REPORT OF THE

JOINT COMMITTEE ON TAXATION

RELATING TO THE INTERNAL REVENUE SERVICE

AS REQUIRED BY THE

IRS REFORM AND RESTRUCTURING ACT OF 1998

Prepared for the

SENATE COMMITTEES ON

FINANCE, APPROPRIATIONS, AND GOVERNMENTAL AFFAIRS

AND THE HOUSE COMMITTEES ON WAYS AND MEANS,

APPROPRIATIONS, AND GOVERNMENT REFORM

For a Joint Review

Scheduled on May 14, 2002

By the Staff

of the

JOINT COMMITTEE ON TAXATION

May 10, 2002

JCX-38-02
i

CONTENTS

Page

INTRODUCTION .......................................................................................................................... 1

EXECUTIVE SUMMARY ............................................................................................................ 3

I. PROVIDING TOP QUALITY SERVICE TO EACH TAXPAYER........................................ 16

A. In General.......................................................................................................................... 16

B. The 2002 Filing Season .................................................................................................... 17

C. Other Service Issues.......................................................................................................... 25

II. PROVIDING TOP QUALITY SERVICE TO ALL TAXPAYERS....................................... 29

A. In General.......................................................................................................................... 29

B. Enforcement Activity........................................................................................................ 30

C. Audit Activity ................................................................................................................... 32

D. Measuring Compliance -- National Research Program.................................................... 34

III. PRODUCTIVITY THROUGH A QUALITY WORK ENVIRONMENT ............................ 35

A. In General.......................................................................................................................... 35

B. Violations for Which IRS Employees May Be Terminated ............................................. 36

C. Personnel Flexibility and IRS Management ..................................................................... 39

D. Development of Organizational Performance Measures.................................................. 41

IV. ORGANIZATIONAL AND TECHNOLOGICAL MODERNIZATION.............................. 43

A. Organizational Modernization .......................................................................................... 43

B. Technology Modernization............................................................................................... 47

V. IRS BUDGET REQUEST FOR FISCAL YEAR 2003........................................................... 56

A. In General.......................................................................................................................... 56

B. Funding for Customer Service .......................................................................................... 57

C. Funding to Support IRS Modernization............................................................................ 58

D. Funding to Maintain Current Operations.......................................................................... 61

E. Legislative Proposals and Other Adjustments.................................................................. 62

F. Financial Audit of IRS Fiscal Year 2001 Financial Statements....................................... 62

VI. OTHER MATTERS ADDRESSED BY THE IRS REFORM ACT...................................... 64

A. IRS Oversight Board......................................................................................................... 64

B. National Taxpayer Advocate ............................................................................................ 66

C. Treasury Inspector General For Tax Administration........................................................ 75

D. Taxpayer Rights................................................................................................................ 80

APPENDIX................................................................................................................................... 90
1

INTRODUCTION

The Internal Revenue Service Restructuring and Reform Act of 19981 (the “IRS Reform 

Act”) made comprehensive changes relating to the operations of the Internal Revenue Service 

(“IRS”). Goals of the IRS Reform Act included increasing public confidence in the IRS and 

making the IRS an efficient, responsive, and respected agency that acts appropriately in carrying 

out its functions.2 The IRS Reform Act included changes relating to organization and 

management of the IRS, Congressional oversight, electronic filing, and taxpayer protections and 

rights.3

In the IRS Reform Act, the Congress directed the IRS to review and restate its mission to 

increase its emphasis on serving the public and meeting taxpayer needs.4 Prior to its revision, the 

IRS mission statement focused on collecting the proper amount of tax.

The new mission statement has interaction with taxpayers as its focus. It states:

Provide America’s taxpayers with top quality service by helping them to 

understand and meet their tax responsibilities and by applying the tax law with 

integrity and fairness to all.

To assist in achieving its new mission, the IRS has developed three strategic goals.5 The 

first goal is to provide top quality service to each taxpayer. The second goal is to provide top 

quality service to all taxpayers. The third goal is to increase productivity within the IRS by 

providing IRS employees with a quality work environment. The IRS describes the process of 

change necessary to meet its strategic goals and fulfill its mission statement as “modernization.”

Under provisions relating to Congressional oversight, the IRS Reform Act requires a joint 

review of IRS activities.6 The joint review is to include two members from the majority and one 

 

1

 Pub. L. No. 105-206 (July 22, 1998).

2

 H.R. Rep. No. 105-364, Pt. 1, at 34-35 (1997) and S. Rep. No. 105-174, at 11-12 

(1998).

3

 For a summary of the IRS Reform Act’s taxpayer rights and protections, see Summary 

of Revenue Provisions Contained in Legislation Enacted During the 105th Congress (JCX-75-

98), November 19, 1998 at 61-77. See also, Internal Revenue Service, Highlights of 1998 Tax 

Changes, Publication 553 (December 1998) at 20-25.

4

 IRS Reform Act sec. 1002.

5

 The most recent strategic plans and major strategies of the IRS are contained in Internal 

Revenue Service, IRS Strategic Plan (Fiscal Years 2000-2005), Publication 3744 (February 

2001) (hereinafter referred to as “IRS Strategic Plan”).

6

 Internal Revenue Code (“Code”) sec. 8021(f)(2). Unless otherwise indicated, all 

section references are to the Code.
2

member from the minority of each of the Senate Committees on Finance, Appropriations, and 

Governmental Affairs, and the House Committees on Ways and Means, Appropriations, and 

Government Reform. The joint review is to be held at the call of the Chairman of the Joint 

Committee on Taxation (“Joint Committee”), and is to take place before June 1 of each calendar 

year 1999 through 2003.7 The joint review is to address the strategic plans and budget of the IRS 

and such other matters as determined by the Chairman of the Joint Committee.

The IRS Reform Act also requires the Joint Committee to report annually to the Senate 

Committees on Finance, Appropriations, and Governmental Affairs, and the House Committees 

on Ways and Means, Appropriations, and Government Reform regarding certain matters relating 

to the IRS. The report is to be made in each calendar year 1999 through 2003.8 

Pursuant to the IRS Reform Act, a joint review of the strategic plans and budget of the 

IRS for fiscal year 2003 has been scheduled for May 14, 2002. This document,9 prepared by the 

staff of the Joint Committee, contains the report of the Joint Committee relating to the IRS as 

required by the IRS Reform Act.

 

7

 The first, second, and third joint reviews were held on May 25, 1999, May 3, 2000, and 

May 5, 2001, respectively. Transcripts are published in Joint Committee on Taxation, Strategic 

Plans and Budget of the Internal Revenue Service, 1999, May 25, 1999 (JCS-4-99); Joint 

Committee on Taxation, Strategic Plans and Budget of the Internal Revenue Service, 2000, May 

3, 2000 (JCS-4-00); Joint Committee on Taxation, Joint Review of the Strategic Plans and 

Budget of the Internal Revenue Service, 2001, May 8, 2001 (JCS-2-02).

8

 Sec. 8022(3)(c). The previous three reports can be found at Report of the Joint 

Committee on Taxation Relating to the Internal Revenue Service as Required by the IRS Reform 

and Restructuring Act of 1998 (JCX-24-99), May 20, 1999; Report of the Joint Committee on 

Taxation Relating to the Internal Revenue Service as Required by the IRS Reform and 

Restructuring Act of 1998 (JCX-46-00), April 28, 2000; and Report of the Joint Committee on 

Taxation Relating to the Internal Revenue Service as Required by the IRS Reform and 

Restructuring Act of 1998 (JCX-33-01), May 4, 2001.

9

 This document may be cited as follows: Joint Committee on Taxation, Report of the 

Joint Committee on Taxation Relating to the Internal Revenue Service as Required by the IRS 

Reform and Restructuring Act of 1998 (JCX-38-02), May 10, 2002.
3

EXECUTIVE SUMMARY

A. Providing Top Quality Service to Each Taxpayer

In general

The IRS’s first strategic goal, providing top quality service to each taxpayer, is designed 

to ensure that every taxpayer receives first-quality service when dealing with the IRS. Roper 

opinion research organization surveys show a 44 percent improvement in the public approval 

rating in the last two years. Electronic filers have shown higher satisfaction than paper filers. 

The data show that the IRS has made a modest improvement in customer satisfaction with inperson and telephone/correspondence collections procedures, while customer satisfaction has 

decreased with respect to toll-free and local walk-in service. The IRS notes that the number of 

IRS employees has decreased while the number of returns filed has increased, and this has 

resulted in taxpayers receiving a lower-than-expected level of service.

The 2002 filing season

The IRS and the GAO report that, with the exception of errors arising from the rate 

reduction credit, the filing season has been smooth and returns are being processed on time. 

Electronic filing has increased substantially and there has been an improvement in telephone 

service; however, the General Accounting Office reports that some of the errors resulting from 

the rate reduction credit may have been avoided with clearer IRS instructions, that some of the 

IRS’s performance measures for telephone service are misconceived, and that important 

performance measures for walk-in assistance have been delayed. 

The IRS projects that net collections for fiscal year 2002 will be approximately $2 

trillion. For fiscal year 2002, the IRS also projects that it will receive 231 million returns, 

including over 132 million individual returns, and the IRS expects to issue over 99 million 

individual refunds -- 3 million more than for 2001. As of March 23, 2002, the IRS reported that 

the average dollar amount per refund was up over 12 percent from last year, and the average 

refund as of that date was $1,980. 

The IRS has reported that, through April 4, 2002, a little more than 40 million tax returns 

were filed electronically, which is a 13.7 percent increase from the same period last year. The 

number of taxpayers filing electronically from their home computer increased 39 percent over 

last year. In addition, 3.6 million taxpayers filed their returns over the telephone and the IRS 

reported that over 16 million taxpayers chose to file both their Federal and state tax returns 

simultaneously in a single electronic transaction, an increase of 23.8 percent over last year at this 

time. Since 1997, electronic filing has increased by 110 percent and on-line filing has grown by 

1,700 percent. The General Accounting Office found that, although the increase in the 

percentage of returns filed electronically is not insignificant, the IRS will need larger future 

increases to achieve the IRS Reform Act’s goal of 80 percent of all returns filed electronically by 

2007. The IRS is undertaking a number of initiatives to expand electronic filing for individual 

and business taxpayers. In addition, the IRS introduced a new web site (www.irs.gov) and has 

developed CD-ROMs for small business taxpayers.
4

On telephone service, the IRS notes that through March 30, 2002, the total volume of 

incoming calls on toll-free lines was up 13 percent, primarily due to questions concerning the 

rate reduction credit and refunds. Even with the increased volume, through March 30, 2002, 

approximately 66 percent of taxpayers who wanted to speak with a customer service 

representative got through, compared to 68 percent at the same time in 2001. Over a four-week 

period beginning in March, the IRS reports that 74 percent of callers got through, which makes 

the IRS’s goal of 71 percent for the year, within reach. Wait time for questions on tax law was 

2.58 minutes (down from 4.27 minutes), and on account questions, 4.76 minutes, (down from 

6.11 minutes). The correct response rate for tax law and tax account questions was 83 percent 

and 89 percent respectively (compared to 75 percent and 88 percent a year ago). In addition, 

45.3 million taxpayers (or 8 percent more than last year) have used automated services to get 

refund and other information. The IRS notes further that a special telephone line for victims of 

the September 11, 2001 attacks was established by September 24 and over a 90 percent level of 

service has been provided on the line. The General Accounting Office found that this filing 

season, taxpayers are spending less time waiting to talk to an assistor and receive accurate 

answers at a higher rate than a year ago. The General Accounting Office confirms, however, that 

the rate at which callers connect with an assistor is down, due in part to callers hanging up after 

inquiring about the rate reduction credit and being transferred to automated services. The 

National Taxpayer Advocate ranks access to IRS toll-free service as the number one problem 

faced by taxpayers. The IRS Oversight Board notes that, while service is hampered by the lack 

of modern tools and technology for providing better service, there is a direct correlation between 

the number of calls that can be answered and staffing levels.

Walk-in service is available at more than 400 locations throughout the United States. As 

of March 16, 2002, the IRS estimates that it had served over 3.3 million taxpayers at all 

Taxpayer Assistance Centers, slightly more than for the same period in 2001. The General 

Accounting Office reports that the accuracy rate reported through mid-March 2002 at walk-in 

sites is encouragingly high, at 84 percent. Although this is clearly a better figure than the low 

accuracy rates reported by the IRS in 2000 (24 percent) and by the Treasury Inspector General 

for Tax Administration in 2001 (51 percent) the measurement methodology for 2002 is not 

comparable to prior years so it is difficult to assess the degree of improvement. After delays, the 

IRS plans to begin measuring the accuracy of account and return preparation services at walk-in 

sites by June 2002.

Other service issues

In the summer of 2001, the IRS mailed out over 90 million advance payment checks for 

the rate reduction credit and issued notices to all taxpayers and coordinated an unprecedented 

outreach to America’s taxpayers through an intricate computer programming project, numerous 

news releases, an updated Web site, and additional assistors to handle record call volumes.

Immediately following the September 11 terrorist attacks, the IRS provided 

administrative relief to the victims in the form of extensions to file returns and pay taxes and 

suspended many enforcement actions for the affected taxpayers. In addition, special toll-free 

numbers were established to answer any questions, and a special disaster relief page was created 

on the IRS’s Web site.
5

During the 2002 filing season, the IRS is averaging 12 days to issue a refund (compared 

to 14.6 last year) for an electronic return and 26 days (compared to 28 days last year) for a paper 

return, though the average rate is expected to increase at the end of the filing season. 

The IRS acknowledges customer service shortcomings in the Employer Identification 

Number assignment process. Telephone coverage for Employer Identification Number service at 

IRS facilities has been inconsistent. Faxed requests for Employer Identification Numbers also 

have not been handled expeditiously. On January 2, 2002, the IRS consolidated Employer 

Identification Number services into three sites and now offers telephone service at consistent 

times.

The IRS redesigned six notices, and continues to redesign 24 additional notices. In 

addition, the IRS has hired a consultant to develop a taxpayer burden model and has hired a 

contractor to redesign Form 941 (Employer’s Quarterly Federal Tax Return) and its instructions. 

Schedule D, which is used to calculate capital gains and losses, was redesigned for the 2002 taxfiling season. Nevertheless, the General Accounting Office reports that the IRS paperwork 

burden increased in fiscal year 2001 by 250 million hours, due in significant part to changes 

initiated by the IRS, as well as a reaction to new tax laws.

B. Providing Top Quality Service to All Taxpayers

In general

The second strategic goal requires the IRS to provide top quality service to all taxpayers. 

A tax system designed to promote and ensure compliance, and effective enforcement of the law, 

are essential components to achieving fair and uniform application of the tax law. In general, the 

IRS ensures compliance by matching information received from employers, financial 

institutions, and other businesses with information received by taxpayers. The IRS estimates that 

the total personal income that cannot be verified by document matching was about $1.2 trillion in 

fiscal year 1998, or 19.7 percent of total reported personal income. In fiscal year 2001, the IRS 

began capturing the data from 16.8 million K-1 forms which are used to report income, credits, 

and deductions of partners, shareholders and beneficiaries of passthrough entities. In 2002, the 

IRS will begin processing and matching K-1 forms with individual tax returns. Trusts and 

offshore bank accounts (including credit cards from offshore banks) used by upper-income 

taxpayers to hide income have become a significant loss of revenue to the Treasury -- the IRS 

estimates losses in the tens of billions of dollars. Among other things, the IRS has started a 

special initiative to identify offshore credit card accounts.

Enforcement activity

Levies, liens, and seizures all increased significantly from fiscal year 2000: levies more 

than tripled, liens increased by approximately 50 percent, and seizures jumped from 74 to 234. 

However, total enforcement actions were a fraction of levels in fiscal years 1995 through 1998 

(e.g., levies were approximately 18 percent of 1997 levels, liens approximately 79 percent, and 

seizures approximately 2 percent). Enforcement revenue remained at fiscal year 2000 levels at 

$33.8 billion, a drop from $37.2 billion in fiscal year 1997. The IRS attributes its inability fully 

to pursue enforcement cases to the modernization effort, a decrease in staff, reassignment of 
6

collection employees to support customer service activities, and additional staff time needed to 

implement certain taxpayer protections that were included in the IRS Reform Act. Additionally, 

the IRS reports that inadequate financial and operational information has hindered development 

of cost-based performance information for tax collection and enforcement programs.

The IRS Oversight Board is concerned that the broad decline in enforcement activity 

increases the tax system’s reliance on voluntary compliance, and fears that the public’s attitude 

towards voluntary compliance is eroding.

The IRS has identified four areas of systemic non-compliance on which it plans to focus 

its (limited) enforcement resources: (1) misuse of trusts and passthrough entities to hide or 

improperly reduce income; (2) use of complex and abusive corporate tax shelters to reduce taxes 

improperly; (3) failure to file and pay large accumulations of employment taxes; and (4) 

erroneous refund claims and Earned Income Tax Credit fraud.

Audit activity

In fiscal year 2001, the audit rate increased slightly to .58 percent and the number of 

returns audited increased to approximately 732,000. By contrast, the number of returns audited 

in fiscal years 1997, 1998, and 1999 were approximately 1,519,000, 1,193,000, and 1,100,000 --

demonstrating a steady decline in number of returns audited. The IRS continues to audit the 

1,100 largest corporations every year but the audit rate for all other corporations declined from 3 

percent in 1992 to 1.1 percent in fiscal year 2001. The audit rate for all large corporations has 

declined significantly since fiscal year 1997 (12,972 closures) to fiscal year 2001 (8,718 

closures), and the decrease for small corporations is more dramatic, from fiscal year 1997 

(56,323 closures) to fiscal year 2001 (14,332 closures). The IRS audited only one of every 256 

returns of passthrough entities -- the equivalent of 0.39 percent. The IRS’s new K-1 matching 

program will not provide any verification of the income reported by the passthrough entity itself; 

this still requires an audit. 

Technical staffing levels for audit activity have declined, from 14,399 revenue agents in 

fiscal year 1997, 12,550 in 2000, and 11,598 in 2001, and from 2,318 tax compliance officers in 

fiscal year 1997 to 1,702, in 2000, and 1420 in 2001. The IRS says it will rely on the Business 

Systems Modernization program to increase the effectiveness and efficiency of compliance 

activities over the long term. The IRS also hopes to reduce the need for some enforcement 

efforts by focusing on prefiling initiatives, thereby increasing voluntary compliance.

Measuring compliance -- National Research Program

The IRS acknowledges that the lack of a reliable way to measure taxpayer compliance 

limits the IRS’s ability to assess progress in serving all taxpayers through effective and fair 

application of the tax laws. The IRS is developing a new program, the National Research 

Program, which will measure filing compliance, payment compliance, and reporting compliance 

by taxpayers. The data gathered through the National Research Program will be used to update 

the formulas used for selecting returns for audit. The IRS Oversight Board supports the National 

Research Program and requests Congressional support for the Program.
7

C. Productivity Through a Quality Work Environment

In general

As its third strategic goal, the IRS plans to increase productivity by providing a quality 

work environment for its employees. The IRS is working to create a positive work place 

characterized by equal opportunity, recognition of employee performance, and no artificial 

barriers to advancement. According to the IRS, overall job satisfaction for IRS employees was 

59 percent in the year 2000. This number decreased to 51 percent in 2001, a 14 percent decrease 

from fiscal year 2000. According to the IRS Oversight Board, IRS employee morale and job 

satisfaction are not adequate and that the IRS is not providing a quality work environment. 

Violations for which IRS employees may be terminated

The IRS Reform Act defined 10 specific acts of misconduct for which an IRS employee 

may be terminated (“section 1203 violations”). The Commissioner may determine that there are 

mitigating factors that weigh against terminating an employee. As of February 28, 2002, there 

were 327 substantiated violations of section 1203. Of the 327 substantiated violations, 282 were 

for failure to file a Federal tax return. Of the 3,045 completed section 1203 inquiries, 2,098 

inquires found that the allegation was not substantiated; 620 inquires were found to constitute 

non-section 1203 misconduct. Fifty-four employees have been removed for section 1203 

violations, 46 of whom were removed for willful failure to timely file a Federal tax return. The 

IRS reports that since enactment of section 1203, IRS employees frequently report that fear of a 

section 1203 allegation causes reluctance to take appropriate enforcement actions and that 

section 1203 is negatively affecting employee morale and effectiveness.

As part of this year’s budget request, the IRS requested that two section 1203 violations 

be eliminated from the list. These are the late filing of tax returns for which a refund is due and 

actions by IRS employees that violate another IRS employee’s rights, rather than a taxpayer’s 

rights. The IRS also requested that the unauthorized inspection of returns or return information 

be added to the list of violations. In addition, the IRS wants the Commissioner to be able to 

establish guidelines that outline specific penalties, including termination, for the types of 

wrongful conduct listed under section 1203. The IRS Oversight Board found that section 1203 

needs reform.

Personnel flexibility and IRS management

The IRS Reform Act gave the IRS considerable authority relating to recruitment and pay 

authority. To attract and retain highly qualified and exceptional individuals, the IRS uses 

professional search firms and often has IRS and Treasury executives interview Streamlined 

Critical Pay candidates. The IRS credits the recruitment techniques and the streamlined aspect 

of the program with finding executives that are better qualified than by using traditional 

recruitment means. According to the IRS, the Streamlined Critical Pay executives have brought 

exceptional talent and a wide range of skills to the IRS. In recruiting critical pay personnel, the 

IRS spent $1,822,759 for moving expenses (the program is the same as for career personnel 

except the IRS Reform Act covers an executive’s first move prior to government service) and 
8

$3,639,985 on executive searches. The IRS states that more could be accomplished if IRS 

employees were eligible for Streamlined Critical Pay positions.

Development of organizational performance measures

Historically, enforcement revenue has been a key measure of success at the IRS. The 

IRS Reform Act sought to change this focus. Accordingly, the IRS is changing its organizational 

performance measures to balance business results (both quantity and quality), customer 

satisfaction, and employee satisfaction. The IRS Oversight Board reports that the IRS will 

complete the implementation of the balanced measures program in 2002.

D. Organizational and Technological Modernization

Organizational modernization

The IRS has made significant progress in implementing the new organizational structure. 

The IRS created four operating divisions to serve taxpayers of similar needs: Wage and 

Investment; Small Business and Self-Employed, Large and Mid-Size Business, and Tax Exempt 

and Government Entities. There are also several functional units, including Appeals, the 

Taxpayer Advocate Service, Criminal Investigation, and Communication and Liaison. This new 

organization formally replaced the prior geographically based organizational structure on 

October 1, 2000. Top management is in place for each of the operating divisions and business 

units. The final stages of implementation, including the redistribution of workload, will require 

another year (through fiscal year 2002). 

However, the transition to the restructured IRS continues to be awkward. Problems 

stemming from the new structure include: providing managers and executives with appropriate 

authority to make decisions, change-induced decrease to employee morale, uncertain 

relationships among the new operating divisions, uncertain understanding by IRS personnel 

about how the new structure is meant to work, and the lack of appropriate information systems. 

Technology modernization

Presently, the IRS relies on computer systems developed in the 1960’s and 1970’s to 

maintain taxpayer records. Modernization of such systems is a massive long-term project that 

aims to improve: access to information and tax data for all taxpayers, accuracy of information 

provided by the IRS to all taxpayers, speed of response to taxpayers, timeliness of IRS initiated 

actions, and productivity of IRS staff.

There are two major modernization efforts: Business Systems Modernization and Tier B 

modernization. Business Systems Modernization is the more significant, involving the long-term 

reconstruction of the IRS’s business technology and processes. Tier B modernization typically 

involves shorter-term projects directed toward updating software and coordinating old computer 

systems with new technology as improvements are made by Business Systems Modernization. 

For the past seven years, the General Accounting Office has discussed with the IRS the 

importance of establishing sound management controls to guide its systems acquisition projects. 
9

In June 2001, the General Accounting Office found that although the IRS continued to make 

important progress in implementing modernization management controls, the IRS’s 

modernization management capacity was still not where it needed to be. In February 2002, the 

General Accounting Office reported progress, specifically, that the IRS had: (1) reviewed the 

PRIME contractor’s quality-assurance function and recommended improvements; (2) defined 

risk management policies and procedures for its enterprise lifecycle approach; (3) issued the 

second version of the IRS’s enterprise architecture and implemented steps to ensure that the 

architecture would be integrated with other modernization projects; and (4) planned an 

independent assessment of selected projects. In addition, IRS recently hired technical and 

managerial executives with substantial private-sector experience for its reorganized Business 

Systems Modernization Office.

In March 2002, the Treasury Inspector General for Tax Administration released an audit 

report of the IRS’s modernization efforts and called the IRS “overly optimistic” about the 

timetable for delivering modernized systems, “given the immaturity of [the IRS’s] management 

processes.” The Treasury Inspector General for Tax Administration noted areas requiring 

improvements needed to avoid future delays and cost increases. 

This April, the General Accounting Office reported continued progress and noted a 

number of IRS accomplishments. Despite progress made, however, the General Accounting 

Office reports that the IRS is not where it committed to be in acquiring both infrastructure and 

application systems and not where it needs to be in implementing modernization management 

controls. In particular, the General Accounting Office found that the IRS is proceeding with 

building systems -- including detailed design and software development work -- before the IRS 

has (1) fully implemented mature software acquisition management processes, (2) developed and 

deployed a human capital management strategy, and (3) established effective cost and schedule 

estimating practices.

The IRS has reported that Business Systems Modernization projects have already 

encountered cost, schedule, and/or performance shortfalls. The General Accounting Office’s 

analysis has showed that weak management controls contributed directly to these problems. 

According to the IRS, until the weaknesses are fully addressed, the IRS will be (1) relying on 

existing immature processes; (2) leveraging the knowledge, skills, and abilities of experienced 

senior executives to ensure that issues are properly managed; and (3) hiring additional 

experienced executives. The General Accounting Office believes the answer lies in a more 

modest scope and pace of systems projects until management capacity is brought up to the level 

needed.

There are a number of key modernization programs. The Customer Account Data Engine 

(often referred to as CADE) will provide a modern system for storing, managing, and accessing 

taxpayer records and accounts. The Customer Account Data Engine incrementally will move 

individual filers from the 1960s tape system to a modern database, and will create applications 

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

tax accounts and return data. The Customer Account Data Engine will be deployed over a sixyear period in five “Releases.” First steps were scheduled to begin in October 2001 but have 

been delayed.
10

The Customer Account Management program will allow the IRS to update data in the 

Customer Account Data Engine and will help the IRS give taxpayers timely and accurate 

responses to requests and inquiries; however it cannot be deployed beyond its initial limited 

releases without Customer Account Management.

The e-Services project will support the IRS’s ability to conduct most transactions with 

taxpayers and their representatives in an electronic format, as required by the IRS Reform Act. 

Another program will deliver a self-service Internet application to allow taxpayers to 

check on the status of their income tax return posting and their refund. 

The Custodial Accounting Project will provide the IRS with the control and reporting 

capabilities mandated by Federal financial management laws. 

The Enterprise Data Warehouse will provide the foundation for data mining and decision 

analytic tools, and will enable risk-based analysis for case selection and provide the tools to 

report on IRS balanced performance measures. 

Filing and Payment Compliance will use technology to improve IRS communications 

with taxpayers on compliance issues and also protect taxpayer rights. 

E. IRS Budget Request for Fiscal Year 2003

In general

For fiscal year 2003, the IRS budget request totals $10.418 billion and 101,080 full-time 

equivalent positions. The fiscal year 2003 budget request reflects a $482 million increase from 

the fiscal year 2002 appropriated level of $9.936 billion and an increase of 1,179 full-time 

equivalent employees from the fiscal year 2002 proposed operating level of 99,901 full-time 

equivalent employees. The IRS fiscal year 2003 budget request has four building blocks: (1) 

provide a world class level of service; (2) modernization; (3) maintain current operations; and (4) 

legislative proposals.

Funding for customer service

To provide a world class level of service, the IRS requests $260 million to fund initiatives 

to enhance customer service and compliance and workload increases, $158 million of which will 

be funded through reapplication of resources within the base budget. This amount reflects $125 

million and 1,857 full-time employees for compliance, $91 million and 1,595 full-time 

employees for customer service and workload increases, and $44 million for non-labor increases.

Funding to support IRS modernization

The IRS has requested an increase of $68 million for Business Systems and Tier B 

Modernization above the $432 million operating level for fiscal year 2002. The IRS has 

requested a total of $450 million for Business Systems Modernization (a $58 million increase). 

The IRS states that the increase will fund the contract, equipment, and software costs needed to 

improve the speed, timeliness and accuracy of the IRS’s interactions with taxpayers. The IRS 
11

plans to deliver a number of benefits for businesses, employees, taxpayers, and a number of 

project-related benefits.

The IRS has requested a total of $50 million for Tier B modernization (a $10 million 

increase). The IRS states that the Tier B projects will support objectives in criminal 

investigations, national headquarters business units, and wage and investment business activities. 

In addition, Tier B investments will provide all Remittance Transaction payment information online in real time, allow for team-based reporting compliance, give employees electronic training 

tools, support the National Forensic Lab’s technology, and create computer enhancements that 

permit multiple system interfaces on one computer terminal.

Funding to maintain current operations

The IRS requests $342 million to maintain current operations. Of this amount, $295 

million funds pay, benefits, and non labor inflationary costs, $37 million covers the costs of 

within-grade pay increases for on-board employees, and $10 million is for enhanced security 

arrangements pursuant to the Homeland Security Supplemental. The IRS expects to save $39 

million from better business practices and notes that $31 million from the fiscal year 2002 

budget for homeland security does not recur in fiscal year 2003.

Legislative proposals and other adjustments

Proposals in the President’s fiscal year 2003 Budget require an increase and adjustments 

of $40 million for the costs of retirement and health benefit retiree costs, the costs of services 

provided by the General Services Administration, the National Archives and Records Service 

and the Department of Agriculture, and a surcharge to the Department of Labor for Federal 

Employees’ Compensation Act benefits.

Financial audit of IRS fiscal year 2001 financial statements

Like fiscal year 2000, the General Accounting Office expressed an unqualified opinion 

on all IRS financial statements. The General Accounting Office rendered unqualified opinions in 

both years due to the “extraordinary efforts of IRS senior management and staff to compensate 

for serious internal control and system deficiencies.” By contrast, the General Accounting 

Office’s audit of IRS financial statements for fiscal year 1999 resulted in an unqualified opinion 

on its custodial activity statement, a qualified opinion on its balance sheet, and a disclaimer that 

no opinion could be issued on the remaining IRS financial statements. In prior years, the 

General Accounting Office’s audit reports were less favorable. However, despite its unqualified 

opinions, the General Accounting Office continues to identify many material weaknesses in the 

IRS’s internal controls.

F. Other Matters Addressed by the IRS Reform Act

IRS Oversight Board

In its January 2002 annual report, the IRS Oversight Board found that customer service 

(especially toll-free telephone and walk-in service) has not risen to desired levels but notes that 
12

taxpayer satisfaction with the IRS has increased. Enforcement results are slightly upward by 

many measures in 2002, with the exception of a general decrease in the number of audits. The 

IRS Oversight Board finds that IRS productivity has decreased by many measures over the past 

three years, which may be attributable to a variety of factors, such as declining resource 

allocation, low employee satisfactions, and tax-law complexity. The IRS Oversight Board 

approved the IRS’s proposed budget for fiscal year 2003.

The IRS Oversight Board identified as significant challenges to the IRS the outdated state 

of IRS technology, the increasing complexity of the tax code, reduced staffing levels, service 

levels to taxpayers, declining results in enforcement, lack of compliance data to make informed 

resource allocation decisions, declining productivity, workforce engagement, successful 

implementation of the balanced measures program (which will evaluate employee performance 

with measures other than tax results), and other human capital issues.

To improve the Business Systems Modernization program, the IRS Oversight Board 

recommends that the IRS improve its program management ability, work more effectively with 

the PRIME Contractor, and manage change more effectively. The IRS Oversight Board also 

recommends that the PRIME Contractor, the Administration, Congress, and oversight 

organizations work to support the completion of the Business Systems Modernization program.

The IRS Oversight Board held a public meeting on January 29, 2002, during which it 

heard testimony about IRS operations from representatives of 16 organizations. Other activities 

of the IRS Oversight Board include helping to select a new IRS Commissioner, reviewing the 

performance evaluations and proposed bonuses of 13 IRS executives, and interviewing the 

current National Taxpayer Advocate prior to her selection as such.

National Taxpayer Advocate

The National Taxpayer Advocate’s annual reportfocused on tax code complexity as the 

most serious problem facing business and individual taxpayers. The National Taxpayer 

Advocate’s Report identified six main areas for legislative action: family status issues, joint and 

several liability, alternative minimum tax for individuals, penalties and interest, home-based 

service workers, and IRS collection procedures. The National Taxpayer Advocate made several 

detailed legislative proposals for each area. The National Taxpayer Advocate’s Report also 

identified and discussed 23 of the most serious problems identified by individual taxpayers and

identifies the top ten most litigated issues by taxpayers. 

The National Taxpayer Advocate’s Report states that during fiscal year 2001, the 

Taxpayer Advocate Service independently reviewed and took action to resolve over 272,000 

cases. The National Taxpayer Advocate’s Report listed the top sources of Taxpayer Advocate 

Service casework as Earned Income Tax Credit examinations due to the Revenue Protection 

Strategy, processing of claims or amended returns, initial processing of original paper or 

electronic individual returns, and processing of refunds.
13

Treasury Inspector General for Tax Administration

The Treasury Inspector General for Tax Administration’s semiannual report to the 

Congress for the period April 1, 2001, through September 30, 2001, reports that the Treasury 

Inspector General for Tax Administration issued 126 audit reports during the six-month period. 

Financial results due to audit reports totaled $13 billion and an additional $13.3 billion in 

increased revenue and protected revenue. The Treasury Inspector General for Tax 

Administration estimates that its audit recommendations will improve tax administration for 

approximately 14.5 million taxpayers. In addition, the Treasury Inspector General for Tax 

Administration closed nearly 2,322 investigations of criminal wrongdoing and administrative 

misconduct during the reporting period. Investigations recovered approximately $8.1 million.

The Treasury Inspector General for Tax Administration reports that the IRS has improved 

security over information systems and has made notable progress in modernizing its technology 

systems. However, significant weaknesses continue to exist in both areas. The Treasury 

Inspector General for Tax Administration also reported that: the IRS needs to increase its focus 

on international compliance programs and improve the quality and use of information received 

on the income of foreign persons; the IRS’s Criminal Investigation function was not making a 

shift to investigate tax crimes as recommended by the June 2001 Report; the IRS did not have a 

centralized process to ensure that all of the requirements of the Government Performance and 

Results Act were achieved and maintained; the IRS has made significant improvements to its 

remediation plan to bring its financial systems into compliance; and that while the IRS had made 

progress in implementing the taxpayer rights provisions of the IRS Reform Act, significant 

improvements are needed in compliance with IRS Reform Act provisions, including innocent 

spouse relief, notice of lien, prohibition on Illegal Tax Protester designations, and restrictions on 

the use of enforcement statistics. In addition, the Treasury Inspector General for Tax 

Administration reports that improvements are also needed in meeting IRS Reform Act’s legal 

and procedural requirements for collection statute extensions and installment agreements. 

The Office of Investigation completed 1,045 investigations related to threats, assaults, or 

harassment of IRS employees as they carry out their duties. During the reporting period, the 

Office received 3,902 complaints of fraud, waste, abuse, and other forms of wrongdoing by IRS 

agents, of which 1,600 warranted further investigation. The Strategic Enforcement Division of 

the Office of Investigation analyzed 293 leads of potential unauthorized access to tax 

information by IRS employees, resulting in 139 referrals to field special agents.

Taxpayer rights

The IRS has stated that the principal difficulty in carrying out the taxpayer due process 

provisions of the IRS Reform Act has been engineering an efficient system that does not 

disproportionately expend resources on cases in which taxpayers are abusing the process to delay 

collection. According to the IRS, a significant percentage of due process cases (four percent, or 

800 out of a total of 20,000 cases in inventory) advance arguments that are frivolous or otherwise 

without merit. The IRS has requested a legislative change to permit the IRS to dismiss requests 

for collection due process hearings if the request is based on frivolous arguments or is intended 

to delay or impede tax administration. The IRS also has requested that the United States Tax 

Court be the exclusive venue for suits to obtain judicial review of an Appeals determination 
14

resulting from a collection due process hearing. The IRS reports that it will establish a list of 

known claims that the IRS will treat as frivolous and will publish the list on the IRS website.

The Treasury Inspector General for Tax Administration concluded in September 2001 

that the IRS is fully compliant with the seizure of property and the notice of levy provisions of 

the IRS Reform Act. However, in a more recent report, the Treasury Inspector General for Tax 

Administration found that the IRS does not always release levies as required by the Code in 

cases where a determination had been made that the tax was not collectible due to economic 

hardship and that IRS was closing some cases that should not be closed.

The Treasury Inspector General for Tax Administration found that the IRS was not fully 

compliant with the notices of lien procedures. In some cases, the IRS failed to notify the 

taxpayer that a lien had been filed, and the IRS still was not compliant with legal and internal 

guidelines in 17 percent of the cases reviewed. The Treasury Inspector General for Tax 

Administration found that Appeals officers hearing appeals of determinations to file a lien or 

intent to levy generally complied with legal requirements in 85 of 87 cases reviewed. 

The IRS has faced several difficulties in implementing the innocent spouse provisions. A 

number of factors resulted in a significant backlog of cases. However, the IRS has taken several 

steps to improve the program and the data show that the IRS is reducing the backlog 

substantially. In addition, the average processing time for claims has improved significantly. 

The IRS reports that efficiencies achieved through the centralization of innocent spouse claims in 

Cincinnati and deployment of the Integrated Case Processing software warrant a reduction in 

staff. The National Taxpayer Advocate concludes that the IRS’s efforts are commendable and 

that fewer innocent spouse cases were being reported to the Taxpayer Advocate Service. The 

Treasury Inspector General for Tax Administration concluded that the IRS is effectively 

educating taxpayers about the requirements that must be met to qualify for innocent spouse 

relief.

In a recent report on the offer in compromise program, the General Accounting Office 

found that between fiscal years 1997 and 2001, the inventory of unresolved offers nearly tripled 

to approximately 95,000. Changes to the program have increased the demand for offers, the 

number of steps involved, and the number of staff hours taken. The IRS is processing far fewer 

offers within six months today than the IRS did in fiscal year 1999 and is processing offers 

within six to 12 months at about the same rate. Offers that take more than a year to process have 

increased substantially. The IRS attributes the delay in processing offers in compromise to 

several factors. To improve the process, the IRS has requested modification of the rules to 

permit the IRS to enter into installment agreements for amounts less than the full liability owed 

by taxpayers. The IRS also requests the authority to dismiss requests for offers in compromise 

that are based on frivolous arguments or that are intended to delay or impede tax administration. 

In addition, the IRS requests that an opinion of IRS Chief Counsel no longer be mandatory for 

compromises of $50,000 or more (including penalties and interest). 

The IRS also explains this year’s increase in average processing time in part to the fact 

that experienced employees were moved from the field to help train at the centralized offer in 

compromise sites and that training took longer than expected. In addition, the IRS reports that 

the newly established centralized sites have been understaffed and attrition at the sites has been 
15

higher than expected. The IRS says that in April 2002 an additional 82 Offer Examiners, and, by 

June 2002, an additional 35 Process Examiners will have completed training and the sites then 

will be fully staffed.

The IRS stated that it continues to address the backlog of offer in compromise cases in a 

number of ways. In general, the General Accounting Office characterized the likely 

effectiveness of the IRS’s current initiatives as uncertain. In light of such uncertainty, the 

General Accounting Office recommended that the Commissioner: (1) develop a final 

implementation plan that evaluate and prioritizes the various IRS offer initiatives before moving 

forward with implementation; (2) determine what offer in compromise performance and cost 

data should be collected; (3) establish goals for offer processing time that are based on taxpayer 

needs, costs, and other benefits; and (4) prepare documentation describing the IRS’s proposed 

partial payment installment agreement program.
16

I. PROVIDING TOP QUALITY SERVICE TO EACH TAXPAYER

A. In General

The IRS’s first strategic goal, providing top quality service to each taxpayer, is designed 

to ensure that every taxpayer receives first-quality service when dealing with the IRS. To 

achieve this goal, the IRS has determined that it needs to: (1) provide clear tax law guidance, 

forms, and instructions; (2) provide taxpayers with accurate, quick, and convenient information 

about their tax accounts and assistance in determining how much to pay, how to pay, and how to 

make adjustments to their accounts; and (3) treat taxpayers professionally, with full 

consideration of their rights, and promptly inform the taxpayer when the IRS believes additional 

taxes are owed.10

Opinion surveys show that taxpayer service is improving. Roper opinion research 

organization surveys show that, after reaching an all time low point in 1998, the agency’s public 

approval rating improved in 2001.11 The survey shows a 44 percent improvement in the last two 

years. The American Customer Satisfaction Index survey for 2001 (conducted by the University 

of Michigan) reported an increase in taxpayer satisfaction of 11 percent since calendar year 2000 

and 22 percent since calendar year 1999, the largest favorable gain of the 30 federal agencies 

surveyed.12 The satisfaction rate for electronic filers was 77 out of 100 points, in contrast with 

52 points for paper tax filers.13 

 

10 IRS Strategic Plan at 4, 25. To carry out the IRS strategic goals, the IRS has developed 

six guiding principles: (1) understand and solve problems from the taxpayer’s point of view; (2) 

enable managers to be accountable with the requisite knowledge, responsibility, and authority to 

take action; (3) align measures of performance at all organizational levels; (4) foster open and 

honest communication; (5) insist on total integrity; and (6) demonstrate effective stewardship of 

assets and information entrusted to the IRS. Id. at 37. All IRS executives, managers, and 

employees are expected to manage and operate using these guiding principles in their 

interactions with both taxpayers and other employees. In addition to guiding principles, the IRS 

has developed 10 “major strategies” to achieve its strategic goals. These strategies are to: meet 

the needs of taxpayers; reduce taxpayer burden; broaden the use of electronic interactions; 

address key areas of noncompliance; stabilize traditional compliance activities; build a capability 

to deal effectively with the global economy; meet the special needs of the tax-exempt 

community; recruit, develop, and retain a qualified workforce; provide high-quality efficient, and 

responsive information services and shared support services; and promote effective asset and 

information stewardship by improving internal processes for information management, financial 

management, and asset management. 

11 Internal Revenue Service Oversight Board Annual Report (January 2002) (hereinafter 

“IRS Oversight Board Report”) at 10-11.

12 Special Report: Government Satisfaction Scores (December 21, 2001), available at 

http://www.theacsi.org/government/govt-01.html.

13 Id.
17

In 2001, for the first time, the IRS set performance goals for its primary programs.14 The 

resulting agency-wide operational performance measures provide a benchmark for analysis of 

the IRS’s performance with respect to service to taxpayers.15 The data show that the IRS has 

made a modest improvement in customer satisfaction with in-person and telephone/ 

correspondence collections procedures, while customer satisfaction has decreased with respect to 

toll-free and local walk-in service.16 The IRS notes that the number of IRS employees has 

decreased while the number of returns filed has increased, and this has resulted in taxpayers 

receiving a lower-than-expected level of service.17

B. The 2002 Filing Season

Overview

Commissioner Rossotti testified that the 2002 tax filing has been “smooth, with returns 

being processed on time, electronic filing increasing substantially and improved accessibility and 

accuracy of telephone service.”18 Although confusion and a significant number of errors have 

resulted from the rate reduction credit, the IRS reports that it has responded quickly to errors and 

taxpayers are timely receiving refunds. The General Accounting Office, in its preliminary 

review of the IRS’s performance during the 2002 filing season, agreed that, with the exception of 

the rate reduction credit, the filing season so far has been smooth, there has been continued 

growth in electronic filing, and telephone service has improved.19 However, the General 

Accounting Office reports that some of the errors resulting from the rate reduction credit may 

have been avoided with clearer IRS instructions, that some of the IRS’s performance measures 

for telephone service are misconceived, and that important performance measures for walk-in 

assistance have been delayed.

20

 

14 Internal Revenue Service Progress Report, From the Commissioner of the Internal 

Revenue Service (December 2001) (hereinafter “IRS Progress Report”) at 36.

15 However, as discussed below, the General Accounting Office reports that the 

performance measures do not provide useful information about certain aspects of the IRS’s 

telephone service.

16 IRS Progress Report at 38. 

17 Id. at 30.

18 Statement of Charles O. Rossotti, Commissioner of Internal Revenue, before the 

Subcommittee on Oversight of the House Committee on Ways and Means (April 9, 2002) 

(hereinafter “Rossotti April 9, 2002, Testimony”) at 2.

19 Statement of James R. White, Director, Tax Issues, before the Subcommittee on 

Oversight of the House Committee on Ways and Means (April 9, 2002) (hereinafter “GAO April 

9, 2002, Statement”) at 3.

20 Id. at 2-3.
18

The IRS projects that net collections for fiscal year 2002 will be approximately $2 

trillion.21 For fiscal year 2002, the IRS also projects that it will receive 231 million returns, 

including over 132 million individual returns, and the IRS expects to issue over 99 million 

individual refunds -- 3 million more than for 2001. As of March 23, 2002, the IRS reported that 

the average dollar amount per refund was up over 12 percent from last year, and the average 

refund as of that date was $1,980.22 Commissioner Rossotti testified that just over 40 million tax 

returns have been filed electronically, a 13.7 percent increase from last year.23

Rate reduction credit

In an otherwise smooth filing season, the rate reduction credit has, as of March 15, 

caused errors on 3.1 million returns out of 4.7 million returns with errors.24 The credit is for 

taxpayers who did not receive the maximum benefit of the advance payments that were mailed in 

the summer of 2001, as required by the Economic Growth and Tax Relief Reconciliation Act of 

2001, and whose 2001 income or tax amounts qualify them for an additional amount. To 

administer the one-time credit, the IRS added a line to the individual income tax forms and 

provided a worksheet for taxpayers to determine eligibility. Common errors have been: failure 

to claim the credit, mistakenly reporting as a credit the amount already paid to the taxpayer as the 

advance payment, and miscalculation of the amount of the credit. 

The General Accounting Office reports that the IRS may have been able to prevent some 

of these errors with clearer instructions, for example by highlighting the rate reduction credit and 

the new line on the tax forms on the cover page of the instructions, where IRS alerts taxpayers to 

annual changes, instead of mentioning the credit under the highlighted caption “Tax Rates 

Reduced.”25 The General Accounting Office notes that information on the IRS’s website was 

more informative than information on the instructions. However, the General Accounting Office 

and the IRS report that the IRS acted quickly once it became apparent that errors on the rate 

reduction credit were numerous.26 The IRS posted information on its website, sought to increase 

public awareness about the credit through new releases and other measures, and for electronic 

filers, rejected many returns so that the error could be corrected and the return resubmitted. The 

General Accounting Office notes that there does not appear to have been an adverse impact on 

 

21 Rossotti April 9, 2002, Testimony at 2.

22 Id.

23 Id.

24 GAO April 9, 2002, Statement at 21.

25 Id. at 23-24.

26 Id. at 22; Rossotti April 9, 2002, Testimony at 2.
19

the IRS’s ability to process returns and refunds in a timely fashion because of the increased 

error-correction workload, though this could change as the filing season progresses.27

Electronic tax administration

In general

Electronic filing generally is thought to have advantages over paper returns for both the 

IRS and taxpayers. According to the IRS, taxpayers who file electronically are able to obtain 

their tax refunds faster than taxpayers who file paper returns and, in general, electronic filing is 

more accurate than paper filing. 

The IRS has reported that, through April 4, 2002, a little more than 40 million tax returns 

were filed electronically, which is a 13.7 percent increase from the same period last year. The 

number of taxpayers filing electronically from their home computer increased 39 percent over 

last year.28 In addition, 3.6 million taxpayers filed their returns over the telephone,29 using the 

TeleFile system, which was down from 3.8 million from the same period last year. Maryland, 

Oregon, and West Virginia joined and Georgia, Indiana, Kentucky and Oklahoma in the 

Federal/State TeleFile option.30 In addition, the IRS reported that over 16 million taxpayers 

chose to file both their Federal and state tax returns simultaneously in a single electronic 

transaction,31 an increase of 23.8 percent over last year at this time. This year, 37 states and the 

District of Columbia are participating in the program. Since 1997, electronic filing has increased 

by 110 percent and on-line filing has grown by 1,700 percent. The American Customer 

Satisfaction survey showed that electronic filers had a high satisfaction rate, increasing in each of 

the last three years. Overall, the IRS is on pace to meet its goal of receiving 46 million returns 

electronically this year, an increase of 15 percent from last year. 

The General Accounting Office found that, although the increase in the percentage of 

returns filed electronically is not insignificant, the IRS will need larger future increases to 

achieve the IRS Reform Act’s goal of 80 percent of all returns filed electronically by 2007.32 

The General Accounting Office reported that to encourage more electronic filing in 2002, the 

IRS mailed letters to approximately 250,000 tax professionals encouraging their continued use or 

 

27 GAO April 9, 2002, Statement at 23.

28 Rossotti April 9, 2002, Testimony at 3.

29 Id.

30 Federal/State TeleFile allows taxpayers to file both Federal and State returns in a single 

telephone call.

31 Rossotti April 9, 2002, Testimony at 3.

32 GAO April 9, 2002, Statement at 25. See also section 2001 of the IRS Reform Act. 

The IRS has acknowledged that “achieving the congressionally-mandated goal of 80 percent of 

returns filed electronically by 2007 will be very difficult.” IRS Progress Report at 13. 
20

adoption of electronic filing. The IRS also mailed about 23 million postcards explaining the 

benefits of electronic filing to selected taxpayers, for example, those who had received TeleFile 

packages in prior years but did not utilize the program.33

The National Taxpayer Advocate’s fiscal year 2001 Annual Report to Congress lists the 

cost of electronic filing for low-income taxpayers as one of the most serious problems 

encountered by taxpayers.34 According to the National Taxpayer Advocate, low-income 

taxpayers file returns to obtain excess withholding or the Earned Income Tax Credit and many 

have a pressing need for funds. Although paper returns are an option, paper returns take four to 

six weeks to process compared to about ten days to receive a refund by direct deposit from an 

electronically filed return. However, many taxpayers incur a significant cost to claim the Earned 

Income Tax Credit electronically. They may be charged a fee for return preparation, for 

electronic return submission, and for a refund anticipation loan if they need money immediately. 

Electronic filing for individual taxpayers

Expansion of the e-file program.--The IRS continues to expand availability of the e-file

program, by increasing the number of different forms that taxpayers may file electronically. For 

example, for the 2002 filing season, the IRS added 29 additional forms and schedules to the 

individual e-filing program.35 The IRS reports that over 99 percent of all taxpayers are eligible 

for electronic filing, and that this year’s increase could add 38 million electronic filers.36

Personal identification numbers in lieu of paper signatures.--The IRS is in the process of 

making the e-filing process entirely paperless. In prior years, the taxpayer’s signature (on paper) 

was required to be filed with an electronically-filed return. In 2000, the IRS successfully tested 

the use of a personal identification number code in lieu of a paper signature. In 2001, the 

program was extended to taxpayers nationwide and nine million taxpayers utilized the selfselected personal identification number option.37 The IRS is continuing the program this year. 

According to the General Accounting Office, as of March 14, 2002, approximately 17.1 million 

returns had been filed electronically using a self-selected personal identification number, about 

180 percent more than during the same period in 2001.38

 

33 GAO April 9, 2002, Statement at 26.

34 Internal Revenue Service, National Taxpayer Advocate Annual Report to Congress for 

Fiscal Year 2001, Publication 2104 (December 31, 2001) (hereinafter “National Taxpayer 

Advocate FY 2001 Report”) at 61-63.

35 Rossotti April 9, 2002, Testimony at 3.

36 Id. at 3-4.

37 Id.

38 GAO April 9, 2002, Statement at 26.
21

Expanded payment options.--In the 2002 filing season, the IRS expanded the electronic 

payment options available by accepting credit cards for payment of installment agreements and 

delinquent taxes. The IRS reported that as of April 4, 2002, about 46,449 payments averaging 

$2,459 were made by credit card and 84,671 payments averaging $979 were made by Automated 

Clearing House Direct Debit (which allows taxpayers to authorize the debit of a checking or 

savings account).39

Marketing the e-file program to taxpayers.--According to a December 2001 report by the 

General Accounting Office, approximately 40 million returns were prepared on computers but 

then filed on paper.40 The IRS reports that this year it focused its marketing campaign on 

promoting electronic filing by such taxpayers and by taxpayers who use tax preparers but file on 

paper. 

Electronic filing for business taxpayers

The IRS reports that it has expanded electronic filing options for business taxpayers. 

Employers already could file Form 941, “Employer’s Quarterly Federal Tax Return” 

electronically. Now, businesses also can file electronically Form 940, “Employer’s Annual 

Federal Unemployment (FUTA) Tax Record” and some businesses can file by telephone. In 

addition, Form 1065 (which reports partnership income) and the accompanying K-1s can now be 

filed electronically. The IRS reports progress in making Form 1099 (to report other income) 

available electronically, and in designing a corporate tax return electronic filing program that is 

scheduled to be implemented in one year.41 To promote electronic filing by businesses, the IRS 

has placed advertisements in publications, including Fortune Magazine.

The IRS further noted that, in 2002, the electronic federal tax payment system, which 

permits taxpayers to pay federal taxes using electronic means, continues to be successful. In 

addition, on September 6, 2001, the IRS launched an online electronic federal tax payment 

system, which lets taxpayers pay federal taxes through a secure web site. The IRS stressed that 

the confidentiality and privacy of taxpayer information is of the highest priority.42

IRS Web site

In January, the IRS introduced a new web site (www.irs.gov). The site was designed to 

make it easier for taxpayers to find information and to be more focused on the taxpayers as a 

customer. The web site is divided into categories of taxpayers, for example, the Small 

 

39 Rossotti April 9, 2002, Testimony at 4.

40 General Accounting Office, Report to the Chairman, Subcommittee on Oversight, 

Committee on Ways and Means, House of Representatives, Assessment of IRS’ Tax Filing 

Season (December2001), GAO-02-144 at 3.

41 Rossotti April 9, 2002, Testimony at 5.

42 Id.
22

Business/Self-Employed Community, which compiles relevant information for the kind of 

taxpayer and thus makes the site easier to use. The new web site retains features of the old, such 

as tax forms, instructions, and publications; the latest tax information and tax law changes; tax 

tables and rate schedules; hypertext versions of all taxpayer information publications; all 

TeleTax topics; answers to the most frequently asked tax questions; a library of tax regulations; 

and the weekly Internal Revenue Bulletin, which contains the latest revenue rulings, revenue 

procedures, notices, announcements, and proposed and final regulations. As of March 14, the 

IRS web site was listed as third in the Lycos search engine’s Top 50 searches. In 2001, the web 

site recorded 2.7 billion hits and more the 336 million forms and publications were downloaded. 

For fiscal year 2001 through March 31, web site hits totaled 1.95 billion, a more than 36 percent 

increase on the same period last year. The IRS reports using the web site as a method to 

communicate tax scams and fraudulent schemes to taxpayers, including the slavery reparations 

scam.43

CD-ROMs

The IRS has developed CD-ROMs for small business taxpayers. The Small Business 

Resource Guide 2002 contains all the business tax forms, instructions and publications needed to 

manage a business, as well as information about disaster relief and the Welfare-to-Work credit. 

Up to five copies can be ordered free online. Introduction to Federal Taxes for Small 

Business/Self-Employed is intended as an introductory guide for business students, new small 

business owners, and self-employed entrepreneurs. A Virtual Small Business Workshop 

replicates IRS workshops on the primary tax implications of establishing and running a small 

business and provides captions in English, Spanish, and Mandarin Chinese. These latter two 

CD-ROMs are free.44

Telephone and walk-in service

Telephone service

Throughout the 2001 filing season, the IRS offered 24-hour, seven-days-a-week 

telephone assistance. After April 16, 2001, the IRS provided around-the-clock service for refund 

and account callers, and service for tax law assistance was provided Monday through Saturday 

from 7:00 a.m. until 11:00 p.m.45 For the 2002 filing season, the IRS determined that customer 

service would be improved if telephone assistance were better allocated to meet customer 

demand, which the IRS determined based on a usage study by AT&T.46 Starting in October 

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

 

43 Id. at 6-7.

44 Id. at 10.

45 Report of the Joint Committee on Taxation Relating to the Internal Revenue Service as 

Required by the IRS Reform and Restructuring Act of 1998 (JCX-33-01), May 4, 2001 at 83.

46 Rossotti April 9, 2002, Testimony at 7.
23

the filing season (January 2, through April 15, 2002), assistors also were available on Saturdays 

from 9 a.m. to 5 p.m., on President’s Day and on Sunday April 7 and Sunday April 14. 

Automated assistance is available 24 hours a day, seven days a week.47

The IRS notes that through March 30, 2002, the total volume of incoming calls on tollfree lines was up 13 percent, primarily due to questions concerning the rate reduction credit and 

refunds. Even with the increased volume, through March 30, 2002, approximately 66 percent48

of taxpayers who wanted to speak with a customer service representative got through, compared 

to 68 percent at the same time in 2001. Over a four-week period beginning in March, the IRS 

reports that 74 percent of callers got through, which makes the IRS’s goal of 71 percent for the 

year, within reach.49 Wait time for questions on tax law was 2.58 minutes (down from 4.27 

minutes), and on account questions, 4.76 minutes, (down from 6.11 minutes). The correct 

response rate for tax law and tax account questions was 83 percent and 89 percent respectively 

(compared to 75 percent and 88 percent a year ago). In addition, 45.3 million taxpayers (or 8 

percent more than last year) have used automated services to get refund and other information.50 

The IRS notes further that a special telephone line for victims of the September 11, 2001 attacks 

was established by September 24 and over a 90 percent level of service has been provided on the 

line.

The General Accounting Office found that this filing season, taxpayers are spending less 

time waiting to talk to an assistor and receive accurate answers at a higher rate than a year ago. 

The General Accounting Office confirms, however, that the rate at which callers connect with an 

assistor is down, due in part to callers hanging up after inquiring about the rate reduction credit 

and being transferred to automated services.51 

The General Accounting Office reports that the IRS attributes improvements in telephone 

service to hiring and training assistors earlier than in past years, certifying that assistors 

completed the necessary training, using a computer-based call routing system to refer calls to an 

assistor trained in the pertinent topic, and to IRS’s establishment of new performance measures 

and goals for the call sites.52 The General Accounting Office notes, however, that although the 

 

47 Id.

48 Id.

49 A recent memorandum from the Commissioner of the IRS to Treasury Secretary 

O’Neill indicated that reaching a service level of 90 percent would require additional funding of 

$35 million. Rossotti April 9, 2002, Testimony at 9.

50 Id. at 7-8.

51 GAO April 9, 2002, Statement at 27-29. The National Taxpayer Advocate’s Fiscal 

Year 2001 Report listed access to customer service toll-free telephone service as the most serious 

problem encountered by taxpayers. National Taxpayer Advocate FY 2001 Report at 8-10.

52 GAO April 9, 2002, Statement at 29-30.
24

IRS’s performance measures are useful in some respects, none of the measures reflect the 

number of callers that hang up while listening to the initial menu, even though the IRS has this 

data. The General Accounting Office notes that the number of such callers decreased after the 

IRS streamlined the menu in mid-February. In addition, the General Accounting Office notes 

that the IRS does not measure automated telephone service, and that the IRS counts some calls as 

receiving assistor service even though the only service received was by automation. 

Nevertheless, the General Accounting Office does not recommend that the IRS take further 

action on such performance measures, pending a further review.53

The National Taxpayer Advocate ranks access to IRS toll-free service as the number one 

problem faced by taxpayers.54 The IRS Oversight Board notes that, while service is hampered 

by the lack of modern tools and technology for providing better service, there is a direct 

correlation between the number of calls that can be answered and staffing levels.55

Walk-in service

Walk-in service is available at more than 400 locations throughout the United States. At 

many walk-in sites, service was offered on 12 Saturdays between January 27, 2002, and April 

14, 2002. As of March 16, 2002, the IRS estimates that it had served over 3.3 million taxpayers 

at all Taxpayer Assistance Centers, slightly more than for the same period in 2001.56 

Taxpayers utilizing walk-in service can make payments, receive help with tax law and tax 

account questions, obtain tax forms and publications, and receive limited courtesy return 

preparation. Return preparation is available for taxpayers with incomes of $33,000 or less, thus 

ensuring assistance for taxpayers that qualify for the Earned Income Tax Credit. Taxpayer 

Assistance Centers also host Problem Solving Days to resolve longstanding taxpayer issues.57

The IRS reports that this fiscal year it is developing baselines for tax law, accounts, and return 

preparation accuracy.58

According to the General Accounting Office, fiscal year 2002 is the first year the IRS is 

measuring the quality of Taxpayer Assistance Centers using contract reviewers instead of IRS 

 

53 Id. at 31-32.

54 National Taxpayer Advocate FY 2001 Report at 8.

55 IRS Oversight Board Report at 11.

56 Rossotti April 9, 2002, Testimony at 10. See also, Appendix at 5 (showing a slight 

increase in taxpayers served per hour from 4.37 in fiscal year 1999 to 4.20 in fiscal year 2001, 

and a decrease of approximately 43,000 hours spent with taxpayers). The Appendix contains a 

letter and attachments from Charles O. Rossotti, Commissioner of Internal Revenue, to Lindy L. 

Paull, Chief of Staff, Joint Committee on Taxation (May 2, 2002).

57 Rossotti April 9, 2002, Testimony at 11; GAO April 9, 2002, Statement at 32.

58 Appendix at 5.
25

employees. Contract reviewers pose as taxpayers and make random visits to Taxpayer 

Assistance Centers. Reviewers ask two of four questions that the IRS has developed for this 

purpose based on the most common inquiries received by the IRS by telephone. The General 

Accounting Office reports that the accuracy rate reported through mid-March 2002 is 

encouragingly high, at 84 percent. Although this is clearly a better figure than the low accuracy 

rates reported by the IRS in 2000 (24 percent) and by the Treasury Inspector General for Tax 

Administration in 2001 (51 percent) the measurement methodology for 2002 is not comparable 

to prior years59 so it is difficult to assess the degree of improvement. After delays, the IRS plans 

to begin measuring the accuracy of account and return preparation services at walk-in sites by 

June 2002.60

This filing season, auditors of the Treasury Inspector General for Tax Administration 

visited 40 taxpayer assistance centers and asked 168 tax law questions. IRS employees provided 

36 correct responses, 42 correct responses despite procedural errors, 40 referrals to publication in 

lieu of a response, and 50 incorrect responses.61

C. Other Service Issues

Administering advance payments for the rate reduction credit

Just six weeks after the signing of the Economic Growth and Tax Relief Reconciliation 

Act of 2001, the IRS began mailing out over 90 million advance payment checks. The IRS had 

begun work weeks earlier so that it would be prepared to handle the $36 billion advance payment 

provision. The IRS coordinated an unprecedented outreach to America’s taxpayers, an intricate 

computer programming project, numerous news releases, an updated Web site, and additional 

assistors to handle record call volumes.62

The IRS issued notices to all taxpayers, both those who qualified for an advance payment 

and those who did not. The notices, issued prior to the checks, helped to answer taxpayers’ 

questions and reduce the number of telephone calls. Although a computer glitch caused almost a 

half-million taxpayers to receive notices with inaccurate amounts, the error was identified and 

those taxpayers were sent a second notice with the corrected amount. Initially, the IRS’s 

telephone systems were overwhelmed and many taxpayers could not get through to the IRS. The 

 

59 Results in 2000, 2001, and 2002 all were based on visits to walk-in sites by persons 

posing as taxpayers, but the questions, the number of weeks covered, and the number and 

selection of sites were different. GAO April 9, 2002, Statement at 33.

60 Id. at 34.

61 Testimony of Pamela J. Gardiner, Deputy Inspector General for Audit, Treasury 

Inspector General for Tax Administration, before the Subcommittee on Government Efficiency, 

Financial Management and Intergovernmental Relations of the House Committee on 

Government Reform (April 15, 2002).

62 IRS Progress Report at 18.
26

IRS responded by retaining its seasonal workers and applying additional resources to address the 

crisis. All told, 21.8 million taxpayer calls on the advance refund were answered.63

September 11th

Following the September 11 terrorist attacks, IRS and Treasury Department employees 

did their best to minimize the distraction of tax issues for the victims. By September 14, the IRS 

provided administrative relief to the victims in the form of extensions to file returns and pay 

taxes. Many enforcement actions for the affected taxpayers also were suspended for six months. 

In addition, special toll-free numbers were established to answer any questions, and a special 

disaster relief page was created on the IRS’s Web site.64

In addition, on September 18, the IRS’s Tax Exempt/Government Entities Division 

placed a new publication on the IRS’s Web site that provided information to assist the public to 

make use of charitable organizations in providing disaster relief. On December 10, the IRS 

issued interim guidance that recognized the unique circumstances caused by the tragedy and 

made it easier for charities to distribute aid to the victims and their families.65

Refunds

For fiscal year 2001, the IRS averaged 14.6 days to issue a refund from an electronic 

return and 28 days to issue a refund from a paper filed return. During the 2002 filing season, the 

IRS is averaging 12 days for an electronic return and 26 days for a paper return, though the 

average rate is expected to increase at the end of the filing season. By contrast, in 1997 the 

average return rate was 16 days (electronic) and 37.7 days (paper); in 1998, 15 days (electronic) 

and 34.8 (paper); and in 1999, 14 days (electronic) and 35.09 (paper).66

Employer identification numbers

The IRS acknowledges customer service shortcomings in the Employer Identification 

Number assignment process.67 The National Taxpayer Advocate’s Annual Report ranks 

“Obtaining Employer Identification Numbers” as one of the top 15 problems faced by 

taxpayers.68 According to the Taxpayer Advocate, taxpayers are unable to obtain Employer 

Identification Numbers within the specified timeframes. This hinders their ability to file Federal 

 

63 Id. at 19.

64 Id.

65 IRS Notice 2001-78, 2001-50 IRB 576 (December 10, 2001).

66 Appendix at 7.

67 IRS Progress Report at 21.

68 National Taxpayer Advocate FY 2001 Report at 7.
27

and state returns and conduct their business.69 Telephone coverage for Employer Identification 

Number service at IRS facilities has been inconsistent. Prior to January 2, 2002, some sites 

answered their phones only three days a week; other sites answered their phones only four hours 

per day.70 Faxed requests for Employer Identification Numbers also were not handled 

expeditiously. 

On January 2, 2002, the IRS consolidated Employer Identification Number services into 

three sites and now offers telephone service at consistent times.71 However, because the system 

shut down from December 21 until January 2, when the system reopened the telephone lines 

were overwhelmed and it took several weeks to stabilize the service.72

Burden reduction

One of the ten major strategies included in the IRS Strategic Plan is “reduce taxpayer 

burden.” Through an approach of short- and long-term improvements, the IRS is working to 

provide taxpayers with both immediate and far-reaching burden relief and has created the Office 

of Taxpayer Burden Reduction. The IRS’s short term efforts include reducing the number of 

taxpayers who must file specific forms, simplifying or eliminating forms and notices altogether, 

and making it easier through electronic means to file and pay. In order to improve the IRS’s 

correspondence with taxpayers, and following the IRS Reform Act’s directions, the IRS 

redesigned six notices, including those dealing with math errors, balance due, overpayments and 

offsets. The IRS continues to redesign 24 additional notices, and plans to release 11 by July 

2002, and the remaining 13 in January 2003.73

The IRS is making other efforts to reduce taxpayer burden. The IRS has hired a 

consultant to develop a taxpayer burden model and has hired a contractor to redesign Form 941 

(Employer’s Quarterly Federal Tax Return) and its instructions. Schedule D, which is used to 

calculate capital gains and losses, was redesigned for the 2002 tax-filing season. A box was 

added to the Form 1040 to allow taxpayers to select a third party who may talk directly with the 

IRS during the processing of the return, and to discuss the status of a refund, payment or other 

notice with the IRS.74 The IRS also announced on April 10 that it has reduced the paperwork for 

most small businesses that file corporate tax returns by eliminating completion of Schedules L, 

M-1, and M-2 of Form 1120, Parts III and IV of Form 1120A, and Schedules L and M-1 of Form 

 

69 Id. at 43.

70 Id.

71 Id. at 43-44.

72 Testimony of Roger Harris, Enrolled Agent, before the Committee on Ways and 

Means, Subcommittee on Oversight, April 9, 2002.

73 IRS Progress Report at 18.

74 Rossotti April 9, 2002, Testimony at 9-10.
28

1120S. The Commissioner estimated that the changes could save 2.6 million small businesses 

approximately 61 million staff hours.75 Nevertheless, the General Accounting Office reports that 

the IRS paperwork burden increased in fiscal year 2001 by 290 million hours, due in significant 

part to changes initiated by the IRS, as well as a reaction to new tax laws.76

 

75 IRS News Release IR-2002-48.

76 General Accounting Office, Testimony before the Subcommittee on Energy Policy, 

Natural Resources, and Regulatory Affairs, Committee on Government Reform, Burden 

Increases and Violations Persist (April 11, 2002) GAO-02-598T at 2. At the hearing, the 

Commissioner defended some IRS initiatives as necessary to collect information on tax schemes. 

See BNA, Daily Tax Report, Taxpayer Paperwork Burden Increasing, GAO Says; Rossotti 

Defends Agency Efforts (April 12, 2002).
29

II. PROVIDING TOP QUALITY SERVICE TO ALL TAXPAYERS

A. In General

The second strategic goal requires the IRS to provide top quality service to all taxpayers. 

This goal aims for fundamental fairness and uniform application of the law to all taxpayers. The 

IRS’s goal is to ensure that the tax law is applied with fairness and integrity so that taxpayers 

who fail to comply with the tax laws do not burden those who comply. A tax system designed to 

promote and ensure compliance, and effective enforcement of the law, are essential components 

to achieving fair and uniform application of the tax law. 

In general, the IRS ensures compliance by matching information received from 

employers, financial institutions, and other businesses with information received by taxpayers. 

Third parties report approximately 80 percent of the personal income received by taxpayers. The 

remaining 20 percent of income, mostly business income, is not reported and often requires inperson auditing to verify. Also, business income, including that by passthrough corporations, 

partnerships, and trusts can be verified only by auditing.77 The IRS estimates that the total 

personal income that cannot be verified by document matching was about $1.2 trillion in fiscal 

year 1998, or 19.7 percent of total reported personal income.78 

In fiscal year 2001, the IRS began capturing the data from 16.8 million K-1 forms which 

are used to report income, credits, and deductions of partners, shareholders and beneficiaries of 

passthrough entities.79 In 2002, the IRS will begin processing and matching K-1 forms with 

individual tax returns.80 In the beginning stages, the IRS will match only for income and 

dividends, not losses, although the IRS will cross-match for potential nonfiling of returns.81

Trusts and offshore bank accounts (including credit cards from offshore banks) used by 

upper-income taxpayers to hide income have become a significant loss of revenue to the 

Treasury--the IRS estimates losses in the tens of billions of dollars.82 In 2002, the IRS’s Fraud, 

Anti-Money Laundering, and Abusive Schemes groups and the Lead Development Center were 

placed under the supervision of one IRS executive in order to allow better flow of information 

 

77 Internal Revenue Service Accountability Report Fiscal Year 2001, Publication 3385 

(Revised March 2002) (hereinafter “IRS Accountability Report”) at 8.

78 IRS Progress Report at 25.

79 IRS Accountability Report at 8.

80 Id.

81 See Amy Hamilton, IRS Considers Simplifying K-1s, 2001 Tax Notes Today 185-8 

(September 24, 2001).

82 Rossotti April 9, 2002, Testimony at 16.
30

between these programs.83 In addition, the IRS started a special initiative to identify offshore 

credit card accounts.84 This initiative, which is still in its early stages, has had initial success in 

identifying cardholders for investigation.85

B. Enforcement Activity

The IRS’s goal in fiscal year 2001 was to stop the long-term decline in compliance 

activities, and enforcement actions did increase in fiscal year 2001. For example, levies, liens, 

and seizures all increased significantly from fiscal year 2000: levies more than tripled, liens 

increased by approximately 50 percent, and seizures jumped from 74 to 234.86 However, total 

enforcement actions were a fraction of levels in fiscal years 1995 through 1998 (e.g., levies were 

approximately 18 percent of 1997 levels, liens approximately 79 percent, and seizures 

approximately 2 percent).87 Enforcement revenue remained at fiscal year 2000 levels at $33.8 

billion, a drop from $37.2 billion in fiscal year 1997.88 The IRS attributes its inability fully to 

pursue enforcement cases to the modernization effort, a decrease in staff, reassignment of 

collection employees to support customer service activities, and additional staff time needed to 

implement certain taxpayer protections that were included in the IRS Reform Act.89 

Additionally, the IRS reports that inadequate financial and operational information has hindered 

development of cost-based performance information for tax collection and enforcement 

programs.90

The IRS Oversight Board continues to find the decline in enforcement activities 

troubling, especially in light of the fact that the number of returns filed is increasing while the 

number of returns examined, and the number of IRS employees, is decreasing. The IRS 

Oversight Board is concerned that the broad decline in enforcement activity increases the tax 

system’s reliance on voluntary compliance, and fears that the public’s attitude towards voluntary 

compliance is eroding.91 

 

83 Statement of Charles O. Rossotti, Commissioner of Internal Revenue, before the 

Senate Finance Committee (April 11, 2002) at 18-19. 

84 Id. at 19.

85 Id.

86 Appendix at 38.

87 Id.

88 Id. at 29.

89 IRS Accountability Report at 24.

90 Id.

91 IRS Oversight Board Report at 11-14.
31

To combat tax fraud schemes in general, the IRS issued two nationwide alerts warning 

taxpayers not to fall victim to fraud and false refund schemes, and established on the IRS website 

a program to alert taxpayers and practitioners of fraud and tax schemes.92 On November 15, 

2001, the Justice Department filed lawsuits in federal courts in three states to crack down on a 

scam that claimed that Section 861 of the tax code exempts from taxation all domestic income 

earned by U.S. citizens.93

The IRS has identified four areas of systemic non-compliance on which it plans to focus 

its (limited) enforcement resources: (1) misuse of trusts and passthrough entities to hide or 

improperly reduce income; (2) use of complex and abusive corporate tax shelters to reduce taxes 

improperly; (3) failure to file and pay large accumulations of employment taxes; and (4) 

erroneous refund claims and Earned Income Tax Credit fraud.94 The IRS has been active in 

pursuing enforcement actions in these four areas, and has begun using the civil enforcement 

provisions of the Internal Revenue Code to enjoin promoters of abusive schemes.95 

IRS Criminal Investigation had 301 open investigations of abusive trusts in 2001, 

including 125 of promoters of such trusts.96 The IRS also has developed specialized training 

programs and trained 160 agents and attorneys on abusive trust-related issues. At the end of 

2001, IRS agents were auditing 57 promoters and evaluating several hundred abusive schemes.97

Curbing corporate tax shelters is a top priority for the Large and Mid-Size Business 

Division.98 In 2000, the Division established the Office of Tax Shelter Analysis as the focal 

point for tax shelter compliance initiatives.99 The Office of Tax Shelter Analysis is responsible 

for coordinating and planning tax shelter initiatives and supporting IRS examiners working on 

abusive tax shelter issues. It also serves as a clearinghouse for information provided to the IRS 

on potentially improper tax shelter activity by corporate and non-corporate taxpayers.100 In 

 

92 IRS Progress Report at 24.

93 Id.; IRS Accountability Report at 24.

94 IRS Progress Report at 22.

95 Rossotti April 9, 2002, Testimony at 23. For a general overview of the IRS’s 

compliance efforts, see Michael Brostek, Testimony before the Senate Committee on Finance, 

Enhanced Efforts to Combat Abusive Tax Schemes--Challenges Remain (April 11, 2002) GAO02-618T.

96 IRS Progress Report at 22.

97 Id. at 23.

98 Testimony of Larry R. Langdon, Commissioner Large & Mid-size Business Division, 

Internal Revenue Service, before the Senate Committee on Finance (March 21, 2002) at 1.

99 IRS Progress Report at 23.

100 Id.
32

2000, regulations were issued requiring corporate taxpayers to disclose reportable transactions 

and requiring promoters to register confidential corporate tax shelters and maintain lists of tax 

shelter investors. However, the Treasury Department and the IRS are disappointed in the small 

number of disclosures and the lack of compliance by promoters with the list maintenance rules, 

and have concluded that significant changes to the rules are necessary.101

Case openings related to employment taxes increased by 75 percent in 2001.102 The IRS 

also issued a special consumer alert on the employment tax fraud problem.

The IRS fought tax-filing fraud in the Earned Income Tax Credit area in many ways. The 

IRS implemented a program of education and outreach visits by IRS agents to offices with a high 

volume of Earned Income Tax Credit return preparers, organized visits by agents to such offices 

to review compliance with due diligence requirements, and “partnered” with Criminal 

Investigation to ensure investigation of known fraudulent Earned Income Tax Credit claims and 

schemes. The IRS also began a check of secondary social security and identification numbers 

associated with a qualifying child to reduce the number and amount of ineligible claims made 

under the Earned Income Tax Credit to address erroneous refunds and compliance among 

taxpayers who claim the Earned Income Tax Credit.103 

C. Audit Activity

An important role of audits is to verify major categories of income and deductions. In 

fiscal year 2000, the audit rate for individuals was less than one-half of one percent and the 

number of individual returns audited (including service center or correspondence audits) was 

approximately 618,000. In fiscal year 2001, the audit rate increased slightly to .58 percent and 

the number of returns audited increased to approximately 732,000.104 By contrast, the number of 

returns audited in fiscal years 1997, 1998, and 1999 were approximately 1,519,000, 1,193,000, 

and 1,100,000 -- demonstrating a steady decline in number of returns audited.

The income reported by businesses is as important as that of individuals with respect to 

both tax revenues and fairness. The IRS continues to audit the 1,100 largest corporations every 

year but the audit rate for all other corporations declined from 3 percent in 1992 to 1.1 percent in 

fiscal year 2001.105 The audit rate for all large corporations has declined significantly since 

 

101 Testimony of Mark Weinberger, Assistant Secretary of the Treasury for Tax Policy, 

before the Senate Committee on Finance (March 21, 2002) at 6.

102 IRS Progress Report at 24.

103 IRS Accountability Report at 24.

104 IRS Progress Report at 43. Most of this increase is attributable to an increase in 

correspondence audits of taxpayers with income in excess of $100,000. IRS Oversight Board 

Report at 11.

105 IRS Progress Report at 25.
33

fiscal year 1997 (12,972 closures) to fiscal year 2001 (8,718 closures), and the decrease for small 

corporations is more dramatic, from fiscal year 1997 (56,323 closures) to fiscal year 2001 

(14,332 closures).106 

Of particular concern to the IRS is the growing number of entities, such as partnerships, 

trusts, and S corporations, that pay no income tax at the business level, but pass their net income 

through to their shareholders or partners. In 2000, these entities filed 7.4 million returns, 

reported $5 trillion of gross revenues, and $680 billion of income. However, the IRS audited 

only one of every 256 returns -- the equivalent of 0.39 percent.107 The IRS’s new K-1 matching 

program will not provide any verification of the income reported by the business entity itself; 

this still requires an audit. 

A significant impediment to achieving the IRS’s compliance goals was the in-person 

examination rate (for corporations and individuals), which declined about 20 percent in fiscal 

year 2001. The IRS believes that improving this number will be a long-term process, and 

anticipates seeing increases in this area in three years. The IRS plans to show improvement by 

stabilizing the number of compliance personnel, reengineering processes, and setting clear 

goals.108 However, technical staffing levels for audit activity have declined, from 14,399 

revenue agents in fiscal year 1997, 12,550 in 2000, and 11,598 in 2001, and from 2,318 tax 

compliance officers in fiscal year 1997 to 1,702, in 2000, and 1420 in 2001.109 The IRS says it 

will rely on the Business Systems Modernization program to increase the effectiveness and 

efficiency of compliance activities over the long term.110 The IRS also hopes to reduce the need 

for some enforcement efforts by focusing on prefiling initiatives, thereby increasing voluntary 

compliance.

In fiscal year 2001, the IRS implemented the first phase of a multi-year Collection Reengineering Program to ensure that business tax cases are promptly assigned to revenue officers. 

 

106 Appendix at 8. The IRS reports that audits conducted by automation (e.g., the 

Automated Underreporter Program and the Automated Substitute for Return Program) have been 

more constant than audits conducted in the field and by correspondence, but the decrease still is 

significant. For example, in fiscal year 1997 the Automated Underreporter Program closed 

1,598,471 cases and sent 3,500,804 letters compared to 1,161,901 cases and 2,576,375 letters in 

fiscal year 2001. For the Automated Substitute for Return Program, in fiscal year 1997 392,598 

cases were closed and 525,432 letters were sent compare to 333,770 cases and 393,751 letters in 

fiscal year 2001. Id. at 9.

107 IRS Progress Report at 25.

108 Id. at 26.

109 Appendix at 33.

110 Id.
34

The IRS also is “reinvigorating” the fraud referral program, so that taxpayers will be referred for 

criminal investigation whenever serious noncompliance is discovered.111

D. Measuring Compliance -- National Research Program

The IRS acknowledges that the lack of a reliable way to measure taxpayer compliance 

limits the IRS’s ability to assess progress in serving all taxpayers through effective and fair 

application of the tax laws.112 Because reliable and timely financial, operational, and compliance 

data is not available to help target efforts to collect billions of dollars in unpaid taxes, the Federal 

government is exposed to significant losses of tax revenue and compliant taxpayers bear an 

undue burden of financing the government’s activities. The IRS projects that the total tax gap 

from nonfiling, underreporting, and underpayment was $272.4 billion in 1998 ($166.4 billion 

from individual income tax, $40.5 billion from corporate income tax, and $65.5 billion from 

employment taxes).113 The decline in key collection actions such as levies and seizures may 

increase the incentives for taxpayers either not to report or to underreport their tax obligations. 

To address these concerns, the IRS is developing a new program, the National Research 

Program, which will measure filing compliance, payment compliance, and reporting compliance 

by taxpayers. The IRS has designed the National Research Program to lessen taxpayer burden 

while still obtaining a sample sufficient to catch tax cheating and to help reduce audits of 

compliant taxpayers by at least 15,000 returns a year.114 Under the Program, payment 

compliance data will be generated annually and reporting compliance surveys will be conducted 

every three years. The data gathered through the National Research Program will be used to 

update the formulas used for selecting returns for audit. The IRS plans to begin the National 

Research Program’s work in September 2002 by gathering data for individual taxpayers, and 

plans to survey small corporations, partnerships, and trusts in the future.115 The IRS Oversight 

Board supports the National Research Program and requests Congressional support for the 

Program.116

 

111 IRS Progress Report at 25.

112 IRS Accountability Report at 9.

113 See table at Appendix at 34. The IRS notes that the projection is based on compliance 

data gathered for tax years 1985 and 1988 and assumes constant compliance rates. Id. at 33.

114 Rossotti April 9, 2002, Testimony at 13.

115 Internal Revenue Service, IRS Fact Sheet, National Research Program (January 16, 

2002).

116 IRS Oversight Board Report at 14.
35

III. PRODUCTIVITY THROUGH A QUALITY WORK ENVIRONMENT

A. In General

As its third strategic goal, the IRS plans to increase productivity by providing a quality 

work environment for its employees. Using the private sector as a model, the IRS notes that 

success requires providing employees with high-quality technology tools, adequate training, 

effective management, and active engagement in the goals of the organization. The IRS is 

working to create a positive work place characterized by equal opportunity, recognition of 

employee performance, and no artificial barriers to advancement. The IRS measures success in 

building productivity by increasing its workforce only slightly while concurrently handling an 

increased workload, and improving service to each taxpayer and to all taxpayers. Employee 

satisfaction also is measured as part of this goal.

According to the IRS, overall job satisfaction for IRS employees was 59 percent in the 

year 2000.117 This number decreased to 51 percent in 2001, a 14 percent decrease from fiscal 

year 2000.118 The IRS strategic plan notes that employee satisfaction differs significantly among 

race, national origin, and gender groups.119 

According to the IRS Oversight Board, IRS employee morale and job satisfaction are not 

adequate.120 Many IRS productivity measure have decreased during the past three years. 

Although no single factor is responsible, the IRS Oversight Board finds that the decline in 

productivity may be attributable to declining resource allocations, low employee satisfaction, 

additional case complexity, less direct time spent on cases, and additional legislated 

requirements.121

In addition, the IRS Oversight Board finds that the IRS is not providing a quality work 

environment. The ability of IRS personnel to respond to taxpayer questions and efficiently 

perform critical duties is limited by the fact that the IRS computer systems are outdated.122 The 

 

117 IRS Progress Report at 39.

118 Id. at 39. The IRS notes that the definition of employee satisfaction changed in 2001, 

so the numbers are not fully comparable. However, the IRS further notes that the decline in 

employee satisfaction can be attributed to the effects of IRS reorganization. Id. at 29.

119 IRS Strategic Plan at 98.

120 IRS Oversight Board Report at 9.

121 Id. at 14.

122 Id. at 23.
36

system prevents taxpayers from receiving up-to-date account information and inhibits 

meaningful progress on IRS modernization,123 which is frustrating to IRS employees. 

B. Violations for Which IRS Employees May Be Terminated

Offenses and procedures

The IRS Reform Act defined 10 specific acts of misconduct for which an IRS employee 

may be terminated (“section 1203 violations”). These acts are:

(1) willful failure to obtain the required approval signatures on documents 

authorizing a seizure of a taxpayer’s home, personal belongings, or business 

assets; 

(2) providing a false statement under oath with respect to a material matter involving 

a taxpayer or taxpayer representative;

(3) violation of the rights protected under the Constitution or the civil rights 

established under six specifically identified laws with respect to a taxpayer, 

taxpayer representative, or other employee of the IRS;124

(4) falsifying or destroying documents to conceal mistakes made by any employee 

with respect to a matter involving a taxpayer or taxpayer representative; 

(5) assault or battery on a taxpayer, taxpayer representative, or employee of the IRS, 

but only if there is a criminal conviction, or a final judgment by a court in a civil 

case, with respect to the assault or battery; 

(6) violations of the Code, Department of Treasury regulations, or policies of the IRS 

(including the Internal Revenue Manual) for the purpose of retaliating against, or 

harassing, a taxpayer, taxpayer representative, or other employee of the IRS; 

(7) willful misuse of the provisions of section 6103 of the Code for the purpose of 

concealing information from a congressional inquiry; 

(8) willful failure to file any return of tax required under the Code on or before the 

date prescribed therefor (including any extensions), unless such failure is due to 

reasonable cause and not to willful neglect; 

 

123 Id. A discussion of the IRS’s efforts to improve its technological infrastructure is 

discussed at Part IV.B. of this Report.

124 These laws are: (1) title VI or VII of the Civil Rights Act of 1964; (2) title IX of the 

Education Amendments of 1972; (3) the Age Discrimination in Employment Act of 1967; (4) the 

Age Discrimination Act of 1975; (5) section 501 or 504 of the Rehabilitation Act of 1973; or (6) 

title I of the Americans with Disabilities Act of 1990. IRS Reform Act, sec. 1203(b)(3)(B).
37

(9) willful understatement of Federal tax liability, unless such understatement is due 

to reasonable cause and not to willful neglect; and 

(10) threatening to audit a taxpayer for the purpose of extracting personal gain or 

benefit.125

In his or her sole discretion, the Commissioner may determine that there are mitigating 

factors that weigh against terminating an employee. This discretionary authority cannot be 

delegated.

Each allegation of a section 1203 violation goes through a review and investigation 

process.126 First, the allegation initially is evaluated to determine whether it should be 

investigated as a section 1203 violation. The Treasury Inspector General for Tax Administration 

has primary responsibility for investigating allegations under section 1203. The facts found as a 

result of the investigation are then reported to the IRS for evaluation. IRS managers then must 

determine whether a violation of Section 1203 has occurred. This determination is made by a 

Division-level or above manager, with assistance of local labor relations specialists and the staff 

of the Centralized Adjudication Unit. The Centralized Adjudication Unit is involved in all 

determinations under section 1203 for the purpose of ensuring consistency throughout the IRS. 

If a determination is made that sufficient facts exists to support a section 1203 violation, the 

employee is given a letter advising that the IRS proposes to remove him or her from Federal 

service. The employee has a right to respond to the letter. The management official then must 

determine if the charge has been sustained by a preponderance of the evidence. If it is 

determined that the charge has been sustained, the case file is forwarded to the IRS national 

office for consideration by the Section 1203 Review Board.

The Section 1203 Review Board then reviews the case to determine whether a penalty 

less than termination of employment is appropriate. The Section 1203 Review Board submits 

recommendations for mitigation to the Commissioner. If the Section 1203 Review Board does 

not find mitigation appropriate, the case is not submitted to the Commissioner and the statutory 

penalty of removal is imposed.

As of February 28, 2002, there were 327 substantiated violations of section 1203.127 Of 

the 327 substantiated violations, 282 were for failure to file a Federal tax return.128 Of the 3,045 

completed section 1203 inquiries, 2,098 inquires found that the allegation was not substantiated; 

620 inquires were found to constitute non-section 1203 misconduct.129 Fifty-four employees 

 

125 IRS Reform Act, sec. 1203(b).

126 See generally, Report of the Joint Committee on Taxation Relating to the Internal 

Revenue Service as Required by the IRS Reform and Restructuring Act of 1998 (JCX-33-01), 

May 4, 2001, Appendix, Letter from the IRS at 51-53.

127 See the final document of the Appendix (final four Appendix pages) at 2.

128 Id.
38

have been removed for section 1203 violations, 46 of whom were removed for willful failure to 

timely file a Federal tax return.130 

Effectiveness of section 1203

As part of this year’s budget request, the IRS requested that two section 1203 violations 

be eliminated from the list. These are the late filing of tax returns for which a refund is due and 

actions by IRS employees that violate another IRS employee’s rights, rather than a taxpayer’s 

rights. The IRS also requested that the unauthorized inspection of returns or return information 

be added to the list of violations. In addition, the IRS wants the Commissioner to be able to 

establish guidelines that outline specific penalties, including termination, for the types of 

wrongful conduct listed under section 1203.131

According to the IRS, such changes are necessary because section 1203 is negatively 

affecting employee morale and effectiveness. The IRS reports that since enactment of section 

1203, IRS employees frequently report that fear of a section 1203 allegation causes reluctance to 

take appropriate enforcement actions. Employees often report routine workplace disputes and 

unprofessional conduct with taxpayers as potential section 1203 violations in order to avoid a 

later claim that the failure to report such disputes or conduct was to hide potentially serious 

misconduct. In addition, taxpayers and practitioners cite section 1203 in correspondence as an 

apparent tactic to delay action by the IRS.132 

Notwithstanding section 1203, the incidence of serious employee misconduct remains at 

the low levels reported prior to its enactment. More than 90 percent of section 1203 violations 

involve employee tax compliance, and according to the IRS, termination of employment 

obviously is too harsh a remedy in many cases.133 Thus, 68 percent of tax compliance cases 

result in mitigation, half of all cases involve refund returns, and 73 percent of employees 

involved are at grade seven or below. The IRS concludes that removing refund return cases and 

those involving employee against employee actions, combined with permitting the 

Commissioner to establish a range of penalties, would better target section 1203 while improving 

employee morale. In addition, adding the unauthorized inspection of taxpayer information to the 

list of violations would permit the IRS to enforce such cases with greater consistency than under 

present procedures.134

 

129 Id.

130 Id. at 3. See also id. at 1-4 for a more detailed breakdown of section 1203 violations.

131 See Department of the Treasury, General Explanations of the Administration’s Fiscal 

Year 2003 Revenue Proposals (February 2002) at 58-59.

132 Appendix at 19.

133 Id.

134 Id. at 19-20.
39

The IRS notes that front line employees and managers frequently cite “the fear and 

anxiety associated with section 1203 as a major factor in their approach to enforcement 

activity.”135 In addition, focus groups and surveys consistently report that there is a link between 

section 1203 and a decline in enforcement activity. The IRS reports that it will continue to 

monitor employee attitudes about section 1203 in order to identify ways to address concerns 

raised by the law.

The IRS Oversight Board found that section 1203 needs reform and identified four 

guidelines as a basis for reform: (1) eliminate mandatory termination and give IRS management 

discretion in imposing a penalty, (2) include “willfulness” as an element to any section 1203 

offense, (3) eliminate from the list of offenses the failure to file a refund return, and (4) eliminate 

from the list of violations employee versus employee allegations.136

C. Personnel Flexibility and IRS Management

IRS Reform Act

The IRS Reform Act gave the IRS considerable authority relating to:

• Pay authority for critical positions.--Upon request of the Treasury Secretary, the 

Office of Management and Budget is authorized to set a basic salary rate for “critical 

pay positions” at levels higher than those generally authorized in the civil service 

laws for critical positions. These rates, including bonuses, awards and differentials, 

cannot exceed the rate of pay for the Vice President.

• Streamlined critical pay authority.--The Treasury Secretary can designate positions, 

set pay, and appoint up to 40 individuals to critical administrative, technical and 

professional positions. Compensation cannot exceed that of the Vice President.

• Recruitment, retention, and relocation incentives.--The Treasury Secretary was given 

the authority to offer incentives for recruitment, retention, and relocation and to pay 

relocation expenses.

• Performance awards for senior executives.--The Treasury Secretary also was given 

greater authority to pay performance bonuses to members of the Senior Executive 

Service. 

• New performance management system.--The IRS Reform Act required 

implementation of a new performance management system, stressing individual 

accountability. The IRS Reform Act prohibits the use of enforcement goals, quotas 

or statistics as the basis for awarding bonuses or merit pay.

 

135 Id. at 22.

136 IRS Oversight Board Report at 11-12.
40

• Workforce classification and pay.--The Secretary can combine grades and salary 

ranges to create broad banded systems for any or all of the IRS work force.

• Limited appointments to career reserved Senior Executive Service positions.--The 

IRS Reform Act permits the IRS to fill certain permanent positions with temporary 

employees. The IRS Reform Act broadens the definition of a career reserved position 

to include a limited emergency appointee. It also covers a limited-term appointee 

who immediately upon entering the career reserved position, served under a career or 

a career-conditional appointment outside of the Senior Executive Service, or where 

the Office of Personnel Management approved the limited emergency or limited term 

appointment in advance.

• Workforce staffing.--Candidates for positions can be selected from the highest quality 

category regardless of individual numerical rating. Further, the IRS can establish a 

three year probationary period when a shorter period is insufficient to evaluate an 

employee. The Secretary also may detail an employee to a different assignment 

without regard to the 120 day limitation otherwise applicable.

• Streamlined demonstration project authority.--The IRS Reform Act permits the IRS 

to take a streamlined approach to conducting research and testing alternative 

management constructs. A demonstration project under this section would not be 

subject to the ordinarily lengthy approval process.

Implementation

Performance management system

The IRS reports that the Performance Management System for Executives, Managers and 

Management Officials that was implemented in fiscal year 2000 continues to be improved. 

According to the IRS, the intent of the system is “to more closely align individual performance 

with organizational success through the Business Planning process and balanced Measurement 

System.”137 For fiscal year 2001, the IRS reports that leadership skills were included as part of 

the performance expectations for executives and managers, which the IRS hopes will improve 

the selection and development of organizational leaders.138

Recruitment efforts

To attract and retain highly qualified and exceptional individuals, the IRS uses 

professional search firms and often has executives, including the Commissioner, Deputy 

Commissioner, and Treasury officials interview Streamlined Critical Pay candidates. The 

Commissioner is the final selecting official for all Streamlined Critical Pay executives, with final 

approval by the Treasury Department. The IRS reports that five Streamlined Critical Pay 

 

137 See Appendix at 22.

138 Id.
41

executives could have been accommodated using the Senior Executive Service pay scale. In 

fact, for such executives their critical pay was less than the maximum pay available using the 

Senior Executive Service. Nevertheless, the IRS credits the recruitment techniques (using a 

search firm) and the streamlined aspect of the program with finding executives that are better 

qualified than by using traditional recruitment means.139

According to the IRS, the Streamlined Critical Pay executives have brought exceptional 

talent and a wide range of skills to the IRS. The IRS cites a number of significant contributions 

made by Streamlined Critical Pay executives in the areas of modernization, customer relations, 

and compliance. For example, the IRS cites reforming the office of the National Taxpayer 

Advocate, establishment of Business Systems Modernization, a nearly flawless Y2K conversion, 

new customer communications systems, a new initiative to combat abusive corporate tax 

shelters, and implementation of an electronic crimes unit within Criminal Investigations.140 

In recruiting critical pay personnel, the IRS spent $1,822,759 for moving expenses (the 

program is the same as for career personnel except the IRS Reform Act covers an executive’s 

first move prior to government service) and $3,639,985 on executive searches.141

The IRS states that more could be accomplished if IRS employees were eligible for 

Streamlined Critical Pay positions, noting that one of the critical challenges for the IRS is 

retaining IRS employees with special skills at the executive level.142

Loss of Streamlined Critical Pay executives

From the passage of the IRS Reform Act in July 1998 through April 2002, the IRS has 

hired 46 Streamlined Critical Pay executives, 36 of which currently are working for the IRS.143 

Through April 2002, 10 Streamlined Critical Pay executives have left the IRS. The average 

tenure of the executives who have left is 17 months, with some staying as few as five months and 

others as long as 29 months. Three departed executives stayed more than two years.144

D. Development of Organizational Performance Measures

Historically, enforcement revenue has been a key measure of success at the IRS. The 

IRS Reform Act sought to change this focus through provisions such as the mandate for a new 

 

139 Appendix at 23.

140 See Appendix at 26-27.

141 Id. at 23.

142 Id. at 27.

143 Id. at 24-25.

144 For a table showing current and departed executives, as well as salaries prior to and 

during IRS service, see id.
42

IRS mission statement and prohibiting the IRS from using tax enforcement results to evaluate 

any IRS employee or to impose or suggest production quotas or goals.145 Accordingly, the IRS 

is changing its organizational performance measures to balance business results (both quantity 

and quality), customer satisfaction, and employee satisfaction. The IRS notes that enforcement 

revenues are not a measure of performance at either the strategic or operational level.146 

According to the IRS, the sole use of enforcement revenue at the strategic level is to measure the 

effectiveness of case selection for compliance activities.147

In September 1999, a balanced measures regulation was issued to formally establish the 

new performance management system.148 The IRS implemented the balanced measures system 

for the Examination, Collection, and Customer Service in 1999.149 In addition, balanced 

measures have been approved for Tax Exempt and Government Entities, Large and Mid-Size 

Businesses, Appeals, Taxpayer Advocate Service, Information Systems, Criminal Investigation, 

Appeals, and for additional Submission Processing and Customer Service product lines within 

the Wage and Investment and Small Business and Self-Employed operating divisions.150 The 

IRS Oversight Board reports that the IRS will complete the implementation of the balanced 

measures program in 2002.151 The Treasury Inspector General for Tax Administration reports 

that the IRS has changed its performance management process to better define and report on 

measures, is planning on qualifying some data, and has issued procedures requiring that reports 

on critical performance measures be verified and approved before being reported to the Treasury 

Department.152

 

145 In addition, the Government Performance and Results Act of 1993 requires Federal 

agencies to establish a hierarchy of goals, objectives, and performance measures applicable to 

various organizational units within their agencies. Pub. L. No. 103-62 (1993).

146 IRS Strategic Plan at 91. According to the IRS, among other actions, it is providing 

guidance and training to its managers and employees on the use of statistics and establishing 

business units to conduct quarterly certifications of compliance with the prohibition on the use of 

statistics. Report of the Joint Committee on Taxation Relating to the Internal Revenue Service as 

Required by the IRS Reform and Restructuring Act of 1998 (JCX-33-01), May 4, 2001, 

Appendix, Letter from the IRS at 15. 

147 IRS Strategic Plan at 91. 

148 Id at 88.

149 Id. at 93.

150 Id.

151 IRS Oversight Board Report at 25.

152 Memorandum from David C. Williams to Paul O’Neill, Management and 

Performance Challenges Facing the IRS (January 29, 2002) at 4.
43

IV. ORGANIZATIONAL AND TECHNOLOGICAL MODERNIZATION

A. Organizational Modernization

Background

At the time of Congressional consideration of the IRS Reform Act, the Commissioner 

had announced the broad outline of a plan to reorganize the structure of the IRS in order to help 

make the IRS more oriented toward assisting taxpayers and providing better taxpayer service. 

Prior to announcement of this plan, the IRS had a three-tier structure of district and regional 

offices and a national office. Thirty-three district offices and ten service centers administered the 

entire spectrum of taxpayers by defined geographical boundaries. Four regional offices presided 

over the districts, with one national office in Washington, D.C. at the top of the command chain.

The Congress found that the organizational structure of the IRS was one of the factors 

contributing to the inability of the IRS properly to serve taxpayers. The Congress believed that a 

new structure focused on taxpayers with similar needs would help enable the IRS to serve 

taxpayers better and provide the necessary level of services and accountability to taxpayers. In 

order to support the Commissioner in his efforts to modernize and update the IRS, the IRS 

Reform Act included a statutory direction for the Commissioner to eliminate or substantially 

modify the existing organizational structure and to establish organizational units to serve 

particular groups of taxpayers with similar needs.153

The IRS has made significant progress in implementing the new organizational structure. 

The IRS created four operating divisions to serve taxpayers of similar needs: Wage and 

Investment; Small Business and Self-Employed, Large and Mid-Size Business, and Tax Exempt 

and Government Entities. There are also several functional units, including Appeals, the 

Taxpayer Advocate Service, Criminal Investigation, and Communication and Liaison.

This new organization formally replaced the prior geographically based organizational 

structure on October 1, 2000. Top management is in place for each of the operating divisions 

and business units. The final stages of implementation, including the redistribution of workload, 

will require another year (through fiscal year 2002). Below is discussion of each of the operating 

divisions and certain functional units.

IRS operating divisions

The Wage and Investment Division serves approximately 122 million taxpayers, 

including married taxpayers who file jointly, accounting for 94 million returns with wage and 

investment income only. Most of these taxpayers have contact with the IRS only once a year, 

when filing their returns. Eight Service Centers provide processing, account management, and 

compliance services.

 

153 IRS Reform Act sec. 1001.
44

The Small Business and Self-Employed Division serves approximately 45 million 

taxpayers, including small businesses, individuals with no wage income and individuals with 

both self-employment income and wage income. According to the IRS, this group of taxpayers 

has more frequent and more complex dealings with the IRS than wage and investment taxpayers, 

ranging from four to 60 transactions with the IRS each year. The Small Business and SelfEmployed Division carries out its functions with a compliance field organization, including 

examination and collection groups, reporting to a manager handling multiple functions.154

The Large and Mid-Size Business Division serves C corporations, S corporations, and 

partnerships with assets greater than $5 million. At least two percent of these taxpayers interact 

with IRS compliance functions each year and the largest taxpayers deal with the IRS 

continuously. The Large and Mid-Size Business Division is predominantly a field organization 

that is structured into five industry groups.

The Tax-Exempt and Government Entities division serves three million entities including 

local community organizations, municipalities, universities, pension funds, state and local 

governments, and Indian tribal governments. This division also handles tax-exempt bond issues.

IRS functional units

Appeals serves as a channel for taxpayers to contest an IRS compliance action. The 

mission of Appeals is “to resolve tax controversies, without litigation, on a basis that is fair and 

impartial to both the Government and the taxpayer, and in a manner that will enhance voluntary 

compliance and public confidence in the integrity and efficiency of the [IRS].”155 The new 

Appeals unit is organized into three operating units similar to the IRS operating divisions: Wage 

& Investment, Small Business/Self-Employed - Tax Exempt/Government Entities, and Large & 

Mid-Size Business. 

The activities of the Small Business/Self-Employed-Tax Exempt/Government Entities 

unit of Appeals involve cases covering corporations with less than $5 million in assets, collection 

issues, estate and gift tax cases, self-employed individuals, tax-exempt entities, and government 

entities. This unit also has responsibility for the current Records and Processing sections. Other 

program responsibilities include innocent spouse cases, Freedom of Information Act appeals, 

excise and employment taxes, and alternative dispute resolution of bankruptcy, dyed diesel fuel, 

and tax-exempt bond cases. According to the IRS website, all Wage and Investment Appeals 

unit cases will be processed by the Small Business/Self-Employed - Tax Exempt/Government 

Entities Appeals unit until the Wage and Investment unit of Appeals is operational. The Large 

and Mid-Size Business unit of Appeals covers corporate and partnership cases with assets greater 

than $5 million with the most complex issues, particularly international issues. 

 

154 IRS Strategic Plan at 83.

155 Report of the Joint Committee on Taxation Relating to the Internal Revenue Service as 

Required by the IRS Reform and Restructuring Act of 1998 (JCX-33-01), May 4, 2001, 

Appendix, Letter from the IRS at 15.
45

Criminal Investigation investigates potential criminal violations of the Code and related 

financial crimes. A report by William Webster found that the then Criminal Investigation 

Division had “drifted from its primary mission of investigations of criminal violations of the Tax 

Code into the broader role of providing federal financial investigative expertise.”156 Following 

the Webster report, Criminal Investigation developed an interim compliance strategy to assist in 

identifying, developing, and investigating cases. The Criminal Investigation Program Strategy 

has three components, legal source tax crimes (generally cases governed by the Code), illegal 

source financial crimes (includes Code and Title 18 violations, as well as money laundering), and 

narcotics related financial crimes (which includes both tax and money laundering violations). 

Criminal Investigation has been actively involved with other government agencies in the postSeptember 11 criminal investigations.

The Taxpayer Advocate Service assists taxpayers in resolving problems that have not 

been resolved through prior contacts with the IRS or cannot be resolved through normal systemic 

processes. On March 12, 2000, the Taxpayer Advocate Service was established as a new 

organization. The new organization has two components, one segment dedicated to casework 

and the other dedicated to advocacy. It is structured to ensure that at least one Local Taxpayer 

Advocate is in each state. See Part VI.B. of this Report for a discussion of the National 

Taxpayer Advocate’s annual report to Congress.

Challenges facing the new IRS organizational structure

The transition to the restructured IRS continues to be awkward. In the words of the 

director of the National Council for Taxpayer Advocacy: “Modernizing and centralizing the IRS 

is causing chaos and confusion in the hinterlands for taxpayers, taxpayer representatives, and 

even rank-and-file IRS employees.”157 Problems stemming from the new structure include: 

providing managers and executives with appropriate authority to make decisions, changeinduced decrease to employee morale, uncertain relationships among the new operating 

divisions, uncertain understanding by IRS personnel about how the new structure is meant to 

work, and the lack of appropriate information systems.158 The IRS reports that the final stages of 

implementing the new structure, including the redistribution of workload, will continue through 

fiscal year 2002.159

 

156 William H. Webster, Review of the Internal Revenue Service’s Criminal Investigation 

Division, IRS Publication 3388 (April 1999).

157 Testimony of Bryan E. Gates, National Council of Taxpayer Advocacy, before the 

IRS Oversight Board (January 29, 2002).

158 See generally, Amy Hamilton, Practitioners Tired of IRS Asking For Understanding, 

Patience, 2002 Tax Notes 20-2 (January 30, 2002). The IRS Oversight Board reports that the 

reorganization is complete except for the Modernization and Information Technology Services 

division, which is still being implemented. IRS Oversight Board Report at 29.

159 IRS Progress Report at 29.
46

The IRS has experienced some difficulties in transitioning to the new organization. Each 

operating division is responsible for all of the interactions a taxpayer under its jurisdiction might 

have, regardless of geographic location. However, one division may be responsible for a 

program carried out by several divisions. For example, most collection procedures are the 

responsibility of the Small Business and Self-Employed division, but the Wage and Investment 

division shares responsibility for carrying out collection actions. Prior to the reorganization, the 

Collection Division would have been responsible for establishing procedures and the actual 

collection of tax. In general, this has resulted in confusion over which unit has ultimate 

decisionmaking authority, and has resulted in managers and executives spending time on 

coordination instead of operational issues.160

Outside groups also have voiced concerns about the new structure. The American 

Institute of Certified Public Accountants noted that implementation of new programs is hindered 

because of inadequate communication.161 The National Association of Enrolled Agents 

suggested that the IRS needs to involve the practitioner community more directly when making 

important changes.162 The Nation Treasury Employees Union stressed that training of IRS 

employees be better integrated into modernization plans.163 

In addition, under the reorganized IRS, support functions such as human resources 

management, information systems and facilities are centralized, rather than under the control of 

local operational managers. The concomitant reduction in support staff has resulted in 

administrative burden because routine functions once carried out by administrative staff are now 

performed by first-line managers.164 The new structure has been viewed by some employees as 

more cumbersome and less effective than when these functions were under the control of the 

local personnel. To address the problem, the IRS is establishing an employee resource center in 

Memphis that will act as a help desk.165 

 

160 George Guttman, IRS Organizational Modernization Not Standing Tall, Tax Notes

(February 25, 2002) at 959.

161 Testimony of the American Institute of Certified Public Accountants before the IRS 

Oversight Board (January 29, 2002).

162 Testimony of the National Association of Enrolled Agents before the IRS Oversight 

Board (January 29, 2002).

163 Testimony of the Nation Treasury Employees Union before the IRS Oversight Board 

(January 29, 2002).

164 George Guttman, IRS Organizational Modernization Not Standing Tall, Tax Notes

(February 25, 2002) at 958.

165 Id.
47

B. Technology Modernization

In general 

The IRS is in the process of modernizing its information technology systems. Presently, 

the IRS relies on computer systems developed in the 1960’s and 1970’s to maintain taxpayer 

records, which, as Commissioner Rossotti observed: “constitutes an insurmountable barrier to 

efficient service and compliance operations and is a very serious risk to the whole tax system.”166 

More generally, with old technology, the IRS cannot take advantage of modern technological 

progress in the way the IRS processes information, interacts with taxpayers, or for gains in 

worker productivity. In short, modernization is a massive long-term project that aims to 

improve: access to information and tax data for all taxpayers, accuracy of information provided 

by the IRS to all taxpayers, speed of response to taxpayers, timeliness of IRS initiated actions, 

and productivity of IRS staff.

There are two major modernization efforts: Business Systems Modernization and Tier B 

modernization.167 Business Systems Modernization is the more significant, involving the longterm reconstruction of the IRS’s business technology and processes. Business Systems 

Modernization aims to bring the IRS up to date through acquisition and implementation of new 

computer technology. At this time, Business Systems Modernization consists of 20 ongoing 

system acquisition projects at different life-cycle stages, as well as various program-level 

initiatives that are to provide the IRS the means to manage these projects. As one example, a 

project called the Customer Account Data Engine (discussed below, with other projects) will 

transfer individual filers from the 1960s magnetic tape-based system for recording taxpayer 

information to a modern database, and will create applications for daily posting of taxpayer tax 

account and return data. 

Tier B modernization typically involves shorter-term projects directed toward updating 

software and coordinating old computer systems with new technology as improvements are made 

by Business Systems Modernization. Recent Tier B projects have included: making more forms 

available for e-filing, redesign and consolidation of taxpayer notices, expanded electronic tax law 

assistance, redesign of the determination letter system to improve the quality of responses to 

taxpayers, and the centralization of the Offer in Compromise program. Planned Tier B projects 

for 2003 include: creation of an integrated system to track taxpayer complaints, modernization of 

 

166 Statement of Charles O. Rossotti, Commissioner, Internal Revenue Service, before the 

Subcommittee on Government Efficiency, Financial Management, and Intergovernmental 

Relations, House Committee on Government Reform (April 15, 2002) at 3.

167 The IRS’s fiscal year 2003 budget calls for an appropriation of $450 million for the 

Business Systems Modernization program, and $50 million for Tier B projects. IRS Budget in 

Brief: Fiscal Year 2002, IRS Document 9940 (Rev. 1-2002) (hereinafter “IRS FY 2003 Budget 

in Brief”) at 7, 9. For a discussion of the IRS budget request for modernization, see Part V.C. of 

this Report.
48

forensic evidence equipment, establishing a records management system that will ensure 

admissibility of electronically stored evidence, and strengthening investigative capabilities.168 

The IRS’s Business Systems Modernization Office manages the modernization effort and 

oversees the “PRIME Alliance,” a group of contractors headed by the Computer Sciences 

Corporation. The Computer Sciences Corporation, also known as the PRIME contractor, was 

hired to help design and integrate the various modernization projects. To obtain Congressional 

funding for Business Systems Modernization, the Business Systems Modernization Office 

prepares a Business Systems Modernization Expenditure Plan169 that lists each project and the 

estimated costs and delivery dates. When funding is received, the Business Systems 

Modernization Office issues task orders to the Computer Sciences Corporation that identify 

specific work and costs. The Business Systems Modernization Office is responsible for 

oversight of the Computer Sciences Corporation, but, as the Treasury Inspector General for Tax 

Administration reports, such oversight needs serious improvement.170

Background

The IRS has been working on systems modernization efforts for over a decade and the 

process continues to present the IRS with challenges. For the past seven years, the General 

Accounting Office has discussed with the IRS the importance of establishing sound management 

controls to guide its systems acquisition projects. In 1995, when IRS was involved in an earlier 

attempt to modernize its tax processing systems, the General Accounting Office recommended 

that the IRS implement fundamental modernization management capabilities before acquiring 

new systems. The General Accounting Office concluded that without such capabilities the IRS 

was not ready to invest billions of dollars in building modernized systems.171 The General 

Accounting Office reported that IRS needed to improve in five interrelated and interdependent 

information technology management categories: investment management, system life-cycle 

management, enterprise architecture management, software acquisition management, and human 

capital management.

In December 1998, the IRS hired a systems integration support contractor to help the IRS 

develop and implement these management controls. In 1999, the Commissioner adopted a 

modernization strategy that required, for example, (1) the use of incremental investment 

 

168 IRS FY 2003 Budget in Brief at 8-9.

169 This plan was formerly called the Information Technology Investment Account 

Expenditure Plan.

170 Treasury Inspector General for Tax Administration, The Business Systems 

Modernization Office Needs to Strengthen its Processes for Overseeing the Work of the PRIME 

Contractor (March 1, 2002) Ref. No: 2002-20-059.

171 General Accounting Office, Tax Systems Modernization: Management and Technical 

Weaknesses Must Be Corrected If Modernization Is to Succeed (July 1995) GAO/AIMD-95-

156.
49

decisionmaking, (2) adherence to a rigorous systems and software life-cycle management 

method, and (3) development and implementation of an enterprise architecture or modernization 

blueprint to guide and constrain the content, sequencing, and integration of systems investments. 

The General Accounting Office favored this approach.172 However, the IRS decided 

simultaneously to proceed with project acquisition in anticipation that program controls would be 

in place and functioning when the projects reached their later, less formative stages. 

However, for the first 18 months after adopting the modernization strategy, progress in 

implementing the management controls was slow while project acquisitions moved rapidly. In 

response, the General Accounting Office reported to Congress that modernization projects were 

getting ahead of the management capacity necessary to manage them effectively.173 As a result, 

the IRS scaled back on modernization projects, and gave priority to implementing management 

capacity.

In March 2001, the IRS requested $128 million from the Information Technology 

Investment Account.174 The General Accounting Office found that, although the IRS’s request 

satisfied the conditions specified in the appropriation acts, and the IRS continued to make 

important progress in implementing modernization management controls, the IRS’s 

modernization management capacity was still not where it should have been given (1) the 

number of system acquisition projects that the request identified as underway and planned, and 

(2) the fact that several of the ongoing projects were entering critical stages in their life cycles.175 

The General Accounting Office found that the IRS did not have a sufficient definition of the 

enterprise architecture to enable it to guide and constrain modernization projects or to use 

rigorous management practices. As a result, the General Accounting Office recommended that 

that the IRS slow ongoing projects and delay and stagger new projects, and not approve certain 

projects176 until the IRS demonstrated a better definition of the enterprise architecture and 

across-the-board improvement in management practices. The IRS agreed with these 

recommendations and stated that the IRS would continue working to implement key 

management controls.177

 

172 General Accounting Office, IRS Continues to Face Management Challenges in its 

Business Practices and Modernization Efforts (April 15, 2002) GAO-02-619T at 29.

173 See, e.g., General Accounting Office, Tax Systems Modernization: Results of Review 

of IRS’ August 2000 Interim Spending Plan (November 8, 2000) GAO-01-91.

174 General Accounting Office, Business Systems Modernization: Results of Review of 

IRS’s March 2001 Expenditure Plan (June 2001) GAO-01-716 at 3.

175 Id. at 4.

176 Projects not to be approved were those exiting “Milestone 3,” which is the point in the 

IRS’s System life-cycle methodology where projects move from preliminary design into detailed 

design and development. Id.

177 Id. at 5.
50

Recent developments

IRS has made important progress in improving its management capacity to cope with 

modernization, however, the General Accounting Office and the Treasury Inspector General for 

Tax Administration both conclude that significant hurdles remain. 

In February 2002, in its review of the IRS’s November 2001 expenditure plan, the 

General Accounting Office reported progress,178 specifically, that the IRS had: (1) reviewed the 

PRIME contractor’s quality-assurance function and recommended improvements; (2) defined 

risk management policies and procedures for its enterprise lifecycle approach; (3) issued the 

second version of the IRS’s enterprise architecture and implemented steps to ensure that the 

architecture would be integrated with other modernization projects; and (4) planned an 

independent assessment of selected projects against the Software Engineering Institute’s SACMM179 requirements by December 31, 2002. In addition, IRS recently hired technical and 

managerial executives with substantial private-sector experience for its reorganized Business 

Systems Modernization Office.180

In March 2002, the Treasury Inspector General for Tax Administration released an audit 

report of the IRS’s modernization efforts.181 The objective of the audit was to determine whether 

the IRS’s Business Systems Modernization Office had established effective processes to ensure 

that the PRIME contractor (the Computer Sciences Corporation) was delivering goods and 

services in a timely and cost-effective manner. The Treasury Inspector General for Tax 

Administration analyzed results from previous audits182 of individual systems modernization 

 

178 General Accounting Office, Business Systems Modernization: IRS needs to better 

Balance Management Capacity with Systems Acquisition Workload (February 2002) GAO-02-

356.

179 Carnegie Mellon University’s Software Engineering Institute has developed criteria, 

known as the Software Acquisition Capability Maturity Model (SA-CMM), for determining an 

organization’s software acquisition management effectiveness or maturity. 

180 Statement of Charles O. Rossotti, Commissioner, Internal Revenue Service, before the 

Subcommittee on Government Efficiency, Financial Management, and Intergovernmental 

Relations, House Committee on Government Reform (April 15, 2002) at 18.

181 Treasury Inspector General for Tax Administration, The Business Systems 

Modernization Office Needs to Strengthen its Processes for Overseeing the Work of the PRIME 

Contractor (March 1, 2002) Ref. No. 2002-20-059.

182 The audits reviewed were: Progress in Developing the Customer Communications 

Project Has Been Made, But Risks to Timely Deployment in 2001 Still Exist (March 2001) Ref. 

No. 2001-20-055; The Customer Relationship Management Examination Project Experienced 

Delays and Increased Costs, But Lessons Learned Should Improve Future Modernization 

Projects (August 2001) Ref. No. 2001-20- 140; The Telecommunications Modernization Project 

Provided Some Benefits, But Process Improvements Are Needed for Future Projects (August 

2001) Ref. No. 2001-20-143; and Improvements Are Needed in the Management of the e-
51

projects to detect issues and trends affecting the Business Systems Modernization program as a 

whole. The report called the IRS “overly optimistic” about the timetable for delivering 

modernized systems, “given the immaturity of [the IRS’s] management processes.” The 

Treasury Inspector General for Tax Administration noted areas requiring improvements needed 

to avoid future delays and cost increases. These areas included: the Business Systems 

Modernization Office’s failure to define and negotiate requirements and costs prior to the 

contractor personnel beginning work; the failure of project managers to establish accountability 

for tasks; and a failure to implement performance-based contracting processes. The Treasury 

Inspector General for Tax Administration recommended that: task orders be performance-based, 

key individuals should be included on assignment schedules for upcoming tasks, and project 

teams should “implement ‘lessons learned’ from previous projects” in developing project 

schedules and cost estimates. 

This April, the General Accounting Office reported continued progress.183 “Customer 

Communications 2001” was implemented last summer and now is routing routine taxpayer 

inquiries to automated menu driven information services, thereby freeing IRS customer service 

representatives to answer complex or less common inquiries. The “Customer Relationship 

Management Exam” software was distributed to Large and Mid-size Business Revenue Agents, 

and by August 2002, all tax revenue agents that deal with large and mid-sized businesses, and all 

international examiners, will be trained to use it for accurate and consistent computation of 

complex corporate taxes. The IRS recently issued an updated version of its enterprise 

architecture, thus giving a high-level roadmap to guide and constrain business and technological 

change.

Despite progress made, however, the General Accounting Office reports that the IRS is 

not where it committed to be in acquiring both infrastructure and application systems and not 

where it needs to be in implementing modernization management controls. The General 

Accounting Office says, once again, that this is because the IRS’s first priority has been to get 

the new systems established before securing the necessary management controls.184 In 

particular, the General Accounting Office found that the IRS is proceeding with building systems 

-- including detailed design and software development work -- before the IRS has (1) fully 

implemented mature software acquisition management processes, (2) developed and deployed a 

human capital management strategy, and (3) established effective cost and schedule estimating 

 

Services Project to Enable Timely Progress Towards Future Goals (September 2001) Ref. No. 

2001-20-144. 

183 General Accounting Office, IRS Continues to Face Management Challenges in its 

Business Practices and Modernization Efforts (April 15, 2002) GAO-02-619T at 29.

184 Id. The General Accounting Office notes that the same general concern was present 

last year. At that time, the General Accounting Office feared that systems workload and pace 

were getting too far ahead of the agency’s ability to deal with them effectively. See generally 

General Accounting Office, Internal Revenue Service: Progress Continues, but Serious 

Management Challenges Remain (April 2, 2001) GAO-01-562T.
52

practices.185 The General Accounting Office says that proceeding without appropriate 

management controls increases the risk of not delivering promised systems capabilities on time 

and within budget. Moreover, such risks are amplified in the future because the complexity of 

managing ongoing projects with more and newer projects will only increase over time.186 

The IRS has reported that Business Systems Modernization projects have already 

encountered cost, schedule, and/or performance shortfalls.187 The General Accounting Office’s 

analysis has showed that weak management controls contributed directly to these problems.188 

Given that the IRS’s fiscal year 2002 Business Systems Modernization spending plan supports 

progress towards the later phases of key projects and continued development of other projects, 

the General Accounting Office believes that it is likely that Business Systems Modernization 

projects will encounter additional cost, schedule, and performance shortfalls.189 The IRS 

acknowledges these risks. According to its Chief Information Officer, until the weaknesses are 

fully addressed, the IRS will be (1) relying on existing immature processes; (2) leveraging the 

knowledge, skills, and abilities of experienced senior executives to ensure that issues are 

properly managed; and (3) hiring additional experienced executives.190 In the view of the 

General Accounting Office, based on past experience, relying on such measures is not enough 

given the size and complexity of the Business Systems Modernization program. Past 

government and industry experience shows that the probability of repeated successes on projects 

proceeding in this manner is low, and the incidence and cost of rework is high. The General 

 

185 General Accounting Office, IRS Continues to Face Management Challenges in its 

Business Practices and Modernization Efforts (April 15, 2002) GAO-02-619T at 31.

186 In February, the General Accounting Office recommended that the Commissioner 

reconsider the scope and pace of the modernization program to strike a better balance with the 

agency’s capacity to handle the workload. General Accounting Office, Business Systems 

Modernization: IRS Needs to Better Balance Management Capacity with Systems Acquisition 

Workload (February 2002) GAO-02-356. The Commissioner agreed, promising to align the pace 

of the program with the maturity of IRS’s management capacity, to reassess the projects planned 

for implementation during the rest of fiscal year 2002, and to make a priority of correcting 

management control weaknesses. Id. at 83.

187 Statement of Charles O. Rossotti, Commissioner, Internal Revenue Service, before the 

Subcommittee on Government Efficiency, Financial Management, and Intergovernmental 

Relations, House Committee on Government Reform (April 15, 2002) at 20.

188 General Accounting Office, Business Systems Modernization: IRS Needs to Better 

Balance Management Capacity with Systems Acquisition Workload (February 2002) GAO-02-

356 at 3. IRS acknowledgement of weak management controls also has led to prudent IRS 

decisions not to start or continue projects. Id. at 83.

189 General Accounting Office, IRS Continues to Face Management Challenges in its 

Business Practices and Modernization Efforts (April 15, 2002) GAO-02-619T at 33.

190 Id.
53

Accounting Office believes the answer lies in a more modest scope and pace of systems projects 

until management capacity is brought up to the level needed.

191

Key modernization programs in progress 

IRS Master File/Customer Account Data Engine

The Customer Account Data Engine (often referred to as CADE) will provide a modern 

system for storing, managing, and accessing taxpayer records and accounts. Once implemented, 

this system will replace the existing tape-based master files and information processing system, 

and it will develop a central database for the management of taxpayer information and software 

systems that support different transactions using taxpayer account information. The Customer 

Account Data Engine incrementally will move individual filers from the 1960s tape system to a 

modern database, and will create applications for daily posting, settlement, maintenance, refunds 

processing and issue detection for taxpayer tax accounts and return data. The database and 

applications developed by the Customer Account Data Engine also will enable the development 

of subsequent modernized systems that improve customer service and compliance. Once 

implemented, modernized applications, such as Customer Account Management, will allow online posting of data in addition to daily batch processing. The Customer Account Data Engine

will be deployed over a six-year period in five “Releases,” each related to a specific segment of 

taxpayers.

Last year, the IRS anticipated that the Customer Account Data Engine would replace the 

current Master File for individual taxpayers by 2006, and that the Master File for business 

taxpayers and information returns would be transferred beginning in October 2001.192 However, 

Customer Account Data Engine production has been delayed by six months.193 The IRS 

discovered in December 2001 a problem with the procurement of critical software by the PRIME 

and the IRS proceeded with the development of the first Release using standard software. The 

IRS is now working to mitigate this problem.

In addition to the technical difficulties, the IRS encountered in late March 2002 an 

additional one-month delay of Release 1 to July 2002.194 The IRS notified its Executive Steering 

Committee and the IRS Oversight Board of the problem and the IRS’s corrective actions. 

Although the delay is regrettable, the IRS says that it will provide time for the development, 

 

191 Id.

192 Joint Committee on Taxation, Report of the Joint Committee on Taxation Relating to 

the Internal Revenue Service as Required by the IRS Reform and Restructuring Act of 1998 

(JCX-33-01), May 4, 2001 at 25.

193 Statement of Charles O. Rossotti, Commissioner, Internal Revenue Service, before the 

Subcommittee on Government Efficiency, Financial Management, and Intergovernmental 

Relations, House Committee on Government Reform (April 15, 2002) at 20.

194 Id.
54

testing, and implementation of the pilot for the first Release in Summer 2002. The IRS says that 

most of the software has been developed, testing has begun, and the IRS plans to implement the 

software during the 2003 filing season. The first Release will move about 10 million Form 

1040EZ electronic and paper single refund filers onto Customer Account Data Engine.

195

Customer Account Management 

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

releases without Customer Account Management. In general, Customer Account Management 

will allow the IRS to update data in the Customer Account Data Engine and will help the IRS 

give taxpayers timely and accurate responses to requests and inquiries. 

Customer Account Management has two Operating Models: Individual Assistance and 

Self Assistance. The Operating Models will enable the IRS to: (1) better manage customer 

service functions; (2) maintain and utilize data to improve taxpayer interactions with the IRS; (3) 

provide comprehensive account and tax law assistance to taxpayers and practitioners; and (4) 

manage the case work flow of customer inquiries. 

The Individual Assistance Operating Model’s main function is to improve customer 

assistance by providing Customer Service Representatives with a desktop information system 

that will enable Representatives quickly to access taxpayer information and respond accurately to 

complex customer inquiries. The main objective of the Self-Assistance Operating Model is to 

provide taxpayers with the flexibility and convenience of accessing IRS-related information by 

telephone or the Internet to resolve relatively simple inquiries.

e-Services 

The e-Services project will support the IRS’s ability to conduct most transactions with 

taxpayers and their representatives in an electronic format, as required by the IRS Reform Act. 

e-Services will provide to third parties over the Internet the four most requested applications: 

electronic taxpayer identification number matching, electronic transcript delivery, disclosure 

authorization, and Electronic Account Resolution. e-Services also directly supports the 

President’s Management Agenda’s government-wide initiative to expand electronic Government.

Customer Communications Internet Refund, Fact of Filing

This program will deliver a self-service Internet application to allow taxpayers to check 

on the status of their income tax return posting and their refund.

Integrated Financial System

 The Integrated Financial System will provide core financial capabilities and financial 

reporting and an integrated framework for retirement of current financial systems. 

 

195 See Appendix at 6.
55

Custodial Accounting Project 

The General Accounting Office identified the lack of an acceptable accounting system for 

the $2 trillion collected in tax revenue as one of the most significant material weaknesses in the 

IRS’s financial management.196 The Custodial Accounting Project will provide the IRS with the 

control and reporting capabilities mandated by Federal financial management laws. It also will 

support the appropriate custodial subledgers containing data from tax operations and help the 

IRS comply with both the Federal Financial Management Improvement Act (FFMIA) and 

federal mandates related to custodial revenue management. 

Enterprise Data Warehouse 

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

by the numerous fragmented databases that evolved over time. The Enterprise Data Warehouse 

will provide the foundation for data mining and decision analytic tools, and will enable riskbased analysis for case selection and provide the tools to report on IRS balanced performance 

measures. 

Filing and Payment Compliance

Filing and Payment Compliance will use technology to improve IRS communications 

with taxpayers on compliance issues and also protect taxpayer rights. The goals of the program 

are to resolve all balance due cases above a minimum threshold, shorten the filing compliance 

lifecycle to ensure resolution before the next filing due date, and shorten the payment 

compliance lifecycle to six-months for non-enforcement cases. 

 

196 General Accounting Office, IRS Continues to Face Management Challenges in its 

Business Practices and Modernization Efforts (April 15, 2002) GAO-02-619T at 4, 11.
56

V. IRS BUDGET REQUEST FOR FISCAL YEAR 2003

A. In General

IRS fiscal year 2003 IRS budget request

For fiscal year 2003, the IRS budget request totals $10.418 billion and 101,080 full-time 

equivalent positions. The fiscal year 2003 budget request reflects a $482 million increase from 

the fiscal year 2002 appropriated level of $9.936 billion and an increase of 1,179 full-time 

equivalent employees from the fiscal year 2002 proposed operating level of 99,901 full-time 

equivalent employees.197

The IRS budget request includes $154,346,000 and 2,353 full-time equivalent employees 

for the earned income credit compliance initiative, which reflects a $406,000 increase from fiscal 

year 2002.198 This appropriation covers customer service, public outreach, enforcement, and 

research to reduce overclaims and erroneous filings. The fiscal year 2003 budgeted staffing 

levels would remain unchanged from fiscal year 2002.199

The IRS Oversight Board supports this year’s IRS budget request.200

IRS objectives and summary of the fiscal year 2003 budget request

The IRS fiscal year 2003 budget request has four building blocks: (1) provide a world 

class level of service; (2) modernization; (3) maintain current operations; and (4) legislative 

proposals.201 

To provide a world class level of service, the IRS requests $260 million to fund initiatives 

to enhance customer service and compliance and workload increases, $158 million of which will 

be funded through reapplication of resources within the base budget.202 

The IRS requests $58 million to maintain the momentum of Business Systems 

Modernization, which are agency-wide long-term projects. The IRS requests $10 million for 

 

197 IRS Fiscal Year 2003 Congressional Justification (February 4, 2002) (hereinafter “IRS 

FY 2003 Justification”) at SD-7, 8, 12.

198 Id. at EITC-3.

199 Id.

200 IRS Oversight Board Report at 35.

201 IRS FY 2003 Budget in Brief at 1.

202 Id. at 1-2.
57

“Tier B” modernization projects, which provide software enhancements to improve business 

processes in the short term.203

The IRS requests $342 million to maintain current operations. Of this amount, $295 

million funds pay, benefits, and non labor inflationary costs, $37 million covers the costs of 

within-grade pay increases for on-board employees, and $10 million is for enhanced security 

arrangements pursuant to the Homeland Security Supplemental. The IRS expects to save $39 

million from better business practices and notes that $31 million from the fiscal year 2002 

budget for homeland security does not recur in fiscal year 2003.204

Proposals in the President’s fiscal year 2003 Budget require an increase and adjustments 

of $40 million for the costs of retirement and health benefit retiree costs, the costs of services 

provided by the General Services Administration, the National Archives and Records Service 

and the Department of Agriculture, and a surcharge to the Department of Labor for Federal 

Employees’ Compensation Act benefits.205

The IRS notes that it provides three primary services: Pre-Filing, Filing, and Post-Filing 

Services. The budget request aims to improve such services by setting performance goals in ten 

areas: improvement of pre-filing taxpayer assistance and education, filing and account services, 

compliance services, research and Statistics Of Income, information services, information 

systems improvement programs, Business Systems Modernization, Earned Income Tax Credit 

initiative, shared services support, and general management and administration. The IRS also 

has identified 12 key strategic themes that drive its budget request, including increase in prefiling agreements, improvement to electronic tax administration, removal of tax-law complexity, 

and better compliance activity.206

B. Funding for Customer Service

The IRS budget request takes into account projected cost savings of $158 million from a 

number of improvement projects, workload decreases, and modernization efforts. For example, 

the IRS reports that improvement projects dedicated to redesigning internal processes, electronic 

tax administration, and improvements to corporate tax analysis software will save $104 million 

(1,722 full-time employees). In addition, the IRS projects that workload decreases from 

expected declines in innocent spouse cases, reduction of the number of employees planned for 

customer service details, redirecting resources from the narcotics program to the Fraud Referral 

Program and the Money Laundering Program, employee attrition, and a decline in Tax Court 

cases will save $51 million (508 full-time employees). Finally, the IRS expects savings of $3 

 

203 Id. at 2.

204 IRS FY 2003 Justification at SD-10.

205 IRS FY 2003 Budget in Brief at 2-3.

206 IRS FY 2003 Justification at SD-2 through 6.
58

million (57 full-time employees) because of two Tier B modernization projects -- the Employee 

Plan Determination System Redesign and the Remittance Transaction Register.207

The IRS budget request applies the efficiencies noted above and requests an additional 

$102 million for certain compliance strategies ($125 million; 1,857 full-time employees), 

customer service and workload increases ($91 million; 1,595 full-time employees), and nonlabor increases ($44 million).208

 

The IRS’s major compliance goals are to stabilize audit rates, increase the audit rate for 

trusts and certain small businesses, address non-filers, address the employment and income tax 

gaps, focus on K-1 matching, act on fraud referrals, improve voluntary reporting by use of a 

national rotational inventory approach for selecting underreporting cases, and combat 

employment tax non-compliance, money laundering, and criminal cases (including electronic 

criminal cases).209 

Customer service and workload increases include funding for improvement of IRS 

correspondence with taxpayers by written notice and telephone assistance, an increase in 

advanced case resolutions, increasing and more complicated legal advice, centralization of offerin-compromise processing, providing multi-lingual services, increasing electronic filing, 

handling the growing number of returns filed, completing the “Design Footprint” by supporting 

new hires that provide pre-filing and filing support (including return preparation) to taxpayers, 

and merging the Tax Assistance Program and Tax Administration Advisory Service.210 

Non-labor increases including funding for enhanced guard services, employee 

transportation subsidy, outsourcing studies, small business/self-employed contracts, physical 

security upgrades, Wage and Investment joint operations center contract, Large and Mid-Size 

Business CRM Exam and Net Quantile 1 returns, Tax Exempt/Government Entities EFAST, 

Employee Resource Center Support, and the Taxpayer Advocate publicity campaign.211

C. Funding to Support IRS Modernization

In general

The IRS reports that modernization is the central part of the effort to improve customer 

service and voluntary compliance. The two primary components of modernization are Business 

Systems Modernization and Tier B projects. Business Systems Modernization is directed at the 

redevelopment of IRS business practices and the acquisition of modern technology. The IRS has 

 

207 IRS FY 2003 Budget in Brief at 3-4.

208 Id. at 4-5.

209 Id.

210 Id.

211 Id.
59

indicated that business systems modernization will provide improved access to information and 

tax data, more accurate information provided by the IRS to taxpayers, faster IRS responses to 

taxpayers, more timely IRS-initiated actions, and a more productive workforce.212 Tier B 

projects are more limited and typically improve existing systems or coordinate current systems 

with modernization projects. 

The IRS collects $2 trillion in revenues but relies on outdated computer systems 

developed over 35 years. The IRS notes that modernization is still at a critical point and that 

failure to continue the current efforts will result in increased costs in the long term to maintain 

existing outdated systems that are not efficient or effective.213

The IRS has requested an increase of $68 million for Business Systems and Tier B 

Modernization above the $432 million operating level for fiscal year 2002.214

Business systems modernization

The IRS has requested a total of $450 million for Business Systems Modernization, 

which reflects a $58 million increase from the fiscal year 2002 operating level of $392 million.215 

The IRS uses a formal method to prioritize, approve, fund, and evaluate its portfolio of Business 

Systems Modernization investments. The IRS finds that this methodology enforces a 

documented, repeatable, and measurable process for managing investments throughout their life 

cycle. Investment decisions are approved by the IRS Core Business System Executive Steering 

Committee, which is chaired by the Commissioner of Internal Revenue.216

The IRS states that the $58 million increase will fund the contract, equipment, and 

software costs needed to improve the speed, timeliness and accuracy of the IRS’s interactions 

with taxpayers. The IRS plans to deliver the following benefits.217

Benefits for businesses

• Encourage more electronic filing by more efficient implementation of daily cycles 

and processing of refunds

• Improved efficiency by facilitating the transfer of taxpayer accounts from the Master 

File to the Customer Account Data Engine

 

212 IRS FY 2003 Justification at BSM-6.

213 Id. at BSM-4.

214 IRS FY 2003 Budget in Brief at 7, 9.

215 IRS FY 2003 Justification at BSM-3; IRS FY 2003 Budget in Brief at 7.

216 IRS FY 2003 Justification at BSM-4; IRS FY 2003 Budget in Brief at 7.

217 IRS FY 2003 Justification at BSM-7-13; IRS FY 2003 Budget in Brief at 7-8.
60

• Provision of timely and accurate financial information to management and 

stakeholders

Benefits for Employees

• Faster resolution of third party problems

• Improving tools available to better manage partner relationships

• Improve resolution of taxpayer questions during the first call

Benefits for taxpayers

• Education of taxpayers using assistors and self-directed online applications

• Using the Internet and phone system to provide information to taxpayers quickly and 

conveniently

• Accelerated refund processing for Customer Account Data Engine accounts

Project related benefits

• Build the Customer Account Data Engine, which will replace the existing return 

processing systems and lead to other applications that will improve customer service 

and compliance

• Establish the Integrated Financial System, which will provide core financial 

capabilities and financial reporting and will permit retirement of current financial 

systems

• Implement the Custodial Accounting Project, which will help the IRS comply with 

legislative and policy directives related to revenue reporting and accounts receivable 

as well as enable the accurate distribution of trust funds

• Fund the Enterprise Data Warehouse, which will improve the IRS’s ability to use 

data for research and decisions

• Continue e-services, which will provide additional Internet self-service applications 

for external IRS business partners

• Improve the customer focus of the IRS with Customer Account Management, which 

will provide IRS Customer Service Representatives with better information about 

customer accounts and enable the IRS to inform relevant parties of important 

developments

• Fund Filing and Payment Compliance, which will use modernized systems to select 

cases to meet the goal of the program, which is to resolve all balance due cases above 

a minimum threshold, shorten the filing compliance lifecycle to ensure resolution 

prior to the next filing due date, and shorten the payment compliance lifecycle to sixmonths for nonenforcement cases.
61

Tier B modernization

The IRS has requested a total of $50 million for Tier B modernization, which reflects a 

$10 million increase from the fiscal year 2002 operating level of $40 million.218 The IRS states 

that the Tier B projects will support the following objectives.

Criminal Investigations business activities

• Provide one-touch query capability on subject information to facilitate tax-related 

financial crime investigations

• Establish a system that will ensure that electronically stored evidence is admissible in 

criminal court cases

• Modernize the equipment used to analyze forensic evidence

National Headquarters Business Units

• Establish an integrated system to receive, manage, and efficiently respond to taxpayer 

complaints

Wage and Investment business activities

• Use a risk-based approach to selecting workload in order to increase voluntary 

compliance and protect revenue

In addition, Tier B investments will provide all Remittance Transaction payment 

information on-line in real time, allow for team-based reporting compliance, give employees 

electronic training tools, support the National Forensic Lab’s technology, and create computer 

enhancements that permit multiple system interfaces on one computer terminal. 219

D. Funding to Maintain Current Operations

The IRS requests $342 million to maintain current operations. Of this amount, $295 

million funds the cost of statutory pay increases and inflation at a level that will maintain the 

current level of services. An additional $37 million covers the costs of within-grade pay 

increases for on-board employees, which are not otherwise funded. The IRS requests $10 

million for enhanced security arrangements pursuant to the Homeland Security Supplemental. 

This amount includes funding that is required for annualizing the Security Guard costs, space 

rental from the General Services Administration, and costs associated with continued 

participation in the Joint Terrorism Task Force. The IRS notes that $31 million from the fiscal 

year 2002 budget for homeland security does not recur in fiscal year 2003. The IRS expects to 

save $39 million by implementing the Treasury Department’s better business practices, which 

 

218 IRS FY 2003 Budget in Brief at 9.

219 Id.
62

encourages bureaus to review current efforts and to eliminate or curtail practices that do not have 

significant value.220

E. Legislative Proposals and Other Adjustments

The IRS budget request includes $40 million to account for proposals in the President’s 

fiscal year 2003 Budget. 

• The President’s budget proposes to permit the Department of Labor to add an 

surcharge to the amount it charges each agency for Federal Employees’ 

Compensation Act benefits. The IRS requests $3 million to cover this surcharge.

• The President’s budget proposes legislation that would require agencies to pay the 

full share of the accruing cost of retirement of employees, the accruing cost of postretirement health benefits for current employees, and the post-retirement health costs 

of retirees (and their dependents/spouses). The IRS requests 32 million to cover this 

cost.

The IRS also requests $5 million to allow the permanent transfers of funds for services 

provided by the General Services Administration, the National Archives and Records 

Administration, and the Department of Agriculture to the IRS.221

F. Financial Audit of IRS Fiscal Year 2001 Financial Statements

The General Accounting Office recently presented the results of its audit of the IRS’s 

principal financial statements for fiscal year 2001. Like fiscal year 2000, the General 

Accounting Office expressed an unqualified opinion on all IRS financial statements.222 The 

General Accounting Office rendered unqualified opinions in both years due to the “extraordinary 

efforts of IRS senior management and staff to compensate for serious internal control and system 

deficiencies.”223 By contrast, the General Accounting Office’s audit of IRS financial statements 

for fiscal year 1999 resulted in an unqualified opinion on its custodial activity statement, a 

qualified opinion on its balance sheet, and a disclaimer that no opinion could be issued on the 

remaining IRS financial statements. In prior years, the General Accounting Office’s audit 

reports were less favorable.

 

220 Id. at 9-10.

221 Id. at 2-3, 11.

222 The IRS financial statements report the assets, liabilities, net position, net costs, 

changes in net position, budgetary resources, reconciliation of net costs to budgetary obligations, 

and custodial activity related to the IRS’s administration of its responsibilities for implementing 

federal tax legislation. General Accounting Office, Financial Audit: IRS’s Fiscal Years 2001 

and 2000 Financial Statements (February 2002) GAO-02-414 at 3.

223 Id. at 1. 
63

Despite its unqualified opinions, the General Accounting Office continues to identify 

many material weaknesses in the IRS’s internal controls. These weaknesses include: (1) an 

inadequate financial reporting process, (2) inability to manage unpaid tax assessments, (3) 

identifying and collecting outstanding tax revenues and issuing refunds, (4) inability to timely 

report IRS property and equipment balances, (5) inadequate budgetary controls, and (6) 

weaknesses in computer security. Such weaknesses may adversely affect many decisions by IRS 

management.224

Commissioner Rossotti has indicated that the IRS has made significant improvements in 

several areas, which contributed to the IRS’s success in obtaining unqualified opinions as to each 

financial statement.225 These improvements include:

• Implementation of a disposal process for property and equipment;

• Implementation of a process to ensure accruals were adequately reflected as of yearend;

• Issuance of guidance and improved review of and accounting for open obligations;

• Implementation of continuity of operations efforts;

• Establishment of the Computer Security Incident Response Center; and

• Requiring all personnel offices to report monthly all individuals who entered on duty 

prior to a fingerprint result.

In the short-term, the IRS plans to:

• Improve field guidance regarding classification of property and equipment;

• Improve the accrual process to address timely recording of receipt of goods and 

services;

• Institutionalize periodic reviews of general ledger balances during the year;

• Record imputed costs regularly; and

• Provide field guidance regarding more accurate reporting of revenue activity.

 

224 Id. at 7.

225 Statement of Charles O. Rossotti, Commissioner of Internal Revenue, before the 

Subcommittee on Government Efficiency, Financial Management, and Intergovernmental 

Relations of the House Committee on Government Reform (April 15, 2002) at 15.
64

VI. OTHER MATTERS ADDRESSED BY THE IRS REFORM ACT

A. IRS Oversight Board

The IRS Reform Act created the IRS Oversight Board. The IRS Oversight Board began 

operations in September 2000. The IRS Oversight Board consists of nine members: seven 

private citizens who serve on a part-time basis, the Commissioner, and the Secretary of the 

Treasury. The IRS Oversight Board meets for two days approximately every two months, 

usually in Washington, D.C.226 Generally, the IRS Oversight Board oversees the IRS’s 

administration, management, conduct, direction and supervision of the execution and application 

of the internal revenue laws.227 Specific responsibilities of the IRS Oversight Board include 

reviewing and approving the IRS’s strategic plans and operational functions (such as 

modernization, outsourcing, training, and education). The IRS Oversight Board also is to 

recommend candidates for appointment as IRS Commissioner, and may recommend whether the 

Commissioner should be removed. The Commissioner’s selection, evaluation, and 

compensation of senior executives also are to be reviewed by the IRS Oversight Board. In 

addition, any major reorganization of the IRS is to be reviewed and approved by the IRS 

Oversight Board.

The IRS Oversight Board reviews and approves budget requests prepared by the 

Commissioner to ensure that the budget request supports IRS annual and long-range strategic 

plans.228 The IRS Oversight Board submits such budget requests to the Secretary of the 

Treasury, who submits the request to the President, who in turn submits it, without revision, to 

Congress together with the President’s annual budget request for the IRS for the fiscal year. The 

President is not precluded from submitting his own budget for the IRS.

In its January 2002 annual report, the IRS Oversight Board found that “the IRS is still not 

effectively and efficiently serving the needs of the American taxpayers, although it has made 

significant progress since 1997.”229 The IRS Oversight Board summarized the current state of 

the IRS and measured the IRS’s progress in meeting its three objectives: service to each 

taxpayer, service to all taxpayers, and productivity in a quality workplace. The IRS Oversight 

Board found that customer service (especially toll-free telephone and walk-in service) has not 

risen to desired levels but notes that taxpayer satisfaction with the IRS has increased.230 

Enforcement results are slightly upward by many measures in 2002, with the exception of a 

general decrease in the number of audits. The IRS Oversight Board concludes that major 

 

226 IRS Oversight Board Report at 35.

227 Sec. 7802(c) and (d).

228 Sec. 7802(d)(4).

229 IRS Oversight Board Report at 1.

230 Id. at 11. 
65

improvement is needed on enforcement matters.231 The IRS Oversight Board finds that IRS 

productivity has decreased by many measures over the past three years, which may be 

attributable to a variety of factors, such as declining resource allocation, low employee 

satisfactions, and tax-law complexity.232 Moreover, outdated computer systems hamper 

productivity of IRS workers and prevent effective service from being delivered.233 

The IRS Oversight Board identified as significant challenges to the IRS the outdated state 

of IRS technology, the increasing complexity of the tax code, reduced staffing levels, service 

levels to taxpayers, declining results in enforcement, lack of compliance data to make informed 

resource allocation decisions, declining productivity, workforce engagement, successful 

implementation of the balanced measures program (which will evaluate employee performance 

with measures other than tax results), and other human capital issues.234

The IRS Oversight Board found that progress has been made in some areas: the 

reorganization of the IRS into four functional units, the nearly complete implementation of the 

balanced measures program and the progress, albeit slow, of the Business Systems 

Modernization program.235

The IRS Oversight Board recommended that the IRS complete Business Systems 

Modernization as soon as possible, and recommended that the IRS receive $400 million in 

funding for the program in fiscal year 2002, $450 million in fiscal year 2003, and $500+ million 

in fiscal year 2004 and beyond. However, the IRS Oversight Board reports that at its current 

level of management capability, the IRS cannot spend over $500 million in a fiscal year 

effectively. To improve the Business Systems Modernization program, the IRS Oversight Board 

recommends that the IRS improve its program management ability, work more effectively with 

the PRIME Contractor, and manage change more effectively. The IRS Oversight Board also 

recommends that the PRIME Contractor, the Administration, Congress, and oversight 

organizations work to support the completion of the Business Systems Modernization 

program.236

The IRS Oversight Board also made recommendations for short-term improvements, 

including completion of the restructuring of the Modernization and Information Technology 

Services division, continued use of pre-filing educational activities, and effective implementation 

 

231 Id.

232 Id. at 14.

233 Id. at 1.

234 Id. at 3, 23.

235 Id. at 25-26.

236 Id. at 27-28
66

of the National Research Project to understand the extent and causes of noncompliance with the 

tax law.237

The IRS Oversight Board approved the IRS’s proposed budget for fiscal year 2003. 

Because the fiscal year 2003 budget was still being formulated at the time of the report, the IRS 

Oversight Board did not comment on its budget recommendation with respect to the final 

Administration request.238

The IRS Oversight Board held a public meeting on January 29, 2002, during which it 

heard testimony about IRS operations from representatives of 16 organizations, including the 

National Council for Taxpayer Advocacy, the American Institute of Certified Public 

Accountants, the National Treasury Employees Union, and the National Association of Enrolled 

Agents.239 Other activities of the IRS Oversight Board include helping to select a new IRS 

Commissioner, reviewing the performance evaluations and proposed bonuses of 13 IRS 

executives, and interviewing the current National Taxpayer Advocate prior to her selection as 

such.240

B. National Taxpayer Advocate

Background and provisions of the IRS Reform Act

The IRS created the Problem Resolution Program in 1976. The purpose of the program 

was to provide an independent means by which taxpayer problems were promptly and properly 

handled. In 1979, the IRS created the position of the Taxpayer Ombudsman to head the 

program. In 1996, the Taxpayer Bill of Rights 2 replaced the Taxpayer Ombudsman with the 

Taxpayer Advocate. The Taxpayer Advocate was expected to represent taxpayer interests 

independently in disputes with the IRS. The IRS Reform Act renamed the Taxpayer Advocate 

the National Taxpayer Advocate. The National Taxpayer Advocate supervises the Office of the 

Taxpayer Advocate.

The Office of the Taxpayer Advocate has four principal functions:

(1) to assist taxpayers in resolving problems with the IRS;

(2) to identify areas in which taxpayers have problems in dealing with the IRS;

(3) to propose changes in the administrative practices of the IRS to mitigate such 

problems; and

 

237 Id. at 29-30.

238 Id. at 35.

239 See Amy Hamilton, Practitioners Tired of IRS Asking for Understanding, Patience, 

2002 Tax Notes 20-2 (January 30, 2002). 

240 IRS Oversight Board Report at 36.
67

(4) to identify potential legislative changes that may be appropriate to mitigate such 

problems.

The IRS Reform Act established a system of local Taxpayer Advocates that report to the 

National Taxpayer Advocate or her delegate. Local Taxpayer Advocates are to be independent 

of the IRS’s examination, collection, and appeals functions. Local Taxpayer Advocates also are 

to be employees of the Office of the Taxpayer Advocate. The National Taxpayer Advocate 

appoints Local Taxpayer Advocates. With the Commissioner, the National Taxpayer Advocate 

must develop career paths for local Taxpayer Advocates choosing to pursue a career within the 

Office of the Taxpayer Advocate.

The National Taxpayer Advocate monitors the coverage and geographic allocation of 

local taxpayer advocate offices and ensures that at least one local advocate is available for each 

State.241 Prior to the reorganization of the Office of the Taxpayer Advocate, the IRS had a 

taxpayer advocate in each of the four regional offices. Each of the 33 district offices, 30 former 

district offices, and 10 service centers has local advocates. The National Taxpayer Advocate 

also must ensure that local telephone numbers for each office are published and available to 

taxpayers served by the office.242 Additionally, the National Taxpayer Advocate must develop 

guidance to be distributed to all IRS officers and employees that outlines the criteria for referring 

taxpayer inquiries to local taxpayer advocate offices.243

The IRS Reform Act also expanded the National Taxpayer Advocate’s ability to issue 

Taxpayer Assistance Orders. A taxpayer can request a Taxpayer Assistance Order if the taxpayer 

is suffering or about to suffer a “significant hardship” from tax law administration.244 A 

Taxpayer Assistance Order may require the IRS to release property of the taxpayer that has been 

levied upon, to cease any action or take any action as permitted by law, or refrain from taking 

any action with respect to the taxpayer. The IRS has recently clarified the guidelines for issuing 

Taxpayer Assistance Orders.245

 

241 Sec. 7803(c)(2)(C)(i).

242 Sec. 7803(c)(2)(C)(iii).

243 Sec. 7803(c)(2)(C)(ii).

244 Sec. 7811(a)(1)(A). Significant hardship is deemed to occur if one of four factors 

exists: (1) there is an immediate threat of adverse action; (2) there has been a delay of more than 

30 days in resolving the taxpayer’s problems; (3) the taxpayer will have to pay significant costs 

(including fees for professional services) if relief is not granted; or (4) the taxpayer will suffer 

irreparable injury, or a long term adverse impact if relief is not granted. Sec. 7811(a)(2). The 

National Taxpayer Advocate may also issue a Taxpayer Assistance Order if the taxpayer meets 

requirements to be set forth in regulations. Sec. 7811(a)(1)(B).

245 Internal Revenue Service, IRS Expands Authority for Taxpayer Advocate Service, IR2001-12 (January 24, 2001).
68

The Code requires the National Taxpayer Advocate to submit two reports annually to the 

Committee on Ways and Means of the House of Representatives and to the Senate Committee on 

Finance.246 The National Taxpayer Advocate submits the reports directly to the Congressional 

committees without prior review by the Commissioner, the Secretary, or any officer or employee 

of the Treasury, the IRS Oversight Board, or the Office of Management and Budget.247

The first report, due June 30th of each year, covers the Office of the Taxpayer 

Advocate’s objectives for the fiscal year beginning in that calendar year. Besides statistical 

information, the report must contain a full and substantive analysis of the objectives. The second 

report, due December 31st of each year, concerns the activities of the Office of the Taxpayer 

Advocate.248 Generally, the report must cover initiatives taken to improve taxpayer services and 

problems encountered, as well as the actions taken to resolve them and the results. The report 

also must cover the 20 most serious problems experienced by taxpayers. In addition, the IRS 

Reform Act requires the report to identify the ten most litigated issues for each category of 

taxpayer and the areas of the tax law that impose significant compliance burdens on taxpayers or 

the IRS. The report must include any recommendations received from individuals with the 

authority to issue Taxpayer Assistance Orders, as well as any Taxpayer Assistance Orders that 

have not been promptly honored by the IRS. The report also must set forth recommendations for 

administrative and legislative action to resolve problems encountered by taxpayers.

Organization of the Office of the Taxpayer Advocate

The reorganized Office of the Taxpayer Advocate (“Taxpayer Advocate Service”) 

became official on March 12, 2000. The field organization consists of nine Area Taxpayer 

Advocate directors, seven of whom oversee casework by Local Taxpayer Advocates in assigned 

territories and two of whom oversee casework from Service Center Advocates. Seventy-four 

Local Taxpayer Advocates report to the Area Taxpayer Advocate Directors and are responsible 

for handling taxpayer cases at the local level. The Area Taxpayer Advocate Directors report to 

the National Taxpayer Advocate. Caseworkers also have been moved into the local Taxpayer 

Advocate organization. A career path has been established for these workers to allow for 

professional development and advancement.

In addition to caseworker positions, the National Taxpayer Advocate has created 

Operating Division Taxpayer Advocate positions to work within the new IRS organizational 

structure. The primary responsibility of the Operating Division Taxpayer Advocate is to provide 

systemic analysis and advocacy, as opposed to performing casework.

The National Taxpayer Advocate receives legal assistance from an executive-level Chief 

Counsel attorney assigned as the Counsel to the National Taxpayer Advocate. The Counsel to 

 

246 Sec. 7803(c)(2)(B).

247 Sec. 7803(c)(2)(B)(iii).

248 Sec.7803(c)(2)(B)(ii)(I) through (XI).
69

the National Taxpayer Advocate has authority to hire four senior attorneys to provide the 

National Taxpayer Advocate and the immediate office with legal support. 

National Taxpayer Advocate annual report

The National Taxpayer Advocate’s annual reportfocused on tax code complexity as the 

most serious problem facing business and individual taxpayers. In the preface to her report, the 

National Taxpayer Advocate wrote, 

I maintain that this nation can ill afford to ignore the increasing burden (for 

taxpayers and tax administrators alike) and irrationality of our tax system. Our 

tax system is a voluntary system, relying on taxpayers to inform the government 

of their taxable income and resulting tax. To the extent that we, as tax legislators 

or tax administrators, make this compliance too burdensome, or too confusing for 

taxpayers, or out of tune with taxpayers’ sensible way of life, we create an 

environment in which even the most compliant taxpayers wonder why they 

bother. In fact, some taxpayers will stop bothering to comply. It matters not that 

this complexity or irrationality is an unintended or inadvertent consequence.249

Legislative proposals

In general

The National Taxpayer Advocate’s Report identified six main areas for legislative action: 

family status issues, joint and several liability, alternative minimum tax for individuals, penalties 

and interest, home-based service workers, and IRS collection procedures. The following 

paragraphs summarize the Taxpayer Advocate’s primary legislative proposals.

Family status issues

The National Taxpayer Advocate’s Report recommended five legislative changes relating 

to family status. The National Taxpayer Advocate indicated that the adoption of these proposals, 

described below, is fundamental to achieving a fairly administered system and also would result 

in significant tax code simplification.250

(1) Adopt a uniform definition of a “qualifying child” applicable to biological, step, 

and adoptive children or descendants for purposes of the dependency exemption 

(sec. 151 (a) and (c); sec. 152), head of household filing status (sec. 2(b)), the 

definition of “not married” (sec. 7703(b)), the earned income tax credit (sec. 32), 

the child tax credit (sec. 24), and the child and dependent care credit (sec. 21).

(2) Provide that means-tested public benefits are excluded from the computation of 

support in determining whether a taxpayer is entitled to claim the dependency 

 

249 National Taxpayer Advocate FY 2001 Report at iv-v.

250 Id. at 76.
70

exemption and from the cost of maintenance test for the purpose of head-ofhousehold filing status or “not married” status (secs. 152, 2(b), and 7703).251

(3) Clarify that a custodial parent who is eligible to claim the dependency exemption 

must voluntarily sign a written release of the dependency exemption to the 

noncustodial parent (sec. 152(e)(2)). Further, explicitly state that the dependency 

exemption cannot be allocated by state domestic relations courts, nor can 

taxpayers be ordered by such courts to relinquish the dependency exemption 

absent a voluntary agreement by the custodial parent.252

(4) Eliminate the age restrictions for those taxpayers who do not have a qualifying 

child and who otherwise qualify for the Earned Income Tax Credit (sec. 32(c)).253

(5) Allow single or separated noncustodial parents who are paying substantially all 

required child support to claim the Head of Household filing status as directed by 

a formal court ordered child support agreement (sec 2(b)).254

Joint and several liability issues

When a married couple files a joint income tax return, both spouses are liable for the 

income taxes with respect to that return regardless of who earned the income or claimed the 

deductions that caused the tax liability.255 Although spouses can avoid joint and several liability 

by filing separately, married individuals filing a separate return are entitled to fewer tax-related 

benefits.256 In general, to obtain relief from joint and several liability, an individual who filed a 

joint return must prove that he or she is an “Innocent Spouse” in accordance with the provisions 

contained in section 6015. 

The National Taxpayer Advocate’s Report recommends legislative changes to:

(1) Allow married individuals to elect to sever their liability by declaring their 

separate items of income on their original married filing joint income tax return 

(sec. 6013(d)).257

 

251 Id. at 101.

252 Id. at 105.

253 Id. at 118.

254 Id. at 122.

255 Sec. 6013(d)(3).

256 Sec. 6013(a).

257 National Taxpayer Advocate FY 2001 Report at 129.
71

(2) Provide additional guidance to the Secretary about the factors to be considered in 

determining whether it would be inequitable to hold the taxpayer jointly and 

severally liable for a jointly filed return (sec. 6015(f)).258

(3) Provide that when relief is granted in full or in part from joint and several 

liability, payments made after the date of filing an innocent spouse claim can be 

refunded (sec. 6015(g)(3)).259

(4) Provide guidance to the Secretary for developing a broader interpretation of 

equitable relief for the issuance of refunds (secs. 6015(f) and (g)).260

(5) Allow the IRS to rescind a determination letter issued under section 6015 with the 

agreement of the taxpayer.261

(6) Require the IRS to provide in the notice of final determination the last date to 

petition the Tax Court, and provide for the taxpayer to be able to petition the Tax 

Court by the later of the date the Secretary specifies in the notice of final 

determination or 90 days from the date of the notice (sec. 6015(e)(1)(A)).262

(7) Allow the taxpayer the right to petition the United States Tax Court in equitable 

relief determinations (secs. 6015(e) and (f)).263

Alternative minimum tax

Citing devilish complexity and an increasing burden on low-income and middle-income 

taxpayers, the National Taxpayer Advocate’s Report recommends repeal of the individual 

Alternative Minimum Tax.264 Alternatively, the report recommends indexing the individual 

Alternative Minimum Tax Exemptions to current dollars; establishing a gross income threshold 

(indexed for inflation) for individual Alternative Minimum Tax that can be taken directly from 

the tax return; or, eliminating personal exemptions, the standard deduction, deductible state and 

 

258 Id. at 146.

259 Id. at 156.

260 Id.

261 Id. at 160.

262 Id.

263 Id.

264 Id. at 167.
72

local taxes, and miscellaneous itemized deductions as adjustment items for individual Alternative 

Minimum Tax purposes.265

Penalties and interest issues 

To encourage compliance by taxpayers, the Code provides for the accrual of interest and 

certain penalties if federal tax liabilities are not timely paid. However, the National Taxpayer 

Advocate reports that taxpayers who believe in good faith that they have complied with the tax 

laws do not understand why they are charged interest and penalties that in some cases exceed the 

tax liability. 

The National Taxpayer Advocate’s Report recommends: (1) Repealing the penalty 

provisions for failure to pay tax while increasing the interest rate for underpayments;266 (2) 

requiring, with some exceptions, the Secretary to abate the assessment of all interest on any 

erroneous refund (sec. 6602) until the date the demand for repayment is made, unless the 

taxpayer (or a related party) has in any way caused such an erroneous refund;267 and (3) 

authorizing the Secretary to grant a one-time abatement of the failure to file penalty (sec. 

6651(a)(1)), and failure to pay penalty (sec. 6651(a)(2)) for first time filers and taxpayers with a 

consistent history of compliance where no countervailing factors are present.268

Home-based service workers 

Home-based service workers help disabled or elderly persons with personal care or 

household chores. The National Taxpayer Advocate reports that in most cases the home based 

service worker is considered to be an employee and the service recipient is considered to be the 

employer. However, sometimes the workers are treated as and/or may be independent 

contractors. Such uncertainty may result in different tax treatment of similarly situated 

taxpayers.269 

The National Taxpayer Advocate’s Report recommends making clear that home-based 

service workers are employees rather than independent contractors.270 The Report also 

recommends enacting a new section that removes liability for employment taxes from the 

common law employer (here, the service recipient) and deems the administrator of home-based 

worker funding (defined as states, their agencies, or intermediate service organizations, 

 

265 Id. at 172.

266 Id. at 179.

267 Id. at 183.

268 Id. at 188.

269 Id. at 195.

270 Id. at 194.
73

regardless of the original source of funding) as the responsible party to withhold, report, and pay 

employment taxes on behalf of home-based workers.271

IRS collection procedures 

The National Taxpayer Advocate’s Report states that the IRS occasionally commits 

flagrant errors that violate either statutes or the IRS’s own established administrative procedures, 

and cause severe harm to taxpayers. The Report finds that such errors most often occur in the 

context of levies or seizure of assets, which are then sold. The Report says that once the errors 

are discovered, the IRS often is prevented from providing relief to taxpayers because of expired 

statutory limitation periods, or because there is no overpayment and thus no grounds for a 

refund. In addition, when the IRS levies upon an individual retirement account or other qualified 

plan, the taxpayer cannot restore any returned levy proceeds to the account and still is liable for 

the income tax on any distribution.272 

The National Taxpayer Advocate’s Report recommends the following changes to the 

IRS’s collection procedures: (1) extend the period of time within which taxpayers or third parties 

can request a return of levied funds or the proceeds from the sale of levied property from nine 

months to two years from the date of levy, or longer for taxpayers if the IRS acted in reckless or 

flagrant disregard of established IRS rules and the taxpayer incurred significant harm (sec. 

6343);273 (2) extend the period of time within which certain third-party suits or proceedings (sec. 

7426) shall begin from nine months to two years from the date of levy or agreement giving rise 

to such action;274 and (3) authorize reinstatement of funds to certain retirement accounts and 

pension plans where the IRS levied upon the plans in error or in flagrant disregard of established 

IRS rules, procedures, or regulations and the funds were returned under section 6343(d).275

Most serious problems faced by taxpayers

The National Taxpayer Advocate’s Report identified and discussed 23 of the most serious 

problems identified by individual taxpayers. The top ten are:

• Access to customer service toll-free telephone service

• Multiple definitions of “qualifying child”

• Determining Earned Income Tax Credit eligibility

• Answers to questions on customer service toll-free lines

• Documenting Earned Income Tax Credit eligibility

 

271 Id.

272 Id. at 202.

273 Id. at 203.

274 Id.

275 Id.
74

• Refund inquiries

• Earned Income Tax Credit examinations

• Understanding estimated tax payments

• Explanations on math error notices

• Processing claims for refund276

Most litigated tax issues

The National Taxpayer Advocate’s Report identifies the top ten most litigated issues by 

taxpayers as:

• Unreported or Underreported Income

• Trade or Business Expenses

• Exemptions (Personal and Dependency)

• Accuracy Related Penalties

• Delinquency Penalty

• Collection Due Process

• Earned Income Tax Credit

• Innocent Spouse

• Entertainment Expenses

• Trust Cases277

Among the most litigated tax issues, the National Taxpayer Advocate noted that the 

personal and dependency exemptions, innocent spouse, and the Earned Income Tax Credit 

present significant compliance problems for taxpayers due to complexity.278 

Taxpayer Advocate Service activities

The National Taxpayer Advocate’s Report states that during fiscal year 2001, the 

Taxpayer Advocate Service independently reviewed and took action to resolve over 272,000 

cases.279 The National Taxpayer Advocate’s Report listed the top sources of Taxpayer Advocate 

Service casework as Earned Income Tax Credit examinations due to the Revenue Protection 

Strategy, processing of claims or amended returns, initial processing of original paper or 

electronic individual returns, and processing of refunds.280 

 

276 Id. at 7.

277 Id. at 259.

278 Id. at 133, 261, 263.

279 Id. at 228.

280 Id. at 229.
75

Approximately 248,000 of the cases originated as Applications for Taxpayer Assistance 

Orders. Relief was granted in approximately 168,900 cases, including the issuance of 18 

enforced Taxpayer Assistance Orders.281 In 68.1 percent of these cases, the National Taxpayer 

Advocate was able to provide relief, partial relief, or appropriate assistance to the taxpayer.282

C. Treasury Inspector General For Tax Administration

In general

The IRS Reform Act created the Office of Treasury Inspector General for Tax 

Administration. The Treasury Inspector General for Tax Administration conducts audits, 

investigations, and evaluations of IRS programs and operations (including the IRS Oversight 

Board).283 In addition, on an ongoing basis, the Treasury Inspector General for Tax 

Administration evaluates the adequacy and security of IRS technology. The Treasury Inspector 

General for Tax Administration also investigates criminal and administrative misconduct, such 

as violations of the Taxpayer Bill of Rights and ethical violations. Taxpayers may report 

allegations of IRS misconduct by a toll-free number maintained by the Treasury Inspector 

General for Tax Administration. Part of the Treasury Inspector General for Tax 

Administration’s responsibility includes protecting the IRS from external threats to corrupt or 

harm employees. The Treasury Inspector General for Tax Administration conducts periodic 

audits of at least one percent of all determinations in which the IRS has asserted the 

confidentiality provisions (either alone or in conjunction with the Freedom of Information Act or 

Privacy Act), or law enforcement considerations as the basis for denying requested 

information.284 

Semiannual report

In general

The Treasury Inspector General for Tax Administration’s semiannual report to the 

Congress for the period April 1, 2001, through September 30, 2001, reports that the Treasury 

Inspector General for Tax Administration issued 126 audit reports during the six-month period. 

Financial results due to audit reports totaled $13 billion and an additional $13.3 billion in 

increased revenue and protected revenue. The Treasury Inspector General for Tax 

Administration estimates that its audit recommendations will improve tax administration for 

 

281 Id. at 231-32. An enforced Taxpayer Assistance Order is required when the local 

Taxpayer Advocate and the responsible IRS functional area cannot reach an agreement on case 

resolution. Of the 18 Orders issued, 12 were Direct Taxpayer Assistance Orders and 6 were 

Review Taxpayer Assistance Orders. 

282 Id.

283 Treasury Order 115-01(b) (January 14, 1999).

284 Sec. 7803(d)(3)(A).
76

approximately 14.5 million taxpayers. In addition, the Treasury Inspector General for Tax 

Administration closed nearly 2,322 investigations of criminal wrongdoing and administrative 

misconduct during the reporting period. Investigations recovered approximately $8.1 million.285

The following discussion highlights some of the material contained in the Treasury 

Inspector General for Tax Administration’s semiannual report.

Providing security over information systems

The Treasury Inspector General for Tax Administration reports that the IRS has improved 

security over information systems, including a better security environment of large processing 

centers, controls of the mainframe computer operating system, and significant progress in 

preparing disaster recovery plans. Nevertheless, despite such progress, the overall level of 

security is not yet adequate. Weaknesses include security of Internet gateways, network 

operating system controls, physical security and access privileges, and security certification of 

sensitive systems.286 For example, the Treasury Inspector General for Tax Administration 

reports that as of May 2001, only 15 percent of the IRS’s sensitive systems had been certified.287

The Office of Audit identifies a lack of clear accountability for security throughout the IRS, 

insufficient knowledge and skills, and insufficient security awareness among managers and 

employees as factors responsible for security weaknesses.

288

Business systems modernization

The Treasury Inspector General for Tax Administration reports that the IRS has made 

notable progress in modernizing its technology systems. The IRS has installed an upgraded 

telephone system that improves its ability to respond to taxpayer calls, and is in the process of 

installing a software application that assists revenue agents in accurately computing corporate tax 

transactions.289

However, the Treasury Inspector General for Tax Administration reports that certain 

issues pose potential barriers to the success of Business Systems Modernization. These issues 

include delays and cost overruns in delivering tangible benefits to taxpayers, potential funding 

problems, inconsistencies in implementing key systems development processes, business needs 

 

285 TIGTA Semiannual Report to Congress, April 1, 2001, through September 30, 2001, 

at 3-4.

286 Id. at 7.

287 Id. at 7.

288 Id. at 8.

289 Id. at 8.
77

not always being well defined, and a lack of clarity as to which systems development projects 

should be classified as modernization projects.290

Addressing the impact of the global economy on tax administration

The Treasury Inspector General for Tax Administration reported that, because of the 

increase in taxpayers’ international transactions and operations, the IRS needs to increase its 

focus on international compliance programs and improve the quality and use of information 

received on the income of foreign persons. The Treasury Inspector General for Tax 

Administration recommends that the IRS more effectively monitor certain foreign partnerships, 

foreign controlled corporations, and the income of foreign persons.291

Criminal investigation

The Treasury Inspector General for Tax Administration reported that the IRS’s Criminal 

Investigation function was not making a shift to investigate tax crimes as recommended by the 

June 2001 Webster Report (an independent review of the Criminal Investigation function). The 

Treasury Inspector General for Tax Administration recommends that the Criminal Investigation 

function work to comply with the Webster Report.292 The IRS has agreed with this 

recommendation and is taking corrective action.

Government Performance and Results Act of 1993

The Treasury Inspector General for Tax Administration reported that the IRS did not 

have a centralized process to ensure that all of the requirements of the Government Performance 

and Results Act were achieved and maintained. The Treasury Inspector General for Tax 

Administration recommends that IRS management consider centralizing Government 

Performance and Results Act oversight; better administer the Customer Satisfaction Surveys; and 

improve the Annual Program Performance Report process.293

Managing finances

The Treasury Inspector General for Tax Administration reported that the IRS has made 

significant improvements to its remediation plan to bring its financial systems into compliance. 

However, while the plan did include all weaknesses reported by the General Accounting Office 

during its financial statement audits through fiscal year 2002, the plan did not always clearly 

identify resource commitments for all remedial actions. Also, the IRS was not performing 

independent verifications of implemented remedial actions, and was not providing sufficient 

explanations of why there were revised remedial action intermediate target dates. The Treasury 

 

290 Id.

291 Id. at 9.

292 Id. at 10.

293 Id.
78

Inspector General for Tax Administration recommends that the IRS independently verify 

completed remedial actions, and verify the reasonableness of remedial action intermediate target 

dates. The IRS agreed with the recommendations and is taking further action.294

Taxpayer rights

The Treasury Inspector General for Tax Administration reports that, while the IRS had 

made progress in implementing the taxpayer rights provisions of the IRS Reform Act, significant 

improvements are needed in compliance with IRS Reform Act provisions, including innocent 

spouse relief, notice of lien, prohibition on Illegal Tax Protester designations, and restrictions on 

the use of enforcement statistics. The Treasury Inspector General for Tax Administration 

recommends that the IRS develop procedures to track programming changes through to 

completion, issue procedural guidance at one centralized site, and complete the necessary 

programming to ensure that certain statement and notices are timely sent to taxpayers.295 

The Treasury Inspector General for Tax Administration reports that improvements are 

also needed in meeting IRS Reform Act’s legal and procedural requirements for collection 

statute extensions and installment agreements. The Treasury Inspector General for Tax 

Administration reported that the IRS was not fully complying with the requirements. The 

Treasury Inspector General for Tax Administration recommended that the IRS clarify procedures 

to ensure that collection statute extensions are approved concurrently with a related installment 

agreement or levy release; update procedures to reflect the new locations for storing signed 

collection statute forms per the IRS’s reorganization; have IRS management review the taxpayer 

accounts identified as inaccurate or that may not have complied with the law, and take 

appropriate action to correct the collection statute expiration dates; and develop a comprehensive 

plan for implementing the provisions of IRS Reform Act and for taking actions to collect the 

remaining tax liabilities before the statutes expire.

The IRS has agreed with these recommendations and is taking further action.

Other significant audit results

In addition to the results summarized, the Treasury Inspector General for Tax 

Administration released the following significant audit reports: 

• The Exempt Organizations Function’s Examination Workplan Can Be Improved to 

Increase Its Effectiveness

• Significant Tax Revenue May Be Lost Due to Inaccurate Reporting of Taxpayer 

Identification Numbers for Independent Contractors 

• Tax Law Changes Are Needed to Improve Fairness in Paying Interest on Tax 

Refunds 

 

294 Id. at 11-12.

295 Id. at 12-13.
79

• The Internal Revenue Service Has an Opportunity to Relieve Considerable Taxpayer 

Burden Involving the Estimated Tax Penalty 

• Letter Report: Additional Controls Are Necessary to Ensure that All Businesses Are

Classified by Their Principal Business Activity 

• Management Advisory Report: The Internal Revenue Service Could Reduce the 

Number of Business Tax Returns Destroyed Because of Missing Information 

• Some Individual Taxpayers are Inappropriately Receiving Tax Credits Intended for 

Businesses that Provide Access for Disabled Americans 

• Millions of Dollars in Erroneous Education Credits Continue to Be Allowed 

• The Internal Revenue Service Successfully Processed Individual Tax Returns During 

the 2001 Filing Season

• Management Advisory Report: The Notice Review Program Should Be Improved to 

Prevent Erroneous Notices From Being Sent to Taxpayers 

• Spanish-Speaking Taxpayers Receive Expanded Access to Telephone Assistance 

• The Internal Revenue Service Is Making Progress, But Is Not Yet in Full Compliance 

With the Requirements of the Clinger-Cohen Act 

Audit reports with significant unimplemented corrective actions

The Treasury Inspector General for Tax Administration reports that there are about 120 

significant recommendations for corrective action, contained in 47 audit reports, that remain 

outstanding. Many of the recommendations pertain to the Treasury Inspector General for Tax 

Administration’s review of the electronic fraud detection system, improvement to IRS computer 

systems, better compliance with processing requests under the Freedom of Information Act, the 

decline in the level of toll-free telephone service and improvements to the treatment of taxpayers 

during office audits.296

Office of Investigation

The Office of Investigation administers investigative programs that protect the integrity 

of the IRS and detect and prevent fraud and other misconduct within IRS programs. This 

includes investigating allegations of criminal violations and administrative misconduct by IRS 

employees, as well as protecting the IRS against external attempts to corrupt or threaten its 

employees. The Office of Investigation completed 1,045 investigations related to threats, 

assaults, or harassment of IRS employees as they carry out their duties.297

The Complaint Management Division of the Office of Investigation operates a 

centralized clearinghouse for processing and tracking allegations of fraud, waste, abuse, and 

other forms of wrongdoing by IRS agents. During the reporting period, the Treasury Inspector 

 

296 Id. at 43-57.

297 Id. at 23.
80

General for Tax Administration received 3,902 complaints, of which 1,600 warranted further 

investigation.298

The Strategic Enforcement Division of the Office of Investigation is responsible for 

executing a proactive program to detect fraud in IRS operations, unauthorized accesses to IRS 

computer systems by internal users, and attempts to interfere with the security of IRS computers 

by external sources. The Strategic Enforcement Division identifies and initiates criminal 

investigations involving fraud and abuse of IRS computer systems and violations of the 

Taxpayer Browsing Protection Act of 1997. During the reporting period, the Strategic 

Enforcement Division analyzed 293 leads of potential unauthorized access to tax information by 

IRS employees, resulting in 139 referrals to field special agents.299 

D. Taxpayer Rights

In general

The IRS Reform Act created or modified numerous taxpayer rights and procedural 

protections. Most of its provisions were effective either on the date of enactment or within six 

months after enactment. Thus, the IRS was required to provide guidance to the public and 

training to its almost 100,000 employees in a very short time frame. The provisions of the IRS 

Reform Act continue to have a significant impact on the operation of the IRS. Discussed below 

is the progress of the IRS in implementing the collection due process, innocent spouse relief, and 

offer in compromise provisions of the IRS Reform Act.

Collection due process

Collection enforcement by the IRS generally takes three forms: (1) placing a lien on a 

taxpayer’s property; (2) placing a levy on the taxpayer’s wages or bank account; and (3) seizing 

the taxpayer’s business or personal assets. The IRS Reform Act added several due process 

provisions that increased taxpayer rights during the collection process, such as pre-lien and prelevy hearings and judicial review of such hearings. In particular, the IRS is required to provide 

the taxpayer with written notification of the right to an impartial hearing before an appeals 

officer after a notice of lien has been filed or before a notice of levy is sent.300 The taxpayer has 

30 days to request an appeal, and during this period, the levy or seizure may not take place. In 

addition, if the taxpayer requests an appeal, the levy or seizure may not take place until the 

appeals officer makes a finding. Finally, the taxpayer has 30 days to challenge an appeals 

finding in the U.S. Tax Court or U.S. District Court during which time the IRS may not levy or 

seize. On January 17, 2002, the Treasury Department released final regulations on the right to a 

collection due process hearing for liens and levies.

 

298 Id. at 4, 24.

299 Id. at 25.

300 Secs. 6320 and 6330.
81

The IRS Reform Act also instituted other procedural safeguards. For example, with 

respect to seizures of assets owned by an individual and used in the course of a business, 

approval by the district director is required and an analysis must be conducted to show that the 

taxpayer’s other assets are insufficient to satisfy the liability. Seizure of a principal residence 

requires court approval.301

The IRS has stated that the principal difficulty in carrying out the taxpayer due process 

provisions of the IRS Reform Act has been engineering an efficient system that does not 

disproportionately expend resources on cases in which taxpayers are abusing the process to delay 

collection.302 According to the IRS, a significant percentage of due process cases (four percent, 

or 800 out of a total of 20,000 cases in inventory) advance arguments that are frivolous or 

otherwise without merit.303 The IRS estimates that frivolous cases constitute 13 percent of all 

cases in the Appeals office that has the most collection due process cases. Frivolous cases 

consume a disproportionate amount of time as the claims often are voluminous; the taxpayers 

often request to record the hearings, which is time consuming; and a large percentage of 

frivolous cases are pursued to court, and sometimes are combined with actions under section 

1203 that are not sustained.304 Taxpayers with nonfrivolous claims also abuse the process 

through delay by being nonresponsive in Appeals, demanding copies of documents as 

prerequisites to meetings, and asking for more time to produce documents. Some taxpayers 

intentionally file in the wrong court, which creates a further delay.305

The IRS has requested a legislative change to permit the IRS to dismiss requests for 

collection due process hearings if the request is based on frivolous arguments or is intended to 

delay or impede tax administration. Frivolous requests would be subject to a penalty of $5,000 

for repeat behavior or failure to withdraw the request after being given an opportunity to 

 

301 The IRS has stated that the collective due process provisions have created additional 

staffing needs at Automated Collection System sites. Report of the Joint Committee on Taxation 

Relating to the Internal Revenue Service as Required by the IRS Reform and Restructuring Act of 

1998 (JCX-33-01), May 4, 2001, Appendix, Letter from the IRS at 88. Prior to the IRS Reform 

Act, the Automated Collection System sites automatically processed levy actions with minimal 

staff intervention. As a result of the new due process provisions, the IRS can only initiate a lien 

or levy action after individually reviewing the facts and circumstances of each case. In addition, 

Automated Collection System staff is required to prepare cases for referral to Appeals upon 

receipt of due process hearing requests. Automated Collection System staff that previously had 

been assigned to processing collection cases has been reassigned to handle the processing of 

collection due process requests. Id.

302 Id. at 90.

303 Appendix at 22.

304 Id.

305 Id. at 22-23.
82

withdraw.306 The IRS also has requested that the United States Tax Court be the exclusive venue 

for suits to obtain judicial review of an Appeals determination resulting from a collection due 

process hearing.307 The IRS reports that it will establish a list of known claims that the IRS will 

treat as frivolous and will publish the list on the IRS website.308

According to a September 2001 audit report by the Treasury Inspector General for Tax 

Administration, the IRS is fully compliant with the seizure of property provisions of the IRS 

Reform Act.309 The Treasury Inspector General for Tax Administration found no legal or 

procedural errors in cases reviewed for fiscal years 2000 and 2001. The Treasury Inspector 

General for Tax Administration also found the IRS to be fully compliant with the notice of levy 

provisions of the IRS Reform Act, an improvement from fiscal year 2000, reporting that 

upgrades to IRS computer systems enabled full compliance in fiscal year 2001.310 However, the 

Treasury Inspector General for Tax Administration notes that continued monitoring is necessary 

because enforcement actions, in decline since 1997, might soon increase in volume. Further, in a 

separate and more recent report, the Treasury Inspector General for Tax Administration found 

that the IRS does not always release levies as required by the Code in cases where a 

determination had been made that the tax was not collectible due to economic hardship311 and 

that IRS was closing some cases that should not be closed.312 

The Treasury Inspector General for Tax Administration found that the IRS was not fully 

compliant with the notices of lien procedures. In some cases, the IRS failed to notify the 

taxpayer that a lien had been filed, and the IRS still was not compliant with legal and internal 

guidelines in 17 percent of the cases reviewed.313 

The Treasury Inspector General for Tax Administration found that Appeals officers 

hearing appeals of determinations to file a lien or intent to levy generally complied with legal 

 

306 Department of the Treasury, General Explanations of the Administration’s Fiscal Year 

2003 Revenue Proposals (February 2002) at 60. 

307 Id. at 63.

308 Appendix at 23.

309 Treasury Inspector General for Tax Administration, Compliance With Certain 

Taxpayer Rights Provisions Contained in the Internal Revenue Service Restructuring and 

Reform Act of 1998 Could Be Improved (September 2001), Ref. No. 2001-10-147 at 3-4.

310 Id. at 4.

311 Treasury Inspector General for Tax Administration, The Internal Revenue Service’s 

Levy Process Can Be Improved to Ensure Compliance With the Internal Revenue Code (March 

2002), Ref. No. 2002-10-078 at 3-4.

312 Id. at 8-9.

313 Id. at 6.
83

requirements in 85 of 87 cases reviewed.314 In the two noncompliant cases, the officers either 

did not adequately balance the efficiency of the proposed action against taxpayer concerns that 

the action be no more intrusive than necessary or did not properly verify that all regulations had 

been met. Nevertheless, the Treasury Inspector General for Tax Administration concluded that 

taxpayer rights were not violated. In 82 of the 87 cases, Appeals adequately communicated the 

decision to taxpayers.315 Overall, the Treasury Inspector General for Tax Administration noted 

improvement from a year ago and made recommendations, including: ensuring that all 

determination letters address all provisions of the law considered in the decisions, ensuring all 

established guidelines are followed, providing additional training and guidance to officers on 

balancing taxpayer concerns about intrusive actions when the taxpayer claims a hardship, and 

finalizing the case processing guide and internal manual.316

Innocent spouse relief

Persons filing a joint return are jointly and severally liable for the joint return. Thus, one 

spouse may be subject to joint liability for the omissions from income or erroneous deductions of 

the other spouse.

The Code provides conditional relief to an innocent spouse.317 The IRS Reform Act 

generally made innocent spouse relief easier to obtain. It eliminated all of the understatement 

thresholds and requires that the understatement be attributable to an erroneous (rather than 

grossly erroneous) item of the other spouse. It also allows for apportionment of relief for the 

taxpayer spouse who simply did not know the extent of the understatement. A taxpayer who is 

no longer married to, is legally separated from, or has been living apart for at least 12 months 

from the person with whom the taxpayer originally filed the joint return can elect to limit liability 

to the portion of the deficiency properly allocable to that individual if he or she did not know, or 

had no reason to know, of an understatement on a joint return which he or she filed. The election 

for relief from liability for all joint filers and the separate liability election must be made no later 

than two years after the date the IRS has begun collection activities for the individual making the 

election. In addition, the IRS Reform Act gave the IRS the ability to grant equitable relief if (1) 

relief is otherwise unavailable and (2) taking into account all the facts and circumstances, it is 

inequitable to hold the individual liable for any unpaid tax or any deficiency.318

 

314 Treasury Inspector General for Tax Administration, Appeals Is Generally Complying 

With the Requirements of the Law for Lien and Levy Appeals Cases (March 2002), Ref. No. 

2002-10-068 at 2-3.

315 Id. at 4.

316 Id. at 4-6.

317 Sec. 6015.

318 Sec. 6015(f).
84

Since passage of the IRS Reform Act, the IRS has faced several difficulties in 

implementing the innocent spouse provisions. Initially, the IRS had no employees trained in 

applying the new provisions and no training materials available for the new provisions. In 

particular, the IRS had no familiarity with applying the equitable relief provision.319 Thus, the 

IRS had to train its staff in how to handle these cases. In addition, the IRS did not have a reliable 

management information system to track innocent spouse cases.320 The combination of these 

factors has resulted in a significant backlog of cases.

To effectively manage the rapidly increasing volume of pending claims for innocent 

spouse relief, the IRS has taken several steps, including: (1) centralizing management of the 

program under a senior manager; (2) developing specific flow charts and other training and job 

aids for the employees doing the screening; (3) revising procedures and training based on initial 

experience; and (4) instituting a 100-percent review of completed claims to ensure quality and 

consistency. The IRS also has developed additional computer support.321

In the four months preceding the passage of the IRS Reform Act, the IRS received 3,000 

claims for innocent spouse relief.322 In fiscal year 2000, the number of claims received by the 

IRS increased 22 percent, and the IRS processed a total of 42,546 innocent spouse claims.323 

On March 6, 2001, the IRS had 40,278 pending claims (affecting 21,198 taxpayers) with 

regard to which the IRS had not yet notified the taxpayer of a determination.324 On October 28, 

2001, the IRS had 26,279 pending claims (affecting 14,835 taxpayers).325 

By February 24, 2002, this number had decreased to 21,354 pending claims (affecting 

11,239 taxpayers).326 The IRS reports that the target for September 30, 2003 is 14,271 claims 

(affecting 7,511 taxpayers).327 

 

319 Statement of Charles O. Rossotti, Commissioner of Internal Revenue, before the 

Senate Committee on Finance (February 2, 2000) at 7.

320 Statement of David C. Williams, Inspector General, Treasury Inspector General for 

Tax Administration, before the Senate Committee on Finance (February 2, 2000) at 3.

321 Statement of Charles O. Rossotti, Commissioner of Internal Revenue, before the 

Senate Committee on Finance (February 2, 2000) at 7.

322 Id. at 6.

323 Report of the Joint Committee on Taxation Relating to the Internal Revenue Service as 

Required by the IRS Reform and Restructuring Act of 1998 (JCX-33-01), May 4, 2001, 

Appendix, Letter from the IRS at 102.

324 Id.

325 Appendix at 17.

326 Id.
85

The average processing time for claims (from initial receipt of a claim to delivery of a 

determination letter to the taxpayer) improved significantly between fiscal year 2000 and fiscal 

year 2001. For example, the average number of days to issue a determination in response to a 

meritorious claim was 219 days in fiscal year 2001 compared to 324 days in fiscal year 2000. 

The IRS determined an innocent spouse claim did not qualify in an average of 68 days in fiscal 

year 2001 compared to 137 days in fiscal year 2000; and the IRS determined that the basic 

requirements of a claim were not met in an average of 84 days in fiscal year 2001 and 132 days 

in fiscal year 2000. The fiscal year 2001 numbers also compare favorably with the IRS’s 

average for the full history of innocent spouse claims.328

The IRS proposes to reduce staffing for field examiners for innocent spouse claims for 

fiscal year 2003. The IRS reports that efficiencies achieved through the centralization of 

innocent spouse claims in Cincinnati and deployment of the Integrated Case Processing software 

warrant the reduction in staff.329

The National Taxpayer Advocate reports that a taxpayer’s learning the status of an 

innocent spouse claim is the 22nd of 23 of the most serious problems encountered by 

taxpayers.330 According to the National Taxpayer Advocate, the increase in cases since the IRS 

Reform Act and the changes brought by the Act meant that the IRS did not always meet case 

processing deadlines. In addition, taxpayers expect their claims to be handled promptly and do 

not understand that legal requirements may add 165 days to the process in the best of situations. 

The National Taxpayer Advocate reports that the IRS has taken a number of positive steps to 

address the issue including: encouraging pre-filing of claims, revising the applicable forms and 

publications, continued customer outreach, the centralization of claims processing, increased 

staff, additional training, and use of computer-based processing. The National Taxpayer 

Advocate concludes that the IRS’s efforts are commendable and that fewer innocent spouse 

cases were being reported to the Taxpayer Advocate Service.331

In a recent audit report, the Treasury Inspector General for Tax Administration concluded 

that the IRS is effectively educating taxpayers about the requirements that must be met to qualify 

for innocent spouse relief.332 The Treasury Inspector General cited the following outreach 

efforts: (1) detailing eligibility information in numerous IRS publications, forms, and notices; (2) 

 

327 Id.

328 Id. at 18. See also id. for a table that showing this and other results.

329 Id.

330 National Taxpayer Advocate FY 2001 Report at 67-69.

331 Id. at 69.

332 Treasury Inspector General for Tax Administration, Management Advisory Report: 

Numerous Efforts Are Taken to Educate Taxpayers on Innocent Spouse Eligibility Requirements

(March 2002) Ref. No: 2002-40-067 at 3.
86

providing a number of outlets from which taxpayers can easily obtain eligibility information; and 

(3) targeting specific segments of the taxpaying public that are more likely to be involved in an 

innocent spouse claim, including presentations at low income tax clinics.333

Offers in compromise

Prior to the IRS Reform Act, the IRS could settle a tax liability for less than the amount 

assessed through an offer in compromise, but the IRS would accept an offer in compromise only 

if there was sufficient doubt as to the existence or amount of the tax liability or if there was 

doubt as to the ability of the taxpayer to pay the tax due. The IRS Reform Act codified the offer 

in compromise program with the intent that the program should be expanded to cover cases in 

which considerations of equity, economic hardship, and public policy favor accepting an offer in 

furtherance of effective tax administration.334

In a recent report, the General Accounting Office found that between fiscal years 1997 

and 2001, the inventory of unresolved offers nearly tripled to approximately 95,000.335 Changes 

to the program, both as a result of the IRS Reform Act and due to IRS initiatives, increased the 

demand for offers, the number of steps involved, and the number of staff hours taken. Staff 

hours more than doubled, taking 18 percent of total staff time spent on all IRS debt collection 

programs.

With regard to the length of time to process an offer in compromise, the IRS is 

processing far fewer offers within six months today than the IRS did in fiscal year 1999 and is 

processing offers within six to 12 months at about the same rate. Offers that take more than a 

year to process have increased substantially. For example, the IRS reports that in fiscal years 

1999, 2000, and 2001, the total offers processed within six months of submission were 52 

percent, 39 percent, and 32 percent respectively. Through five months of fiscal year 2002, the 

IRS reports that 33 percent of offers are processed within six months. The percentage of offers 

processed between six and 12 months in fiscal years 1999, 2000, and 2001 are 40 percent, 45 

percent, and 43 percent, respectively, with a 40 percent rate through the first five months of 

fiscal year 2002. Offers taking more than a year to process were 8 percent of offers in fiscal 

year 1999, 17 percent in fiscal year 2000, 25 percent in fiscal year 2001, and 26 percent through 

the first five months of fiscal year 2002.336 Average processing time has increased from 311 

days in fiscal year 2001 to 324 days for the first five months of fiscal year 2002. The General 

Accounting Office attributes the increase in offer in compromise inventory and processing time 

 

333 Id.

334 Sec. 7122(c) and (d).

335 General Accounting Office, IRS Should Evaluate the Change to Its Offer in 

Compromise Program (March 2002) GAO-02-311 at 2.

336 Appendix at 14.
87

to the IRS’s inability to keep pace with the effects of changes to the offer in compromise 

program, despite increases in staff.337

Last year, the IRS attributed the delay in processing offers in compromise to several 

factors, including: mandated administrative review of IRS decisions to reject offers or return 

offers for failure to provide financial information; expansion of the offer in compromise program 

to cases that would promote effective tax administration; not automatically rejecting incomplete 

offers; and no longer accepting installment agreements that would not satisfy the entire tax 

liability (thus increasing the number of offers involving cases that might otherwise be resolved 

through installment agreements).338 The IRS stated that it could more efficiently evaluate and 

process offers in compromise through future automation and centralized processing of offers.339 

This year, the IRS has requested modification of the rules to permit the IRS to enter into 

installment agreements for amounts less than the full liability owed by taxpayers.340 The IRS 

believes such a change would increase the number of installment agreements and reduce the 

number of offers in compromise.341 The IRS also requests the authority to dismiss requests for 

offers in compromise that are based on frivolous arguments or that are intended to delay or 

impede tax administration.342 In addition, the IRS requests that an opinion of IRS Chief Counsel 

no longer be mandatory for compromises of $50,000 or more (including penalties and 

 

337 General Accounting Office, IRS Should Evaluate the Change to Its Offer in 

Compromise Program (March 2002) GAO-02-311 at 2.

338 Report of the Joint Committee on Taxation Relating to the Internal Revenue Service as 

Required by the IRS Reform and Restructuring Act of 1998 (JCX-33-01), May 4, 2001, 

Appendix, Letter from the IRS at 100. The determination that the IRS may not enter into an 

installment agreement with a taxpayer unless the full amount of tax due will be paid is based 

upon an IRS legal interpretation of the interplay between sec. 6159 (installment agreements) and 

sec. 7122 (offers in compromise). According to IRS Chief Counsel, a taxpayer may resolve a tax 

liability for less than the full amount of the tax due only through the sec. 7122 offer in 

compromise procedure. Id. at 95.

339 Id. at 99-101.

340 Department of the Treasury, General Explanations of the Administration’s Fiscal Year 

2003 Revenue Proposals (February 2002) at 61.

341 The General Accounting Office reports that the IRS should submit additional detail on 

the proposal, describing eligibility, procedures, staffing needs, information system needs, 

projected costs, or evaluation plans. Such additional information would better provide Congress 

and other stakeholders with information about the impact of the proposal and the IRS’s ability to 

manage the program. General Accounting Office, IRS Should Evaluate the Change to Its Offer 

in Compromise Program (March 2002) GAO-02-311 at 3.

342 Id. at 60.
88

interest).343 The IRS believes that such a change would permit better allocation of resources 

without undermining the quality of the review process. 

The IRS also explains this year’s increase in average processing time in part to the fact 

that experienced employees were moved from the field to help train at the centralized offer in 

compromise sites and that training took longer than expected, thus keeping such employees from 

the field for longer than anticipated periods and delaying the ability of newly trained employees 

to handle cases.344 The impact of the anthrax attacks on the mail system also adversely affected 

management of inventory. In addition, the IRS reports that the newly established centralized 

sites have been understaffed and attrition at the sites has been higher than expected. The IRS 

states that full staffing has been delayed because trainees moved to higher graded positions in 

other areas. The IRS says that in April 2002 an additional 82 Offer Examiners, and, by June 

2002, an additional 35 Process Examiners will have completed training and the sites then will be 

fully staffed.345

The IRS stated that it continues to address the backlog of offer in compromise cases in a 

number of ways, including:346 

• Centralization of the process at service centers in Memphis, TN and Brookhaven, 

NY, where less complicated cases will quickly be resolved; 

• Resolving simple cases by streamlining the level of investigation; 

• Transferring work between service centers to better balance workload; 

• Lowering the delegation authority for some types of offers; 

• Expanding the reasons why an offer may be returned without a full investigation to 

include that (1) estimated tax payments are not current and (2) the offer is not 

significantly different from a previously rejected or defaulted offer; 

• Redefining the reasons why an offer may be returned because it was submitted solely 

to delay collection;

• Issuing guidance from Chief Counsel to reduce the level of scrutiny required in the 

review for legal sufficiency;

• Approving the use of overtime for work on offers in compromise; 

• Legislative changes (discussed above); and

• Developing additional changes in the process to speed case resolution in both the 

centralized sites and in the field, for example by: (1) reducing levels of verification 

and associated taxpayer burden, where appropriate, and (2) maximizing the use of 

screening techniques to eliminate cases that can be resolved as full pays or through 

installment agreements. 

 

343 Id. at 64.

344 Appendix at 14-15.

345 Appendix at 16.

346

 Id. at 92.
89

According to the General Accounting Office, IRS projections of 40 percent more cases 

closed in fiscal year 2004 depend on a number of assumptions, such as the staff hours needed per 

case. The General Accounting Office notes that notwithstanding the lack of an empirical basis 

for such assumptions, the IRS has little choice but to rely on intangibles such as professional 

judgment. In general, the General Accounting Office characterized the likely effectiveness of 

the IRS’s current initiatives as uncertain. In light of such uncertainty, the General Accounting 

Office recommended that the Commissioner: (1) develop a final implementation plan that 

evaluate and prioritizes the various IRS offer initiatives before moving forward with 

implementation; (2) determine what offer in compromise performance and cost data should be 

collected; (3) establish goals for offer processing time that are based on taxpayer needs, costs, 

and other benefits; and (4) prepare documentation describing the IRS’s proposed partial payment 

installment agreement program.347

 

347 General Accounting Office, IRS Should Evaluate the Change to Its Offer in 

Compromise Program (March 2002) GAO-02-311 at 3-4.
90

APPENDIX

Questions for the Internal Revenue Service

Many of the requests below are requests for data. For purposes of answering these data 

request, a history of data for each year from Fiscal Year 1997 through Fiscal Year 2001 should 

be provided. If there is insufficient data or the data provided is incomparable, please explain.

I. Questions Relating to Customer Satisfaction

Pursuant to the IRS Restructuring and Reform Act of 1998 (the “Act”), of the IRS 

changed its mission to emphasize serving the public and meeting the needs of 

taxpayers. Please describe how customer service has improved, providing data on 

customer service before the Act with levels of service today in the following areas:

1. Telephone Service of Taxpayer Questions. Please provide data 

showing the number of answers to taxpayer calls today and the number answered prior 

to the Act. Please also show the number of taxpayer questions answered correctly. If 

available, please show the average waiting time for taxpayers to speak to the IRS 

employee who answers the taxpayer’s question. If available, please approximate the 

number of calls completed (i.e., the number of calls answered, correctly or incorrectly) 

with the number of calls attempted. Also, please include the average length of a call.

TOLL FREE QUALITY AND PRODUCTIVITY PROGRAM GOAL IMPROVEMENTS

FY 1997 FY 1998 FY 1999 FY 2000 FY2002 

Plan

MEASURE FY 2001

Quantity

Unique Numbers (1) Unavailable 45.3M 54.3M 54.5M 65.2M 55.0M

Total Number of Calls (2) 198.2M 140.6M 155.3M 120.3M 186.5M 127.6

Automated Calls Answered (3) 49.9M 76.0M 75.0M

Assistor Calls Answered (4) 32.3M 32.0M 33.75M

Total Calls Answered (5) 82.2M 108.0M 108.75M

Busies Signals (6) 3.5M 1.9M .8M

CSR Level of Service (7) 61% 59% 71.5%
2

Quality

Tax Law Quality (8) 73% 75% 78%

Accounts Quality (8) 60% 69% 72%

Chronology of Key Operational and Technological Changes

FY 1997

- Call sites were stand alone, decentralized and managed by local site executives who 

had multi-functional program responsibilities; customer service delivery was 

inconsistent across sites.

- Planning and reporting completed independently at each site.

- Performance measures tabulated manually each week by the individual sites and 

forwarded to the respective regional staffs for consolidation prior to national 

submission.

- Calls routed geographically to each site by area code.

- Hours of service varied by site.

- Automated services were unsophisticated and limited to pre-recorded tax information 

and refund status.

- Singular focus on delivering scheduled calls answered on a weekly basis.

- Introduced new desktop research tools for CSRs.

- Tax law quality measure based on standardized test calls by national quality 

reviewers with account quality determined by review of paper referrals at each site.

FY 1998

- First attempt to centralize planning and align workload to customer demand 

nationwide.

- Progressed from focusing performance on a weekly basis to a daily basis.

- Routed calls by percentage allocation to each site to provide uniform service 

nationwide; calls considered corporate workload.

- Prototyped intelligent call routing at nine sites and began nationwide standardization 

of sites’ telephone systems to improve service.

- Established uniform hours of service for customers across the country and expanded 

service to 16x6.

- Rolled out customer interactive automated applications such as change of address and 

establishment of installment agreements.

FY 1999

- Piloted a restructured customer service field organization in the Southeast Region 

with one executive in charge and singular focus on program delivery.

- Established in January the Customer Service Operations Center – later known as the 

Joint Operations Center – with enterprise responsibility for planning, scheduling, 

monitoring, reporting, and analyzing telephone performance; no longer reliance on 

site reporting – data could be verified as reliable and accurate. 
3

- Introduced intelligent call routing to improve service by sending each call to the first 

available assistor nationwide with the necessary skills to answer the customer’s 

question.

- Negotiated IRS/NTEU policy change and discontinued the automatic routing of 

another call to assistors immediately upon their completion of a call 

- Established 24x7 service

- Shift in focus from traditional measure of scheduled call delivery to a balanced 

measurement system to include customer satisfaction, employee satisfaction, and 

business results.

- Introduced toll-free service for customers seeking assistance from the National 

Taxpayer Advocate

- Restructured CSR Training to a modularized, just-in-time format; training targeted to 

CSRs’ specific responsibilities rather than generalized.

- Tax law and Account quality measurement system was changed to monitor live calls 

by a centralized unit and counted customer impact errors along with internal 

procedural mistakes.

FY 2000

- First complete year of reliable, comparable telephone statistical data.

- Established the Customer Service Field Operations organization with one executive in 

charge and singular focus on program delivery; eliminated the regional approach to 

customer service management.

- Introduced network prompting for callers with refund inquiries; calls were sent to 

automated services allowing the highly skilled CSRs to answer more complex 

questions.

- Introduced Spanish-language service on the toll-free lines.

FY 2001

- Stood up the modernized IRS structure; established Customer Account Services 

organizations with focus on specific customer markets.

- Began specialization of topics within call sites and skills among CSRs.

- Introduced voice recognition in the call menus and expanded network screening for 

all customers to improve delivery of calls to the appropriate automated service or 

CSR.

- Immediate Tax Relief enacted causing large volumes of calls between July and 

September; supplemented toll-free staff with assistors who answered form request 

inquiries during the filing season.

- Established in September special toll-free service for victims of disasters.

FY 2002

- Continued progress toward call site and assistor specialization.

- Changed hours of service to 15x5 with Saturday service during filing season; moved 

highly skilled CSRs from low demand, off-hours to high demand, core hours to 

improve service.

- Established site level balanced measures to shift accountability from enterprise 

responsibility to individual sites.
4

- Immediate Tax Relief/Rate Reduction Credit continued to cause large volumes of 

calls during filing season.

- Introduced specialty toll-free services for the practitioner community and requestors 

of Employer Identification Numbers; established technical backup service via 

telephone for walk-in office customers.

Footnotes

(1) Total number of specific phone numbers, regardless of the number of times the customer called over the 

course of a week; it includes 800-829-1040, 800-829-8815, and 800-808-4262. 

(2) Total number of calls represents the number of call attempts made by customers to the Internal Revenue 

Service toll-free telephone numbers of 800-829-1040, 800-829-8815, 800-808-4262

And 800-829-4477. 

(3) Automated calls answered includes any call attempts that were serviced by automation rather than speaking 

with an assistor. 

(4) Assistor calls answered represents the number of calls that terminated with a Customer Service 

Representative. These customers were not serviced by any of the available automated options, but rather were 

handled by live assistors. 

(5) Total calls answered represents the sum of the automated calls answered and assistor calls answered 

representing all service provided to the customer.

(6) Customers receiving a busy signal due to maximum utilization of resources or circuitry. 

(7) CSR Level of Service reflects the percentage of callers obtaining toll-free service from a live assistor.

(8) Quality figures represent, by year, the percentage of calls answered accurately based on a valid sample. Call 

applications are broken down into two categories - Tax Law and Accounts. 

2. Walk-In Service for Taxpayers. Please show the number of 

taxpayers receiving walk-in-service. If available, please provide the waiting 

time, accuracy of service, and duration of service.
5

Answer:

 TOTAL WALK-IN CONTACTS

Total Taxpayers Served Total Hours Spent * Taxpayers Served per Hour

FY 1999 10,263,158 2,347,616 4.37

FY 2000 9,926,252 2,659,836 3.73

FY 2001 9,683,544 2,304,702 4.20

FY 2002 4,809,353+ 1,122,131# 4.29

* These hours reflect time spent face-to-face with the taxpayer and other associated time. For 

example, some taxpayer contact requires further research without the presence of the taxpayer 

and this research time is captured here as well.

+ Current as of 3/16/02 

# Current as of 3/16/02

Prior to the standup of the new IRS organization and the standardization of services, 

each Region and/or District office tracked wait time. Prior to FY 2001 the goal was to 

service 95% of customers within 15 minutes for non-return preparation and 30 minutes 

for return preparation. Beginning with FY 2001, we continued to track wait time but 

removed it as a measure to eliminate the time pressure to rush taxpayers in and out of 

the office and thus compromise the quality of services delivered. Wait time data for 

January through September in FY 2001 (the only period tracked) and for October 

through December for FY 2002 are attached.

During FY 2002, we are establishing baselines for tax law, accounts, and return preparation 

accuracy. We have no specific tracking mechanism on the service duration/transaction time, but 

we do have volume of taxpayers, hours expended, and the rates overall, for each of the major 

workload categories. The rate is the average number of taxpayers served per hour, which can be 

converted to the average transaction time or “duration of service” (e.g. FY rate is 4.29 or about 

14 minutes per customer).

3. Customer account Data engine (“CADE”). The CADE program is

designed to enable IRS employees instantly to access a taxpayer’s return 

information on a computer to help address taxpayer questions about a return. 

Please discuss the IRS’s progress in implementing the CADE program. When 

will CADE permit employees to directly make adjustments to taxpayer’s 

returns? 
6

Answer: 

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

tape-based Master Files that currently contains the only authoritative information on all 

individual and business tax accounts. The IRS dependence on this 1960s Master File 

system today constitutes an insurmountable barrier to efficient service and compliance 

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

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

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

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

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

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

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

customer service and compliance. Once implemented, modernized applications, such as 

Customer Account Management (CAM), will allow on-line posting of data in addition to 

daily batch processing.

CADE will be deployed over time in five releases, each related to a specific taxpayer 

segment, phased in over a period of six years. At the conclusion of Release 5, CADE will 

have replaced IMF.

Due to a number of technical difficulties and schedule delays, Release 1pilot of CADE 

Production has been delayed until July 2002. We discovered in December 2001 a 

significant issue with Procurement of a Business Rules Engine (BRE). A key part of the 

overall CADE development strategy was predicated on the use of BRE software that 

would be used to generate some programming code. Unfortunately, the PRIME was 

unable to procure the BRE in time to be used in the development of Release 1 and we 

were forced to proceed using standard development language. We notified our Executive

Steering Committee and Oversight Board of the problem and our corrective actions. The 

delay will provide time for the development, testing and implementation of the Release 1 

pilot this summer. Currently, most of the software has been developed and testing has 

begun. Planning for production implementation in conjunction with the startup of the 

2003 filing season has also started. The release will include both 1040EZ electronic and 

paper single refund filers – about 10 million taxpayers. Therefore, based on this plan our 

most important business objective, which is to move the first block of taxpayers onto a 

new data base will be achieved.

4. Refunds. Please show the average length of time for a taxpayer to 

receive a refund from the date of filing a return for both electronic returns and paper 

returns.
7

Answer:

In Fiscal Year 2001, the IRS averaged 14.6 days to issue a refund generated from an electronic 

return and 28 days from the date we received the paper return. Up to this point in the 2002 

Filing Season, the IRS is exceeding this timeframe with a 12-day average for electronic returns 

and 26-days for a paper return. These timeframes will grow longer by the end of the filing 

season, in particular for paper returns as balance due filers and late filers mail their returns on 

April 15th. 

The chart below shows the average length of time for a taxpayer to receive a refund. However, 

due to programming problems, no information is available for 2000. In addition, data from 1997 

– 1999 was calculated on a calendar year basis using sample data.

Calendar Year Average Number of Days Originating from a 

Paper Return

Average Number of Days Originating for 

an Electronic Return

1997 37.7 16

1998 34.8 15

1999 35.09 14

5. Audits. Please show both the number of audits conducted each year (regardless of the 

taxable year to which they relate) and the average length of time of an audit for 

individuals, for large businesses, and for small businesses. Audit data should include 

separate results for both face-to-face audits and computer document matching audits 

under the Information Reporting Program (“IRP”). If the IRS conducts 

correspondence audits that are not part of IRP, please also identify such audits 

separately. For IRP (and other correspondence) audits, please show the number of 

contacts and the number of letters sent to taxpayers as a result. Please also project the 

number of IRP audits through 2007.
8

Answer:

Examination Closures

FY 1997 though FY 2001

 All Individuals FY 1997 FY 1998 FY 1999 FY 2000 FY 2001

Field 715,615 567,759 384,484 251,108 202,515

Service Center 803,628 625,021 715,789 366,657 529,241

Total Return Closures 1,519,243 1,192,780 1,100,273 617,765 731,756

Corporations < $10 Million FY 1997 FY 1998 FY 1999 FY 2000 FY 2001

Field 55,021 40,735 27,484 17,580 13,169

Service Center 1,302 1,083 784 1,043 1,163

Total Return Closures 56,323 41,818 28,268 18,623 14,332

Corporations $10 Million & Over FY 1997 FY 1998 FY 1999 FY 2000 FY 2001

Field 12,706 11,464 10,287 8,978 8,465

Service Center 266 366 250 234 253

Total Return Closures 12,972 11,830 10,537 9,212 8,718

Grand Total FY 1997 FY 1998 FY 1999 FY 2000 FY 2001

Field 915,420 728,545 505,847 342,660 280,111

Service Center 812,702 634,098 722,559 373,255 534,946

Total Return Closures 1,728,122 1,362,643 1,228,406 715,915 815,057

Hours per Return

Individuals

FY 1997 FY 1998 FY 1999 FY 2000 FY 2001

Revenue Agent 22 22 25 28 29

Tax Auditor 4.3 4.5 5.7 7.1 8.3

Service Center (Non-IRP) 0.8 0.9 1.1 1.8 1.7

Corps. < $10 M 43 45 51 58 64

Corps. $10 M & Over 140 138 154 174 194
9

Automated Underreporter (AUR) and Automated Substitute for Return (ASFR) 

Programs

(“Information Reporting Program”)

AUR FY 1997 FY 1998 FY 1999 FY 2000 FY 2001 FY 2002

Cases Closed 1,598,471 1,726,098 1,770,695 1,353,545 1,161,901 1,523,361

Letters Sent 3,500,804 3,208,770 3,350,891 2,735,345 2,576,375 3,076,898

Avg. Hours per Case 1.0 0.9 0.8 1.1 1.4 1.0

ASFR FY 1997 FY 1998 FY 1999 FY 2000 FY 2001 FY 2002

Cases Closed 392,598 426,495 584,142 332,427 333,770 200,000

Letters Sent 525,432 628,541 467,254 228,203 393,751 118,648

Avg. Hours per Case 2.0 2.0 2.0 2.0 2.0 2.0

Table Notes:

1) For AUR, letters sent include: notice of withholding adjustment, query, 30-day additional tax proposal, 

notification of no change, and 90-day statutory notice of deficiency.

2) For ASFR, letters sent include: 30-day and 90-day statutory notice of deficiency.

3) Figures for FY 2002 are projections.

6. Taxpayer complaints. Please show the number of telephonic and

written taxpayer complaints against the IRS.

Answer:

The IRS receives a wide variety of communications from taxpayers in which they request 

assistance or complain about tax matters. Most of these communications are resolved by frontline employees and managers, and do not appear in a reporting system on “complaints.” The IRS 

has several sources of information on complaints that are not resolved at the front-line. One is 

the Executive Correspondence Management System (ECMS), which is used to track 

correspondence sent to the President, the Secretary of the Treasury, the Commissioner of Internal 

Revenue and the Deputy Commissioner. The table below reflects total taxpayer complaints 

received by fiscal year, as well as some specific categories of complaints. Note that the Fiscal 

Year 1997 data includes several months of Fiscal Year 1996 data. The ECMS system was 

implemented late in Fiscal Year 1996, and the partial year data for that year is combined in that 

data file. The data on specific issues should not be added, since correspondents often raise more 

than one issue in their letters.
10

FY 96/97 FY 98 FY 99 FY 2000 FY 2001 FY 2002

All Taxpayer Complaints 981 2053 1976 2653 2124 840

Audit Issues 551 361 272 252 137 53

General Customer Service 

Issues

Data Not 

Reported

877 584 567 275 113

Form Simplification 12 28 28 91 48 8

Innocent Spouse 0 0 0 24 40 17

Installment Agreements 102 107 69 38 29 14

Levies 460 228 92 68 85 53

Liens 261 158 119 112 61 41

Offers in Compromise 173 139 180 125 144 80

Refund 426 343 459 428 414 117

Refund Offset 69 22 70 88 52 6

Tax Forms and Publications 119 54 43 43 38 26

Taxpayer Walk-In Service 39 14 5 3 3 3

Toll-Free Number` 68 40 7 30 26 6

The IRS has had other headquarters level reports regarding taxpayer complaints, which 

have evolved to respond to changes in the law and the IRS organization. For example, 

the Customer Feedback System was developed in July, 1996, to provide information 

about taxpayer allegations of inappropriate behavior by IRS employees and the 

disposition of those allegations. The Customer Feedback System was terminated in 

December, 2000, after it became apparent that it was no longer producing meaningful 

information. Almost 75% of the complaints recorded in the Customer Feedback System 

resulted in findings that the employee behavior was appropriate, or the information 

provided with the complaint was not sufficiently complete to permit meaningful followup. The most serious allegations of misconduct were by that time being captured in 

reports on §1203 allegations. 

The IRS now uses data on §1203 complaints to monitor allegations of serious employee 

misconduct. This data is reported to Congress as part of the Treasury Inspector 

General for Tax Administration’s Semiannual Report, and includes allegations from both 

taxpayers and IRS employees. During the most recent reporting period (October1, 

2001 to March 31, 2002), the IRS completed 154 inquiries into §1203 allegations, and 

had 57 in progress. These numbers exclude cases based on the employee tax 

compliance provisions of §1203. The completed inquiries resulted in 6 findings of 

§1203 misconduct, 22 findings of other misconduct, and 126 unsubstantiated 

allegations. 

7. If there are other areas of customer service that should be highlighted (whether or not 

they have shown improvement or worsened), please comment. If customer service 

could be improved with increased staff, increased equipment or software, or a 

legislative, regulatory or other change, please comment as appropriate.
11

Answer:

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

service hours last year to meet customer demand. Beginning October 7, 2001, IRS assistors are 

available 7 a.m. to 10 p.m. Monday through Friday local time. During the filing season (January 

2 through April 15, 2002), assistor services are available on Saturdays from 9 a.m. to 5 p.m. 

Assistor services are also available on President’s Day and Sunday April 7 and April 14, 2002. 

IRS automated assistance systems continue to be available 24 hours a day, 7 days a week. 

Primarily because of increased calls concerning refunds and the rate reduction credit, 

the total volume of incoming calls on our toll-free lines for the fiscal year through March 

30 has been up 13 percent over last year, totaling 51.1 million calls for the first half of 

the fiscal year.

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

March 30, 2002 approximately 66 percent of taxpayers who wanted to talk to a customer service 

representative got through, compared to 68 percent last year. In the last four weeks, service 

improved further, with 74 percent of taxpayers getting through to customer service 

representatives. We have set a goal for the whole year of 71 percent. 

In addition, 45.3 million taxpayers used our automated services to get information, 

including refund status, an increase of 8 percent since last year, and the upward trend 

continues. 

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

account and tax questions. Here too we have made substantial progress towards 

providing better service to taxpayers. The telephone correct response rates for tax law 

and tax account questions showed a marked improvement in FY 2002. They were up to 

83 percent and 89 percent respectively as compared to 75 percent and 88 percent over 

the same period last year.

We established a special telephone line for victims of the terrorist attacks and since then, we 

have provided over 90 percent level of service on this line. 

II. Taxpayer Protection

The Act made a number of significant changes to the rights of taxpayers. 

Please comment on whether any of the taxpayer rights provisions should be 

revisited or strengthened. Please identify any provisions that are proving difficult 

to administer. In addition, we specifically would like to measure progress in the 

following areas:

1. Innocent Spouse. Please show the number of innocent spouse cases, 

both new cases and total caseload. What is the current backlog of innocent spouse 

claims and the average processing time for such claims? Last year, the IRS reported 

that staffing for innocent spouse claims had increased to address the backlog. The IRS 

also reported that the implementation of an Integrated Case Processing computer 
12

application would increase productivity in innocent spouse cases. For Fiscal Year 2003, 

the IRS plans to cut funding for innocent spouse cases in order to increase funding for 

audits. Does the planned cut in funding accurately reflect improvements in addressing 

innocent spouse claims?

Answer: 

The following table is a summary of the receipts, determinations, and inventories through 

02/24/02.

Modules* Taxpayers*

Modules Total Waiting Waiting

Date Received Determinations Determinations Determinations

09/30/00 40,158 21,136

09/30/01 28,187 14,835

10/28/01 3,586 5,494 26,279 13,831

11/23/01 2,894 4,373 24,800 13,053

12/24/01 3,019 4,000 23,819 12,536

01/27/02 2,309 4,021 22,107 11,635

2/24/02 4,234 4,840 21,354 11,239

Ending Inventory

is the total number of modules divided by 1.9

A "determination" is made when the taxpayer is notified of IRS's decision

* There is an average of 1.9 modules per claim so the actual number of affected taxpayers

Our target for Modules Awaiting Determination at 9/30/03 is 14,271 (7,511 taxpayers).

The following table is a comparison of the lapse time between receipt of the claim and 

notification letter by determination type for the full history of receipts and for FY 2000 

and FY 2001 receipts.

AVERAGE LAPSE TIME TO NOTIFY TAXPAYER OF DETERMINATION

Full History FY 2000 Receipts FY 2001 Receipts
13

Type of Determination Days Days Days

W&I SBSE IRS avg. W&I SBSE IRS avg W&I SBSE IRS Avg.

Non Qualifying 

Determinations

77 402 150 90 335 137 60 183 68

Basic Req Not Met 

Determinations

96 341 130 114 312 132 80 228 84

Merit Determinations 268 377 330 314 334 324 216 233 219

The IRS also reported that the implementation of an Integrated Case Processing 

computer application would increase productivity in innocent spouse cases. For 

Fiscal Year 2003, the IRS plans to cut funding for innocent spouse cases in order 

to increase funding for audits. Does the planned cut in funding accurately reflect 

improvements in addressing innocent spouse claims?

Answer: 

The reduction in staffing for field examiners is the result of efficiencies achieved through 

centralizing processing of innocent spouse claims in Cincinnati and deployment of the Innocent 

Spouse Integrated Case Processing computer application. 

2. Offers in Compromise. Please show the percentage of offers in 

compromise completed within one year of submission and within six months 

of submission. Please also report on the number returned to taxpayers 

because they were incomplete or could not otherwise be processed. Last 

year, the IRS reported that the additional requirements to the offer in 

compromise process required by the Act increased the IRS’s processing time 

and case inventory but also noted that automation could alleviate costs and 

processing time. One year later, has processing time improved? What 

specific steps are being taken to address the backlog? What steps are being 

taken to automate the process? Has centralization of the process helped?
14

Answer: 

 Percentage of Offers in Compromise Closed by Time to Close and

Fiscal Year

FY 1999 FY 2000 FY 2001 FY 2002 

(5 Months Year to Date)

Within 6 Months 52 % 39 % 32 % 33 %

Over 6 Months, Within 12 

Months

40 % 45 % 43 % 40 %

Over 12 Months 8 % 17 % 25 % 26 %

Source: C108 Reports

Question:

a) Please also report on the number returned to taxpayers because they 

were incomplete or could not otherwise be processed.

Answer:

Offers in Compromise Returned to Taxpayers by Fiscal Year

FY 1999 FY 2000 FY 2001 FY 2002 

(5 Months Year to Date)

Not Processable 22,342 13,694 16,185 9,190

Returned 0 ∗ 13,555 27,751 15,594

∗ Note: Beginning in FY 2000, the definition of Not Processable changed to include only those offers 

that could not be processed because the taxpayer was in bankruptcy or was not in filing compliance. 

A new category called Return was created for the other situations where the offer could not otherwise 

be processed.

Question:

Last year, the IRS reported that the additional requirements to the offer in 

compromise process required by the Act increased the IRS’s processing 

time and case inventory but also noted that automation could alleviate 

costs and processing time. One year later, has processing time improved?

Answer:

Processing time has increased from an average of 311 days in FY 2001 to an average of 324 days 

for the first 5 months of FY 2002. This is due in part to the fact that we pulled many experienced 

Offer Specialists out of the field to assist with the training at the Centralized Offer in 

Compromise (COIC) sites. We also experienced a steeper than expected learning curve and a 
15

higher than expected turnover at both Brookhaven and Memphis which meant the Offer 

Specialists were kept longer doing training and on-the-job instruction (OJI). 

Question:

What specific steps are being taken to address the backlog?

Answer:

 To meet our processing time goals, and reduce the backlog, we:

• Centralized the receipt of new cases in two service center campuses, at 

Memphis, TN and Brookhaven, NY, where paraprofessional staff will resolve 

the less complicated cases before they become aged. 

• Developed a plan to quickly resolve simple cases by streamlining the level of 

investigation. This will allow the professional staff in the field to focus on the 

more complex work or be available for reassignment to general collection 

program work. 

• Are transferring work between geographic locations to balance workload 

with existing staff. 

• Lowered the delegation authority for some types of offer decisions. 

• Expanded the reasons why an offer may be returned without a full 

investigation to include:

• estimated tax payments are not current

• the offer is not significantly different from a previously rejected or 

defaulted offer 

• Redefined the reasons why an offer may be returned because it was 

submitted solely to delay collection. 

• Issued guidance from Chief Counsel to reduce the level of scrutiny in the 

review for legal sufficiency. 

• Approved the use of overtime to work OICs. 

• Submitted legislation to address frivolous OIC filers and remove the barriers 

to granting installment agreements for less than full payment. Both of these 

legislative proposals can assist in reducing inappropriate OIC receipts. 

• Are developing additional process changes to speed case resolution in both 

the Centralized OIC sites and in the field. Examples include: 1) reducing 

levels of verification and associated taxpayer burden, where appropriate; 

and, 

2) maximizing the use of screening techniques to eliminate OIC cases that 

can be resolved as full pays or through Installment Agreements. 
16

Question:

What steps are being taken to automate the process? 

Answer:

We are taking a multi-tiered, multi-year approach to automation. Over the next year and a half, 

we anticipate making approximately twenty programming changes to the current system that 

have the potential to increase productivity and provide enhanced customer service. Many are 

directed at automating labor intensive procedures and should result in improved accuracy and 

reduced processing time. Our focus is on prioritizing the programming changes so that we move 

forward first with those enhancements that provide the highest potential of improvement. 

Connectivity with other IRS computer systems and an automated tool for calculating 

“Reasonable Collection Potential” are key areas to improvement. 

Question:

Has centralization of the process helped?

Answer:

The first several months of FY 2002 were an implementation period for our centralized sites. 

The anthrax terrorist attack on our U. S. Postal system just weeks after start-up adversely 

affected mail handling and added additional stress to our already difficult inventory management 

situation. In addition, higher than expected attrition losses in the centralized sites extended the 

period of resource instability. 

Neither COIC site is fully staffed. We have 154 Offer Examiners and 365 Process 

Examiners working inventory at the centralized sites. By April 2002, 82 additional Offer 

Examiners and by June 2002, 35 more Process Examiners will complete training which 

will fully staff the sites. We experienced a delay getting to full staffing because of a 

significant loss of trainees to higher graded positions in other service center program 

areas. 

In addition, new employees are experiencing a steep learning curve. To date, the 

process examiners have mastered the initial case building actions, but the offer 

examiners are just starting to gain experience at accepting or rejecting offers. This has 

impacted the timely and efficient flow of casework through the centers. 

We expect continued improvement in initial case processing timeframes, as we require taxpayers 

to submit offers on the most recent version of Form 656. Effective May 1, 2002, we will return 

offers submitted on obsolete versions of the form will be returned immediately to the taxpayer as 

not processable. When taxpayers provide all the documents necessary to verify their financial 

condition, less time is required to resolve the case. 

3. Collection Due Process. Last year the IRS reported that the due 
17

process provisions of the Act had slowed and lengthened the overall compliance cycle 

and that the process was open to abuse by taxpayers seeking to delay collection 

activities by filing frivolous claims. The year, the Administration’s Fiscal Year 2003 

budget proposals request that the IRS be permitted to dismiss requests for collection 

due process hearings if the request is based on frivolous arguments or is intended to 

delay or impede tax administration. Please update your assessment of how the 

collection due process provisions have affected the compliance cycle and discuss the 

likely effect of the Administration’s proposal. Please describe how “frivolous” claims 

will be defined and distinguished from legitimate claims. Also provide the percentage 

of determinations by an Appeals’ officer in collection due process hearings that have 

been overturned.

1. Please update your assessment of how the collection due process

 provisions have affected the compliance cycle and discuss the likely

 effect of the Administration’s proposal.

Answer:

The collection due process (CDP) provisions require us to give taxpayers an opportunity to 

request a hearing with Appeals after the filing of a Notice of Federal Tax Lien and prior to 

proposed levy action. Some taxpayers use the hearing process to delay collection action by filing 

hearing requests that raise frivolous issues.

Appeals has approximately 20,000 CDP cases in inventory. About 4% or 800 cases involve 

frivolous issue taxpayers. The Area Appeals Office with the most cases has about 13% of nonfiler/frivolous taxpayers. Sub-offices within that area have even more substantial percentages of 

taxpayers with frivolous claims.

However, the actual number alone does not account for the amount of time it takes for such 

cases. Frivolous claims occupy a disproportionate share of time over claims from taxpayers 

having substantive issues. Frivolous issue taxpayers frequently file voluminous claims. Most of 

these taxpayers request being able to record hearings via audio or stenographic recordings. This 

is often time-consuming to arrange. A larger percentage of the frivolous issue taxpayers go to 

court where they raise the same frivolous issues. Also some of the representatives of these 

claims file Sec. 1203 actions against IRS employees, which are very time-consuming, even when 

they are not sustained.

In addition to frivolous claims, taxpayers attempting to delay collection action have been taking 

an inordinate amount of time. They often tend to be non-responsive in Appeals. If they do 

respond, before agreeing to meet with the Appeals officer, they insist on being provided certain 

documents, such as a copy of the Appeals officer’s delegation of authority or a copy of the notice 

and demand for payment, or they routinely ask for more time in producing necessary records or 

data. These are often the same taxpayers who will go to court and in many instances these 

taxpayers file in the incorrect court - even when Appeals has correctly advised them where to 

file. By statute, these taxpayers have another 30 days to file in the correct court after having 

been dismissed from the incorrect court; so it seems they are exploiting every delay the system 

allows them. 
18

Time spent on these frivolous claims is time spent away from taxpayers who raise legitimate 

issues. We also suspend collection action on these accounts while the case is pending in Appeals. 

A legislative change, which would allow us to dismiss frivolous claims, would allow us to 

proceed with collection on these cases and enable Appeals to focus full efforts on taxpayers with 

legitimate claims.

2. Please describe how “frivolous” claims will be defined and 

 distinguished from legitimate claims.

Answer: 

We will ask taxpayers making a hearing request to state the grounds for appealing the filing of 

the notice of lien or proposed levy action. The IRS will examine claims with frivolous positions 

carefully to determine if real tax issues are present.

Frivolous claims are generally easy to spot. Many are similar to issues being thrown out of courts 

repeatedly, such as: taxes are voluntary so they chose to not pay; they are a citizen of the State of 

Virginia, not the United States, so they don't pay US taxes; the 16th amendment was never 

validly ratified; only federal employees owe taxes; etc. Others use popular terminology which is 

common among frivolous claims.

The IRS will establish a list of the known claims and terminology which we will treat as 

frivolous. We will update this list periodically. We maintain a list of frivolous arguments on our 

Internet site. Under the heading, "The Truth About Frivolous Tax Arguments," is a 32-page 

document explaining why various shop-worn arguments are frivolous. The link is: 

http://www.ustreas.gov/irs/ci/tax_fraud/frivolous.pdf.

1. Also provide the percentage of determinations by an Appeals’ officer

 in collection due process hearings that have been overturned.

 

Answer:

Appeals officer determinations were overturned or conceded in less than 1%, or 5

cases, of approximately 750 court cases. 

III. Employee Performance and Satisfaction

(a) Section 1203 of the Act provided that IRS employees could be 

terminated for certain proven violations.

1. How many employees have been terminated for each violation

 numerated in section 1203? Have the procedures been effective in 

 addressing employee misconduct?
19

Answer:

No specific measure exists for the “effectiveness” of §1203. If effectiveness is measured in 

terms of modification of employee behavior, the data suggests significant behavior modification 

has occurred. Little of that modification has been productive. Since the enactment of §1203, 

employees have frequently reported that the fear of a §1203 allegation has caused reluctance to 

take otherwise proper enforcement actions. Managers and employees also report routine 

workplace disputes and rude or unprofessional interactions with taxpayers as potential §1203 

violations to avoid a claim that they have covered up potentially serious misconduct. Taxpayers 

and practitioners have cited §1203 in correspondence about tax account issues, in an apparent 

attempt to delay IRS action on the case. Meanwhile, the incidence of serious employee 

misconduct remains at the very low levels reported prior to the enactment of §1203.

The overall objective of §1203 was to ensure that employees who commit serious 

misconduct are removed from Federal employment. The discretion of IRS managers 

was limited, as was the employee’s ability to have a third party review the penalty 

determination. The §1203 penalties have been applied most frequently in cases 

involving employee tax compliance—fewer than 10% of the substantiated allegations 

involve the other eight §1203 provisions. However, the cases submitted to the 

Commissioner’s §1203 Review Board include many where the penalty of removal is 

obviously too harsh. Sixty-eight percent of the tax compliance cases result in mitigation 

of penalty, and the cases warranting mitigation of penalty are readily identifiable. Half of 

the cases involve refund returns, and 73 percent of the employees are at grade 7 or 

below. The effectiveness of the law is compromised by overly broad language in the 

law that encompasses these cases.

2. The Administration’s Fiscal Year 2003 budget proposal requests that the 

late filing of refund returns and employee-against-employee actions be

removed, and that the unauthorized inspection of return information be added 

to the list of violations. Are there other violations that should be removed or 

added? Please address the effect of the provisions that would terminate an 

IRS employee for harassment of a taxpayer.

Answer: 

Removing refund return cases and those involving employee-against-employee allegations, 

combined with the proposed authority of the Commissioner to set a penalty range for offenses, 

would enable the IRS to address the most significant problems with the current provisions of 

§1203. For example, the Commissioner could establish a range of penalties for late filed Federal 

tax returns that would take into account the grade, job duties, and common personal 

circumstances in these cases. 

The Commissioner recommended that unauthorized inspection of taxpayer records be 

added to §1203 because of our experience in dealing with these cases. The IRS has 

attempted to implement a policy to the effect that removal is the appropriate penalty in 

these cases, absent mitigating factors. The qualifier “absent mitigating factors” is 
20

required by the case law on employee discipline, and has been interpreted 

inconsistently both within the IRS and by third parties reviewing employee appeals. The 

addition of this offense would permit greater consistency within the IRS, and would 

resolve the problem of third parties substituting their judgment for that of the IRS on the 

question of the seriousness of this offense. Traditional discipline processes appear to 

be adequate to address other categories of misconduct.

If an employee violates the Internal Revenue Code, Treasury Regulations, or IRS policy, 

including the Internal Revenue Manual, with the intent to harass a taxpayer, the employee is 

subject to removal under §1203. One removal has occurred under §1203 for harassing a 

taxpayer. The IRS found §1203 retaliation or harassment allegations substantiated in four other 

cases, but the employee resigned or retired before the personnel process was completed. Two of 

those cases involved taxpayer victims, and in the other two cases the misconduct was directed at 

other IRS employees. In an additional 113 cases, in which a §1203 retaliation or harassment 

allegation was not substantiated, the IRS found the employee had committed other misconduct. 

The IRS removed two employees based on non-§1203 misconduct, and suspended ten. 

Reprimands and counseling were imposed in most of the remaining cases for offenses such as 

rude and unprofessional behavior, the employees received reprimands and counseling.

3. Should mitigating factors be required to be considered in addition to 

relying on the discretion of the Commissioner? Should there be provision for an appeal 

of the ruling of the Commissioner and if not, why not?

Answer: 

The legislative proposal includes a revision to §1203 that would permit consideration of

mitigating factors in §1203 cases. This would allow the IRS to address some of the common fact 

patterns that routinely result in mitigation of penalty by the Commissioner, without requiring his 

personal review. Enactment of this part of the proposal would reduce the anxiety of employees 

who would otherwise face months of uncertainty as their case moves through the various stages 

of the personnel process.

Employees have the right to appeal the finding that a §1203 violation occurred, and 

many have done so. Findings have been reversed when a third party concluded that 

the IRS erred in finding that the misconduct was willful. We are waiting for the results of 

a review of a third party decision that the IRS used an incorrect definition of “threat” in a 

case where we found the employee threatened an audit for the purpose of extracting a 

personal gain (§1203(b)(10)). The employee does not have the right to appeal the 

Commissioner’s decision on the penalty. Creating such an appeal right would 

undermine the basic premise of §1203.

The basic premise of §1203 is that certain offenses are so serious that termination of employment 

is the appropriate sanction. Section 1203 eliminated the discretion of IRS managers to select an 

alternate penalty and the authority of third parties to substitute their judgment for that of the IRS 

on the appropriateness of the penalty imposed. Vesting the authority to reduce the penalty in the 

Commissioner ensures consistency within the IRS. The Commissioner is also far removed from 

any possible bias for or against a particular employee, and in that sense is as independent and 
21

objective in his evaluation of the case as any third party would be. If Congress concludes that 

the Commissioner is not sufficiently independent and objective, and therefore an appeal to a 

third party should be available to the employee, the difference between the §1203 process and 

the regular discipline process would be substantially eliminated. The additional case processing 

time, and the resources committed to the Commissioner’s review process, would not be justified 

by the marginal difference that would remain. A repeal of §1203 would be more efficient than 

the addition of an appeal right.

4 Are there procedures other than those in section 1203 (for example, in

guidelines of the Office of Personnel Management) that affect termination of IRS 

employees?

Answer:

Title 5 of the United States Code, and OPM, Treasury and IRS implementing regulations, 

establish procedures for termination of employment “for such cause as will promote the 

efficiency of the Federal service.” Other laws define specific conduct that warrants termination 

of employment, but the process for actually imposing the penalty is the one prescribed by OPM. 

The manager gives the employee written notice of the charges against him or her in a “proposal 

letter,” which also advises the employee of his or her opportunity to respond to the proposal. 

After considering the evidence, including any response from the employee, the IRS notifies the 

employee of the findings and penalty in a “decision letter.” The employee may appeal through 

channels established in a negotiated agreement, or through the Merit Systems Protection Board. 

Employees may also challenge the decision through the EEO process. As a general rule, 

managers have discretion about the level of penalty to include in the proposal letter, and in the 

penalty imposed by the deciding official. A law like §1203 limits that discretion in penalty 

setting, but follows all other aspects of the OPM prescribed process.

5. Please discuss whether section 1203 has had an impact on the number 

of seizures, levies, fact-to-face audits, and job performance.

Answer:

We cannot isolate the impact of §1203 from other factors that contributed to the decline in 

seizures, levies, face-to-face audits and job performance. Numerous other provisions of the 

Restructuring and Reform Act changed procedures and taxpayer rights. These changes had 

temporary effects as employees learned and adapted to the new procedures and rights, as well as 

continuing effects by making previously accepted enforcement activities more difficult to 

complete. We have only recently addressed the decline in the number of front-line enforcement 

personnel and how the accusations and scrutiny of the IRS in 1997 and 1998 seriously affected 

employee morale. 

Recognizing we must consider a number of factors, front line employees and managers 

frequently cited, the fear and anxiety associated with §1203 as a major factor in their approach to 

enforcement activity. They believe the law reflects an assumption that the IRS did not take 

certain egregious misconduct seriously, and that it needed a Draconian approach in order to 

prevent this conduct from occurring. Notwithstanding the very low incidence of the prohibited 
22

behaviors, both before and after enactment of §1203, employees felt that the lack of confidence 

expressed through the enactment of §1203 could result in a lack of support for them in the event 

of an unfounded allegation. 

Focus groups and surveys consistently report a view that the enactment of 1203 put employees 

taking appropriate enforcement actions at risk. That view will persist as long as the law remains 

in effect. The IRS will continue to monitor employee attitudes through surveys and focus 

groups, so we can identify other ways to further address employee concerns about §1203.

(b) The Act required the IRS to establish a new performance management system.

1. Does the IRS now have a system that better evaluates and awards

employees based on performance that is consistent with the IRS’ mission? If, 

so how does such system work?

Yes, the Internal Revenue Service (IRS) has implemented a new Performance Management 

System in compliance with the Internal Revenue Service Restructuring and Reform Act of 1998 

(RRA '98), codified as 5 USC Chapter 95, and the Service's adoption of balanced measures of 

performance. This system:

• Strengthens the linkage between an individual employee's performance, and the Service's 

mission, business goals and strategic plans 

• Includes an employee retention standard for the fair and equitable treatment of taxpayers for 

all employees (as required by statute), and,

• Assures that employee performance awards are directly linked to employee performance 

results.

Additionally, RRA ‘98 allows the Secretary of Treasury to provide the IRS the authority to 

establish one or more payband systems covering all or any portion of the IRS workforce that is 

under the General Schedule. Subject to OPM guidelines and limited by the General Schedule 

salary ranges, IRS has the flexibility to develop paybands to meet the needs of our organization. 

We used this authority to develop a Senior Manager Payband and a Department Manager 

Payband. These paybands are performance-based systems whereby movement through the band 

is contingent upon increasingly higher levels of performance

(c) The Act provides the IRS with certain personnel flexibilities to bring in experts 

and revitalize the IRS workforce. These personnel flexibilities include 

streamlined critical pay authority for up to 40 individuals, the ability to set the 

pay for certain positions at levels higher than under prior law, and the ability to 

offer recruitment, retention, and relocation incentives.

1. How many critical pay hires could have been accommodated under the 

Senior Executive Service (“SES”) pay scale? What level of pay would those hired under 

the critical pay provisions been eligible for without critical pay and how does such 

amount compare to the critical pay amount paid?
23

Answer:

Since the implementation of the Streamlined Critical Pay authority, the IRS has hired five 

executives with a base salary that the SES pay scale could have accommodated. However, 

recruitment efforts under these traditional methods (i.e., SES) were unsuccessful in providing 

candidates with the required level of technical and leadership expertise. Through the critical pay 

authority and the use of a search firm, we were able to identify and hire executives with the 

appropriate background and expertise to fill these high-level critical positions. In all five cases, 

the critical pay executive’s base salary was actually less than the maximum allowable under the 

SES pay scale. We should also note that Streamlined Critical Pay is not just about pay. Equally 

important is the streamlined aspect of the program. We are able to identify candidates for the 

positions and quickly bring them into the agency.

Title Initial CP Salary Maximum SES at 

Time of Hire

Director, Communications $125,000 $133,700

Deputy Chief, C&L $133,000 $133,700

Director, Security Modernization $130,000 $138,200

National Director, Account 

Management Division

$105,000 $125,900

Director, Product & Partnership 

Development

$125,000 $133,700

2. How much has the IRS spent on moving expenses for critical pay 

 personnel?

Answer:

As of March 31, 2002, the IRS has spent $1,822,759 for moving expenses for critical pay 

personnel. The benefits under this program are the same as for career individuals, with the 

exception that RRA 98 provides the additional authority to allow coverage of their first move 

prior to government service.

3. How much has the IRS spent on search firms to recruit critical pay

personnel and how much of this amount is attributable to personnel actually hired?

As of March 31, 2002, IRS has spent $3,639,985 on executive searches.

4. Please show the prior salary and critical pay salary for each critical pay employee 

hired.
24

CURRENT CP EXECUTIVES (AS OF April 2002)

SALARY

CURRENT COMPENSATION NAME PRIOR

to

IRS BASE POTENTIAL 

BONUS

TOTAL 

COMP

Adams, Robert $167,269 $175,000 $11,300 $186,300

Allen, Maureen $80,000 $125,000 $25,000 $150,000

Ayres, James $203,179 $170,000 $22,600 $192,600

Berg, Doug $240,975 $181,400 $4,900 $186,300

Boswell, William $500,000 $192,600* $0 $192,600

Bratton, Delena $92,016 $133,000 $20,000 $153,000

Chesman, Michael $615,300 $186,300 $0 $186,300

Claytor, Paul $197,000 $181,400 $4,900 $186,300

Dobbins, Tom $149,537 $142,500* $42,600 $185,100

Duder, John $176,000 $176,000 $16,600 $192,600

Dunahoo, Carol $334,000 $192,600* $0 $192,600

Eads, James $355,717 $192,600* $0 $192,600

Forman, Fred $622,700 $192,600* $0 $192,600

Gaur, Prashant $255,000 $160,000 $30,000 $190,000

Horsey, Daniel $196,685 $165,000 $15,000 $180,000

Jakabcin, George $109,201 $130,000 $10,000 $140,000

Jernigan, Cliff $206,847 $181,400 $0 $181,400

Kehoe, Joseph $1,000,000 $192,600* $0 $192,600

Langdon, Larry $650,000 $192,600* $0 $192,600

Leighty, Colleen $154,614 $140,000 $21,000 $161,000

Liuzzi, John $195,000 $175,000 $17,600 $192,600

Matthews, Mark $185,000 $192,000* $0 $192,600

Meier, Kurt $207,000 $181,400 $4,900 $186,300

Olson, Nina $95,000 $135,000* $0 $135,000

Porter, William $107,346 $150,000 $30,000 $180,000

Pursley, Mark $135,000 $125,500* $40,000 $165,500

Ratcliffe, Wilbur $342,341 $186,300 $0 $186,300

Reece, John $219,811 $192,600* $0 $192,600
25

CURRENT CP EXECUTIVES (AS OF April 2002)

SALARY

CURRENT COMPENSATION NAME PRIOR 

To

IRS BASE POTENTIAL 

BONUS

TOTAL 

COMP

Rinaldi, Jim $308,118 $186,300 $0 $186,300

Rosenker, Heather $150,000 $135,000 $30,000 $165,000

Shultz, Paul $186,000 $165,000 $16,400 $181,400

Stricklin, H. James $125,000 $150,000 $15,000 $165,000

Terry, Thomas $199,958 $186,300 $0 $186,300

Toder, Eric $147,000 $150,000 $15,000 $165,000

Tootson, Jack $205,016 $180,000 $12,600 $192,600

Warren, Margaret $93,333 $125,000 $25,000 $150,000

SEPARATED CP EXECUTIVES (AS OF April 2002)

SALARY

IRS COMPENSATION (at time of 

NAME PRIOR departure)

to

IRS BASE POTENTIAL 

BONUS

TOTAL 

COMP

Conklin, Bert $204,750 $181,400 $0 $181,400

Conti, Vincent $160,000 $135,000 $0 $135,000

Cosgrave, Paul $463,000 $181,400* $0 $181,400

Cunninghame, Donna $118,400 $147,500 $0 $147,500

LaFaver, John $90,000 $155,100* $0 $155,100

Liberti, Thomas $228,700 $181,400 $0 $181,400

Mazei, Albert $220,000 $160,000 $0 $160,000

Myers, Shelly $115,529 $130,000 $0 $130,000

Oveson, Wilford $85,107 $144,800* $0 $144,800

Yuckenberg, Timothy $243,413 $175,000 $11,300 $186,300

*Current base salary includes annual salary increases since EOD.

5. How many of those hired work in automation, administration, and general business 

respectively?

Technology 14

Administration 6

General Business 17
26

6. How many hired pursuant to the special pay provisions have since left the IRS? What 

is the average tenure?

Answer:

As of April 5, 2002, nine executives have left the IRS. 

The average tenure of the executives who have departed is 17 months. Three of the executives 

were with the IRS for over two years with the longest being 29 months.

7. Please describe specific accomplishments made possible by the special pay provision.

Answer:

The streamlined Critical Pay executives brought exceptional talent and an extensive range of 

skills to the IRS. These talents are evidenced by the significant contributions they made that 

enable us to successfully meet the challenges of the congressionally mandated presented by the 

complete restructuring . For example:

• Modernization

• Transformation of the IRS into four new customer-based divisions with detailed 

organizational designs for the 11 organizational units and the national headquarters 

organization.

• Transformation of the National Taxpayer Advocate’s office to a nationwide network to 

provide dedicated assistance to taxpayers in tax disputes with the IRS, and to champion 

taxpayer’s rights and provide recommendations for improving tax legislation.

• Creation of the Tax Administration Visioning project -- a key element in defining the future 

Business Systems Modernization Program.

• Creation of a consolidated nationwide IS organization, where we directed nearly 100 percent 

of the IT resources, in accordance with industry standards.

• Completion of a nearly flawless Y2K conversion resulting in many areas of standardization 

and consolidation of our information systems operations.

• Establishment of the Business Systems Modernization program to replace IRS’ outdated 

technology with modern systems, and the completion of the IRS Enterprise Architecture to 

clearly define improvements to our business operations and the modernization of the IRS 

using modern technology.

• Implementation of “CRM Exam”, a tax computation software package for LMSB revenue 

agents and international examiners.
27

• Customer Relations

• Creation of new expanded annual report from the National Taxpayer Advocate to Congress 

providing the 20 most serious problems encountered by taxpayers, legislative 

recommendations for improvements, and assessments of IRS efforts to improve customer 

service and reduce taxpayer burden.

• Development and implementation of modernized business systems for improved customer 

communications, such as, 1) voice-activated programs that more accurately route taxpayer 

calls to the most appropriate IRS resource, 2) a new desktop interface applying industry best 

practices for agent desktop design and functionality, and 3) the SB/SE Community website.

• Development of effective pre-filing educational initiatives and publication of guidance to 

clarify the tax law and reduce unnecessary controversy.

• Development and implementation of the IRS’s new approach to proactively partnering with 

external stakeholders to achieve mutual objectives (i.e., trade associations, practitioner and 

payroll organizations, educational and financial institutions, liaison groups, and 

Congressional staff offices.)

• Compliance

• Implementation of a successful initiative to combat abusive corporate tax shelters.

• Initiation of the largest criminal investigation in history, a combined domestic and 

international case against a ring of promoters of abusive trusts.

• Implementation of electronic crimes unit within CI and a compliance Council.

8. Would more be accomplished if IRS employees were eligible for the special pay 

provision?

Answer:

Yes. The IRS looses employees with special skills to the private sector regularly. Retaining these 

skills ,especially at the executive level is a continuing challenge the IRS faces. 

(d) Please show the number and kind of Equal Employment Opportunity 

Commission complaints and grievances. What percentage of complaints were

settled? What was the average amount of settlement?
28

Answer:

Number of Formal Complaints

Fiscal Year Filed1 Closed 2Settled 2 % Settled 3

97 763 519 145 27.94%

98 806 532 167 31.39%

99 842 529 148 27.98%

00 766 727 157 21.60%

01 744 714 143 20.03%

1 The number of complaints filed for Fiscal Years 97 through 00 is taken from the Department of the 

Treasury, Office of Equal Opportunity Program's report of Key EEO Complaint Statistics. The 

number of cases filed in Fiscal Year 2001 was taken from the Department of the Treasury Complaint 

Tracking System.

2 Source: Complaints Tracking System.

3 The % Settled computed by dividing the number of complaints settled by the number closed.

Bases of Formal Complaints 4

Fiscal Year Race & National 

Origin

Age Gender Reprisal Religion Disability

97 24.00% 13.00% 19.00% 27.00% 2.00% 15.00%

98 25.00% 14.00% 22.00% 22.00% 2.00% 15.00%

99 25.00% 13.00% 20.00% 25.00% 3.00% 14.00%

00 25.00% 15.00% 19.00% 24.00% 3.00% 14.00%

01 26.00% 14.00% 20.00% 22.00% 2.00% 16.00%

4 The data for Fiscal Years 97 through 00 are taken from the Department of the Treasury Office of 

Equal Opportunity Program's report of Key EEO Complaint Statistics. The data for Fiscal Year 01 are 

from the Department of the Treasury Complaints Tracking System.

Fiscal Year 2001 Settlements

As shown above, the IRS settled143 formal complaints during Fiscal Year 2001. Based on a 

review of the Complaints Tracking System, the primary remedies provided in these settlements 

were:
29

Monetary Remedies

Type of Remedy Number Total Amount Average Amount

Compensatory Damages 30 $270,714.00 $9,023.80

Backpay

(with computed amount) 8 $47,660.00 $5,957.50

(without computed amount) 45

Attorneys' Fees 11 $230,016.00 $20,910.55

(e) Please compare the average salary (adjusted for inflation in 2001

 dollars) and average grade of all employees.

Answer:

 Average Salary: $45,431 *

 Average Non Supervisory Grade: 7.7

*Average salary is for all employees and is based on per annum salary, which includes 

locality pay rates. 

Revenue and Business Results

Please provide data for the following:

1. Total revenue collected, total enforcement revenue collected

FiscalYear Total Revenue

Collected ($B)a

Net Revenue

Collected ($B)b

Total Enforcement 

Revenue Collected ($B)

1997 1,623.3 1,505.0 37.2

1998 1,769.4 1,641.3 35.2

1999 1,904.1 1,746.1 32.9

2000 2,096.9 1,900.3 33.8

2001 2,128.8 1,902.1 33.8

a Before refunds

b After refunds
30

2. Total number of returns filed.

Calendar Year 1997 1998 1999 2000 2001

Grand Total 217,916,000 222,481,000 224,402,874 226,563,974 229,577,173

3. Total number of full time equivalent employees; number of employees

involved in automation.

Answer: 

The total projected FTE for FY 2003 is 101,080. The number of FTE for our 

business systems modernization effort (automation) is 176.

4. Total budget; travel expenses, outside contract expenses (split between automation and 

other and exclude payments to other government agencies), relocation expenses, space 

rental, and automation budget.

(See attachment 1)

5. Electronic Filing. The Act set a goal for the IRS to have at least 80 percent of all tax 

returns filed electronically by the year 2007. Please show the number of forms 

available for electronic filing (compared to the total number of forms), the number of 

taxpayers utilizing electronic filing, the number of taxpayers “eligible” to file 100 

percent of their forms electronically, and the percentage increase each year in use of 

electronic filing. Please forecast the percentage of electronic filing through 2007. If the 

IRS is not on course to meet the Act’s 80 percent goal, what are the obstacles to meeting 

the goal? What specific steps are being taken to increase electronic filing, including 

steps to ensure coordinated filing between the IRS and State governments?

Answer:

During the past several years, the IRS has made significant progress toward accomplishing the 

goal established by Congress. Approximately, one out of every four individual taxpayers file 

electronically. To date, 110 forms/schedules are electronically enabled. This leaves less than 

1% of tax returns that cannot be filed electronically because digital versions of certain forms do 

not exist. 

As of March 28, 2002, IRS has received over 37 million individual returns electronically, a 13 

percent increase over the prior year and 26 percent increase over 2000. 
31

The following chart summaries IRS’ efforts with electronic filing since its inception in 1997.

Calendar Year E-File Volume

(thousands)

% of Increase

1997 19,135

1998 24,580 28.46%

1999 29,329 19.32%

2000 35,402 20.71%

2001 40,206 13.57%

However, with this increase, our current projections show us falling short of the 80 percent goals 

established by Congress.

Calendar Year E-File Projections

(thousands)

% of Increase

2002 44,930

2003 49,801 10.84%

2004 54,082 8.60%

2005 58,022 7.29%

2006 61,567 6.11%

2007 64,647 5.00%

In addition, we must overcome a number of significant challenges if the IRS is going to achieve 

the 80% goal. Some of the major impediments are:

• Product and service cost and complexity

• Technical infrastructure

• Taxpayer apprehension concerning security and privacy

We must make the e-file system less complex. To begin with, IRS e-file has not been 

completely paperless. Paper signature jurats and other paper forms and checks have been part of 

the system. In addition, taxpayers cannot file some forms and schedules electronically. These 

factors complicate the e-file system and drive up the costs for both taxpayers and practitioners. 

The IRS is taking a series of actions over the next several years to remove these barriers to make 

IRS e-file more convenient and cheaper to use. Some of these actions included expanding the 

use of electronic signatures through the self-selected PIN initiative, reinstating the practitioner 

PIN initiative, accepting 29 new forms electronically in 2002, exploring the feasibility of 

extending the return due date for electronically filed returns, and offering free Internet filing. The 

IRS will also continue working with Treasury and the private sector to develop a solution(s) that 

will provide a no cost option for taxpayers to file their tax returns online. 

We must also ensure that our technical infrastructure can support a robust electronic tax 

administration program. Not only do we expect a significant increase in the number of 

Electronic Return Originators and returns that they submit electronically, but also in the many 
32

new products and services they use for transacting and communicating electronically with us. 

Return preparers now file over half of all tax returns and to receive all of those returns 

electronically, we must work with that community to convert their entire operation to an 

electronic environment. That community has assured us that if we provide the ability to file all 

returns, including business returns, electronically and accept all other communications 

electronically, they will fully support the program. Toward that end, we awarded a PRIME 

contract to Computer Sciences Corporation and a team of leading technology and consulting 

firms to be major partners in managing the modernization of IRS’ core business and technology 

systems with a near term focus that will include value added e-services for third parties such as 

electronic disclosure authorization, transcript delivery, and communication.

Taxpayers also have concerns about the security and privacy of electronic transactions with the 

IRS. We must continue to demonstrate that the security and integrity of our electronic systems 

and the confidentiality of taxpayer information are among the most important responsibilities we 

have to the American people. We have strengthened our systems’ security and must remain 

vigilant to keep the e-file process the safest possible.

6. Total number of audits, percent of “no change audits”; average cycle time per audit; 

number of employees conducting audits.

Answer:

Examination Closures

FY 1997 though FY 2001

 All Individuals FY 1997 FY 1998 FY 1999 FY 2000 FY 2001

Field 715,615 567,759 384,484 251,108 202,515

Service Center 803,628 625,021 715,789 366,657 529,241

Total Return Closures 1,519,243 1,192,780 1,100,273 617,765 731,756

Corporations < $10 Million FY 1997 FY 1998 FY 1999 FY 2000 FY 2001

Field 55,021 40,735 27,484 17,580 13,169

Service Center 1,302 1,083 784 1,043 1,163

Total Return Closures 56,323 41,818 28,268 18,623 14,332
33

Corporations $10 Million & 

Over FY 1997 FY 1998 FY 1999 FY 2000 FY 2001

Field 12,706 11,464 10,287 8,978 8,465

Service Center 266 366 250 234 253

Total Return Closures 12,972 11,830 10,537 9,212 8,718

Grand Total FY 1997 FY 1998 FY 1999 FY 2000 FY 2001

Field 915,420 728,545 505,847 342,660 280,111

Service Center 812,702 634,098 722,559 373,255 534,946

Total Return Closures 1,728,122 1,362,643 1,228,406 715,915 815,057

Cycle Days

Individuals FY 1997 FY 1998 FY 1999 FY 2000 FY 2001

Revenue Agent 299 286 311 360 377

Tax Auditor 205 217 244 267 252

Service Center (Non-IRP) 235 206 325 321 263

Corps. < $10 M 255 281 316 365 359

Corps. $10 M & Over 466 447 466 511 565

No Change Rates

Individuals FY 1997 FY 1998 FY 1999 FY 2000 FY 2001

Revenue Agent 10% 12% 12% 13% 14%

Tax Auditor 14% 15% 15% 15% 17%

Service Center (Non-IRP) 13% 21% 15% 26% 19%

Corps. < $10 M 26% 27% 27% 27% 30%

Corps. $10 M & Over 18% 19% 21% 20% 20%

Technical Staffing

FY 1997 FY 1998 FY 1999 FY 2000 FY 2001

Revenue Agents 14,399 13,647 13,061 12,550 11,598

Tax Compliance Officers 2,318 2,113 1,930 1,702 1,420

Source: Table 37
34

7. The projected loss of revenue from no non-filers; total tax gap.

Answer:

We have used compliance data to make estimates of the gross tax gap (tax liability that 

is not paid voluntarily and timely) for income and employment taxes for Tax Years 1985 

and 1988. Because of the lack of compliance data since 1988, we have projected our 

estimates to Tax Years 1992 and 1998 based on the assumption of constant 

compliance rates. No other projections are available at this time.

Gross Tax Gap ($ in billions)

Tax Year Component

1985 1988 1992 1998

Individual Income Tax 74.4 85.8 101.7 166.4

Nonfiling 9.8 11.2 13.8 22.6

Underreporting 53.5 58.5 73.1 119.6

Underpayment 11.1 16.1 14.8 24.2

Corporation Income Tax 16.5 22.9 24.5 40.5

Nonfiling 0.0 0.0 0.0 0.0

Underreporting 15.5 21.4 22.5 37.5

Underpayment 1.0 1.5 2.0 3.0

Employment Taxes 20.7 32.1 48.3 65.5

Nonfiling 0.0 0.0 0.0 0.0

Underreporting 15.8 26.2 41.0 55.3

Underpayment 4.9 5.9 7.3 10.2

TOTAL 111.6 140.8 174.5 272.4

Nonfiling 9.8 11.2 13.8 22.6

Underreporting 84.8 106.1 136.6 212.4

Underpayment 17.0 23.5 24.1 37.4

8. Number of the Senior Executive Service; GS-15s and 14s.

Answer:

Currently on rolls :

Senior Executives (SES) : 312

Supervisors at grades 14 and 15: 2263

Pay Banded Senior Managers ( formerly grades 14 and 15) : 1702

Non supervisor grades 14 and 15 : 4415
35

9. Total number of managers; ratio of management staff to nonmanagement staff; average number of employees managed by first line 

mangers.

Answer:

Currently on rolls: 

Total number of Managers: 10:484

Ratio of Managers to Non Managers: 1to 10.9

We determine the ratio of managers to non managers by dividing the total number of 

non supervisory employees (management officials included) by the number of 

supervisors. The IRS employee database does not identify front line managers. 

10 Total number of appeals; Appeals sustention rate; and cycle time.

ANSWER:

NATIONAL APPEALS

FY 

1997

FY 

1998

FY 

1999

FY 

2000

FY

2001

FY

2002

YTD

Mar.

Closed Cycle Time: 

 Field 342 326 365 408 441 436

 Office 230 230 256 282 309 331

 Collection 220 222 235 263 272 298

 Service Center 117 101 109 121 142 171

 CE 878 822 725 752 773 846

Inventory: (excludes cases in 

Counsel jurisdiction)

 Field 21,784118,411 13,629 10,664 9,713 9,514

 Office 14,188 10,011 5,807 4,334 4,386 4,337

 Collection 5,230 5,004 8,306 9,863 14,869 16,280

 Service Center 8,744 8,070 10,270 12,141 22,229 26,410

 CE N/A 1,070 963 1,065 1,085 1,060

 Total Inventory 49,946 42,566 38,975 38,067 52,282 57,601

 

1

This amount includes both Field and CE cases for the fiscal year 1997 since we are unable to separate 

those categories for that year.
36

Collection Due Process (CDP) 

Activity: 

 Receipts 5,365 6,892 19,119 12,412

 Disposals 557 4,145 8,065 8,633

 Inventory 4,808 6,541 17,109 20,076

 Cycle Time N/A 262 280 278

• Closed cycle time and inventory for all sources (other than CDP) is National from ACDS 

(Appeals Centralized Database System) reports.

• CDP data for FY’00 through March FY’02 is National from D&BAM (Diagnostics and 

Balanced Appeals Measures) reports. 

• CDP data for FY’99 is from Appeals National database ACCESS report.

General Appeals stopped systemically collecting sustention rate information several years ago 

and therefore, does not collect for our programs. This is due in part to systems issues and to the 

designation of sustention rates as ROTERS (Records of Tax Enforcement Results). The IRS has 

established regulations containing rules to ensure that ROTORS are not used in a way as to 

improperly influence the handling of taxpayer cases. 

APPEALS LMSB

FY 2001 FY 2002 YTD

February

Closed Cycle Time: *

 Field 532 569

 CEP 773 859

Inventory: (excludes cases in Counsel urisdiction)

 Field 3,649 3,059

 CEP 1,085 1,083

 Total Inventory 4,734 4,142

*Closed cycle time and inventory data include Field cases for Appeals LMSB and all CEP for 

Appeals Nationwide.

Fiscal Year 2001 Only RecoveryRate Sustention Rate

 Field ( Only Activity Codes 219 and above)

11%2

 CEP 23%

34%

 

2

 The Recovery Rate shown for Field Exam cases for these limited activities codes is skewed by one case in 

which, 98% of the amounts were conceded. That one case represented 37% of the total proposed dollars for this 

category.
37

Recovery rate is the ratio of tax sustained by Appeals, to total tax proposed by Compliance plus 

amounts of claims disallowed by Compliance. The recovery rate for FY 2001 is comparable to 

earlier studies of Recovery rates. In 1993 and 1995 studies, recovery rates were 23% and 14% 

respectively for a statistical sample of CEP cases.

Sustention rate is the ratio of adjustments to taxable income sustained by Appeals (dollars) to 

Compliance proposed adjustments to taxable income (dollars). It also includes, the percentage of 

tax credits sustained to the tax credits disallowed by Compliance. The sustention rate for FY 

2001 is comparable to earlier studies of Sustention rates. In 1993 and 1995 studies, recovery 

rates were 35% and 33% respectively for a statistical sample of CEP cases.

The earlier studies noted that the recovery rates are affected by significant factors beyond the 

control of either Compliance or Appeals. These include, Loss Carrybacks, Carryover 

Adjustments from prior periods, New Issues Raised during appeal, Technical Advice issued 

during the appeal, Supreme Court Decisions issued during the appeal, Change is Service position 

and TEFRA Flow Through Adjustments. The studies estimated the effect of these at between 

18% and 31%.

11. Total number of trials; total docketed case/dollar amounts; litigation

 sustention rate and cycle time.

Answer:

For FY01, 762 cases that went to trial were closed.

For Tax Court as of September 2001:

• 18,300 Dockets

• $29.8 Billion

• 80.97 % sustention rate

For District Courts

• 900 dockets

• $3 Billion

• 98% sustention rate

Court of Federal Claims

• 600 Dockets

• $2 Billion

• 99% sustention rate

IRS does not capture cycle time. 
38

12. Total number of collections; seizures, liens, and levies; number

 employees involved in collection activities

Answer:

Collection Closures

Total Dispositions FY 1997 FY 1998 FY 1999 FY 2000 FY 2001

TDI (Taxpayers) 1,647,848 1,381,025 1,748,164 1,445,593 1,086,236

TDA (Modules) 5,012,662 4,288,695 2,954,434 2,771,870 3,040,809

Source: NO-5000-4

 NO-5000-2

Enforcement Statistics

Action FY 1997 FY 1998 FY 1999 FY 2000 FY 2001

Liens 543,613 382,755 167,867 287,517 428,376

Levies33,659,417 2,503,409 504,403 219,778 674,0804

Seizures 10,030 2,307 161 7452345

FTE Collection Activities

Location FY 1997 FY 1998 FY 1999 FY 2000 FY 2001

Service Center Control

Branch

 3,078.0 2,721.2 2,810.8 2,505.2 2,712.0

Automated Collection

System

2,647.042,241.8 2,124.1 2,375.2 2,616.5

Collection

Field function

11,075.0 10,448.0 9,981.0 8,448.0 7,926.0

 

3

 These are the figures for notices of levy issued in CFf and ACS. They do not include systemic levy programs, such as 

SITLP (State Income Tax Levy Program), FPLP (Federal Payment Levy Program), and AKPFD (Alaska Permanent Fund Levy 

Program) 

4

 This figure includes the number of levies issued by SB/SE CFf from the C-23 report and ACS information from the CSAR 

report.

5

 The FY 2000 and 2001 figures are different then the C-23 report. These figures reflect a physical count (conducted in 

December 2001) of seizures done during these two years.

4

 The 1997 ACS FTSs cannot be compared to the other years, because Nashville’s FTEs in 1997 included both ACS and 

Taxpayer Service staffing. The ACS and Taxpayer Service staffing. The ACS staffing can not be backed out from the total.
39

13. What is the status of the Enterprise Wide Security Mail system 

 (i.e.,secure e-mail for sensitive data)?

Answer:

IRS deployed an Enterprise Email System during second quarter FY2000. At the end of 

FY2000, IRS had completed the expansion of the email infrastructure to add a Secure 

/Multipurpose Internet Mail Extensions (S/MIME) security enhancement (email and attachment 

encryption) for transporting Sensitive But Unclassified (SBU) data across the IRS. During 

FY2001, we completed operational testing and began piloting the capability with small groups of 

users. However, we postponed full deployment to end users pending the completion of the 

deployment of a standard software suite for IRS end user computers (desktop and laptops). 

During first Quarter 2002, we began an annual hardware refreshment program to upgrade end 

user computers. We deployed refreshed systems with standardized software products to give us 

a stable baseline for managing end user systems. Additionally, each new system had an 

engineered software image to improve overall security assurance for systems at the IRS. We 

aligned desktop delivery of the secure email capability with the refreshment project and a 

parallel effort to deliver software upgrades to non-refreshed systems. Although we planned 

deployment activities to minimize impact to the 2001 Filing Season, IRS leaders recently 

reaffirmed their resolve to complete the secure email deployment to all email users before the 

end of first Quarter 2003. Providing continued resource availability and timely completion of 

employee education and the electronic enrollment process, we will achieve our goal. Currently, 

3555 users have the secure email system enhancement. 

14. Number of criminal cases; number of criminal convictions,

 percentage of tax verses non-tax

Answer:

Criminal Cases FY01 FY00 FY99 FY98 FY97

# of Cases Initiated 3284 3372 3952 4655 5335

# of Cases Convicted 2251 2249 2713 3000 3110

Attached are program area summary reports for each of the fiscal years that provide 

additional and more complete information. Also attached is Criminal Investigation’s (CI) 

special agent on-roll report showing a decrease in agent-resources of approximately 

18% from FY97 to FY01. (attachment #2 and #3)

The following table shows the extent to which CI’s initiated cases and sentenced cases involve 

tax administration:
40

Criminal Cases FY01 FY00 FY99 FY98 FY97

% of Initiated Cases that 

include Tax Violations

 56.4% 52.9% 48.5% 52.9% 57.2%

% of *Sentenced Cases that 

include Tax Violations

 40.5% 45.8% 44.6% 49.8% 49.3%

Attached is a chart that provides additional and more complete information.

*Generally speaking, a case sentenced during a particular fiscal year was most 

likely initiated and worked during preceding fiscal years. Therefore, this statistic 

is not a strong indicator of CI’s current emphasis on tax administration. 

(attachment #4) 

15. Total square footage of building space the IRS occupies.

Answer:

The IRS currently occupies 31,059,028 square feet of 

space. 

SQUARE FOOTAGE OCCUPIED

1997 1998 1999 2000 2001

34,985,517 34,321,000 33,626,842 29,610,961 30,161,707




 

 AS OF 09/30/1997

 

 AVERAGE SALARY: 38322

 AVERAGE NONSUPV GRADE: 7.90

 AVG NONSUPV GRADE IF WAGE GRADE EMPLOYEES EXCLUDED: 7.91

 

 TOTAL NUMBER OF SES EMPLOYEES: 255

 TOTAL NUMBER OF SUPERVISORY GRADES 14 AND 15: 3381

 TOTAL NUMBER OF PAY BANDED SENIOR MANAGERS (FORMERLY GRADES 14 AND 

15): 0

 TOTAL NUMBER OF NON SUPERVISORY IN GRADES 14 AND 15: 2888

 

 TOTAL NUMBER OF MANAGERS: 9199

 RATIO OF MANAGERS TO NON MANAGERIAL: 1 TO 11.6

 

 

 

 AS OF 09/30/1998

 

 AVERAGE SALARY: 39646

 AVERAGE NONSUPV GRADE: 7.89

 AVG NONSUPV GRADE IF WAGE GRADE EMPLOYEES EXCLUDED: 7.89

 

 TOTAL NUMBER OF SES EMPLOYEES: 261

 TOTAL NUMBER OF SUPERVISORY GRADES 14 AND 15: 3459

 TOTAL NUMBER OF PAY BANDED SENIOR MANAGERS (FORMERLY GRADES 14 AND 

15): 0

 TOTAL NUMBER OF NON SUPERVISORY IN GRADES 14 AND 15: 3129

 

 TOTAL NUMBER OF MANAGERS: 9146

 RATIO OF MANAGERS TO NON MANAGERIAL: 1 TO 11.4

 

 

 AS OF 09/30/1999

 

 AVERAGE SALARY: 41183

 AVERAGE NONSUPV GRADE: 7.94

 AVG NONSUPV GRADE IF WAGE GRADE EMPLOYEES EXCLUDED: 7.95

 

 TOTAL NUMBER OF SES EMPLOYEES: 262

 TOTAL NUMBER OF SUPERVISORY GRADES 14 AND 15: 3495

 TOTAL NUMBER OF PAY BANDED SENIOR MANAGERS (FORMERLY GRADES 14 AND 

15): 0

 TOTAL NUMBER OF NON SUPERVISORY IN GRADES 14 AND 15: 3468

 

 TOTAL NUMBER OF MANAGERS: 9335

 RATIO OF MANAGERS TO NON MANAGERIAL: 1 TO 11.1

 

 
-2-

 

 AS OF 09/30/2000

 

 AVERAGE SALARY: 43146

 AVERAGE NONSUPV GRADE: 7.92

 AVG NONSUPV GRADE IF WAGE GRADE EMPLOYEES EXCLUDED: 7.93

 

 TOTAL NUMBER OF SES EMPLOYEES: 254

 TOTAL NUMBER OF SUPERVISORY GRADES 14 AND 15: 3753

 TOTAL NUMBER OF PAY BANDED SENIOR MANAGERS (FORMERLY GRADES 14 AND 

15): 0

 TOTAL NUMBER OF NON SUPERVISORY IN GRADES 14 AND 15: 3642

 

 TOTAL NUMBER OF MANAGERS: 9603

 RATIO OF MANAGERS TO NON MANAGERIAL: 1 TO 10.9

 

 

 

 AS OF 09/30/2001

 

 AVERAGE SALARY: 44930

 AVERAGE NONSUPV GRADE: 7.94

 AVG NONSUPV GRADE IF WAGE GRADE EMPLOYEES EXCLUDED: 7.95

 

 TOTAL NUMBER OF SES EMPLOYEES: 310

 TOTAL NUMBER OF SUPERVISORY GRADES 14 AND 15: 2217

 TOTAL NUMBER OF PAY BANDED SENIOR MANAGERS (FORMERLY GRADES 14 AND 

15): 1620

 TOTAL NUMBER OF NON SUPERVISORY IN GRADES 14 AND 15: 4245

 

 TOTAL NUMBER OF MANAGERS: 9851

 RATIO OF MANAGERS TO NON MANAGERIAL: 1 TO 10.7

 

 

 

 AS OF 04/06/2002

 

 AVERAGE SALARY: 45334

 AVERAGE NONSUPV GRADE: 7.64

 AVG NONSUPV GRADE IF WAGE GRADE EMPLOYEES EXCLUDED: 7.64

 

 TOTAL NUMBER OF SES EMPLOYEES: 312

 TOTAL NUMBER OF SUPERVISORY GRADES 14 AND 15: 2264

 TOTAL NUMBER OF PAY BANDED SENIOR MANAGERS (FORMERLY GRADES 14 AND 

15): 1714

 TOTAL NUMBER OF NON SUPERVISORY IN GRADES 14 AND 15: 4425

 

 TOTAL NUMBER OF MANAGERS: 10518

 RATIO OF MANAGERS TO NON MANAGERIAL: 1 TO 10.9
Summary of §1203 Allegations Recorded

In ALERTS as of February 28, 2002

1203 Violation 1203 

Section

Completed 

Inquiries

Inquiry In 

Progress

1203 Inquiry

Deferred

Total

Seizure Without Approval (b)(1) 13 1 0 14

False Statement Under Oath (b)(2) 17 4 1 22

Constitutional & Civil Rights Issues (b)(3) 244 6 6 256

Falsifying or Destroying Records (b)(4) 58 8 6 72

Assault or Battery (b)(5) 8 1 1 10

Retaliate or Harass (b)(6) 1,564 60 24 1,648

Misuse of 6103 (b)(7) 2 1 0 3

Failure to File Federal Tax Return (b)(8) 765 187 29 981

Understatement of Federal Tax Liability (b)(9) 306 179 11 496

Threat to Audit for Personal Gain (b)(10) 68 5 0 73

Totals 3,045 452 78 3,575

1. This report includes all §1203 allegations recorded in ALERTS since enactment of the IRS Restructuring and Reform Act of 1998 (July 1998).

2. 1203 Inquiry Deferred = Inquiry was not completed to determine if §1203 was violated (e.g., Employee resigned before an inquiry could be completed).

3. In addition to the information above:

 a) CCPAG received and forwarded to the Frivolous Return Program 902 taxpayer complaints alleging §1203 issues based on the constitutionality of the nation’s

 tax laws. These complaints were not recorded in ALERTS.

 b) Since the passage of RRA, the Office of EEO & Diversity, Discrimination Complaint Review Unit (DCRU) has received 781 EEO settlements and/or

 findings of discrimination for review of potential §1203(b)(3)(B) violations. As of December 31, 2001, the DCRU had reviewed 641 cases. 

 No §1203(b)(3)(B) violations have been substantiated.

Notes:

1

Source: Automated Labor and Employee Relations Tracking System (ALERTS).

Extract Date: Monday, March 04, 2002
Summary of Completed §1203 Inquiries Recorded

In ALERTS as of February 28, 2002

1203 Violation 1203 

Section

1203

Misconduct

Non-1203 

Misconduct

Allegation

Not

Substantiated

Total

Substantiated Misconduct

Seizure Without Approval (b)(1) 0 2 11 13

False Statement Under Oath (b)(2) 1 2 14 17

Constitutional & Civil Rights Issues (b)(3) 0 9 235 244

Falsifying or Destroying Records (b)(4) 9 18 31 58

Assault or Battery (b)(5) 1 4 3 8

Retaliate or Harass (b)(6) 6 113 1,445 1,564

Misuse of 6103 (b)(7) 0 0 2 2

Failure to File Federal Tax Return (b)(8) 282 271 212 765

Understatement of Federal Tax Liability (b)(9) 15 182 109 306

Threat to Audit for Personal Gain (b)(10) 13 19 36 68

Totals 327 620 2,098 3,045

2

Source: Automated Labor and Employee Relations Tracking System (ALERTS).

Extract Date: Monday, March 04, 2002
Summary of Substantiated §1203 Allegations Recorded

In ALERTS as of February 28, 2002

1203 Violation Removals

Resigned / 

Retired

Probation 

Separation

Removed On 

Other Grounds

Penalty

Mitigated

In Personnel 

Process Total

Seizure Without Approval 0 0 0 0 0 0 0

False Statement Under Oath 0 1 0 0 0 0 1

Constitutional & Civil Rights Issues 0 0 0 0 0 0 0

Falsifying or Destroying Records 2 5 1 0 0 1 9

Assault or Battery 1 0 0 0 0 0 1

Retaliate or Harass 1 4 0 0 0 1 6

Misuse of 6103 0 0 0 0 0 0 0

Failure to File Federal Tax Return 46 86 11 7 102 30 282

Understatement of Federal Tax Liability 0 6 0 0 0 9 15

Threat to Audit for Personal Gain 4 4 2 1 1 1 13

Totals 54 106 14 8 103 42 327

1. The cases reported as "Removals" and "Penalty Mitigated" do not reflect the results of any third party appeal.

Notes:

 3

Source: Automated Labor and Employee Relations Tracking System (ALERTS) and 1203 Review Board records.

Extract Date: Monday, March 04, 2002
Unsubstantiated §1203 Allegations with Other Proven Misconduct 

In ALERTS as of February 28, 2002

1203 Violation Removals

Resigned / 

Retired Suspension Reprm'd Admshm't Other Total Written Oral

1203 

Section

Probation Counseling

Separation

Seizure Without Approval (b)(1) 0 0 0 0 0 0 0 2 0 2

False Statement Under Oath (b)(2) 0 1 0 0 0 0 1 0 0 2

Constitutional & Civil Rights Issues (b)(3) 0 0 0 0 2 1 4 2 0 9

Falsifying or Destroying Records (b)(4) 1 0 0 6 2 1 3 1 4 18

Assault or Battery (b)(5) 0 0 0 0 1 0 1 1 1 4

Retaliate or Harass (b)(6) 2 6 0 10 17 7 33 19 19 113

Misuse of 6103 (b)(7) 0 0 0 0 0 0 0 0 0 0

Failure to File Federal Tax Return (b)(8) 5 46 23 12 32 36 66 15 36 271

Understatement of Federal Tax Liability (b)(9) 2 9 0 8 17 22 53 7 64 182

Threat to Audit for Personal Gain (b)(10) 1 2 0 4 4 0 4 1 3 19

Totals 11 64 23 40 75 67 165 48 127 620

4

Source: Automated Labor and Employee Relations Tracking System (ALERTS).

Extract Date: Monday, March 04, 2002