be able to

get through on the phone which, to me, is something that is really

not a tolerable situation. One has to believe—even though we can’t

prove it at this point quantitatively—that that’s going to hurt compliance.

52

I think that there have been some things that the IRS has done

to try to offset the impact of the way that resources have been allocated. For example, the math error capability that was added

which allows certain kinds of checks to be made in the up-front

processing of tax returns—to check social security numbers, for example—used to be done under the audit program. It’s now built in

as part of processing tax returns. I think there was something like

a half a million returns that were done under the audit program

a couple of years ago that have been built in to processing.

As when I said my original testimony to this committee the last

time, is I think if we can get the money for training and technology, we can do what a lot of private sector companies do—we

can keep our workforce stable, we can improve the quality of the

way it works and still be able to achieve our customer service goals

and our compliance goals and, as the Chairwoman noted, increase

the volume. I really think we can do that if we can get the investment money and if we can get the time to make those things happen. And I think already there’s been some signs of that happening.

Mr. PORTMAN. Let me ask you a specific compliance question.

This is one that’s always troubled me and I think a lot of members

of the committee and that is that the Office of Appeals generally

rejects about two-thirds of the revenue agents’ post-audit request

for additional taxes and I just wondered if you can comment on

that briefly. Does this suggest that revenue agents are seeking unreasonable high amounts? Does this suggest they’re trying to make

themselves look good in front of their superiors? And why would

there be a two-thirds rejection rate by the Office of Appeals?

Mr. ROSSOTTI. Well, that’s a very good question and I’ve asked

that question. I honestly don’t know that we know exactly what the

answer is but I will tell you one thing that we are doing that has

been suggested by a number of people that may have some impact

on this.

As you know, we’re in the process of changing the entire measurement system for——

Mr. PORTMAN. The measurements of performance that there may

be some reason that——

Mr. ROSSOTTI. It might be. I mean, no one can prove that but—

we’re definitely changing—the measurement system so that we will

not be measuring it in such a way that it would potentially give

somebody encouragement to just build up assessments and I don’t

know that that has actually happened—

Mr. PORTMAN. I would just suggest, as we’re talking about compliance and how to make compliance more efficient with limited resources, that may be one area where one could look closely and talk

about more targeted use of the resources.

Quickly, on Year 2000—you talked a lot about it today, I know

you’re very concerned about it, and I guess the question I would

have and—not to be negative here—but what are your contingency

plans? What if you don’t become compliant by the Year 2000? Are

you going to be able to revert back to some equipment that is not

compliant in terms of the type of equipment or the type of application? Do you have a contingency plan, a back-up plan if we’re not

there?

53

Mr. ROSSOTTI. Reverting to old equipment doesn’t do it because

the old equipment isn’t compliant. What we are doing is we are trying to very specifically identify our risks and figure out those

places where we need to have—and where it’s feasible to have—a

contingency plan. That’s where we’re putting our emphasis on contingency planning and I’ll give you an example.

One of the major programs that Madam Chairman mentioned

was the consolidation of the mainframe computers at the two sites.

In that case, that’s a very, very big program, that obviously has a

lot of risk to it. The target is to get all of the 10 service centers

converted to 2 computing centers before the year 2000.

However, we do have a contingency plan. We don’t need to absolutely do that. The contingency plan would be to upgrade some of

the computers in the sites that they’re already in, and we’re preparing that kind of a contingency plan. But——

Mr. PORTMAN. At what point in time do you make that determination?

Mr. ROSSOTTI. Pardon me?

Mr. PORTMAN. At what point in time do you decide that you need

to revert to the contingency plan?

Mr. ROSSOTTI. We’re deciding these—every month. I mean, I personally have a meeting every month with a high-level group and

we go over these kinds of things on each risk-area every month. We

made this decision, for example, just this last month, related to

these mainframes.

Mr. PORTMAN. I have additional questions on EITC and maybe

we’ll have time at the end of the session. Thank you.

Chairwoman JOHNSON. Mr. Tanner.

Mr. TANNER. Thank you, Madam Chairman. I want to follow up

on the Year 2000, if I could, Commissioner. And thank you for

being here today.

I am not as concerned, I guess, about the fact that you all will

do, I think, what you need to do to get your computers compliant

with whatever technology is available for the purpose intended.

At the moment, what about all of the people who communicate

with you and who may not be in the same position? That’s, I think,

one of jobs facing not only the Congress in terms of education and

public awareness but also the service as well. And so, do your contingency plans—could you briefly describe where we are with that?

Thank you.

Mr. ROSSOTTI. Yes, that is, in fact, a very good point. When we

talk about Year 2000, it’s not just converting our own application

programs. There’s a whole series of areas that we include under

our management program. And one of them is the very area you’re

talking about—we call it ‘‘external trading partners.’’ These are

people we exchange data with—like the States, the people that

send us information returns. We have a whole office of people who

are tracking those people, especially the major ones. I don’t have

the exact number here but I think there’s about 67 or some number

like that that’s the top priority ones and then we’ve got the next

priority ones. And we have a whole program to communicate with

them and actually to test at the appropriate time the ability to

interchange data with them.

54

So, I mean, it is a focus area. I will say that based on the reports

I’ve gotten right now for at least the top-priority ones, that is not

one of the ones that is in the most cautious status. We seem to be

doing pretty well at least for our major trading partners.

Mr. TANNER. Thank you, Madam Chairman, I yield back.

Chairwoman JOHNSON. Congresswoman Thurman.

Mrs. THURMAN. Thank you, Madam Chairman. First of all, I

want to take a few moments just to say that in the short period

of time that I’ve been on this committee, we’ve asked a lot of questions of the IRS in bringing forth information, letting us know how

you do communicate with our constituents. Certainly what I think

you’ve brought back to us today says that you have done a much

better outreach program than I think I would have anticipated in

the two years that I’ve been here and been listening to some of

this. So, first of all, I want to compliment you on that fact. And I

want to compliment you because it’s an issue that I raised several

months ago; and that is the outreach you’ve done with your frontline people. Those are the people that our offices are talking to,

those are the people that we have to go to to get our questions answered, and certainly those are the people that I think are going

to need to have the information to best provide for the taxpayers

out there. So, I compliment you on recognizing that that front line

is an extremely important part of this.

In keeping with that and in the information that I’ve received

over the last couple of years, the EITC and small business seem

to be the two areas that we’ve had the hardest time in compliance,

certainly from the electronic filing, possibility of the 16-hour telephone service, the kinds of things that you’ve done to outreach.

What other kinds of things are you doing or do you anticipate

doing to try to bring—I think the number that I heard for sole proprietors, small businesses, is about 40 percent. If you bring in some

cash businesses, it might go up as high as 60 percent. EITC, I

think, was at one time 25 percent. Is it now down to about 17 percent? Is that somewhere——

Mr. ROSSOTTI. Well, I don’t think we’re——

Mrs. THURMAN [continuing]. Around those numbers?

Mr. ROSSOTTI. We don’t have up-to-date numbers. We’re doing a

study to find that out. But I think that, you know, it is interesting

that you put both of those together.

In these areas where there’s noncompliance, I think that the

strategy that we’re following right now with EITC is generally the

strategy we want to follow with all non-compliant areas, which is

to have a strong emphasis on preventing the problem in the first

place, by such things as what we did with EITC; mailing out notices to people that have previously claimed an EITC they weren’t

entitled to and tell them, look, you really shouldn’t be claiming this

or, if you are, you need to provide us with better information. Get

the problem resolved upfront. Have education, outreach kinds of activities. Educate the practitioners.

Then, at the back end, you also need to apply your resources to

identify those people that, continue to non-comply even after that,

and that’s why we have these various detection programs, to try to

detect and, where possible, prevent the refunds from going out.

55

I think with all other areas, whether it be small business or elsewhere, that most people, given the right services and the right

kinds of education, will comply if they know they’re supposed to

and if they understand that really is a mandatory requirement. I

think better working with some of the small business groups; better support for people that are starting up small businesses—which

is something I knew something about in my previous life—those

kinds of things will, I think, help.

That’s one of the reasons in the long term that we need to organize the IRS into units that are dedicated to understanding those

particular kinds of taxpayers. If we get to the point where we have

a small business unit that basically services all the taxpayers, they

can, then, get to be very, very knowledgeable about all the specific

problems—the specific problems for each industry whether it be the

construction industry, the software industry, and all the different

industries and work with those associations; work with those people, and figure out what do we need to do to help these people understand their obligations; keep them in compliance, and limit our

enforcement resources where they should be to those people who

really just aren’t willing to comply after we’ve done that. Now,

that’s, the long-term strategy that we want to go to, and we’re pursuing that this year with EITC as much as we can.

Mrs. THURMAN. As you see and start to pull that information

and, particularly, as you’ve kind of singled because you have a special account to work on EITC, do you potentially see something

that people complain about the most—and that is the complexity

of the forms, the kinds of things that we hear about—do you see

that as maybe an offspring of this to the possibility that we’ll see

some of the paper reduction in these kinds of filings for these particular folks?

Mr. ROSSOTTI. Well, I hope that as we learn more——

Mrs. THURMAN. Beyond what we’re doing up here to add 800

pages in new tax laws.

Mr. ROSSOTTI. I think there’s potential for that in the sense that

if you have people that are working with a particular group of taxpayers and they see problems—and this is what we’re trying to do

with the Taxpayer Advocate Network—they can come back and

they can recommend not just specific cases but how we can systematically improve the system, and one way, of course, is to redesign

the forms; to have better education. We are going to be doing that

as part of our customer services initiative improving some of the

publications. Of course, there are limits based on what the tax law

says.

Mrs. THURMAN. I acknowledge that. [Laughter.]

Mr. ROSSOTTI. But I do think there’s potential to improve that,

yes.

Mrs. THURMAN. Thank you.

Chairwoman JOHNSON. Mr. Rossotti, I’d like to proceed with a

couple of more questions myself; I know Mr. Portman does and if

my colleagues have other questions, we’ll have a short additional

round.

There are two things that I want to approach. First of all, in

your plans for customer service, you don’t mention—you don’t advance any interest in reorganizing your very front line personnel.

56

We had a very, very interesting hearing at which the taxpayer advocates testified, and they were very high on the special tax days

that the agency has been doing, the Saturday days, the problemsolving days, but they made a very important point: part of the

success of those days was due to the fact that everyone on the team

was there, and they could take the taxpayer’s problems and all the

people they would have to run it through and ask questions of were

there, so they could solve it. Now, I thought—and we discussed this

at some length—I thought that was a very important bit of testimony, because—and that kind of reorganization needs to be

thought through at the local level if you’re really going to be a

problem solving agency and not one that takes in the problem; runs

through a million bureaucratic hoops, and hopes that at the end it

comes out solved in a timely fashion. That kind of front line reorganization, I think, is extremely important and is what has made the

difference in the private sector.

Mr. ROSSOTTI. I couldn’t agree with you more, Madame Chairman. If you look at this organization chart of the whole IRS, by the

time you get down to the front line employees, they’re divided up

into these, what we call, stovepipes, functional areas, that are then

under quite of few layers of management.

Chairwoman JOHNSON. Yes, I do think the idea of reorganizing

according to the subject matter expertise is very good. This is way

below that, and it’s probably not something that you can do entirely from the top. It’s something that they—each office is going

to have to figure out how to do, but just Saturday problem-solving

days isn’t the only time you need the whole team at the table.

Mr. ROSSOTTI. No, I think that the concept that I’ve proposed organizing is not just strictly at the top. I think that when we get

to the next level of detail which we’re currently studying, I think

we will find that—the whole point is to deliver what the customer

needs, not what is organized according to the IRS.

Chairwoman JOHNSON. Well, I thought that was the most significant comment that was made by the advocates about what they

had learned from the problem-solving days, and I’ll be interested

to watch to see if that’s——

Mr. ROSSOTTI. Well, I would agree with that very, very much,

and if you diagram the way that the current IRS organization

works, it makes it very difficult to do that except on an exceptional

basis.

Chairwoman JOHNSON. There is one area in which I have a significant question about how you’re going to—about your budget decisions. First of all, it is truly remarkable, the increase in electronic

filing, telefiling—electronic filing up 28 percent; telefiling up 68

percent; some other statistics along those lines that are very impressive. From past hearings, while we couldn’t exactly agree on

how much is saved, there was general agreement that an electronically filed tax return is far cheaper for the agency to process than

a paper filed tax return. So, clearly, this level of increase of activity

does save the agency some money. Consequently, I find it really

hard to understand why you’re going to continue to function with

only 1,682 cross checkers. Now, you used to have 3,322 employees

who cross checked interest and dividends reported on individual

tax returns, and you used to collect $3.5 billion just from cross

57

checking. Now, the agency now has 1,600 people, so it has about

half the number of employees, but it’s only collecting about onethird of the amount of revenue. It’s collecting—your prediction next

year is that you will collect $1.2 billion from this activity as opposed to $3.5 billion.

Now, first of all, half of the employees ought to be able to collect

at least half the money; that’s a problem. Secondly, this is clearly

an area in which personnel matter. I don’t know how you cross

check if you don’t have the people to do it. It also is clearly an area

of high yield. So, there are areas in which outside of the whole ‘‘we

need more money’’ issue—and I agree you need more money, and

I’ll work with you to get more money—nonetheless, are you deploying your resources in the most powerful way when you’re clearly

reducing people power demands in some areas, and you’re not

pumping them up in an area where there is an obvious big bang

payoff for the taxpayers?

Mr. ROSSOTTI. Well, I’d like to be able to get back to you, perhaps, in writing——

Chairwoman JOHNSON. Yes, I’d appreciate that.

[The following was subsequently received:]

Question: The IRS cut about half of the employees from the document matching

program but is only collecting about one third of the revenue. Why aren’t employees

being moved from areas where demand is reducing to the document matching programs where there is a big payoff?

Answer: IRS is constantly trying to balance scarce resources while prioritizing its

program objectives. In the area of our document matching program, we made a program decision to shift some of the resources originally directed towards document

matching towards increasing the Service’s ability to respond to the more taxpayer

telephone inquiries during the past filing season. Although the document matching

program’s resources were reduced, we believe that our shift significantly enhanced

our educational efforts through greater contact with taxpayers and, indirectly may

have had a beneficial impact upon taxpayers to avoid future contacts within the document matching program.

Mr. ROSSOTTI. But let me just say that one of the issues here is

that the total staffing in the IRS, if you look over the last 3 years,

has gone down by 10,000 people. The number of returns processed

has gone up by 8 percent in total which is more returns, by far,

than—in terms of an increase—than we’ve saved in terms of how

many have gone up through electronic filing, because even though

our filing’s gone up 25 percent, it’s 25 percent of a small base. The

whole economy has grown enough to add that many returns, so it’s

certainly more efficient relatively but in terms of absolute numbers

of people, we’ve got to process more returns. In terms of the specific

allocation of people to that specific function in terms of document

matching, though, I don’t have those numbers in my mind, so I

could get back to you in writing?

Chairwoman JOHNSON. Yes, I would like you to get back to me.

Mr. ROSSOTTI. I will.

Chairwoman JOHNSON. In the same sort of context, I was very

distressed by a report in the newspaper that we did verify and your

people said was accurate—this is in February of this year; it’s now

March, so this is a recent report, and this Ms. Marvel didn’t name

any officers but said there’s been historically a tendency on the

part of some, not all, of the revenue officers who contact taxpayers

to start that dialogue with an enormous chip on their institutional

shoulder. This creates a level of acrimony and a level of perception

58

of persecution that is really not what the system should convey or

intends to convey.

Now, you have mentioned that you are very interested in training, and I know from talking with you in other instances that you

fully understand that this training has got to correct this kind of

problem, but I think this also goes to the problem that Mr.

Portman raised of the number of revenue agent recommendations

that are actually rejected on appeal. I have no idea how many are

paid that should not have been paid just because people can’t tolerate the process of or front the money of an appeal. I think we

really do have to be very aggressive about training, and I think

when we do that we’re going to save some money in some other

places, and I would like you to get to me on the cross checkers, because I think that’s one area that we need to look at as we move

through this budget process.

Mr. ROSSOTTI. On the training, I think that the whole business

that we’re talking about is how do we convert the whole agency,

to an agency that says, ‘‘Look, our job here is to assume the taxpayers want to comply; we want to help them comply, and then if

they don’t, then, and only then, do we apply the more stringent

kinds of enforcement tools.’’ That is a big change, okay, and it involves more than one thing; I’ve laid out a number. One of them

is, of course, the measurement issue; another one is the training,

and it is somewhat technical training, but it’s also some of the

practices that you mentioned about how you go about doing an

interview. In one of our programs that we’re working on, we have

one of the people working on specifically that issue with respect to

collections about how do we retrain or restructure some of the

interviewing process for revenue officers, and it’s obvious that there

are opportunities to improve in that area. It’s just that when you

have that many people, it takes a little while to get it done, but

I am very encouraged by the response I’ve gotten from the front

line employees. I really think that people are ready to change, and

they want to make these kinds of changes. They’re asking for help

in the form of training and other kinds of tools.

Chairwoman JOHNSON. I appreciate that, and for those who are

listening—and there always are some that are interested enough in

what we’re doing to listen—I do affirm my congratulations to you

and the people who work in the IRS and the tremendous effort

you’ve made in the last year to respond to the concerns that have

been raised publicly and the many, many, many changes that have

been made to make the agency more efficient and more customer

friendly and more responsive as a customer service bureau.

There are problems and that’s why I wanted to be sure that the

record did contain a recent complaint, because it’s only if people

keep talking to all of us—to you as well as to us—that we can

make sure that the statistics not only represent progress but that

we are creating a different environment for our employees; a different way of serving the public, and a different style of collecting

taxes, and I think it will take awhile to make sure that the statistics represent reform at the kind of human level that we all know

is important and are committed to achieving.

I’d like to yield to Mr. Portman.

59

Mr. PORTMAN. I thank the Chair for the second round, and I’d

like to focus a little on the earned income tax credit, if I could. This

is something that troubles, again, a lot of us on this committee because of the mispayments. I think this year we’re estimating they’ll

be, what, about $5.4 billion worth of mispayments which is well

over half of your budget request today, and we continue to see, as

Ms. Thurman mentioned, real compliance problems there.

I guess I would have a couple of comments: one, is having looked

at the GAO statement today—I know we’re going to hear from

Lynda in a moment—but on page 41, it talks about the fact that,

at least according to GAO, the IRS is not using the 1995 study the

IRS undertook which showed that there was about a 26 percent

error rate; about 26 percent of the dollars were being misclaimed,

and I wonder if you could respond to that first to be sure that

that’s not the case; that, in fact, you are using that as part of your

baseline?

And then I want to talk a little about your compliance efforts.

You’ve just asked for $143 million for the second year of a 5-year

compliance effort. If you’re not using that 1995 study as a baseline,

that would obviously concern me, and that’s the implication from

GAO’s testimony today.

And then I want to talk to you a little about what you are doing

in your study.

Mr. ROSSOTTI. Well, first of all, I wanted to bring my colleague

here, Mr. Dalrymple, who’s more or less directly in charge of this.

On the matter of the baseline—and John will elaborate on this—

but I think that it’s not that it’s not being used, it’s just that what

we’re trying to do is to come up with——a preliminary kind of an

informal study that was done by the Criminal Investigation Division and not by the people that normally do compliance studies; research that is more statistically sound. So, it is a useful study, but

what we’re trying to do is, since we have this 5-year program, to

create a more reliable and more statistically-based kind of baseline

which we will then use every year.

Let me just ask John to talk about that and also the other issue

you talked about, about what we’re doing in compliance this year.

Mr. PORTMAN. OK.

Mr. DALRYMPLE. Actually, I’ll reiterate part of what——

Mr. PORTMAN. My time is limited, John, as you know.

Mr. DALRYMPLE. Yes, okay. I won’t reiterate too much. The CID

study that we did, which we shared with this committee last year,

actually took place prior to all of the changes that Congress made

and allowed us to implement such as math error changes for invalid and missing social security numbers, et cetera, which we expect would have a substantial impact on overclaim rates.

Mr. PORTMAN. Moving it from, what, about 26 percent to 21 percent?

Mr. DALRYMPLE. Well, we’re really not sure, actually, I mean,

that’s really the problem. So, that study, the beauty of it was that

it pointed up a significant problem that we had; allowed us to create some additional screens in our screening processes for overclaims and identify schemes, and we followed that up with another

study the following year, but both those studies predate the

changes in the law. So, what we’re doing this year is a very precise

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research study which we believe will show exactly what the compliance rate is this year, and we will follow that up each year of the

compliance initiative, or the EITC Initiative, with another compliance study, and we’ll be able to tell from the baseline this year

what impact steps we’re taking this year have had.

Mr. PORTMAN. So, the funds which were appropriated last year

are being used, in part, primarily for a benchmark study that

would then be used going forward to see whether your compliance

efforts are successful?

Mr. DALRYMPLE. Right. It’s not really a huge part of the $138

million, but it is a study that’s being done this year. It’s going to

affect about 2,500 tax returns.

Mr. PORTMAN. And when is that study due?

Mr. DALRYMPLE. That study is being conducted right now. We expect to have preliminary results in time for us to affect next filing

season, and I’ll have to get back to you with the exact date that

we expect the study results.

Mr. PORTMAN. Another point GAO makes—which I know you’re

very well aware of—was your efforts this year with regard to increased information, public information, and so on, probably won’t

be affected because, yes, these folks tend to file earlier because

they’re getting a refund, and so when you say for next filing season, I guess that would mean sometime during this calendar year.

Mr. DALRYMPLE. Yes, it would, and, actually, it’s interesting because we did quite a bit of work early this year to try to ensure

that folks knew about the credit. For example, we sent information

letters to 100 of the top employers most likely to employ taxpayers

who would be eligible. We sent 6 million EITC recipients informing

them of the advanced EITC credit. We sent a notice to approximately 2.5 million taxpayers who did not claim the credit but we

thought were eligible, and took other measures. And our EITC filings are up dramatically this year, and the total rate of examinations is actually down, so we think we hit the right mark there. In

addition to that, we’ve put in a substantial number of new screens,

and we’ve done substantial work, also, in the compliance arena

which I’d be more than happy to supply you with.

Mr. PORTMAN. Is one of your major problems social security numbers?

Mr. DALRYMPLE. That is one of the major areas that we’re looking at. And the math error legislation that you helped pass has

been a significant help to us.

Mr. PORTMAN. What does it cost you to check social security

numbers with paper returns?

Mr. DALRYMPLE. I have to get back to you. I don’t know that off

the top of my head.

Mr. PORTMAN. Just one point I would make—and I appreciate

the indulgence of the subcommittee—is that I’ve heard numbers as

high as $60, $70 to check the social security numbers. If that’s

true, then there certainly would be an advantage to move to electronic filing rather than the paper returns and I wonder whether

there are efforts being undertaken on the electronic side to encourage electronic filing?

Mr. DALRYMPLE. Yes, there are, to answer that question. We are

highly encouraging that, and, of course, there’s huge advantages to

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us there because we check them up front and then reject them out

of the system before they ever come in, so we encourage that highly, and, in fact——

Mr. PORTMAN. They need to be screened.

Mr. DALRYMPLE [continuing]. Our trading partners——

Mr. PORTMAN. But at no cost. Well, I guess, if you could get back

to me on the social security issue, specifically, and any detail you

could give us as to what you plan to undertake with this money,

you started to outline it in general terms—I think we’re out of time

now—and then the more general question I have is whether you’re

going to give us a benchmark that we can then use for policy purposes here within the year? It would be very helpful for us.

Mr. DALRYMPLE. I’ll get you those dates.

[The following was subsequently received:]

Question: What does it cost to check social security numbers with paper returns

for EITC compliance?

Answer. Using 1996 data, the average cost to check social security number per

paper return claiming EITC is twenty-two cents. This takes into account all processing and validation costs up to the point it becomes necessary to issue a math

error notice.

Question: What does the IRS plant to do with the additional funding requested

for the EITC compliance initiative?

Answer. The IRS plans to expand on the FY 1998 EITC inititive in FY 1999. The

1998 initiative includes plans to expand customer service efforts with dedicated tollfree telephone assistance, increase community based tax preparation assistance

sites, and develop a marketing and educational campaign. The IRS will also expand

compliance research efforts. Enhanced computer capabilities will allow the IRS to

identify and select questionable EITC claims prior to refund issuance. Funds also

are included to reimburse State vital statistics offices, through the Social Security

Administration, for expanded data associated with social security numbers. Finally,

expanded examination and criminal investigation staff in the district office and

service centers will assist our efforts to address questionable or potential EITC

fraud.

Question: Is the IRS going to provide a benchmark for EITC compliance that Congress can use for policy purposes within the year?

Answer. A study on EITC for the 1998 filing season is currently in process. The

goal of the study is to establish a baseline for measuring EITC compliance. A fully

developed and reviewed report including an EITC level of compliance measurement

is expected to be available in 1999.

Mr. PORTMAN. Thank you. Thank you, Madame Chair.

Chairwoman JOHNSON. In addition to that, you’ll get the figure

that I asked the commissioner for earlier, the cost per filing.

Mr. DALRYMPLE. Right. I have that also.

[The following information was received:]

Question: What is the cost per return for administering the EITC initiative?

Answer. The IRS is currently developing an Activity Based Costing that will provide the cost per return specifically for administering the operational portion of the

EITC Initiative. This costing will cover the cost of processing the return, issuing notices and/or refunds, and any compliance actions. The EITC Initiative Plan includes

direct work (processing of return, issuing notices, and compliance actions) as well

as items such as taxpayer education and outreach efforts, research project funding,

postage and printing, and EITC systems development that are not traditionally captured in cost per return calculations.

Chairwoman JOHNSON. We’d like to have that report as soon as

you conclude it, that you’re doing now, your oversight report.

Mr. DALRYMPLE. Okay.

[The following information was received:]

Question: What is the date the study on current year EITC returns will be available?

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Answer. The Compliance Research study on EITC for the 1998 filing season is

currently in process. The goal is to establish a baseline with the data. The steps

of the study include the selection of returns, examinations of the returns, and analysis of the information. A fully developed and reviewed report, including an ‘‘EITC

level of compliance’’ measurement, is expected to be available in 1999.

Chairwoman JOHNSON. Mr. Coyne.

Mr. COYNE. Thank you, Madame Chairwoman. Commissioner,

are there any results in yet from the EITC awareness day that was

conducted this past Saturday in 150 sites across the country?

Mr. ROSSOTTI. We are going to collect the comments from the

taxpayers, but we don’t have them in yet; it was just this Saturday.

Mr. COYNE. Nothing you could share with the committee at this

point?

Mr. ROSSOTTI. Sure.

Mr. COYNE. The current study that’s being done, the EITC study,

are you going ask that it distinguish between errors and fraud?

Mr. DALRYMPLE. Well, we’re actually looking at what we consider

to be overclaim rates. It is extremely difficult in these scenarios—

I mean, if we see some really abusive things here, we will make

referrals out of this process, but it is a research study, and what

we’re looking for is, in general, overclaim rates. And it’s very difficult to determine willfulness in those kind of situations. Now, it’s

not to say we may not find some really abusive situations which

we would then refer to our criminal investigation units, and if we

do that, we consider that there was, potentially, some fraud involved.

Mr. COYNE. Well, don’t you think that it would be important to

go the extra mile for people who do make innocent errors like we

all do on our tax returns; to distinguish that between fraud and innocent errors?

Mr. DALRYMPLE. Well, that’s how we do distinguish them, Congressman, I’m sorry. If we see badges of fraud in this study, we will

know how many—it’s a statistically valid study—and we will send

those on to our criminal investigation unit, so, to the extent that

we see that, we will be pursuing it.

Mr. COYNE. So, the answer to the question, will we be able to distinguish between innocent errors and fraud, is yes?

Mr. DALRYMPLE. A qualified yes. Innocent errors—I mean, there

are all kinds of errors, and whether it reaches the threshold for

fraud and the definition for fraud is another issue. Does that make

sense?

Mr. COYNE. Yes. Thank you.

Chairwoman JOHNSON. If there are no further questions? Thank

you, Commissioner Rossotti. We appreciate your testimony, and we

look forward to working with you on the budget issues.

Mr. ROSSOTTI. Thank you very much, Madame Chairwoman.

Chairwoman JOHNSON. I’d like to call next, Lynda Willis, the Director of the Tax Policy and Administration Issues at USGAO, General Accounting Office. Ms. Willis, welcome to you and your staff.

STATEMENT OF LYNDA WILLIS, DIRECTOR, TAX POLICY ADMINISTRATION ISSUES, UNITED STATE GENERAL ACCOUNTING OFFICE

Ms. WILLIS. Thank you, Madame Chairman. I’m very pleased to

be here today and with your permission, I’ll ask that my written

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statement be put in the record in its entirety, and I’ll just very

quickly hit the highlights of what we have to say today.

Chairwoman JOHNSON. Thank you. So, ordered.

Ms. WILLIS. I have with me, today, my associate, Jim White, and

also the Assistant Director responsible for our technology modernization work, Randy Hite.

The most critical issue IRS faces this year and next is the need

to make its computer systems year 2000 compliant. The goal is to

implement all year 2000 efforts by January of 1999 to allow time

for testing, and with the IRS, as you are all aware, it is very important to have enough time to test the new systems during a filing

season before we go into the year 2000. IRS’ latest cost estimates

indicate that additional funds will be needed for Fiscal Year 1998

beyond the amount already available. IRS is also refining its budget estimates for Fiscal Year 1999 in light of more current information.

For Fiscal Year 1999, the administration is also requesting an

additional $323 million for IRS’ information technology investments account. Combined with the $325 million appropriated for

1998, that request would increase the account’s total to $648 million. Because we believe that $246.5 million of the request has not

been justified on the basis of analytical data or derived using a

verifiable estimating method, we believe that Congress should consider reducing the administration’s request by that amount.

The administration’s request also includes $103 million to enhance customer service. IRS plans, among other things, to provide

better telephone service; improve customer service training, as you

discussed; and strengthen the Taxpayer Advocates Office. We believe all of these areas are critical to good customer service and

need improvement.

Each year IRS submits detailed budget estimates to support the

administration’s budget request. In our opinion, several factors

limit the utility of the budget estimates for oversight purposes. For

example, the estimates do not provide the kind of information

needed to determine how much of the administration’s request is

for taxpayer assistance as opposed to enforcement. One aspect of

IRS’ budget estimates that has improved over the years involves

the use of performance measures, however there is still much work

to be done in that area and many challenges to overcome. Both of

these things are very critical to IRS’ successful implementation of

the Government Performance and Results Act.

Interim data on the 1998 filing season indicate that IRS is continuing to make progress in two very important areas: electronic

filing and the ability of taxpayers to reach IRS by telephone. In addition, although it is too soon to assess the results of the IRS initiative to reduce earned income credit non-compliance, we do have observations on two aspects of the initiative. First, some of the expanded assistance will probably be too late to help many claimants,

and, second—as Congressman Portman noted--the baseline 1995

study, according to IRS, cannot be used as a baseline. This raises

questions as to whether decisions to develop and fund the initiative

were founded on reliable data. We also question, based on the information we have from IRS, whether the results of the new baseVerDate 20-MAR-2000 08:54 Apr 17, 2000 Jkt 010199 PO 00000 Frm 00066 Fmt 6633 Sfmt 6602 E:\HEARINGS\60874 pfrm02 PsN: 60874
64

line study will be available soon enough to be of any value to the

Congress.

Madame Chairman, those are the highlights of our testimony

today. I’d be happy to answer any questions you may have.

[The prepared statement follows:]

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Chairwoman JOHNSON. Thank you. I’d like to enlarge on this

issue of the $243 million, was it, that you don’t feel is adequately

documented.

Ms. WILLIS. Let me allow Mr. Hite to answer that question.

Mr. HITE. Madame Chair, the OMB has put forth guidance directing the agencies as to what they need to do to justify investments in capital assets. This guidance requires that these capital

assets be justified on the basis of verifiable data; that the amounts

being requested be determined using formal estimating methods.

Now, in the case of IRS’ request this year for its investment account of $323 million, if you combine that with the appropriation

IRS received last year in the investment account which was $325

million. That provides $648 million in the account. Now, the justification that IRS has put forth in terms of a business case for the

first release of the first phase of the modernization, totals $401.5

million. The difference has not been justified on the basis of any

verifiable analysis. Therefore, in the absence of that, IRS has not

met the requirements of OMB, and that leads us to our recommendation that about $247 million not be funded.

Chairwoman JOHNSON. So, $247 million of the dollars that they

already have for capital investment cannot be justified?

Mr. HITE. Two hundred and forty-six point five million of what

they are asking for this year, out of that $323 million cannot be

justified.

Chairwoman JOHNSON. That’s a very high percentage. What are

the kinds of problems you’re seeing? I mean, that seems like a remarkable statement. What are the failures? What I hear you saying is that $247 million of $323 million can’t be justified using the

guidelines OMB has issued for capital investment.

Mr. HITE. Correct. And the rationale behind the $323 million

that’s being requested this year is to show a steady state of funding

from prior years. Last year, $325 million was appropriated, and

what we were told by OMB was we’ll keep the request for funding

at a steady rate, therefore, it will be somewhere around $325 million.

Chairwoman JOHNSON. So, your point is that they just keep asking for the same amount of money knowing that they’re going to

have technology needs, but, actually, they’re not spending it well,

because they can’t justify it?

Mr. HITE. That’s correct. The fact that they’re not spending it

well, I wouldn’t necessarily agree with, but they’re asking for that

steady rate of funding without the associated justification for that

amount of money.

Ms. WILLIS. Madame Chairman, this is not dissimilar to the situation we had with this investment account last year when IRS

came in asking for $500 million, and we found that they did not

have good plans justifying what they were going to buy with that

money and what they were going to get in return for it. Congress

cut the $500 million request down to just over $300 million, and

that’s basically the same amount that they’ve asked for this year,

but, again, in our opinion, without having an adequate basis for

saying this is how much we need to fund investments in the account even in the future, recognizing that they will not be spending

this money in the near term if there are certain requirements on

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it. In order to know how much you’re even going to need, you need

to have a better justification for the total.

Chairwoman JOHNSON. Do you mean that while they know they

need to replace a lot of front line computers, they can’t tell you exactly how many nor what kind?

Ms. WILLIS. Well, now, the front line computers that they’re replacing are being funded under the operations part of the budget

not the investment account. That’s all part of the year 2000 investment, and so none of that money is coming out of the investment

account.

Chairwoman JOHNSON. Are the mainframes and the centers coming out of this investment?

Ms. WILLIS. No, no, that, again, is coming out——

Chairwoman JOHNSON. Is this all just blueprint stuff?

Ms. WILLIS. This is all money designed to pay for the investment

that will be driven by the blueprint for modernization in the future.

Chairwoman JOHNSON. Is this money actually being spent? It’s

just being allocated so that they can build it up, and we don’t have

to do it over one budget here?

Ms. WILLIS. Yes, it’s just being placed in a multi-year type of investment account so that when IRS is in a position—we hope in a

position—and has the disciplined processes in place to spend the

money properly, that this is where they will go to get the money

for the new modernized systems. But how much money will be

needed and when will it be justified are the open questions.

Mr. HITE. If I could add to that? For Fiscal Year 1999, from that

investment account, IRS is planning to obligate, roughly, $81 million.

Chairwoman JOHNSON. Well, since some of this money is clearly

being set aside to meet the future costs of the blueprint, of implementing the blueprint, and since they’re just now going out for contracting the blueprint, would you assume that they would be able

to be justified—that they would be able to justify this, all of this

money precisely at this time? It’s kind of a question of the overall

blueprint plus the detail of the equipment that’s going to achieve

those goals. Can you really expect at this point that they would

know all of that and, therefore, be able to attach specific justification for equipment to these dollars at this time?

Ms. WILLIS. Madame Chairman, I think the issue here is that

under OMB guidelines before investment accounts are set up or

money is placed in investment accounts, you need to be far enough

along the process to have a justification for what you’re going to

spend that money on. So, no, IRS is not in a position right now to

say how much they’re going to need overall to modernize and when,

but before we start appropriating or allocating money in specific

amounts for that, they do need to be farther down the road in understanding what they’re going to use it for. Right now, it’s just

kind of going into a bank account that can be drawn on in the future, and we don’t know what they’re going to buy with it.

Chairwoman JOHNSON. Interesting. Certainly, one of the problems that we saw in the $4 billion that we’ve already put into technology modernization.

Mr. COYNE. Congresswoman Thurman.

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Mrs. THURMAN. Thank you. Just so I understand it, in that account that we’re talking about, are there any guidelines; are there

any stipulations; is there anything that would prevent them from

spending those dollars or is this just to kind of gather some money

recognizing modernization later on? I mean, is there anything that

covers that?

Ms. WILLIS. Well, there are certain requirements or fences that

have been placed around the money in terms of IRS having a systems life cycle, processes in place, and the blueprint finished, et

cetera, but once that basic framework is in place and the money

is released, as I understand it, at this point, there are no controls

around what and how that money will be spent.

Mr. HITE. One thing I could possibly add to clarify this, is that

the modernization blueprint lays out multiple phases; and within

each phase, it specifies multiple releases of technology. There are

16 releases in all. What IRS has justified so far is the first of the

16 releases. Now, these releases are going to be brought on incrementally; presumably, they’re going to be justified incrementally.

Thus far, only release one has been justified.

Mrs. THURMAN. And justified and accepted with the justification.

I’m not sure that I understand all of this.

Mr. HITE. Justified in terms of OMB’s requirements for business

case justification—a case where the estimates, or the monies that

you’re going to spend for the technology that you want, are arrived

at using formal cost estimating techniques; where there is a validated cost benefit analysis justifying those amounts, and the payback—the return on investment from those amounts are worth

making that investment. These are the type of things that OMB is

requiring.

Mrs. THURMAN. Okay, so they put some kind of limitation on

what can happen. And you said that’s 1 out of 16? Have there been

other ones offered and they just haven’t been justified at this point

or——?

Mr. HITE. No.

Mrs. THURMAN. No——

Mr. HITE. I’m sorry. There have been no justifications put forward in terms of a business case for any of the releases beyond release one.

Mrs. THURMAN. Do they have a time period in which they can do

that with that pot of money?

Mr. HITE. We asked that question and right now they have no

time frames for preparing the business cases for the subsequent releases.

Mrs. THURMAN. What did they say back to you when you asked

about that? I mean, not having the opportunity to ask them that

question because they’re no longer a witness. What is their justification to you? I mean, when you talk about this issue. Do they

give you any?

Mr. HITE. Justification in terms of why they haven’t completed?

Mrs. THURMAN. Why they have that money? Why they need that

money? I mean, what have they been telling you?

Mr. HITE. We asked IRS how that amount of money was derived,

and they couldn’t explain the derivation over and above the $401.5

million that’s justified in that business case. We asked OMB and

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OMB’s reply was the steady rate of funding from year to year in

the investment account. So, the presumption is we’ll ask for a constant amount of money over a number of years, so you do not see

a lot of peaks and valleys in the amount of money that’s being

asked for in the investment account.

Mrs. THURMAN. So, does this kind of go to the issue that we hear

sometimes from Government where if you don’t get the money but

when you need it to do modernization or you need to do some other

updating and that kind of stuff, because you haven’t spent that

money the year before, so they don’t want to give you any more

money, but there’s no account for them to use later on where something might be more expensive? I don’t know if that made a lot of

sense.

Ms. WILLIS. As we have looked at IRS’ technology programs and

modernization over the past 10 years, we have not found a lack of

money to be a problem at all. Now, there is the issue of having

money to invest as the projects come up in the future, but there’s

also the issue based on history of making sure that when the

money is invested it is invested wisely and consistent with the

blueprint, with the architecture, and done in a way that will bring

the benefits that you expect to get; and that has not historically

happened.

Mrs. THURMAN. Are we—and I don’t know that you can answer

this—but are we seeing that same problem—I mean as I look at

this year 2000 issue that seems to be getting very close to us—are

we experiencing this in other parts of budgets in other areas, the

same kind of situation?

Ms. WILLIS. Around the year 2000 budget? Yes, I think across

the board in Government what you’re seeing are increases in the

estimates for what it’s going to cost to become year 2000 compliant

as agencies become more familiar with the inventory of their systems; what they’re going to have to do; which systems are going to

have be replaced; what that’s going to cost. There’s also some

hypotheses out there that as we get closer to the time and resources get tighter, that the cost of contractors will go up. So, the

expectation is that the cost will continue to climb.

Mrs. THURMAN. Okay, thank you.

Ms. WILLIS. And that’s not unique to the Federal sector.

Mrs. THURMAN. Thank you.

Mr. COYNE [presiding]. Well, I’d like to thank the panelists, director, for your testimony and call up the next panel.

The next panel is Joseph Lane, EA, Chair, Government Relations

Committee from the National Association of Enrolled Agents, and

Roger Harris, Federal Taxation Committee, National Society of Accountants.

Mr. Lane.

STATEMENT OF JOSEPH LANE, NATIONAL ASSOCIATION OF

ENROLLED AGENTS

Mr. LANE. Thank you, Mr. Coyne. We appreciate the opportunity

to visit with the committee again today. If it’s all right, I’ll submit

our written comments for the record and I’ll just summarize and

then be happy to take your questions afterwards.

119

We’re pleased to be before the committee again this afternoon,

and continue to appreciate the opportunity to come in annually to

review the preparation for the filing season and the service’s performance. We’re surveyed our online members in the last two

weeks in preparation for this testimony. We received scores of comments from our members who, despite the fact they work 100 hours

a week, wanted to comment and have some input on this hearing

today.

The overall impression is that the filing season is running very

smoothly. More taxpayers than ever are using paid preparers to get

their tax returns done this year because of the confusion caused by

the tax bill was passed last year. And while we appreciate the

work, we probably would recommend that Congress revisit the

whole area of tax simplification next year, because we don’t really

think the intent of last year’s bill was to increase our workload.

There’s a lot of confusion about the Schedule D, the various IRAs

that take effect this year, and the childtax credit.

We also want to extend some congratulations to the Service for

the way they’ve taken the criticisms of last year, both at the congressional hearings and from taxpayers. We think they have made

a legitimate and concerted effort to try improve responsiveness to

taxpayer complaints and problems and to emphasize to their employees the absolute necessity for courtesy in all their dealings.

Our members report to us a general improvement across the board

in that area.

We also think the institution of the local problem-solving days at

the district level was a masterstroke. And the decision to continue

these events into the filing season has proved very effective and we

support the Service on that.

What we would like to suggest the committee do, however, is to

schedule a hearing in the near future to have the Service come in

and present to the committee what systemic problems and caseprocessing problems have been identified across the country in

these problem-solving days, and what steps they’ve taken to ensure

that those problems don’t continue to recur. We think we could all

learn something out of this, and the Service would benefit from

having the committee’s input and the input of the practioner organizations on those issues.

Another example of improved service is the extended office hours

into nights and weekends. We think this is a trend in the right direction, and IRS should be granted with additional budget support.

We caution the committee not to expect an immediate payoff.

Sometimes it takes a while and a number of years of pump-priming

to get people to realize IRS is not open during the usual business

hours, but has extended hours and is available on weekends.

Several years ago IRS had a program where they used to take

fully-outfitted campers out to shopping centers. They had tax forms

and actual assisters on board to help taxpayers. A guy would come

to the shopping center not knowing IRS was going to be there, see

it there, and come back the next weekend with his stuff. And of

course they would have moved to another mall by then. So they

had some bad publicity and there was a disconnect. It takes a

while and a concerted effort to make sure this publicity gets out.

But we praise IRS for their ability to take this these programs out

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to the public where the public is, as opposed to expecting them to

go downtown on a weekday to a Federal building.

Schedule D reporting of capital gains has been a major headache

for taxpayers and practitioners and apparently for mutual funds

and brokerage houses. We are seeing a tremendous increase in the

number of corrections that are coming out late in the year on

1099’s because brokerage houses were not able to properly account

for and report the capital gains. Some of the mutual funds gave out

reports that did not break out what was subject to the 28 percent

rate versus the 20 percent rate, so we had problems along those

lines. We had many practitioners exercised about that.

Another exasperated practitoner basically said that anybody in

Congress who voted for this bill ought to be taken out and hung

or shot or whatever, but we’ll say we don’t blame you folks for designing the form.

One thing that is important, I think, is that any time you have

a late-year tax law change, it really is disruptive, not only to the

IRS, but to the publishing industry, the software industry,

practioners and everybody else. So we would like to see the committee agree that for current year tax law changes, legislation

must be ready for a vote by July 1, and any vote on a tax law

change that comes after July 1 would have to take effect the following year. It just makes sense to do it on a more rational basis.

One of the other issues we looked at is the electronic filing program. The comments we received from our members were universally supportive of the quality and design of the e-filing program

material that the IRS made available this year. They are very

happy with that. We would note that was done by an outside agency under IRS contract.

What our members have not noticed are any of the Public Service Announcements on public television. It’s been very, very spotty,

and so it prompted a lot of our members to be concerned. And so

like other government agencies that have legitimate advertising

program needs—for example, the volunteer Army, which we understand is somewhere funded in the neighborhoood of $100 million

for advertising—that the IRS ought to get some kind of reasonable

budget that allows them to go out and actually market this e-filing

program appropriately with professional management.

Of course, the caveat is that would have to be handled by an outside advertising agency. We would not recommend that we have

IRS engage in running their own advertising campaign. The experience we’ve had with them in the past has not been entirely positive

in that regard, but they certainly deserve a much-enhanced budget

to allow them to go out and actually purchase advertising.

We are still receiving complaints from practitioners who would

be willing to convert to electronic filing, but can’t because not all

the tax forms can be accepted electronically. And one of the concerns we have is that we hope the Senate delays in passing the IRS

reform bill will not cause a situation where IRS is granted a delay

beyond December 31 of this calendar year to have a procedure in

place which allows IRS to accept all forms electronically. And that

is a major concern of ours because, quite frankly, we think it’s not

getting the proper amount of emphasis in this budget request.

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If you look at that illustration in the Commissioner’s testimony

you got today, of the additional $103 million that’s going for enhanced customer education and customer service, only $3 million is

earmarked to go to electronic filing. Now we heard testimony all

last year where we had an $800 million cost to process tax returns

through the pipeline, and if 50 percent of those tax returns are

from practitioners that are in digital format already and get transferred back to paper to send to IRS, it seems to me that there is

a substantial budgetary savings that could be derived by just increasing the number of practioners who file electronic returns.

So it’s critical, and we believe it ought to be addressed in a specific line budget item, to make sure that that work is done and it

is done timely, even if it means going outside and hiring an outside

contractor to identify what reprogramming needs to be done to

make sure IRS could accept the all existing tax forms. We understand the Service has lots of priorities, and the Year 2000 problem

is a major one, but this cannot be allowed to drop through the

cracks.

We’ve also had some complaints about the refund telephone solicitors giving bad advice to taxpayers. All of these examples we’re

putting up are mentioned to us by our members for purposes of illustrating that the Service has still got some improvements to

make in the training area.

One of the real concerns we have is the so-called e-filing educational monitoring visits that are part of the revenue protection

strategy. These visits are ostensibly done to assure the practioner

is complying with the record-keeping requirements of the e-filing

program and maintaining the documentation required of return

transmitters. Based on our review of our members’ depictions of

these events, we can only conclude the Service has re-defined the

word ‘‘visit’’—something akin to the Viking visits of Northern Ireland centuries ago.

We have had incredible complaints from members about revenue

agents barging into their offices full of people, insisting on seeing

the preparer immediately, asking to see taxpayer records immediately, not calling for appointments, not explaining the purpose of

the visit. We understand the need for revenue protection strategies,

to make sure you don’t have earned income fraud and refund fraud,

but the IRS’s own study two years ago indicated that Enrolled

Agents and CPA’s who are covered by Circular 230 were a miniscule percentage of the problem e-filers. I think that these educational visits, if they’re allowed to be conducted the way they’re

being conducted now, are just going to cause more ill-will.

And it’s important, we think, for the Service to communicate the

criteria they use—when they identify these problem taxpayers—

that they’re going to be using, that they should share that information with responsible practitioner organizations and the banking

industry, in particular, and the software companies, because they

have the most to lose from earned income credit fraud.

So we need to address those issues dramatically and quickly, because one of the problems we had this year is the earned income

credit criteria that they publicized they didn’t put out until midMarch, and the peak refunding cycles had occurred in late January

and February. So all of those bad loans had already been made beVerDate 20-MAR-2000 08:54 Apr 17, 2000 Jkt 010199 PO 00000 Frm 00124 Fmt 6633 Sfmt 6602 E:\HEARINGS\60874 pfrm02 PsN: 60874
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fore the criteria that the Service was going to use was disclosed to

the people that would have been making the loans.

And part of the problem, as we understand it from the banks

that we’ve talked to and our own members who have lost a fair

amount of money so far on this, these people came in, made a commitment to the Service to file electronically. They filed the returns

electronically. The Service has selected these tax returns for additional review for purposes of looking at the earned income credit.

And in the cases where the Service subsequently decides that

that is an accurately claimed return refund and an accurately

claimed earned income credit, even though they have been designated or instructed on the original return that was filed to do a

direct deposit of the refund back out—and generally in those cases,

that means to a bank that’s already advanced the loan to the taxpayer against that refund, they are issuing a paper refund, which

means that the very people who are supporting them in the electronic filing arena, trying to get additional tax returns filed electronically, the banks and the preparers that are involved in that

program now, are losing. The preparer loses his fee because it

doesn’t get deducted, and the bank loses the repayment of a loan

which they had assumed was a guaranteed repayment because the

Service was going to do a direct deposit.

Now, they should be able to get that back into a direct deposit

cycle. IRS should not have to issue a paper refund on that. In 1995

when they did that, the bankers we talked to told us that it cost

them over $200 million. This year the bankers have told us that

they had programmed a 2 percent unfunded refund loss rate, and

they’re currently running 4 percent. So they’re looking at the same

type or dimensional losses this filing season. That’s outrageous.

That’s four years that they’ve been talking about changing that.

They should get that back into an automatic deposit cycle. It just

creates ill-will among everybody that they’re looking to help them

improve their processing systems.

And we’d like to suggest that the committee hold hearings on

this issue alone this year and invite in the banks. There are only

three or four banks that are involved in this, and software people,

and some practitioner organizations—to comment specifically on

the cost to them to do business with IRS just because of the way

they handle these refunds.

As to budget priorities, we reviewed the budget. We think the

budget priorities in terms of the design and direction are all getting

proper emphasis. It’s taxpayer service; it’s enhancing the ability of

the technology to process the work effectively. The one area we

would like to spell out in detail, and we believe you have to stay

on top of it, is to make sure that those tax forms are translatable

and file able electronically by the end of this year.

The IRS has supported this and said they had supported it for

years. The problem is, if you look at that budget request, with $3

million allocated to enhancing electronic filing, I don’t think you’re

going to buy much in terms of moving the rest of the tax forms

over. We would be happy to come back and comment at either one

of those hearings, should you decide to put those on your schedule.

In summary, we would like to comment that Commissioner

Rossotti has made a substantial effort in turning around the moVerDate 20-MAR-2000 08:54 Apr 17, 2000 Jkt 010199 PO 00000 Frm 00125 Fmt 6633 Sfmt 6602 E:\HEARINGS\60874 pfrm02 PsN: 60874
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rale of that organization and we commend him on that. And we

would also like to commend Deputy Commissioner Mike Dolan,

who was acting for quite a while before Mr. Rossotti was confirmed, and the IRS employees, who really had to take some pretty

substantial hits last year in terms of their own performance and

but who took the valid stuff to heart. They have made a legitimate

change, and, I think, basically, are going to continue to make positive changes in the way they deal with taxpayers.

So, in general, we’re happy to report a much better functioning

IRS this year than we have had in the last year or so. So, I’d be

happy to take any questions if you have any.

[The prepared statement follows:]

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Chairwoman JOHNSON [presiding]. Thank you very much, Mr.

Lane.

Mr. Harris.

STATEMENT OF ROGER HARRIS, VICE CHAIRMAN, FEDERAL

TAXATION COMMITTEE, NATIONAL SOCIETY OF ACCOUNTANTS

Mr. HARRIS. Thank you, Madam Chairman. My name is Roger

Harris. I am president of Padgett Business Services and currently

the vice chairman of the National Society of Accountants Federal

Taxation Committee. We’re very pleased to have the opportunity to

be here today to comment on the current filing season, as well as

the 1999 IRS budget.

I think, as you know, our organizations have been big supporters

of the restructuring legislation that the House has passed and the

Senate is considering, and certainly we’ve been supportive of the

goal of that legislation, which is to make the IRS a much more customer-responsive agency. I think to be consistent with that support, we must also be supportive of the fact that they need money

to do that, and we stand in general support of their budget request.

Specifically, on a few points, Commissioner Rossotti’s reorganization plan, I think, is something we agree, certainly in principle,

with. I think we know very well that the small business taxpayer

is a different person than the individual taxpayer, and when the

IRS reorganizes in a business unit format, I think it offers them

the opportunity to train their people to understand their customer

better, and that what they are dealing with is their customers. I

think that this has a tremendous opportunity to improve the customer service of the agency.

Clearly, I think training and equipping personnel is important at

all levels of the IRS. I think we have a lot of hardworking people

at the IRS that just need to have the training and equipment that

they need to do the kind of job that I think they want to do when

they come to work every day. And I think to the extent that we

can fund that, it certainly is money well-spent.

I don’t think that we can—any of us—sit around and question

the need for funding for the Year 2000. I think all of us shudder

at the idea of what would happen if the system is not functioning

as it needs to be in the Year 2000. Perhaps of all the budgetary

processes, that maybe is the most important area that we have to

address. I think that the system has to work and work indefinitely.

Moving into the filing season, I can agree in large part with some

of the things that Joe said, particularly as it relates to the Schedule D and the capital gains rule. I think we would all agree that

this has been a relatively smooth filing season, but there is no

question that the Schedule D and the capital gains law has added

a complexity that many of us didn’t anticipate and has been an unintended benefit to the tax practioners. And I know that that legislation was not intended to help us make money, but it has done

that.

But there’s also been another interesting result of that—that

since most taxpayers have benefitted from these changes, it’s amazing how complexity, when it saves you taxes, is not nearly as offensive as it is when your taxes go up. [Laughter.]

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So, I don’t know what the message is there, but we thank you,

and I think the taxpayers thank you at this point.

There have been some positive things, obviously, done this year

by the IRS, many of which have been mentioned here today with

regard to the expanded hours of the phone, the walk-in Saturdays,

and the problem-solving days. I don’t think we can ignore that

those have been well-received and have made a major impact on

this smoother tax season. I think we should commend the Service

and certainly encourage them to continue to work in those areas.

With regard to electronic filing, we’ve heard numbers and we’ve

heard comments today that electronic filing has increased, and I

think, in fact, it has. But, unfortunately, I don’t think it’s increasing anywhere fast enough if we’re going to try to meet the 80 percent goal of the legislation that has passed the House. There are

problems in the current system that have to be addressed if we are

going to realistically meet an 80 percent goal.

There are some encouraging things going on, though. One, I

think, is Bob Barr joining the IRS—I know they are currently

working right now to put together the Electronic Tax Administration Advisory Committee, and I think if we build that committee

properly and give Mr. Barr the funds and the people to work with,

I think we can devise the system that will help us reach the goal.

I don’t think today we know what that system looks like. I’m not

sure that we should be restricted by what’s happening today. I

think we have to be, again, a little creative and give this group the

empowerment to design a system that gives incentives both to taxpayers and practitioners so that the 80 percent goal is met very

easily and leads into perhaps even better than 80 percent, because

it becomes the way everyone wants and chooses to file their tax return.

I see the light is coming on, and in the interest of everybody’s

time, I will ask you—to include written testimony I have submitted

that is in more detail. I certainly, again, welcome the opportunity

to be here today. It’s also a pleasure to come, and I certainly will

look forward to any questions that any of you may have.

[The prepared statement follows:]

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Chairwoman JOHNSON. Thank you very much.

Mr. Lane, your comments about the need to complete work on

making all the forms of the IRS compatible with the electronic filing system is a very important point. The Commissioner didn’t

speak to that, and certainly from last year’s work we know how important it is to get more people into that system, both to save

money, improve accuracy, service, and so on. Is anything going on

to move forward on accommodating the forms to the electronic system?

Mr. LANE. We had a meeting yesterday afternoon with Commissioner Rossotti to just chat with him, meet him, and talk about

what his plans were, and I brought this up with him as well. We

had given him an advance copy of our testimony. And he obviously

shared with us the concerns he has in terms of the number of problems he’s dealing with over there, and clearly the Y2K problem is

a major preoccupation of the Service right now.

Our concern is exactly as we outlined in the testimony, that the

Service has always said that they support that process, but we

don’t see the support given in the budgetary requests. And I think

if you look at the Commissioner’s exhibit, it shows, I think, $3 million out of $103 million going for enhanced electronic filing. I can

sympathize with their situation. They have a unique problem with

the Y2K issue, given the age of their equipment. I mean, they’re

unlike almost any other corporate business, because most corporate

businesses have much more current equipment to work with.

So, we can sympathize with that and recommend to the committee that if the Service feels they cannot meet that goal this

year, then they ought to let a contract out and have an outside

group do that piece of it because that has nothing to do with Y2K.

Let an outside group of programmers come in and get all those tax

forms moved over.

Right now they have the ability to enter the data from those

forms digitally because when they keypunch the return, they put

it in. So it’s not like they have to reprogram everything. They just

have to give us the ability to load that data electronically, basically, if they are in fact keying that information.

Chairwoman JOHNSON. Do you have reason to believe that this

will cost more than $3 million?

Mr. LANE. You know, I would assume that it does. I don’t have

the data in my possession to determine what their cost factors are,

but $3 million is a paltry sum when you consider that just the

amount of money that would have to go into advertising promotion

alone to expand electronic filing beyond 20 percent to 25 percent

of tax returns to get up to 80 percent—that’s an admirable goal.

Chairwoman JOHNSON. Is is worth, though, putting the money

into a big marketing effort when you can’t yet let everyone who

could file electronically, file electronically?

Mr. LANE. I agree with you. There’s no question the priority

ought to be on getting as many of those forms moved over.

Chairwoman JOHNSON. How big a job is that? How long do you

think it would take? I mean, if you really committed yourself to

getting all those forms in there, what are we talking about? Six

months, a year, three years?

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Mr. LANE. You know, I don’t have the expertise to respond to

that. I’m sure the Service has looked at it and could do it, but—

and I would like to see the answer to that because we’ve been raising that issue, and I noticed the National Commission on Restructuring focused on that issue intently and tried to get an answer of

what that would cost.

The key thing—and I think that the National Commission has

understood it when we got finished, and I think your staff people

here understand it from the discussions we’ve had with them in the

committees—the key thing to getting practitioners to move into

electronic filing is to allow them to file. They will not set up two

separate processing pipelines in their office during tax season.

They have to have one processing—and as long as 40 or 50 or 60

percent of the tax returns can’t be filed electronically, they’re going

to keep 100 percent of the volume out, and that’s critical.

Chairwoman JOHNSON. Right, and I think that point has been

very well made, and I appreciate your calling us back to something

that is very fundamental to the whole cost structure of the IRS and

its ability to use its resources in the future in the way that will

be most effective for the taxpayers in the long run.

Mr. LANE. Absolutely.

Chairwoman JOHNSON. We will look into some of these questions

about how long this project would take and what the resources are

and what they’re planning, as certainly this is a key component of

customer service.

Also, I just wanted to ask you briefly—you heard the discussion

about the cross-checkers?

Mr. LANE. Yes.

Chairwoman JOHNSON. What is your opinion of that process and

the need for more people in that function? Will that need decline

as electronic filing increases?

Mr. LANE. It’s interesting. Part of the reason you’ve had a dropoff in yield from that program is because of the fact that they have

gotten so much more corrective. Initially, the reason you got a lot

of yield on that program is that people didn’t know that there was

a cross-check between the 1099 data that came in, so a lot of stuff

didn’t get put on tax returns or it got put on tax returns erroneously or taxpayers didn’t know that they got it and should have

put it on. So, I think what’s happened is an education level as this

IRP program has matured—taxpayers and practitioners are doing

a better job of making sure the information is on the return.

Chairwoman JOHNSON. Interesting. So would you interpret, then,

the fact that the personnel has been cut in half but the collections

have been cut by two-thirds, to indicate greater compliance out

there in the community and therefore may not be a case for adding

more people back and doing more of that function?

Mr. LANE. I would say that you’ve had a significant increase in

compliance with the tax return data matching the 1099 data.

There’s no question about that compared to 5 or 10 years ago, absolutely no question about that. Roger?

Mr. HARRIS. Oh, I would agree completely. I think most people

now are aware of the fact that the cross-checking does go on, and

I think you’re seeing a much higher compliance.

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Chairwoman JOHNSON. So actually increasing personnel in that

function might not make any difference to the yield?

Mr. LANE. No, because the vast majority of the 1099 data you

get, what they call the IRP data—the information returns data—

comes in electronically, so those people—those checkers—are only

looking at the stuff that’s dropping out of the other system because

of a mismatch, and I think what we’re saying is that a lot less stuff

is mismatching.

Now, it’s going to be interesting to see, because as more requirements get ladeled-in to require 1099’s—for example now, this year,

every check written to a lawyer—whether he’s a corporation or

not—for $600 or more needs a 1099. So you’re going to increase

dramatically the number of small paper 1099’s you get. So, I can

see a need if you’re going to generate a lot of that stuff in the future to have to increase those checkers back up again, because the

paper documents don’t get the degree of verification that the electronically filed documents do.

Chairwoman JOHNSON. Thank you.

Mr. LANE. Sure.

Chairwoman JOHNSON. Mr. Coyne. Mr. Portman.

Mr. PORTMAN. I first want to thank both of these gentlemen.

Roger and Joe, this is like deja-vu all over again. You’ve testified

so many times before this subcommittee and the Commission.

I sort of agree with you that to get to the 80 percent goal in electronic filing you almost have to have that quantum leap that Joe

talked about. And I guess one question I would have for you is, as

you look at the restructuring bill that is now over in the Senate,

and with any luck will be back for a House-Senate conference within a month, is there anything that you think should be changed

with regard to electronic filing to create more incentives? As you

know, we took that legislation—this subcommittee took the legislation and the recommendations—changed them somewhat, dropped

out a couple of things, added a couple of things. Do you have any

comment on that? We have a window of opportunity here.

Mr. LANE. Yes; I would like to see—we made a recommendation

to the Restructuring Commission at some point in our testimony—

quite frankly, I don’t remember which one it was, but it’s in there.

I would like to see a provision that if a person files electronically

and there is an accurate match on the IRP data with what’s on the

tax return—so, in other words, the 1099 dividend and information

and the W–2 data was correct—that the statute for audit on that

tax return be 24 months instead of 36 months.

Mr. PORTMAN. Yes; I remember that recommendation.

Mr. LANE. I think what that will give you is taxpayer motivation

to file electronically, and practitioners will always respond to client

demand before they’re going to respond to anything else. And so if

practitioners get a taxpayer ground-swell that says, ‘‘I want this

filed electronically because I want to limit my audit exposure,’’

their malpractice insurers are going to be telling them the same

thing: ‘‘You better justify why you’re not filing everything electronically because we don’t want to have another year of exposure if we

don’t need it,’’ I think you’ll get that 80 percent number relatively

quickly, if not within a year or two.

Mr. PORTMAN. Interesting. Roger, do you have some thoughts?

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Mr. HARRIS. You know, I think what we’ve got is a lot of things

that move a small number of people. I don’t think there’s any one

magical change we’re going to make that’s going to all of a sudden

have the whole marketplace demand electronic filing, so I think

anything—what Joe suggested, what’s in the legislation, incentives

we’ve talked about were taken out——

Mr. PORTMAN. What about the signature?

Mr. HARRIS. Signature—I think all of those things are important.

I think that’s why the Commission that I know the bill had set up

and now the IRS is setting up is so important that we not be bound

by what we know today, that we’re able to look, not only with

what’s out here today, but what can happen over the next three or

four years—not get in a hurry to hit 80 percent, but get there the

right way.

Mr. PORTMAN. Yes; therefore the advisory committee could be

very helpful. You know one thing—this is a far-fetched idea, but I

thought I’d throw it out anyway—EIC is one area where I think

you could see some increase in electronic filings, as I mentioned

earlier, and that there are some advantages to that in terms of cost

and compliance. Anybody who wants a refund, obviously there’s an

incentive there now. For people who owe taxes, there, in a sense,

is a disincentive. We can knock down all the barriers in the world,

and we can create, therefore, some more incentives, but there will

be that disincentive for somebody who files on paper, and because

it processes more slowly it is going to be a disadvantage. Can you

address that?

Mr. LANE. But the taxpayer who owes money typically has the

more complex return and is the one who has the most audit exposure. So where you do get that guy, where you incentivize him is

you say, ‘‘Well, limit your own exposure.’’

Mr. PORTMAN. Going back to your idea.

Mr. LANE. And why it’s important to make sure that the provision has to be, not only is it filed electronically, but all the IRP

data matches, is because the delay time in IRS getting the confirmation back from Social Security on the wage data and getting

all the IRP data processing could take anywhere from 12 to 14

months. So, if only in cases where that’s a 100 percent match is

the 24-month statute in there; if it’s not a match, they should have

the additional 12 months to pursue examination.

Mr. HARRIS. Well, and we mention in our testimony that right

now if you file electronically and owe this year, that it will be debited on your account on the 15th. If you mail your tax return, then

you’ve got a certain float. Why not give the people who file electronically until May 1? You know, put an incentive in there to file

electronically; your payment will be made later.

Mr. PORTMAN. Yes. I say it’s far-fetched because it will cost something, and we’re running into that problem with this bill already.

Mr. HARRIS. That’s why I think we’ve got to be creative and

think of all of these, and see what the effect will be.

Mr. PORTMAN. Yes.

Mr. LANE. You know, I’d like to suggest one other thing. It seems

to me every year we’re having problems on this earned income

credit, and it really isn’t a tax issue. I can see an argument to say,

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‘‘Hey, give this to Social Security; give it to Health and Human

Services, but it doesn’t belong on a tax form.’’

There are a lot of people who are entitled to that that aren’t getting it because they’re not even filing. You know, the guy working

for minimum wage and he’s making $4,000 to $5,000 a year, and

he’s got a couple of kids—he’s going to be qualified, and he’s not

even filing a tax return. So, I think one of the issues you might

want to address is whether IRS ought be handling this at all. And

why create all of this tension and aggravation over this issue?

Mr. PORTMAN. I can’t believe you said that, Joe.

Chairwoman JOHNSON. We’re working up to that one.

Mr. PORTMAN. That’s exactly the question that needs to be proposed, and the answers need to come more from us.

Thank you very much.

Mr. LANE. Thank you.

Chairwoman JOHNSON. Thank you. Congresswoman Thurman.

Mrs. THURMAN. Mr. Harris, just very quickly, because I know

this is an issue that our chairperson and Mr. Portman and others

of us—with the electronic filing, and we were certainly encouraged

by some of the statistics, I think, that we heard today of the more

compliance on this—and I can’t remember for the life of me who

said this to me, but somebody said, ‘‘Well, we don’t do electronic

filing because we don’t have enough clients to really do that.’’ Help

me with that statement. I mean, in the fact that you represent accountants—and I don’t know how many accountants there are in

the country—but what do you think the percentage of accountants

that are actually in the situation or have the ability, or would, how

many are doing it electronically?

Mr. HARRIS. Currently, to the best estimates of our organization,

about one-third are doing it today.

Mrs. THURMAN. And in that, can you tell us why they don’t?

Maybe it’s because of what I just said, but there are other stumbling blocks that would prevent them from wanting to get into the

electronic filing?

Mr. HARRIS. We’ve talked about some of them today; I think the

fact that you can’t file all returns electronically. You know, there

are the checks that you must go through during the filing season

that contribute to some. But as a business person, I think it’s that

the demand in the marketplace is not that great yet—again, unless

you’re right now in the business of filing a lot of returns due refunds early and you can speed that process up. If your practice is

geared towards business people who maybe don’t have refunds,

there’s no demand, certainly not to pay extra to file a return electronically when you owe money. It’s very hard to sell that idea to

a business person.

Mrs. THURMAN. But this year would be different because they’re

getting money back, right? [Laughter.]

Mr. HARRIS. Yes.

Mr. LANE. I’d like to add something on that, if I could. I think,

as Roger said, there are lots of issues that impact that, particularly

from a member’s behavior standpoint. Some of it’s education, some

of it’s a perception of a lack of technical competence, technical competence in the terms of the technology as opposed to the technical

tax stuff. And actually it’s much simpler than they really believe

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it is, and once you show them how easy it is they go, ‘‘Oh, my God;

I could have been doing this.’’

Mrs. THURMAN. ‘‘Why haven’t I been doing this?’’

Mr. LANE. Part of it is a perception that they have to go out and

buy a whole bunch of expensive equipment to do it, and they’re

very happy with the DOS machine they have in their office and

they don’t want to upgrade; they don’t realize you can use that machine to do it.

So, part of it is the way the whole program has been packaged

and sold. Quite frankly, some of it is also a kind of a hangover of

the bad reputation electronic filing got early on when it was basically viewed as a way of gouging clients by charging them outrageous fees for doing refund anticipation loans. They don’t realize

that the whole market has really transformed, and there is a whole

array of financial products that really help taxpayers—and they’re

not right for every taxpayer, but they’re right for some taxpayers.

And so we’re going through this whole re-education effort in both

of our memberships in terms of the benefits of that. Quite frankly,

the IRS causes themselves a lot of problems by doing exactly what

we talked about in our testimony today. They don’t share the information; they change procedures in mid-stream, and it catches the

guy unaware.

This whole paper refund issue—I mean, in 1995 they pulled 7

million returns that had EIC credits on them out of the line that

were supposed to go direct deposit and did nothing with 6 million

of them and put them back 12 months later, all on paper refunds,

and cost people all of the fees on those returns and the banks all

of the loan repayments. I mean, it’s just appalling, and this is supposed to be the partner you’re working with—to give him the information. And, we would hope they would have learned from that,

but now we’re back into the same problem this year. So you look

at people and say, well, if they’re going to lose that kind of money,

what’s the business reason for them to do it? There isn’t any.

Mrs. THURMAN. But we can fix this, right? I don’t know—what

kind of an answer was that? [Laughter.] Thank you.

Mr. LANE. A qualified ‘‘yes.’’

Chairwoman JOHNSON. Before we go to vote on this current problem of the IRS not doing direct deposits, is that elective or a matter

of law?

Mr. LANE. We tried to get an answer on that yesterday. The

thing that’s got our members so upset about this is this is a problem that IRS has said for four years that they would correct, and

it hasn’t yet been corrected. My personal view—we were told when

we inquired about this that there is a technical problem in terms

of being able to put the refunds that were now held up back into

an electronic deposit stream as opposed to a paper check. I don’t

know if that’s accurate or not.

My belief is that probably when you get down to the bottom of

it, that what the advice that is being given, because it’s coming out

of a criminal investigation, they’re looking at the potential for

fraud there. What I would be willing to hazard a guess as to what

the advice is is make it a paper refund, because if we were right

and it subsequently develops that there was fraud there, we have

a better case if we have a taxpayer’s signature on a cancelled check

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as opposed to a bank deposit that went in straightforward. And so

my concern is if that is what they’re looking for—to have a better

paper trail in the event one of these things gets prosecuted—I

mean it is at an extremely high cost to the people who are participating in this program.

And what we tried to point out in our testimony is that everybody loses with refund fraud, not just the Government. The banks

are the biggest losers, and the preparers and software companies

lose because they don’t get their fees paid. If the IRS was more

forthcoming in their criteria for identifying refund fraud, the software companies and banks would be happy to act as the first couple of screens for that because they don’t want to make that loan.

Chairwoman JOHNSON. And are their new screens, even though

they came out a little later—are they helpful?

Mr. LANE. Yes, yes. But mid-March, when 95 percent of the business is done by February 15, mid-March doesn’t help them.

Chairwoman JOHNSON. No; I appreciate that. But as you reflect

on this—what to try to do now versus next time we go through

this, now with a better system in place. I would be interested in

hearing any thoughts on that.

Mr. LANE. What I would hope, and I think Roger could agree

with me on this, is that this new ETAAC, or advisory board for

electronics—I would hope that when that gets funded and put together this year that the whole revenue protection strategy is discussed at great detail with those folks and then shared with the

practitioner organizations like NSA and NAEA and AICPA, so we

can disseminate that information to our people——

Chairwoman JOHNSON. That’s a very good suggestion.

Mr. LANE [continuing] And also to the banks and software companies.

Chairwoman JOHNSON. We have three minutes left, so thank you

for your input. I appreciate your testifying today.

Mr. LANE. Thank you.

Mr. HARRIS. Thank you.

Chairwoman JOHNSON. The hearing is closed.

[Whereupon, at 4:06 p.m., the hearing was adjourned subject to

the call of the Chair.]

[A submission for the record follows:]

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