[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
THE 2000 TAX RETURN FILING SEASON AND THE IRS BUDGET FOR FISCAL YEAR
2001
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
MARCH 28, 2000
__________
Serial 106-49
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
66-463 CC WASHINGTON : 2000
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Oversight
AMO HOUGHTON, New York, Chairman
ROB PORTMAN, Ohio WILLIAM J. COYNE, Pennsylvania
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
WES WATKINS, Oklahoma JIM McDERMOTT, Washington
JERRY WELLER, Illinois JOHN LEWIS, Georgia
KENNY HULSHOF, Missouri RICHARD E. NEAL, Massachusetts
J.D. HAYWORTH, Arizona
SCOTT McINNIS, Colorado
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisory of March 20, 2000, announcing the hearing............... 2
WITNESSES
U.S. Department of the Treasury, Hon. Charles O. Rossotti,
Commissioner, Internal Revenue Service......................... 6
U.S. General Accounting Office, James R. White, Director, Tax
Policy and Administration Issues, General Government Division;
accompanied by Randy Hite, Associate Director, Governmentwide
and Defense Information Systems, Accounting and Information
Management Division and Dave Attianese, Assistant Director, Tax
Policy, and Administration Issues, General Government Division. 34
______
American Institute of Certified Public Accountants, Deborah
Pflieger....................................................... 52
National Association of Enrolled Agents, Gregory H. Steinbis..... 62
National Society of Accountants, Bryan E. Gates.................. 56
THE 2000 TAX RETURN FILING SEASON AND THE IRS BUDGET FOR FISCAL YEAR
2001
----------
TUESDAY, MARCH 28, 2000
House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to call, at 2:03 p.m. in
room 1100, Longworth House Office Building, Hon. Amo Houghton
(Chairman of the Subcommittee) Presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON OVERSIGHT
Contact: (202) 225-7601
FOR IMMEDIATE RELEASE
March 20, 2000
No. OV-17
Houghton Announces Hearing on the 2000 Tax Return Filing Season and the
IRS Budget for Fiscal Year 2001
Congressman Amo Houghton (R-NY), Chairman, Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on the 2000 tax return filing season
and the Administration's budget request for the Internal Revenue
Service (IRS) for fiscal year 2001. The hearing will take place on
Tuesday, March 28, 2000, in the main Committee hearing room, 1100
Longworth House Office Building, beginning at 2:00 p.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include IRS Commissioner Charles O. Rossotti,
representatives from the U.S. General Accounting Office, and
professional tax practitioner groups. However, any individual or
organization not scheduled for an oral appearance may submit a written
statement for consideration by the Committee and for inclusion in the
printed record of the hearing.
BACKGROUND:
The 2000 tax return filing season refers to the period of time
between January 1st and April 15th when Americans will file over 215
million primary tax returns. During this period, the IRS is expected to
issue over 95 million tax refunds and answer 118 million telephone
calls from taxpayers asking for assistance.
The Administration's budget requests $8.9 billion to fund the IRS
for fiscal year 2001. This level of funding will support 100,133
employees who will collect about $1.9 trillion in taxes, according to
Administration estimates. (Note: These figures include the $145 million
and 2,082 employees, technically outside the spending caps for the IRS,
devoted to administering the earned income tax credit.) The fiscal year
2001 budget request represents an increase of $769 million (or 9
percent) over the fiscal year 2000 operating level, as well as an
increase of 2,528 employees (technically referred to as full-time
equivalents or FTEs) over fiscal year 2000 staffing levels.
Beyond supporting the traditional activities of the filing season,
the fiscal year 2001 budget request also addresses several additional
activities. First, the budget seeks to reverse the decline in the IRS
workforce by proposing to increase IRS staffing levels by 2,835 FTEs
over two fiscal years, 2000 and 2001. Described by the acronym STABLE
(Staffing Tax Administration for Balance and Equity), the proposal
would assign about half of the new employees to work in the customer
service area, while the other half would be assigned to examination and
collection activities. Second, the budget requests $42 million to
continue the Organizational Modernization program which would
reorganize the IRS into four operating divisions correlated to the
needs of taxpayers. The new operating divisions will be:
(1) wage and investment income, (2) small business and self
employed, (3) large and mid-size businesses, and (4) tax-exempt
organizations and governmental entities. Third, the IRS budget request
includes $119 million for its Investment Technology Account to support
the project to upgrade the IRS' computer system.
In announcing the hearing, Chairman Houghton stated: ``The IRS is
seeking significantly higher funding and significantly more employees
for next year. The Subcommittee should review this request carefully.
We need to give the IRS the resources it needs to operate effectively,
but why is it asking for such a large increase? It seems to go against
the trend of government downsizing which the President and Congress
began several years ago. What would the increases mean for the IRS, and
more importantly, what would they mean for the taxpayers? ''
FOCUS OF THE HEARING:
The Subcommittee will review the 2000 tax filing season and explore
how the IRS intends to allocate its fiscal year 2001 budget resources.
It will examine the Administration's justification for the significant
increase in both funding and staffing proposed for the IRS. It also
will review the progress of the program to modernize the IRS'
organizational structure, and the progress of its information systems
program.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch
diskette in WordPerfect or MS Word format, with their name, address,
and hearing date noted on a label, by the close of business, Tuesday,
April 11, 2000 , to A.L. Singleton, Chief of Staff, Committee on Ways
and Means, U.S. House of Representatives, 1102 Longworth House Office
Building, Washington, D.C. 20515. If those filing written statements
wish to have their statements distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this
purpose to the Subcommittee on Oversight office, room 1136 Longworth
House Office Building, by close of business the day before the hearing.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
Committee.
1. All statements and any accompanying exhibits for printing must
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect or
MS Word format, typed in single space and may not exceed a total of 10
pages including attachments. Witnesses are advised that the Committee
will rely on electronic submissions for printing the official hearing
record.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.
3. A witness appearing at a public hearing, or submitting a
statement for the record of a public hearing, or submitting written
comments in response to a published request for comments by the
Committee, must include on his statement or submission a list of all
clients, persons, or organizations on whose behalf the witness appears.
4. A supplemental sheet must accompany each statement listing the
name, company, address, telephone and fax numbers where the witness or
the designated representative may be reached. This supplemental sheet
will not be included in the printed record.
The above restrictions and limitations apply only to material being
submitted for printing. Statements and exhibits or supplementary
material submitted solely for distribution to the Members, the press,
and the public during the course of a public hearing may be submitted
in other forms.
Note: All Committee advisories and news releases are available on
the World Wide Web at ``http://waysandmeans.house.gov''.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.
Chairman Houghton. Good afternoon and welcome to our
hearing.
Today the Subcommittee will examine the current tax return
filing season and the budget request for the Internal Revenue
Service for fiscal year 2001.
First of all, I am pleased to note that the current tax
return filing season has been going smoothly and with no major
problems. That is a relief for both the Commissioner and for us
in Congress.
Processing tax returns and sending out timely refunds are
the primary activities by which the public judges the IRS. This
year the IRS will send out 8 billion pages of tax forms and
instructions. This paperwork avalanche will be augmented by 100
million W-two forms from employers and about 1 billion 1099
forms from financial institutions. The net result is that about
300,000 trees will be sacrificed in order to carry out the
current filing system. That ought to be a cause of alarm for
the environmentalists.
Fortunately, more people than expected are filing their tax
returns electronically. The figures for electronic filing are
up about 12 percent so far this year. This means less paperwork
for taxpayers to fill out, fewer paper forms for the IRS to
struggle with and less harm to our forests.
For several years, the IRS has had a fairly flat budget and
a declining work force. This was part of a larger pattern of
government downsizing which the President and Congress both
supported. It supported the theme advanced by the Vice
President's campaign on ``Reinventing government.''
For fiscal year 2001, the administration has proposed an
IRS budget increase of $769 million which is about 9 percent
higher than its operating level for the current fiscal year.
The increased budget funding would be used in part to hire over
2,500 new IRS employees. Why are so many new employees needed?
What will they be doing? Does the fiscal year 2001 budget
request mean that the era of IRS downsizing has ended?
The IRS currently is in the midst of a major internal
reorganization. It is transforming itself into four operating
divisions. The IRS has fostered the expectation that its new
operation divisions would result in better taxpayer service,
but a new organizational structure is not enough to improve
that taxpayer service.
As the IRS' own budget material states, it requires a
combination of improved management, business practices, and
technology. So while the IRS reorganization may take 12 to 18
months to complete, what is the timetable for implementing new
business practices and for providing the operating divisions
with the new technology tools they will need in order to make
better taxpayer service a reality.
If we have the new operating divisions functioning with the
old business practices and the old computer systems, then
clearly it is difficult to see how the IRS will be able to meet
the expectations of improved taxpayer service.
It is not the role of the Oversight Subcommittee to explore
all the narrow, technical details of the IRS budget request. A
budget is more than just numbers. A budget is a policy
statement. We want to know what the trends are and what this
budget signifies for the IRS. What are the long term goals
which this budget is trying to achieve; are the proportions of
this budget request the best ones for achieving the overall,
long term goal?
The IRS has a difficult job to do, and I believe that
Congress should give the IRS the resources it needs to do that
job, but we also should require that the IRS provide a strong
justification for any increases which it requests and hold it
accountable for producing the results which it promises.
I look forward to working with and hearing the Commissioner
and our other witnesses.
I would like to now recognize the Ranking Democrat, Mr.
Coyne, for his opening statement.
Mr. Coyne. Thank you, Mr. Chairman.
I would like to join Chairman Houghton in welcoming today's
witnesses. I look forward to discussing with the IRS
Commissioner the progress of the current tax filing season and
the IRS' fiscal year 2001 budget request.
The President's proposed budget for the IRS contains a
small increase in IRS funding and staffing levels. This will
help the IRS handle the many new requirements imposed by the
Reform and Restructuring Act of 1998 and allow the IRS to
address the increasing number and complexity of tax returns to
be filed this year.
The Congress must support full funding for IRS' fiscal year
2001 budget as requested by the President. The IRS needs the
resources to provide improved customer service and to make sure
each American pays their fair share. Proper funding is a
critical step to a successful restructuring and reform of the
IRS. Support for the fiscal year 2001 budget request would
signal our support for the hard working men and women who
enforce the Nation's tax laws.
I would like to commend Commissioner Rossotti on what has
been an extremely successful 2000 filing season thus far.
I look forward to working with my colleagues on both sides
of the aisle to continue supporting the IRS' efforts to
restructure and reform our tax collection agency. Our annual
hearing on the IRS is an important oversight responsibility of
this Subcommittee and I commend the Chairman, Mr. Houghton, for
his commitment to a better IRS.
Thank you, Mr. Chairman.
Chairman Houghton. Thank you, Mr. Coyne.
Mr. Portman, have you got a statement?
Mr. Portman. No, sir. Just eager to hear.
Chairman Houghton. Ms. Dunn?
Ms. Dunn. No.
Chairman Houghton. Mr. Watkins?
Mr. Watkins. No.
Chairman Houghton. Mr. Hayworth?
Mr. Hayworth. No.
Chairman Houghton. Commissioner, you are on.
STATEMENT OF HON. CHARLES O. ROSSOTTI, COMMISSIONER, INTERNAL
REVENUE SERVICE
Commissioner Rossotti. Thank you, Mr. Chairman and
distinguished Members of the Committee.
The IRS is delivering a very successful filing season while
we are also working to fulfill the many mandates that we were
given under the Restructuring Act. Under the direction of the
Act, we are making some of the most significant changes in 50
years to the IRS organization, technology and most importantly,
the way we serve taxpayers.
In the current filing season, we expect to receive a total
of 127 million individual returns. Electronic filing is up 16
percent, so we expect to receive between 34 and 35 million
returns electronically this season.
In terms of our telephone service, we are delivering about
a 65 percent level of service, meaning about 65 percent of the
calls get through which obviously is still way too low, but it
is up substantially compared to the 50 percent of last year.
Our current success was possible in large part, due to the
completion of the enormous program of $1.3 billion to fix all
of our Y2K problems. I am pleased to say that has been
accomplished almost flawlessly.
For the whole year, we expect to collect $1.67 trillion and
turn over that amount to the Treasury.
While the IRS is showing important signs of progress, I
cannot say today the IRS meets the legitimate expectations of
our compliant taxpayers. Futhermore, the number of exam and
collection cases is declining substantially.
As you know, many of the basic accounting and other systems
we use to manage the $1.8 trillion in tax revenue are
inherently deficient. These problems are severe and if they are
not addressed, over time they will certainly undermine the
fairness, viability and integrity of the whole tax system.
However, these problems are not newly identified and I do
not believe they are impossible for us to solve. In fact, I
think we now have in place at the top level at least all the
plans we need that will allow us to address them.
The President's budget for the IRS for 2001 requests the
resources I think we need to implement these plans. So far, we
have implemented many RRA, Restructuring and Reform Act,
taxpayer rights provisions; we have completed the first phase
of our new system of balanced performance measures; our
reorganization to increase customer focus and management
accountability is progressing rapidly and all of our top
management teams are now in place.
We are beginning the long term program of re-engineering
our business practices and technology which is ultimately what
will really allow us to deliver on our mandates for improved
service and taxpayer compliance. As streamlined management and
new technology becomes effective, we will also improve our
efficiency and be able to maintain a stable work force even
while the economy grows.
To do all this, we must have adequate budget resources in
2001 to address our critical operational needs for the short
term and to invest in new technology for the longer term.
This chart illustrates how the rapidly expanding economy
increases our workload every year, not only because of the
number of returns increasing but the complexity. For example,
the number of individual returns with over $100,000 reported
income, which tend to be the more complex returns, have
increased by 63 percent in the last 5 years. In the meantime,
during that period of time, our staff has dropped by 17,000.
In addition to these general trends which have been long
standing, some of the specific provisions of the RRA 1998 have
added significantly to our workload in the short term. As you
can see on the chart, some specific provisions have required
about 4,500 additional staff just to administer these
provisions.
Our compliance personnel, those that do the case work, are
the largest component of the budget. In addition to compliance,
they are the staff required to administer the provisions of RRA
1998. Therefore, when you look at the net effect on the number
of frontline workers actually in the compliance functions, it
has declined quite significantly.
In addition to the staffing factors, the red line which is
the net effect on our frontline compliance staff, we have also
had a great deal and very pervasive change in the way the work
force is required to work because of all the changes in RRA.
This undoubtedly has caused a certain amount of confusion and
relearning for many of our employees. These changes have had an
effect on the number of compliance activities we have been able
to address.
To address these operational requirements, we are
requesting a staffing increase in the 2001 budget which we call
STABLE. With this staffing level, we expect that in 2001, the
IRS will be able to stabilize the level of collection and exam
activity while also implementing those provisions that were
noted in RRA 1998, and also continue to gradually improve our
service levels.
Additional staff will enable us to meet our pressing
operational requirements while we implement our longer term
solution which is our technology. As this Committee knows, our
IRS systems are fundamentally deficient and really need to be
replaced.
This is a big program and it has risk, but I think the
success we had in the Y2K program, which was also a huge
program, is a good harbinger of the future. We have in place
many activities to manage these programs and manage this risk
which I would be glad to go through in more detail if the
Committee would like.
I think we are making real progress toward our goals and
mandates of RRA. If Congress can continue to provide us the
support we need for modernization, including our fiscal year
2001 budget request, we will be able to produce the visible and
tangible improvements in service, compliance and efficiency
which I think are the three things that America's taxpayers
expect from the IRS.
Thank you, Mr. Chairman.
[The prepared statement follows:]
Statement of Hon. Charles O. Rossotti, Commissioner, Internal Revenue
Service
Mr. Chairman and Distinguished Members of the Subcommittee,
I am pleased to discuss the IRS' 2000 tax filing season, our FY
2001 budget request and some of the initiatives we are
undertaking on behalf of America's taxpayers.
Introduction
The IRS is delivering on a very successful filing season as
it also works to fulfill the mandates that Congress set forth
in the landmark IRS Restructuring and Reform Act of 1998 (RRA
98). During this time, the IRS also completed an enormous, yet
almost flawless, Y2K conversion program to ensure that IRS
computer systems continued to operate after the century date
change.
Following RRA 98's clear directions, the IRS is planning
and implementing the most significant changes to its
organization, technology and the way it serves taxpayers in
almost a half-century. However, in spite of some recent
tangible improvements in service, many years of hard work lie
ahead to make this modernization of the agency a reality, and
FY 2000 and FY 2001 represent critical junctures in our
efforts.
Mr. Chairman, neither Congress nor the IRS could have
anticipated all the implications, including resources, needed
to implement the full scope of RRA 98 which covers 71 new
taxpayer rights and organizational and technological
modernization. However, in the 20 months since this bill was
enacted we have learned a great deal, and at this point I am
convinced we can succeed through the combination of a limited
increase in staff resources and investments in technology and
organization.
By continually managing this change and risk in an orderly
and integrated fashion, I am pleased to report to the
subcommittee that the 2000 tax filing season has been smooth
and almost error free. Of equal importance, the 2000 filing
season demonstrates some very important and positive trends in
service to taxpayers on which we can build in the coming years,
especially as our major technology and organizational
initiatives take effect.
Projected net collections for FY 2000 are $1.767 trillion.
During FY 2000, we also project to receive 213.1 million
returns, including over 127.3 million individual returns, and
expect to issue over 93 million individual refunds. As of March
10, 2000 refunds are up over 10 percent over last year, and the
average refund is $1,731. On-line filing is running 96 percent
ahead of last year's pace and has already exceeded last year's
total volume of 2.5 million.
Y2K Conversion
Mr. Chairman, the IRS experienced a smooth Y2K ``roll-over
weekend'' between December 29 and January 3 with fewer glitches
than we experience in a normal year. There were also no
problems associated with the leap year on February 29, 2000. We
have now enjoyed almost three full months of successful
operations following the century date change. Although we do
not anticipate any future problems, we will remain vigilant
during the remaining few weeks of high-volume tax-filing
season.
Our success to date was hard won and can be directly
attributed to our comprehensive planning and preparations over
the past three and a half years. Mr. Chairman, we are also most
grateful for the guidance, assistance and support that you and
the Ranking Minority Member provided throughout this effort.
I would like to briefly recap our Y2K efforts. The scope of
the Y2K problem at the IRS was enormous. The IRS employs more
than 100,000 individuals in over 700 locations across the
United States. Making the IRS' Y2K problem even more
challenging is the sheer number of affected information
technology systems.
There were over 800,000 information technology (IT) items
in our inventory that were assessed for compliance; renovated,
replaced or retired; tested; and placed back into production.
The technology ranged from custom applications programs to
mainframe computers to commercial software products as well as
thousands of non-IT items found in elevators and office
equipment.
Without the significant investment in resources to plan and
prepare for Y2K, there was a tremendous potential for
significant disruptions to ongoing IRS operations. Simply put,
the tax system would have ground to a halt causing a massive
disruption affecting almost every taxpayer. Fortunately, that
investment was made.
The IRS also gained some valuable residual benefits from
the Y2K conversion project that will be of great value as we
now proceed to our even more challenging business systems
modernization program.
First is replacement of obsolete hardware and systems
software products. As a result of the Y2K program, most of this
hardware has been replaced and software releases have been
brought up to date. This is a prerequisite for supporting our
technology modernization program and it is imperative that we
have adequate annual replacements of hardware and regular
routine upgrades of software releases.
Second is improved program management practices. The Y2K
program has been successful, largely because effective program
management practices were implemented and improved over the
last three years. This experience will be extremely valuable as
we now move forward with our major technology modernization
program. However, the modernization program imposes greater
challenges because it involves major business changes as well
as new technology.
Third is standardization of products. The IRS installed
base of hardware and software was not only obsolete, it was
heterogeneous in the extreme. The Y2K program has allowed us to
set up and largely implement standard products. Because of our
reorganization under the leadership of our CIO Paul Cosgrave we
now have the management structure and delegated authority in
place to make design and procurement decisions to maintain
standardization of technology.
Fourth is improved inventory management. GAO criticized the
IRS for the poor condition of its IT inventory, but because of
Y2K, we were forced to examine our inventory as never before.
The condition of our inventory is now greatly improved although
much work remains to be done.
Mr. Chairman, I must stress that these benefits will only
be realized if we actively continue the practices established
during Y2K, including regular replacement and upgrades of
hardware and software.
Electronic Tax Administration
Meeting the Challenge
The IRS Restructuring and Reform Act of 1998 set forth the
mandate that at least 80 percent of returns be filed
electronically by 2007. We know that the stakes are high in
Electronic Tax Administration (ETA), but so are the potential
benefits to taxpayers, practitioners and our tax administration
system. There are, of course, the obvious rewards. Increased
electronic filing of returns can improve tax administration by
speeding refunds to taxpayers, provide positive acknowledgment
that a return has been received and reduce the need to correct
errors.
However, on a broader scale, improved electronic exchange
of information with taxpayers and practitioners advances all
three of the IRS' strategic goals: service to each taxpayer,
service to all taxpayers and productivity through a quality
work environment.
A robust ETA program will reduce time spent by taxpayers
dealing with the IRS. We will reduce the number of phone calls
we have to answer and because of these two factors we will free
up our compliance employees to focus on real compliance issues,
rather than just retrieving or correcting information.
The IRS has made considerable progress in expanding
electronic filing. During 1999, approximately one out of every
four taxpayers, over 29 million individuals, filed
electronically using one of three convenient e-file options:
filing through an IRS-authorized Electronic Return Originator,
filing on-line via home computer through a third party
transmitter, and filing over the telephone via TeleFile. The
IRS expects to receive more than 34 million electronically
filed individual income tax returns in 2000.
Businesses also enjoy the benefits of electronic filing and
payment. During Fiscal Year 1999, taxpayers made over $1.3
trillion in tax deposits through the Electronic Federal Tax
Payment System (EFTPS). This system allows taxpayers to make
their federal tax deposits over the telephone or using the
computer, eliminating the need for paper deposit coupons,
checks, or trips to the bank. In addition, well over two
million employment tax returns were filed electronically or
over the telephone during Fiscal Year 1999.
The 2000 Filing Season
2000 filing season is turning out to be another growth year
for ETA as more taxpayers than ever before are enjoying the
benefits of filing taxes electronically. Through March 10,
2000, over 25 million individual taxpayers filed using one of
the three e-file options; a 16 percent increase over the same
period last year.
Nearly 18.4 million taxpayers e-filed their tax
returns electronically through an IRS-authorized Electronic
Return Originator (ERO); a 16.1 percent increase over the same
period last year.
Approximately 2.8 million taxpayers file their tax
returns on-line via their home computer through a third party
transmitter. On-line filing is running 95.7 percent ahead of
last year's pace and as of March 10 has already exceeded last
year's total volume of 2.5 million.
Almost 3.9 million taxpayers filed their returns
over the telephone using the award winning TeleFile system. For
the first time, taxpayers in Indiana and Kentucky were able to
file both their federal and state returns in a single telephone
call during the pilot of the first Federal/State TeleFile
option.
Overall, 8.5 million taxpayers have chosen to file
both their federal and state tax returns simultaneously in a
single electronic transmission. This year, 35 states and the
District of Columbia are participating in the program.
In addition, many of the volunteer sites under the IRS-
sponsored Volunteer Income Tax Assistance (VITA) or Tax
Counseling for the Elderly (TCE) programs offer free e-filing
to those seeking help. Taxpayers can locate the nearest
volunteer site by calling the IRS at 1-800-829-1040. As
described in the following section, the IRS is undertaking
several initiatives to further expand the program this year.
Individuals, businesses and practitioners are also seeing many
improvements in 2000 and will see even more in future filing
seasons.
New in 2000 for Individual Taxpayers:
Expansion of Signature Pilots: More individual taxpayers
are able to file totally paperless returns in 2000 because the
IRS expanded its Practitioner PIN Pilot to include about 18,000
tax preparers. The IRS also continued the On-Line ECN Pilot by
mailing 11 million postcards containing e-file customer service
numbers (ECNs) to taxpayers who used a computer to file their
own return last year. In 1999, over 650,000 taxpayers
participated in the On-Line PIN Pilot, while nearly 500,000
participated in the Practitioner PIN Pilot.
Expansion of Electronic Payments: More electronic payment
options (credit card and ACH debit payment) have been made
available to taxpayers this year, such as accepting debit
payments through TeleFile and accepting credit cards for Forms
1040ES, estimated tax payments, and Forms 4868, extensions of
time to file. Last year, over 53,000 tax payments were made by
credit card and approximately 75,000 payments were made by ACH
Debit.
Additional Forms and Schedules Accepted: More forms and
schedules including Schedule J, Farm Income Averaging, and
Forms 8271, Investor Reporting of Tax Shelter Registration
Number, 8582-CR, Passive Activity Credit Limitations, 6781,
Gains and Losses from Section 1256 Contracts and Straddles, and
8586, Low Income Housing Credit, are being accepted through IRS
e-file, making the program available to more taxpayers. In
addition, the IRS is finalizing its plans for accepting all
forms and schedules via IRS e-file; half of the remaining forms
and schedules should be added for 2001, with the balance by
2002.
Web-based e-file Options: Millions of taxpayers have
discovered that the IRS home page on the World Wide Web is an
excellent and convenient source for tax forms and tax
information. They are also discovering that the IRS e-file
Partnerships page on the IRS Web site provides links to various
private industry companies that provide affordable, convenient,
user-friendly e-file options. In the spirit of RRA 98, the IRS
is partnering with the private sector to provide IRS e-file and
electronic payment options for individuals and businesses.
2000 Marketing Campaign: To help move us toward the goal
Congress set for us, ETA launched a brand new marketing
campaign this year, ``30 Million Americans Use IRS e-file.'' It
is a fully integrated campaign with new TV, radio and print
advertising.
New in 2000 for Business Taxpayers:
Form 941 On-Line Filing: This April, employers will have
the added option of filing their quarterly Forms 941 from their
office computer, in addition to e-filing and TeleFile.
Electronically Filed Information Returns: Effective for
2000, payors who electronically transmit information returns to
the IRS will have an extra month--from February 28 to March
31--to file over IRS' new system, Filing Information Returns
Electronically (FIRE).
New in 2000 for Practitioners:
Account Management Pilot: The IRS is piloting an Accounts
Management Program in the Kansas-Missouri and Southern
California Districts to serve the needs of Electronic Return
Originators (EROs), financial institutions, large and small
employers, and payroll service providers who distribute ETA
products and services to taxpayers.
Debt Indicator Pilot: Through the Request for Agreement
(RFA) process, selected tax professionals are participating in
the debt indicator pilot.
Presidential Budget Initiatives
The President's FY 2001 budget request contains two
provisions that are intended to make electronic filing of
income tax returns more attractive to taxpayers. These
provisions would provide taxpayers with:
A temporary, refundable tax credit for the
electronic filing of individual income tax returns. The credit
would be for tax years 2002 through 2006--$10 for each
electronically filed return other than TeleFile returns for
which the credit would be $5; and
One or more no-cost options for preparing and
filing individual income tax returns over the Internet
beginning no later than tax year 2002.
If enacted, the IRS intends to work closely with the
private sector to implement the free Internet filing provision.
It states that no later than tax year 2002, the IRS would be
required to offer one or more options to the public for
preparing and filing individual income tax returns over the
Internet at no cost to the taxpayer. If the IRS offered such
options through contract arrangements with Authorized IRS e-
file Providers, it would be with the assurance that the
taxpayer's tax return information would not be used by the
Provider without the taxpayer's permission for any purpose
other than submission to the IRS.
This proposal does not mean that the IRS will be entering
the tax software business. Currently, there are several dozen
commercial providers of tax preparation software for individual
returns who provide software and customer support. The IRS does
not currently provide tax preparation software and is not
equipped to enter this business, nor does it plan to do so.
However, the proposal would require the IRS to build on the
trends that already exist in the industry, which are to offer
very low cost, or even no cost tax services over the Web. The
IRS could implement this option by issuing a Request for
Proposal (RFP) to the industry.
Providing Information and Service to Taxpayers
From web-based technology to 24 hours-a-day/7-days-a-week
phone service to sitting down face-to-face with a taxpayer with
a problem, the IRS continues to work to provide the easiest and
most efficient ways for taxpayers to get the information and
assistance they need not only during filing season, but
throughout the year.
Web Site
An increasing number of taxpayers are discovering that the
IRS site on the World Wide Web (the ``Digital Daily'') is an
excellent and convenient source for tax forms and tax
information. In preparation for the 2000 filing season, the IRS
also has a shorter and easier to remember Web site address--
www.irs.gov. Since coming on line in January 1996, taxpayers
have downloaded over 201 million forms, publications and
products. Through February 2000, there have been over 51.5
million downloads as compared to 24.3 million for the same
period in 1999--an increase of almost 112 percent.
Anyone with Internet access can receive: tax forms,
instructions, and publications; the latest tax information and
tax law changes; tax tables and rate schedules; and hypertext
versions of all taxpayer information publications, including
the very popular Publication 17, ``Your Federal Income'' all
TeleTax topics; answers to the most frequently asked tax
questions; a library of tax regulations; and the weekly
Internal Revenue Bulletin, which contains all the latest
revenue rulings, revenue procedures, notices, announcements,
proposed regulations and final regulations.
The IRS Web site also now has a W-4 Calculator in its ``Tax
Info for You'' section. In addition, expanded use of online
customer service technologies provides greater taxpayer access
to IRS' help while on the Digital Daily.
Web Site and Innocent Spouse
The IRS Web site has become an important tool in the IRS'
efforts to educate and inform taxpayers of their rights under
the new RRA 98 innocent spouse provisions and to help them to
make correct and accurate claims. To this end, we developed an
interactive application on our Web site that provides taxpayers
a general explanation of eligibility for spousal relief. This
application has also been distributed to 50,000 tax
practitioners nationwide and assists taxpayers in understanding
the information IRS needs in order to evaluate innocent spouse
claims.
The interactive application includes not only innocent
spouse provisions, such as separation of liability and
equitable relief, but it also takes taxpayers through injured
spouse and community property issues as well. Moreover, the
interactive application will give taxpayers direct access to
forms and publications so they can apply for any of the
applicable relief options. We have shared this interactive
Internet application with 11 Internet sites associated with
spousal issues, including the Oprah Winfrey Television Show Web
site.
Web Site and Installment Agreements
In August 1999 the IRS announced a new aid for those
interested in paying their taxes on an installment plan. The
IRS Web site now has an interactive calculator that helps a
person figure the monthly payment amount, and then prints out
an installment agreement form for the taxpayer to file.
The calculator is for individuals who have filed their
returns and are not already paying taxes under an installment
agreement. It is available through the ``Interactive
Installment Payment Process'' link on the ``Tax Info for You''
page of the IRS Web site.
Those qualifying for a ``streamlined'' agreement--
generally, taxpayers with a tax debt of not more than $25,000
that they will be able to pay off within five years--will find
out how long their proposed monthly payments would last.
Taxpayers who do not meet the criteria for a streamlined
agreement can compare their monthly expenses to the amounts
allowed under the IRS' Collection Financial Standards, to help
determine an appropriate tax payment amount.
Users may print out the Form 9465, Installment Agreement
Request, from the Web site--with the allowable expense
worksheet, if used--and mail it to the IRS for review and
approval. The Web site does not store or transmit any personal
data. Persons who are already paying back taxes under an
installment plan must pay all subsequent taxes on time or they
will default on their agreement.
Web Site Alerts
This filing season, the IRS continues a Web site alert for
taxpayers and practitioners about problems that could affect
them. Similar to a product recall notice, the ``Index of
Problem Alerts,'' found under the ``What's Hot'' section
describes the problem, its scope (the number of people likely
to be affected), where they are located, and most importantly,
what the IRS is doing to fix the problem, and what, if anything
the taxpayer needs to do about it. In most cases, taxpayers do
not have to take any action. However, if they want more
information, taxpayers can call our toll-free, 24 hour-a-day/7-
day-a-week phone number 1-800-829-1040. Thankfully, this filing
season there were few problems to report.
Web Site Small Business Corner
The Small Business Corner located on the IRS web site was
inaugurated in January 1999 to benefit the over 23 million
small business taxpayers and the 800,000 start-up businesses
begun each year. It is intended to provide these taxpayers with
easy-to-access and understand information. This type of
convenient ``one-stop shopping'' for assistance could provide
most, if not all of the immediate products and services that a
small business needs. It also offers the potential for Web-
based Q&As which can help the IRS identify and address trends
and systemic problems. Improved electronic access to
information should also result in decreased demand for
telephone and walk-in assistance.
Expanded Web Site Tax Professional Corner
The Tax Professional Corner offers practitioners the
opportunity to order electronically, tax products, including
the Federal Tax Forms CD-ROM. Practitioners can also subscribe
to electronic e-mail information services, such as the Digital
Dispatch and Local News Net, giving them access to
instantaneous news and information direct from national and
local IRS offices. The Web site also provided highlights of the
first conference on IRS Modernization, a joint effort between
the IRS and private sector partners, including the American Tax
Policy Institute, American Bar Association. American Institute
of Certified Public Accountants, National Association of
Enrolled Agents and Tax Executives Institute.
Web-based Customer Service
This filing season, the IRS continues to provide
interactive electronic tax law assistance to taxpayers via its
Web site. Users click on the mailbox icon on the Digital Daily
home page and then proceed to the Tax Law Question section.
This is not intended for highly complex tax issues or questions
regarding specific tax accounts. Specific tax account or refund
questions must still be handled by telephone or in person. IRS
customer service staff will provide answers to ``general'' tax
law questions to assist taxpayers in preparing their returns.
Taxpayers select one of a number of categories, provide an e-
mail address, and submit their questions. To answer taxpayers
accurately, economically and quickly, the IRS will provide a
``pre-prepared'' response, if available.
Notice Information on the Web
This new application answers the most frequently asked
questions about the IRS' highest volume notices. It shows
taxpayers how to determine which notice they have, what they
should do next and who to contact if they disagree. Information
is provided on the following notices:
------------------------------------------------------------------------
CP Number Notice Title
------------------------------------------------------------------------
CP 12..................................... Math Error--Overpayment of
$1 or more
CP 14..................................... Balance Due, No Math Error
CP 49..................................... Overpaid Tax Applied to
Other Taxes You Owe
CP 161.................................... No Math Error, Balance Due
CP 515.................................... First Notice--Return
Delinquency
CP 518.................................... Final Notice of Overdue Tax
Return
CP 523.................................... Notice of Default on
Installment Agreement
CP2000.................................... Notice of Proposed
Adjustment for Underpayment/
Overpayment
------------------------------------------------------------------------
Expanded Web Site Orders
In FY 1998, the IRS introduced ``Forms & Publications by
U.S. Mail.'' This allowed taxpayers to request forms by
conventional mail rather than downloading. In January 2000,
approximately 82,000 orders were placed distributing 283,000
products. In FY 1999, we added the ``Practitioner Order
Program.'' For FY 2000, the Digital Daily expanded the
electronic order capability to add a Tax Practitioner Order
Program and added a Tax Package Request service and an Employer
Order Program.
The Tax Practitioner Order Program is used by tax
professionals to order their copies of Package X. In an effort
to save both paper and IRS costs, the IRS issued a ``postcard''
rather than a tax package to individuals who filed an
electronic return in the previous year. Some portion of those
individuals may still want to receive a tax package. The
postcards the IRS issues provide the vehicle to request a tax
package, but now taxpayers have yet another option. Those
individuals can order their Tax Package via the Web using our
new Online Tax Package Request.
For FY 2000, tax professionals are able to correct their
mailing addresses with IRS via the Internet. The IRS is
expanding these ordering services to Post Offices, libraries,
and other tax products distribution partners. In addition, we
are looking to add VITA and TCE order capability on the net.
This on-line ordering program will provide an online
capability for employers to order quantities of Forms 1099 and
a variety of other employer forms. In the past, employers had
to request a copy of ``Package 1099'' in order to get a copy of
the paper-based order form. More than 750,000 electronic orders
were filled last year, before these many enhancements.
CD-ROMs
The Federal Tax Forms CD-ROM contains more than 600 tax
forms and instructions for the current tax year, and on archive
of forms and instructions dating back to 1992, and some 3,000
pages of topic-oriented tax information. Users can
electronically search, view-on-screen, or print any of the
items contained on the CD on their own printers. The two-issue
subscription is conveniently available through the Digital
Daily for $21. If ordered by fax, mail, or telephone, the cost
is $28. As of March 20, 2000, over 40,500 subscriptions were
sold.
In conjunction with the Small Business Administration, the
IRS also recently produced the joint small business CD-ROM,
``Small Business Resource Guide: What You Need to Know About
Taxes and Other Topics.'' Last year's prototype CD-ROM received
highly favorable reviews from small businesses and external
stakeholders. As a result, the Year 2000 version of the CD-ROM
is being made available free of charge, one-per-customer, by
calling our toll-free number at 1-800-TAX-FORM. It can also be
ordered on the IRS Web site.
The CD-ROM is an interactive multi-agency product utilizing
the latest technology to provide the small business taxpayer
with easy-to-access and understand information. The CD-ROM
provides an array of helpful information for business
operators, including actions to take before going into business
and tax filing and reporting responsibilities when starting,
expanding, closing and selling a business. In addition, it
includes all of the business tax forms, publications and
instructions for e-filing. The CD-ROM also allows users with
Internet access to link to other helpful federal and state web
sites.
We are working with the SBA, the Association of Small
Business Development Centers and the Service Corps of Retired
Executives (SCORE) to help publicize and distribute the new CD-
ROM so that we can get it to the people it will help most.
Combined, these organizations have over 1,500 locations and the
IRS is sending each site 100 free copies of the CD-ROM to share
with their small business clients. Each Member of Congress will
soon receive two copies as well.
EITC CD-ROM
IRS' Earned Income Tax Credit CD-ROM is now available. The
first EITC CD-ROM was shipped to the three IRS distribution
centers on February 17th. Thirty thousand disks were produced.
The EITC CD-ROM is aimed primarily at tax practitioners and
contains hundreds of forms, along with electronic documents and
publications to help tax professionals meet their obligations
related to EITC due diligence. It is the IRS' hope that the
electronically searchable publications and electronically
fillable forms will reduce practitioner burden and help in
compliance.
New TAXi Module Debuts/TAXi CD-ROM Nears Completion
The new Tax Interactive module, ``The Real Planet'' debuted
this year. Tax Interactive is IRS' Web site for teens and is
part of the ``Digital Daily.'' The original TAXi concept was
created and produced through the joint efforts of the IRS and
the American Bar Association's Section of Taxation.
The new TAXi module is a Web talk show about ``teens in
business for themselves'' and explains planning and operating a
business, with an emphasis on business related taxes. The
module helps teens learn in the same relaxed and fun style as
the other TAXi modules. ``The Real Planet'' gives teens a
practical introduction to owning a business and the related tax
obligations.
IRS is again working with the American Bar Association's
Section of Taxation to develop a companion CD-ROM product for
TAXi. When it is completed, teachers will be able to use the
Tax Interactive materials on their local computers and
networks, without an Internet connection. The CD-ROM will be
completed next month.
Braintaxer Tax Game Show
``Braintaxer'' is a new fun and Web-based interactive game
to test knowledge of a specific IRS or tax-related topic. A
game show host introduces the taxpayer to the game and the
contestants. The taxpayer selects the contestant of his or her
choice and answers tax questions related to that contestant.
Choosing a small business owner profile means the taxpayer
receives small business tax questions. The taxpayer is then
presented with three questions and multiple-choice answers. The
``Results'' page shows which questions were answered correctly
and provides links to a more complete explanation of the tax
issues. Finally, the taxpayer can display and print a
certificate.
IRS Local News Net
IRS Local News Net is a list server that supplements the
Web site's Digital Dispatch (there are over 70,000 Digital
Dispatch subscribers) by providing localized, targeted and
immediate information for tax professionals. It is a system
capable of reliable and efficient delivery of information to
the tax professional community across the nation.
The system is structured to support the localized nature of
information based upon the tax professional's specific local
needs. Any District Office, Service Center or Computing Center
that needs to communicate with the public or with tax
professionals on a regular basis can request a list server.
Local News Net Servers are being developed primarily to reduce
the print and postage costs incurred with the Director
newsletters.
Telephone Assistance
24/7 Phone Service and Access
One of the hallmarks of the IRS' commitment to providing
top quality service to taxpayers is 24 hours-a-day/7 days-a-
week toll-free telephone service (1-800-829-1040). So-called
``24/7'' phone service became a permanent IRS service feature
on January 4, 1999, and we offer it throughout the filing
season. After April 17, we will continue to offer around-the-
clock service for refund and account callers, and service will
be available for tax law assistance Monday through Saturday
from 7:00 AM until 11 PM. As of March 11, 2000, more than 26
million taxpayers have been served in FY 2000, compared to
almost 29.9 million over the same period last year.
As the Subcommittee is aware, the expansion to 24 /7
service last year, combined with increased training demands to
implement the new tax law requirements, caused the effective
level of service to decline, especially during the beginning of
the filing season. However, we believe we have turned a corner
this filing season. The upward trends across the board in phone
service are most encouraging and show that our investments in
training, management and technology are beginning to pay
dividends. For this filing season as a whole, our level of
service is 65 percent so far compared to our target of 58
percent. In the last four weeks, the level of service averaged
70 percent.
Some of our toll-free telephone strategies and initiatives
for the 2000 filing season include: the Customer Service Field
Realignment implemented October 1, 1999, that will help us to
make the best use of staffing by routing calls to where we have
trained people available; the increased ability to answer tax
law inquiries by assigning additional compliance staff during
regular hours and overtime and supplementing them with Appeals
officers; improved accessibility to and service from the
National Taxpayer Advocate; and expanded Spanish Language
Assistance.
One of the very important steps we are taking to improve
telephone service is to change the way we measure service and
quality to better reflect the ``real world'' way that taxpayers
receive it. These are more stringent, but also more useful
ways, of measuring.
For access, we have begun to measure the percentage of
calls in which the taxpayer receives actual service, in
relation to the percentage of time the taxpayer simply gains
access to our system.
To promote consistency in call accounts quality, we
established a Centralized Quality Review Site in October 1999
to replace the field review process we had previously employed.
The reported quality rate is lower in FY 2000 because the IRS
is reviewing more stringently for adherence to Internal Revenue
Manual requirements. If Customer Service representatives do not
perform all action required by the IRS, the call is marked as
incorrect.
In order to deliver truly high quality communication to
taxpayers, we need to improve the management, organization,
technology and training that support these operations. This is
a major long-term objective of our overall modernization
program.
Referral Mail
R-Mail (or Referral Mail) is a system that facilitates the
referral of tax law questions on specific categories to
Compliance employees.
Up until the 2000 filing season, Customer Service employees
transcribed these phone message recordings to paper and faxed
or delivered them to Compliance employees. Compliance employees
made two attempts to call taxpayers and if no contact was made
on the second attempt, the message was discarded or filed. This
system was time consuming and inefficient. Its deficiencies
included poor workload controls and lack of management
information.
The R-mail system rolled out nationwide for the 2000 filing
season addresses these problems. It provides a more effective
method for moving this referral workload to Compliance staff
than the previous cumbersome ``message offloads'' from
recordings and unreliable distribution of paper.
Calls on the topics identified for Compliance referral are
routed to screeners through our routing scripts. CSRs type a
brief message into a template on the R-mail system and add each
question to the centralized database. Revenue Agents and Tax
Auditors from all over the country who are assigned to do the
callbacks are immediately able to access the questions from
their computers using a Web browser and call taxpayers back
with answers.
Other than obvious workload distribution advantages, this
system also provides not only better service to taxpayers, but
easily quantifiable management information, improved controls,
and the elimination of clerical time associated with logging
and filing of paper referrals.
Forms By Fax
Taxpayers can receive more than 150 frequently used tax
forms 7 days a week, 24-hours-a-day from IRS TaxFax. Taxpayers
can request up to three items per call. Taxpayers use the voice
unit of their fax machine to dial the service at 703-368-9694.
The only cost to the taxpayer is the cost of the call.
Recorded Tax Information
TeleTax has 148 topics available 24 hours-a-day using a
Touch-tone phone. Taxpayers can call (toll-free) 1-800-829-4477
to hear recorded information on tax subjects such as earned
income credit, child care/elderly credit, and dependents or
other topics, such as electronic filing, which form to use, or
what to do if you cannot pay your taxes. Nearly 11.5 million
taxpayers used TeleTax last year for recorded tax information;
as of March 11, 2000, over 3.3 million have taken advantage of
the service so far this fiscal year.
Automated Refund Information
In FY 1999, more than 34 million taxpayers used the
Automated Refund Information system on TeleTax to check on the
issuance of their refund checks. As of March 11, 2000, the
number stands at over 14 million. Taxpayers may call 1-800-829-
4477 to check on their refund status Monday through Friday from
7 a.m. to 11:00 p.m. if using a touch-tone phone, or 7:30 a.m
to 5:30 p.m. for rotary or pulse service.
Taxpayer Assistance Centers
Saturday Service
Delivering on our promise to supply even more reliable and
helpful taxpayer assistance, the Internal Revenue Service is
providing Saturday service for the entire 2000 filing season at
275 locations nationwide, and for the first time, Sunday
service on April 16th. As of February 29, 2000, we served
62,496 taxpayers on weekends. So far this filing season, we
have served over 2.8 million taxpayers at all Taxpayer
Assistance Centers--a nine-percent decrease from last year.
The Saturday Service sites were selected based on their
weekend accessibility, year-round operational status, and high
traffic volume and include non-traditional locations, such as
shopping malls, community centers and post offices.
On each of the Saturday Service Days, IRS employees
provided taxpayers with the following services: (1)
distribution of forms and publications; (2) answers to account
and tax law inquiries; (3) verification of Individual Taxpayer
Identification Number documentation; (4) processing of alien
clearances; (5) acceptance of payments; and (6) return
preparation.
While some taxpayers prefer face-to-face meetings with IRS
personnel to resolve their problems, we believe that in the
long run, most taxpayers can be best served over the toll-free
telephone services and the Internet. We also believe that by
energizing the VITA return preparation program and co-locating
these activities at the Taxpayer Assistance Centers, the IRS
will be able to focus on simple account and collection issues.
Problem Solving Days
Problem Solving Days continue to be a great success story
on the problem resolution front. Last year, nearly 32,000
people took advantage of this program. According to the
National Taxpayer Advocate's 1999 Annual Report to Congress,
the IRS handled 57,450 cases during the program's first two
years. More than half the cases revolved around seven issues
raised by taxpayers: audit reconsiderations (6,667 cases),
Offer in Compromise issues (6,330), requests for technical/
procedural explanations (4,124), Installment Agreements
(4,083), account and notice inquiries (3,393), various penalty
issues (3,247) and inability to pay issues (2,561). Since the
report was issued, an additional 5,700 taxpayers have been
served during Problem Solving Days.
There were a number of lessons learned from handling these
cases: (1) Most taxpayers prefer a telephone solution to their
problem, although some still want the option of a face-to-face
meeting; (2) taxpayers want their issue resolved with one
contact; (3) an increasing percentage of cases at Problem
Solving Days involve routine issues, and systemic long-standing
problems cases are becoming the exception; (4) most of these
routine cases could have been resolved either by phone or in
person at our current Taxpayer Assistance Centers; and (5)
cross-functional coordination is an essential ingredient to
effective problem solving.
In July 1999, the IRS transferred responsibility for
Problem Solving Days from the Office of the National Taxpayer
Advocate to the IRS Chief Operations Officer. The Chief
Operations Officer created a task force to study ways to
institutionalize Problem Solving Days into every day operations
and presented its recommendations earlier this year.
A project office is now operational in Customer Service.
One of the key recommendations is to move key features and best
practices that have evolved from Problem Solving Days and
incorporate them into a plan for implementing the Taxpayer
Assistance Centers. However, during this transition, we
continue to hold the annual National Problem Solving Day and
local Problem Solving Days. A total of 74 Problem Solving Day
events were scheduled across the country from January through
March 2000. Taxpayers can get schedules for these special days
from the IRS Web site or by calling their local IRS office.
Volunteer Programs
Through February of the 2000 filing season, over 112,000
taxpayers were assisted by IRS Volunteer Income Tax Assistance
(VITA) and Tax Counseling for the Elderly (TCE) volunteers at
more than 4,400 sites. During all of FY 1999, over 3.4 million
taxpayers were assisted by more than 71 thousand VITA and TCE
volunteers.
We also opened up VITA and TCE offices that were in
locations close to our assistance centers and offices observing
EITC Awareness Days. Our volunteer programs are set up in
shopping centers, libraries, churches and community centers,
providing an additional avenue of support to taxpayers visiting
an IRS office for EITC assistance.
In addition to this type of volunteer assistance, our
outreach program targeted expanding EITC education and
assistance. We identified EITC coordinators in our offices who
are responsible for the full complement of EITC outreach
activities. While no data is available yet for FY 2000, during
FY 1999, this program reached 174,067 EITC taxpayers through
social workers, community organizations, homeless shelters and
faith based organizations.
Our challenge for the 2000 filing season was to provide
volunteers with the necessary tools to assist taxpayers and
reduce the burden on internal resources. To this end we loaned
5,300 computers and 3,400 printers and provided software
(TAXWISE) to volunteer sites. We are also identifying
communities that would benefit from EITC programs and
recruiting volunteers through the Internet.
The IRS Corporate Partnership Program
The IRS Corporate Partnership Program has expanded
dramatically. While our initial goal was to partner with 500
companies that had 600,000 employees, there are now more than
2,366 companies with more than 15.5 million potential employees
in the program. Employees of these firms can get forms through
the corporations' Intranet site or local LAN."font-family:
Arial">
Tax Package Innovations
In recent years, the IRS has worked with private
contractors to improve forms, instructions, and publications by
making it as simple as possible for taxpayers to understand and
fulfill their tax obligations. The contractors have brought a
wide range of expertise, including behavioral science and
learning theory, to bear on the challenge. Application of these
principles has enabled us to simplify language and use graphic
and other cues to aid taxpayers.
Specific areas targeted included the Earned Income Tax
Credit (EITC) and Child Tax Credit (CTC) forms, worksheets, and
instructions. The joint team effort used behavioral science
principles to evaluate the effectiveness of the existing EITC
and CTC materials, and to make improvements. While we do not
yet have data from this filing season, the reworked forms and
instructions received favorable reviews in focus group
sessions, showing a dramatic decrease in the error rate. The
redesigned EITC instructions refer taxpayers with very complex
situations to Publication 596, Earned Income Credit. Removing
consideration of these special situations from the instructions
simplified filing for 90 percent of taxpayers claiming the
EITC. Five publications have also been rewritten working with
contractors using these same principles.
For the 2000 filing season, most taxpayers whose only
capital gains are from mutual fund distributions will not need
to file Schedule D (Form 1040), Capital Gains and Losses.
Rather than having to complete the 54-line schedule, these
taxpayers can use a 15-line worksheet. This represents a
dramatic burden reduction for approximately six million
taxpayers. For the 2001 filing season, a line will be added to
Form 1040A for reporting capital gain distributions from mutual
funds, thus allowing the Service to send the simpler Form 1040A
package to the approximately 2.5 million taxpayers who in the
past had to file Form 1040 to report those distributions.
Simplification Initiatives
The IRS released a new version of Form 8857, Request for
Innocent Spouse Relief, that makes it easier for taxpayers to
use the form. Using the revised form, filers are guided through
the various types of relief available (innocent spouse,
separation of liability, and equitable relief) through the use
of simple-to-answer questions with Yes/No checkboxes. The
instructions were revised to clarify key points and definitions
such as the difference between understatement of tax and
underpayment of tax. The revisions reflect feedback from
various sources, including focus groups held at the IRS' Austin
Development Center.
In an effort to streamline the amount of information with
which small businesses must contend to meet their requirement
to file information returns, the IRS also developed the
following new products for 2000, while continuing to provide a
booklet for payers who need all of the Form 1099 information.
The new products should help the majority of small businesses
that are required to file only one or two of the various
information returns:
A separate new booklet containing only general
instructions (16 pages) for use by all filers who need only
certain form instructions; and
Fourteen new separate form instructions for payers
who need only the information pertaining to the forms they file
(some form instructions have been combined based on forms used
by certain filers).
The Form 5500 series for 1999 used for reporting employee
plan information was also substantially revised and improved.
The prior Forms 5500 and 5500-C/R were replaced with one Form
5500. The revised form will streamline reporting, filing, and
processing.
In addition, we removed two lines from Schedule AI, Part II
of Form 2210. Part II of Schedule AI is completed by self-
employed taxpayers to figure their self-employment tax when
computing any estimated tax penalty. Each line had four entry
spaces, one for each payment period. Thus, these taxpayers now
have two fewer lines to complete and eight fewer calculations
to make.
For the longer-term, the IRS' Tax Forms and Publications
Division entered into a multi-year contract with The Gallup
Organization to help determine the degree of customer
satisfaction with tax forms and publications. The contractor
will work with the division in gathering data through surveys,
focus groups, and other methods to measure customer
satisfaction, reduce both processing and taxpayer errors, and
identify other possible improvements to division products.
In addition, the Tax Forms and Publications Division is
working with the Indiana District Office Research and Analysis
(DORA) in the Simplifying Filing Research Strategy. This
initiative will identify opportunities to migrate taxpayers to
simpler returns, improve tax forms and instructions through
detailed analyses of where errors are being made on current
forms, and minimize the number of taxpayers affected by
proposed changes to tax forms and instructions. This strategy
initially focused on individual taxpayers, but has been
expanded to include forms used by small business taxpayers.
Finally, the IRS established several vehicles for
conducting focus group interviews with Service employees to
test new and redesigned products. These include use of the
Development Centers in the Austin and Ogden Service Centers,
and establishment of a cadre of IRS employee volunteers. Use of
these resources enables us to conduct focus group interviews on
short notice and at minimal cost. Also, we have found that in
addition to doing an excellent job of providing input from a
taxpayer's perspective, these employees also provide us with
valuable insight into how the revised products will impact the
IRS.
Tax Packages
For most taxpayers, the 2000 filing season tax packages
contain forms that look very much like last year's. There are
different dollar amounts associated with some tax benefits,
such as the higher $500 per child limit for the child tax
credit, but the structure of the forms is very similar. There
were very few tax law changes for 1999, and these are reflected
in the forms and instructions.
When the IRS finalized the content of the tax packages in
October, it included a cautionary note about pending
legislation. After Congress extended various expiring
provisions, the IRS was able to replace the caution--or add an
insert to ignore it--in all but about eight million of the 26
million forms packages. Taxpayers receiving these packages also
received a postcard telling them that the forms and
instructions were all right to use.
The one thing entirely new to the tax packages is not tax-
related. Photos of missing children appear on otherwise blank
pages of the tax instructions and other publications. The IRS
is working with the National Center for Missing and Exploited
Children to expand the distribution of photos of lost, abducted
or runaway children.
Newspaper Supplement Program
The Newspaper Supplement Program promotes distribution of
IRS forms in selected areas that do not currently have
sufficient outlets for tax products. There are currently six
newspapers enrolled in the program with a circulation of
1.1million readers. Each newspaper distributes six pre-selected
tax items (Forms 1040, 1040EZ, 4868, Schedules EITC, A&B, and
Publication 2053, Quick and Easy Access to IRS Tax Help and
Forms) in one of their upcoming Sunday editions. The IRS will
supply the newspapers with enough forms to satisfy one Sunday
circulation. All participating newspapers distribute in one or
more of the counties identified as needing additional tax form
outlets.
Taxpayer Rights Implementation
RRA 98 required the IRS to implement 71 new or modified
taxpayer rights provisions, many of which were effective either
on date of enactment, or within six months of it. At the same
time, the IRS received recommendations from many sources about
other pressing changes that were required to improve service or
fix problems. These included such basic matters as availability
and quality of telephone service, rewriting of notices and
letters sent to taxpayers, control over inventory of assets and
hundreds of other matters.
For example, over the last year, the IRS received 58 audit
reports from the Treasury Inspector General for Tax
Administration (TIGTA) containing 314 specific recommendations
for changes or improvements and 74 reports from GAO containing
42 specific recommendations. In addition, there are 127 TIGTA
and 36 GAO audits underway. The National Taxpayer Advocate
identified the top twenty problems affecting taxpayers and made
recommendations as to what should be done about them.
Addressing and managing these changes requires significant
management attention, and many require additional resources,
including information systems resources, to implement.
In this context, the first priority was implementation of
the taxpayer rights provisions of RRA 98 in accord with the
law. Given the short time frames, and many competing demands,
our capacity to provide guidance to the public and to employees
and to conduct training for the 100,000 employees affected was
stretched to the limit. The initial focus was on ensuring legal
compliance. In many cases, we did not know the amount of time
and resources that would be needed to carry out these
provisions. In FY 1999, for example, we had briefings and
training on 55 RRA 98 provisions and provided a total of two
million hours of training. We estimate that nearly 4,560 full
time equivalent personnel were required for the specific
administrative provisions of RRA 98.
We are at the stage where we have implemented the RRA legal
provisions. However, we have several years of work ahead to
make them work more efficiently and with higher quality. Our
immediate challenges are primarily training and management. We
are continuing a high level of training in FY 2000.
I want to stress that we are wholly committed to
implementing each and every taxpayer rights provision and
making them work as intended, while still fulfilling our
mandate to collect taxes that are due. We will get the job done
and we will get it right. However, we will also make mistakes
along the way and we are not yet at an acceptable level of
quality, efficiency and effectiveness in the way that we are
implementing some of these provisions.
New Taxpayer Advocate Organization
The Taxpayer Advocate Service (TAS) is in the process of
implementing a modernized structure as called for in RRA 98.
The new organization officially ``stood up'' on March 12, 2000.
TAS is competitively hiring over 2,300 individuals to work full
time in the Taxpayer Advocate Service. All Taxpayer Advocates
will report to the National Taxpayer Advocate rather than to an
IRS District or Center director. Every state now has at least
one Taxpayer Advocate. Separate addresses, telephone and fax
numbers for Taxpayer Advocates are being published as the
telephone directories are updated. They are also included on
notices of deficiency. Because of the restructuring, TAS will
be better positioned, better trained and more focused to
address the more difficult problems facing taxpayers.
The expanded hardship criteria as called for in RRA 98 also
changed the way TAS classified cases. This change allows more
taxpayers to qualify to be considered for Taxpayer Assistance
Orders (TAOs). Compared to FY 1998, nearly three times as many
taxpayers qualified for consideration for a Taxpayer Assistance
Order. The expansion of the hardship criteria was so dramatic
that TAS no longer found it necessary to maintain the separate
problem resolution criteria. By adopting a single unified
criteria governing TA cases, the TAS was able to make it easier
for taxpayers and the IRS staff to understand the types of
cases that qualify to come to the Taxpayer Advocate for
assistance.
Between FY 1998 and FY 1999 the number of regular cases
worked in the Taxpayer Advocate Service decreased by 29
percent, or by 81,704 cases. At the same time, the number of
cases that met the rules for Application for Taxpayer
Assistance Order increased by 281 percent, or by 59,869 cases.
Once again, this shift in casework is explained by the expanded
rules for Application for Taxpayer Assistance Order criteria
defined in RRA 98. Overall, the number of cases worked in the
Taxpayer Advocate Service decreased by 7 percent, or by 21,835
cases.
Citizen Advocacy Panels
The Citizen Advocacy Panels achieved several major
successes during the first year of operation. In addition to
the South Florida panel, three additional Citizen Advocacy
Panels were established in Brooklyn, Pacific-Northwest and
Midwest Districts. Although independent, the panels came
together in late June for a national conference. The meeting
provided members with an opportunity to discuss their roles,
share ideas and experiences. As a result, coordination and
teamwork among panel members has increased.
Included in the accomplishments of the past year, the
Pacific-Northwest panel worked with their local districts'
small business lab unit to develop software that analyzes
questions posed to the IRS through the Services' Web site, the
``Digital Daily.'' The result should be improved categories of
responses--more closely meeting the needs of taxpayers.
The South Florida panel also forwarded two recommendations
to the Department of the Treasury: (1) the inclusion of a
limited power of attorney on federal tax returns; and (2)
changes to the Earned Income Tax Credit (EITC) to redefine
qualifying child, household, and age requirements. The Brooklyn
Panel is working with IRS to clarify wording and make
recommendations for improvement to Publication 596, Earned
Income Credit and the 1040 Schedule for EITC. In addition, the
Midwest Citizen Advocacy Panel continues to work with the
Taxpayer Education office to solicit input not only from
individual taxpayers, but also from members of the Bar
Associations and various tax practitioner groups.
1999 Revenue Protection Strategy
During the 2000 filing season, validation of Social Security
Numbers (SSNs) and other tax identification numbers will continue to be
a very visible portion of our overclaim prevention efforts for the
Earned Income Tax Credit (EITC).
We have expanded the validation of SSNs/TINs to virtually all forms
and schedules requiring identification numbers. We will identify
dependent SSNs claimed on more than one return along with the improper
claiming of children for the dependency exemption and/or EITC.
Taxpayers with incomplete returns, invalid or duplicate SSNs, or
returns demonstrating patterns consistent with profiles of invalid EITC
claims can expect to have their refunds delayed or disallowed through
``math error'' procedures or examinations.
Beginning this filing season, we will test the Dependent Database
that includes records from the Social Security Administration and the
Office of Child Support Enforcement at Health and Human Services. These
records contain data linking the names and SSNs of dependent children
with the names of their parents and their parents' SSNs, along with
information on custody and child support obligations. IRS is testing
this data to identify the appropriate tax return for examination and
eliminating unnecessary contacts with taxpayers who appear to be
eligible for EITC, the Child Tax Credit and the dependency exemption.
We have expanded the EITC Communications Strategy in FY 2000 by
initiating an integrated compliance strategy with the paid return
preparer community. It consisted in part of
Outreach/Education: Over 9,000 return preparers who
prepared over 100 EITC returns were contacted and offered an
opportunity to meet one-on-one with an IRS Revenue Agent and receive
guidance on EITC and their due diligence responsibilities. Acceptance
of the visits was voluntary and nearly 8,000 return preparers
participated and were provided with materials and an overview of EITC
specifically developed for tax return preparers. Additionally, we
worked closely with the major tax return preparation services to
provide information and training material as well as providing
presentations at their tax year planning conferences.
A telephone survey to determine the level of customer
satisfaction achieved by these outreach visits was conducted by the
Gallup Organization for the IRS and the results of that survey
indicated that 83 percent of the contacted preparers were very
satisfied with the education/outreach visits. Similarly, high scores
were given for the clarity and completeness of the information provided
to the preparers.
Due Diligence: Approximately 1,100 preparers of EITC
returns were examined to determine if they were complying with the due
diligence requirements including the requirement that practitioners
exercise due diligence in determining whether a taxpayer meets the
eligibility requirements of the EITC. Penalties were asserted against
149 preparers.
For the fiscal year ending September 30, 1999, IRS examination
resulted in approximately 605,000 cases closed with protected or
collected revenue of $740 million and math error corrections/
adjustments of $383 million total of $1.123 billion.
FY 2001 Budget Request
To deliver on the RRA 98 mandates for improved service and taxpayer
treatment while also increasing compliance effectiveness, IRS requires
increased funding in FY 2001. With improved management and technology
enabling the delivery of improved service and increased compliance
effectiveness, the IRS will be positioned to succeed with limited
resources in future years. As the streamlined management and new
technology become effective, the IRS can also improve efficiency and
maintain a stable workforce in relation to the economy. However, we
face a major budget challenge in FY 2000 and FY 2001, which, unless
addressed, will threaten not only the IRS reform and restructuring
program, but the entire tax system.
The FY 2001 request is $8.841 billion (without the Earned Income
Tax Credit Account), $769 million more than the final FY 2000 enacted
level of $8.072 billion. This is $729 million over the FY 2000 proposed
funding level of $8.112 billion, which includes a $40 million
supplemental to stabilize the IRS workforce. Of this increase, $119
million is for resuming funding of the Information Technology
Investment Account (ITIA) for which there was no funding in FY 2000.
The IRS requires this increase in FY 2001 to deliver on the RRA 98
mandates, manage organizational modernization, and invest in critically
needed information technology.
Our budget request has two broad management categories: (1)
Maintaining Current Operations, and (2) Modernization. Increases to
maintain current operations include more FTE to assist in stabilizing
enforcement activity levels and modestly increasing service levels, and
to provide adequate non-labor resources for increasing electronic tax
filing capability and contractual support for critical operational
activities of the agency. Increases for modernization include funds for
completing organizational modernization, business line investments, and
replenishing of ITIA. The requested resources provide for full
implementation of RRA 98 along with plans to modernize and realign the
IRS organization, and fund the workforce.
Maintaining Current Operations
To implement RRA 98, the IRS must modernize its organizational
structure and technological base. However, during this time, we must
also maintain operational activity at acceptable levels.
As I discussed earlier in my testimony, RRA 98 established 71
taxpayer rights provisions, each of which imposed additional procedures
or new requirements for tax administration. This increased the time
required to handle existing cases and required the IRS to divert
compliance personnel to handle new procedures such as Innocent Spouse
and Third Party Notice provisions. In addition, other compliance
personnel were re-assigned to provide extended hours of telephone and
walk-in service. This came on the heels of declining staffing from FY
1996 through FY 1999.
In part because of these changes and increased workload demands,
the number of examination and collection cases handled declined by half
since 1997. This illustrates the need to balance the continued
improvements in customer service with funding adequate to maintain
enforcement activity to collect unpaid taxes and address areas of
potential under-reporting of income.
Current Services Level
The IRS is requesting a net increase of $336 million to maintain
the current services level. The IRS is a labor-intensive organization
and we must have a stable workforce. To maintain current operations,
carry out a successful filing season, oversee tax administration
programs, and implement organizational modernization, the IRS must have
the resources to pay for the inflationary costs associated with
statutory pay and other mandatory increases.
Since 1992, the IRS workforce has decreased more than 16 percent
while handling significant increases in workload due to tax law changes
and customer demand. The downward trend in FTE is the result of: (1)
reduced funding in general; (2) inadequate funding for pay components,
such as costs of within-grades (WIGs) and promotions; and (3)
insufficient funding of non-labor inflationary costs for required
agency-wide shared services support costs. During the last few years,
costs for Support Services have been cut to a bare minimum. In
addition, the IRS has proactively reduced rent costs. From FY 1996
through FY 1998, the IRS released 2.5 million square feet of space for
savings of $40.8 million. There is little room for further cost
reductions. Any further cuts in agency-wide shared services support
will result in further FTE reductions.
It is vital to note that the long-term decline in the IRS workforce
due to funding constraints has led to a situation where virtually no
hiring has been done since 1995 in critical front-line skilled
positions. For example, in a revenue agent workforce that was over
15,000 in 1995 and hovers at 12,000 today, the IRS has only hired 75
revenue agents since 1995. Funding of our current services request,
together with the STABLE initiative discussed next, will allow us to
begin the process of meeting the need for critical skilled positions.
Stabilizing the Workforce (STABLE)
The IRS is requesting $144 million and 1,633 FTE to stabilize and
strengthen tax compliance and customer service programs in FY 2001 and
$39.8 million and 301 FTE for a FY 2000 proposed supplemental. This
request is collectively known as the STABLE (Staffing Tax
Administration for BaLance and Equity) Initiative.
Efforts have been made to improve toll-free service, improve access
to new web-based products and information, and expand electronic
filing/payment options. However, staffing resources devoted to critical
compliance and enforcement programs have declined by more than 20
percent over the last five years.
Beyond the reduction in staffing levels, annual growth in return
filings and additional workload from RRA 98 contributed to a steady
erosion of enforcement presence, audit coverage, and case closures in
front-line compliance programs. Current estimates of additional work
directly related to RRA 98 total nearly 4,560 FTE for Compliance and
Customer Service activities. Although the IRS is fully committed to
delivering on every mandate and objective of RRA 98, it is essential
that we restore and maintain adequate staffing levels in our key
program areas.
To ensure that the benefits of this initiative are realized as
quickly as possible, the IRS has proposed a supplemental FY 2000
appropriation, which, if approved by Congress, would allow the hiring
of 301 FTE in FY 2000. This would ensure that most training of new
hires would be undertaken in FY 2000, allowing the impact of these new
hires to be fully maximized in FY 2001.
With this staffing level, we expect that in 2001, the IRS will be
able to slightly increase levels of service and stabilize the level of
exam and collection activity while complying with the taxpayer rights
provisions of RRA 98.
Electronic Tax Administration (ETA)
The IRS is requesting $3 million for ETA to continue progress
toward achieving the congressional goal that 80 percent of all tax and
information returns be filed electronically by 2007. In RRA 98,
Congress established the interim goal that all returns prepared
electronically, but filed on paper (approximately 80 million) be filed
electronically by 2003. Increasing taxpayers' awareness and
understanding of IRS e-file products, services and benefits will help
close the gap between the projected range of 44.1 -49.4 million returns
being filed electronically in 2003 and the aggressive goals established
by Congress. This funding will be used to expand marketing efforts that
communicate the benefits of IRS e-file to both taxpayers and
practitioners. The IRS plans to advertise in the television, radio, and
print media; continue the launch of a business marketing campaign; and
conduct the necessary marketing research to ensure that ETA products
and services meet our customers' needs.
Contract Management
In FY 2001, we are requesting an increase of $44 million to fund
necessary contracts that support general operations, mandatory
contractual arrangements and necessary outside expertise. In prior year
budgets, we funded these contracts--which were absolutely necessary to
conduct business--by reducing funding available for staffing. This is
in contrast to our FY 2001 request that simply requests the necessary
funding. Mr. Chairman, I would like to stress that contractual support
is critical to maintaining operations and implementing RRA 98 and the
Modernization program. Our contractual support is in three categories:
mandatory, operational and expertise contracts. I would like to
describe for you the type of contracts and provide examples:
Mandatory contracts make up 44 percent of the total budget
and are required by law, or agreement with other Federal agencies.
These include National Archives storage of tax records; Treasury's
Financial Management Service activities for tax refunds and lockbox
collections; and Low Income Taxpayer Clinic grants.
Operational Contracts make up 32 percent of total budget
and support IRS operations. Examples include funding for Currency
Transaction Report processing, FedWorld management of the IRS Web Site,
and Multilingual Interpretation services for Walk-in offices.
Expertise Contracts make up the remaining 24 percent and
are required to obtain expertise outside the IRS for activities
including outside services for customer satisfaction surveys and
rewriting of IRS Forms and Publications in plain English.
Modernization
The IRS budget is only a small part of the cost to the
public of administering our tax system. Most of the costs, both
tangible and intangible, are related to what the public
encounters when it must deal with the IRS. The tangible cost is
each taxpayer's time and money. The intangible cost is the
frustration of being treated poorly when making an honest
effort to comply with a complex tax code. Moreover, this
frustration has occurred at a time when the level of service
that many people are receiving from other service providers has
been increasing. In order to provide better service to
taxpayers across the board, we need to reengineer the entire
way the agency does business.
In addition, the tax system depends on each taxpayer who is
voluntarily paying the tax owed having confidence that his or
her neighbor or competitor is also paying. Modernization will
enable the IRS compliance activities to identify more
effectively areas of non-compliance and to address them
promptly, accurately and fairly.
Organizational Modernization
In FY 2001, an additional $42 million is being requested to
cover IRS reorganization expenses. These costs will peak in FY
2001, decline in FY 2002, and end in FY 2003. The IRS
organizational modernization involves the first complete
reorganization of the IRS since 1952. Essentially all
management positions above the first line are being redefined;
district and regional offices are being eliminated; and some
new front-line positions are being created. This massive change
is being done with the objective of minimizing physical
relocation and associated costs. However, some relocation of
personnel and a great deal of reassigning and retraining are
required. In addition, some managerial and administrative
positions are being eliminated and it is necessary to assist
the incumbents in these positions either to find new positions
in the IRS or to retire.
Together with the $140 million included in the FY 2000 base
for this effort, this request will be used to cover all the
expenses of the reorganization. These costs include buyouts,
recruitment, relocations, employee training, equipment,
services and supplies, telecommunications moves and
installations, and modifications of information systems to the
new organizational structure. Resources are also requested for
design work, space alterations, and contract movers to
physically align employees with their operating divisions for
the Area and Industry Offices, Chief Counsel Headquarters,
Information Systems, and the National Office. These resources
cover all aspects of organizational change that will complement
the IRS' systems modernization efforts and implement the RRA 98
reorganization mandate.
Business Reengineering and Technology Investments
The IRS depends entirely on its computer systems to
administer the tax system and to collect and properly account
for $1.9 trillion of tax revenue. Nearly every IRS employee
depends on computer systems to perform his or her daily
activities, such as processing returns, answering taxpayer
questions, adjusting taxpayer accounts, sending out notices and
letters, conducting examinations and collecting overdue
accounts.
However, the IRS base of existing systems, which evolved
over a 40-year period, is totally inadequate to support these
activities at an acceptable level of service to the public,
internal efficiency, or acceptable risk. GAO and TIGTA
repeatedly identify serious problems and risks in IRS
operations and financial management, many of which cannot
realistically be rectified except by a near total replacement
of IRS' systems.
In addition, nearly all the numerous changes required to
improve service to taxpayers under RRA 98, and to increase the
effectiveness of compliance activities depend on improvements
to IRS' information systems. As indicated earlier in the
testimony, it would be extremely expensive and require very
large increases in staff to meet the service and compliance
demands of an increasing economy and the RRA 98 mandates by
simply adding staff. Instead, the IRS must reengineer and
replace its archaic processes and systems.
Since reengineering the IRS' business practices and systems
is a massive job that will take many years, it is necessary to
set priorities and adopt time-phased plans since the needs and
opportunities for systems improvements are far greater than can
be accommodated in any one year, or even a few years.
Business Line Investments
Most of the largest scale and most complex systems'
improvements will be accomplished through the agency-wide Core
Business Systems program that is funded by the ITIA and is
discussed below. However, there are dozens of smaller and more
focused high-priority needs to support and improve operations.
They are either too specific to be included in the Core
Business Systems program, or, if they were included, would not
be delivered for many years. The IRS has gone through a
prioritization process for these business line investments and
requests funding for $40 million in FY 2001 for only the
highest priority of such projects.
We are requesting the $40 million to develop, redesign or
acquire new systems to improve:
(1) The Taxpayer Advocate's ability to identify problems
and recommend changes to the business process by redesigning
and consolidating multiple, stand-alone systems into one
management and control system;
(2) The management and reporting of taxpayer and employee
complaints by designing a new system;
(3) The new Tax Exempt/Government Entities organization's
ability to process determination requests, contacts with
requestors and track the deposits of fees;
(4) The notices sent to taxpayers, including clarity and
reduction of the need for multiple contacts with taxpayers;
(5) The Chief Counsel Case Management activities, including
modernizing many business rules and updating the system to save
costly manual work and improve Counsel's ability to timely deal
with the Courts, taxpayers and IRS' needs; and
(6) The walk-in sites' efficiency and service to taxpayers
by providing automated management tools of tax information to
about 125 walk-in sites.
ITIA Funded Core Business Systems
The Core Business Systems program is an agency-wide program
designed to reengineer all of the basic IRS' business processes
and the computer systems that support them. After the award of
the PRIME contract in December of 1998, the IRS spent CY 1999
and the early part of CY 2000 building the management and
governance process necessary to manage this huge program;
developing plans for the near-term and medium-term projects;
and beginning to update architectural and technology
infrastructure plans. This program is being very carefully
managed at the highest levels within the agency and adjustments
to plans are made frequently based on experience to date and on
risks anticipated.
The first, relatively small projects to be delivered will
provide for improved telephone service during FY 2001 and
provide improved tax computation capabilities to examiners.
Further enhancements to taxpayer service over the Internet and
increased electronic tax administration services will follow.
Two critically important projects will be planned in detail in
FY 2000 and are expected to proceed to development stages in FY
2001. They will replace incrementally and over time the archaic
tape-based system that maintains all taxpayer records and
improve our financial management systems. Other critical
projects to improve service and compliance programs, including
correspondence, collection and exam are in the early states of
design and further plans will depend on results of the design
efforts.
In support of these business projects, work will proceed in
FY 2000 to complete institutionalization of the ITIA governance
process and the Enterprise Life Cycle methodology. This will
provide for the first complete update of the technology
blueprint since 1997 and complete major infrastructure and
architectural work necessary to support the other projects.
Security issues are being given special attention in this work.
In FY 2001, continued update of the blueprint and other
architectural and technology standards will be done and
additional work on infrastructure will continue as necessary to
support the business projects.
The Congress through the specified ITIA wisely planned the
funding for this core business systems program. This account
represents a practical means of funding a long-term program
such as the IRS technology modernization program. Under ITIA,
Congress appropriates the funds for the program as a whole and
the IRS is allowed to plan for continuity of the program
subject to stringent reviews and safeguards. No funds are
released from the ITIA until the IRS prepares a plan for
specific increments of funding and is reviewed and approved by
the Treasury, OMB, GAO and the two Appropriations
Subcommittees. This approval, however, still only provides the
IRS authority to proceed up to a certain funding level. No
funds are actually obligated except through a rigorous internal
process within the IRS, which is managed by the IRS Executive
Steering Committee chaired by the Commissioner.
In FY 2001, we are requesting $119 million to continue
progress as anticipated on the ITIA funded Core Business
Systems program. In FY 2000, we requested no funds for ITIA.
Remaining balances from prior year appropriations plus the new
$119 million request will support a spending level in FY 2001
of $330 million. To ensure continued funding, we are requesting
an advanced appropriation of $375 million for FY 2002.
Conclusion
Mr. Chairman, I believe we are making real progress not only to
provide better service during the filing season, but also on the goals
and mandates set forth by the Restructuring Act to bring meaningful,
positive changes to the IRS and America's taxpayers. It is true that no
one fully understood everything that would be required to implement
this far-reaching Act. However, if Congress can provide continued and
assured support for IRS modernization, such as that contained in our FY
2001 budget request, we will be able to produce the visible, tangible
changes in service, compliance and productivity that America's
taxpayers expect and deserve now and in the future. Thank you.
Chairman Houghton. Thank you, Commissioner.
Mr. Coyne?
Mr. Coyne. Commissioner, you stressed the importance of the
fiscal year 2001 as a pivotal year in the agency's
restructuring. What will be the consequences to the tax system
if the IRS receives less than the administration's requested
budget of $8.8 billion?
Commissioner Rossotti. I think that we would be taking some
real serious risks. In fact, we already have some serious risks
but I think we would be increasing them more than we should if
we are not able to get this funding. In the short term, the RRA
1998 has created an expectation among taxpayers that they will
be treated right and that they will get reasonable service.
While we are doing our best with our resources, we are still
not anywhere near the 100 percent level.
In the meantime, it is a fundamental tenet of our tax
system that the vast majority of people, the honest taxpayers,
are complying voluntarily because they have a confidence that
their neighbors or their competitors are also paying the bill.
If we continue to have the kind of declines that we have
currently in enforcement activities, I think we risk that
fundamental tenet of the tax system.
Finally, the only solution in the long term, unless we
really want to reverse the entire trend of efficiency in
government, is to invest in technology. It takes some time to
realize those benefits but we have to operate today while we
invest in technology for tomorrow and that is why we need our
budget request fullfilled.
I believe we already have a significant amount of risk
because of the massive changes that we have been asked to
comply with and the past resource reductions. I really do not
think it is wise to risk our $1.8 trillion tax system any
further than we already have.
Mr. Coyne. I understand that you are working on an EITC
compliance study currently under review. Is compliance better
relative to EITC?
Commissioner Rossotti. I really don't have that answer yet
until we get the study completed. I can only say that with the
funding the Congress gave us beginning in 1997, we have taken
steps to deal with compliance issues, both by doing the
traditional kind of compliance such as auditing many of the
returns before the refunds are out and some after the refunds
are out, but also through a very innovative program that we
instituted last year.
We did a study of the tax preparers. Many of the EITC
returns are done by tax preparers. We found that many tax
preparers do make errors in these returns. These can be
legitimate errors because of complexity or they could be just
because of lack of due diligence by the preparers.
We did a study of where these errors were occurring and we
had a program last fall for having 10,000 preparers visited by
revenue agents to point out to them what some of the key due
diligence requirements are for preparing EITC returns, the
kinds of errors being made in the past. We are hopeful this
will contribute to a reduced error rate in this filing season
which we will not know until we get the study.
We felt some preparers were not performing their due
diligence adequately, so we did more serious visits with them,
where we audited their previous activities and potentially took
enforcement action if necessary.
We have this program in place. We will get some additional
data to see how effective it has been hopefully later this
year.
Mr. Coyne. Do you have any sense of when the study will be
completed?
Commissioner Rossotti. I can only say I hope we will have
it later this year.
Mr. Coyne. Later this year. Does the study or investigation
give you any hint as to whether most of the errors that occur
are problems of fraud or are they innocent mistakes?
Commissioner Rossotti. It is really very hard to tell.
There are purely innocent errors, there are careless errors and
there are deliberate errors. It is extremely hard to separate
those. I will tell you that we have some returns that are
actually prepared by experienced IRS employees where we assist
some people at our walk-in sites. We have looked at the error
rate--those are some EITC returns--and even those returns
sometimes have errors in them because of basic
misunderstandings of what the taxpayer has said about their
personal situation.
So you have a spectrum of errors from purely mechanical or
straightforward errors to carelessness all the way up. We are
trying to address the whole spectrum of them.
Mr. Coyne. Can the IRS identify, for instance, the number
of people who are eligible for EITC say within the geographical
area of the congressional district?
Commissioner Rossotti. Can we identify the number that
actually claimed it or would theoretically be eligible?
Mr. Coyne. That would be eligible?
Commissioner Rossotti. I don't think we have that
information because it really requires knowing some fairly
specific details about the family situation. You can't just
tell it from income levels. You have to know all the things
that go into what a qualifying child is. To my knowledge, we
don't have that but I will get back to you and see if we have
some information on that.
Mr. Coyne. But you do have the knowledge and could provide
how many take advantage of the ITC within a geographic
district?
Commissioner Rossotti. Yes, we do. We have that and we can
give it to you but what we may not know is how many might not
be claiming the credit that could. We just don't have any way
of knowing that, that I am aware of.
Mr. Coyne. Thank you.
Chairman Houghton. Mr. Portman?
Mr. Portman. Thank you, Mr. Chairman.
On the ITC a couple of years ago, we had a hearing of this
Subcommittee and the best consensus guess of Treasury, GAO and
the IRS was there was about $6 billion a year in missed
payments under EITC. I am eager to see that report as well. I
think it would be an appropriate area for the Subcommittee to
delve into.
You know that I am very concerned about the complexity
analysis that was mandated under the RRA. The Subcommittee was
eager to see that report on March 1 when it was due. I know it
continues to be in process. My concern is I have heard reports
that this delay of getting the complexity analysis to us is not
due to the IRS but due to the Treasury Department reviewing the
IRS' work which was not the intent of this Congress.
I would refer you to the Code section itself which asks for
Congress to hear straight from the IRS as to the sources of
complexity and administrative problems. This came from the
Commission's work where the Commission said it would recommend
Congress hear ``an uncensored view'' of the administrability of
all tax legislative proposals and makes the point that the tax
legislative process is driven by revenue neutrality and
progressivity estimates but rarely takes into account the IRS'
ability to administer the tax law and taxpayers' ability to
comply with it.
That is the background and I think you would be the first
to agree with the need for more focus on that aspect of our job
as legislators. I would hope you could give us an answer today
as to when the complexity report is due and give us some
assurance this will be an IRS report that is unfiltered and
represents your best estimate as to what the sources of
complexity are and not a tax policy document.
Commissioner Rossotti. I am very sorry that I can't be here
on time with this report. I take these deadlines very
seriously. I have to say what we have been doing. We have been
working very hard on this but we have been soliciting the input
from technical experts in Treasury as well as counsel in other
places in order to make sure this first report is as
technically accurate as possible because that is important.
That is taking some time. That is not an excuse but it is
taking some time.
We haven't tried to tackle the whole Tax Code but we have
three areas we have focused which I think are important. Those
are the filing status and dependent qualification issue, the
alternative minimum tax and the quarterly payments issue.
We are certainly intending and I believe we will come out
with a report which will provide some useful analysis of what
causes the complexity in these three important areas, what
information we have and some possibilities as to what could be
done to deal with the complexity aspect.
As you noted, it will not be a tax policy document, it will
not deal with all of the issues you would need to think about
in order to determine the best way to fix the Tax Code because
there are issues about revenue and distribution which we will
not deal with in our report.
Insofar as the report deals with what causes complexity and
some of the things that might be done to deal with the
complexity aspect, I am optimistic that we will get this out. I
can't give you a specific date but I think we are getting close
to the point where we can submit this to you.
Mr. Portman. We need it as soon as possible because we are
once again in the process of legislating on tax matters and we
have a short year in front of us. I think it would be possible
even this year to make some changes based on your
recommendations.
I would hope you could give this Subcommittee further
assurance that these recommendations will be IRS
recommendations and that they will reflect the best thinking of
the IRS. Is that accurate?
Mr. Portman. That is our intent.
There are so many other questions I would love to get into
but I guess my major one would be in the area of the budget, we
see your need for increased personnel and increased funding for
technology. I have a concern that post-Y2K now that there are
some resources that have been freed up, perhaps the IRS has
decided to slow down a bit the pace of modernization and that
there may be some delay in some of your projects including
electronic services until 2002.
My question would be why would we want to slow down the
modernization effort because it seems to me that although there
may be a need for additional staff on the compliance side
through this year's budget, the ultimate answer here is
technology as you have said in other sessions, that technology
will lead to not only better taxpayer service but more
efficient delivery of service and fewer personnel over time.
I wonder if you could comment on that. Are we delaying and
if so, why is the IRS doing that?
Commissioner Rossotti. First, let me say I doubt you could
find a greater supporter of the idea of using technology to
improve the productivity and effectiveness of the IRS than I
am. That is the only real solution that I think exists.
The limiting factor is really how fast we can manage this
program successfully. We are going to move ahead at the fastest
practical speed. The difficulty is that these are large,
complex programs and there is a lot of risk attached to them.
As you know, there were some not successful initiatives in the
past at the IRS. The limiting factor we are dealing with is
simply how fast we can manage these improvements, with
reasonable and acceptable risk.
With respect to the e-filing part of our technology
modernization program, we did, in an earlier, preliminary plan,
have some objectives we thought we could reach for the 2001
filing season for Internet access for certain constituencies.
We did have to make a decision to delay that past that season.
It was simply because upon further examination, we simply
could not be confident--in fact, we were confident we would not
have acceptable security infrastructure in place to manage that
in the 2001 filing season. We just were not far enough along in
solving some very difficult problems there. We just did not
have the solutions to be able to go forward on that kind of an
accelerated schedule. We have not in any way backed off from
the priority. We have only tried to be realistic about what is
necessary to be successful.
Mr. Portman. I appreciate the fact that you have not backed
off.
My time is up and I would just make one other statement.
That is that under the RRA, we provided you with a public-
private oversight board that has now been through the first
process which was after a year late, the President finally made
his nominations. Now the Senate has gone through its practice
of confirmation and we need to move that on the Senate floor. I
understand there is one Senator holding those nominees. I
assume you are pleased they will soon be on board to help you
with your strategic plan?
Commissioner Rossotti. I am waiting.
Mr. Portman. Thank you, Mr. Commissioner.
Chairman Houghton. Ms. Dunn?
Ms. Dunn. I want to follow up, Commissioner, on the
technology questions of Mr. Portman.
You have a prime contractor now for the computer blueprint,
the modernization blueprint. I am wondering what benchmarks you
believe we should be using to make sure that is proceeding at
an acceptable pace?
Commissioner Rossotti. I think the best benchmark is to
look at the plans we have submitted to the Congress and have
actually published. Because the way this appropriation works,
even though money has been appropriated in previous years, in
order to get it released to us, we have to submit some very
specific programs that show exactly what projects we are going
to do. A couple of weeks ago, we submitted our request for the
remainder of this fiscal year to the Appropriations Committees.
The GAO and others have those. I would be glad to supply you
with a copy of that.
Our request lays out in some detail what the objectives are
for various timeframes. There are a significant number of
projects. To summarize them quickly, we have some shorter term
projects which are aimed at delivering some improved service
during the 2001 filing season, mainly for customer service for
phone traffic and people that call in. That is an immediate
project.
We then have a series of other projects underway including
the overall blueprint which would be aimed at the next year,
adding some additional electronic services for an array of
taxpayers and then also the financial management systems to
support the financial management improvement.
Finally, a very critical one and one in which we have made
real breakthroughs is the most critical system of all, the one
that keeps the basic taxpayer accounting records, the basic
records of every taxpayer in America. This is the most
fundamental problem that we have. We have a 35-year-old tape-
based sequential system that is updated once a week. As long as
that is there, no matter what else we do, we are not going to
be successful.
We have now come up with what I think is the first
practical way for gradually getting out from under this
terrible burden. This is one of our critical projects. There
are some others that are longer term. So there is a whole
sequence of things that we hope are laid out step by step to
deliver improved technology and improved business practices
over the coming years.
Mrs. Dunn. I would like to have a copy of that.
Commissioner Rossotti. I will get that to you.
Ms. Dunn. Let me ask a question about one of the areas that
we spent some time on as we were reviewing and reforming the
IRS, the innocent spouse provisions.
Right now I understand there is a backlog of about 45,000
of these cases waiting to be considered. I am wondering if this
is the result of changes, did we make it too complicated, are
there more cases than you expected, are we behind because we
don't have enough FTEs looking at them? What is the problem
here and what are we doing to try to get a hold on this?
Commissioner Rossotti. That is a matter I have been very
focused on. As a matter of fact, I ran into Mr. Portman in
Cincinnati airport last night because I was returning from
being all day in Cincinnati which is where we have our center
of innocent spouse processing. I was out there for that exact
reason.
Your question had a number of premises and I think the
answer is all of them are part of it. It is a rather complex
law. There are actually three new provisions plus a fourth
provision and to judge each claim, as it turns out, you really
have to look at each one of those. For example, if the
requesting spouse doesn't qualify under one of the provisions,
you then have to look at the equitable relief to see if they
might get relief under that.
Learning how to comply with the provisions and getting the
appropriate guidance out and the appropriate explanations to
our own employees about how to adjudicate these claims
correctly has been our number one problem and our number one
effort.
I am pleased to say I believe we have really come up the
learning curve quite significantly. It did take us longer than
I wish it had but my conclusion was that it was most important
to get these right. Remember, there are always two spouses
involved in most of these claims, we couldn't just process them
like a bunch of numbers, we had to be very careful. Until we
learned how to get some experience with this, we were not able
to process them very quickly.
Now, I think we have come up with that learning curve. We
have gotten some guidance and training and are very well
organized in the Cincinnati customer service site. We have
already seen that the rate of conclusion of determinations, as
they are called, to these claims has picked up. I believe over
the remainder of this calendar year, we will see a substantial
improvement in the rate of progress. I have stressed to our
employees that the first and most important thing is to do them
correctly because we really don't want to go wrong on this.
In reference to your question regarding the complexity of
the law, I don't believe it is too complicated. I might not
have said that 6 months ago because there was a time when some
of us just couldn't figure it out, but we have now learned a
lot about how to complement this provision. I think we have,
through that experience, come up with some practical ways to
make these decisions. I don't think the law is wrong, I believe
that Congress was appropriately careful to say how this should
be done. We are trying to be just as careful in our
implementation.
I can honestly say that if I come back here next year for
this hearing that we will be in a lot better shape on these
claims than we are now.
Chairman Houghton. I just have two questions. The first
ought to be rather fast.
1,769 on the basis of 8 billion is roughly 8 or 9 percent,
something like that, but what would that average out to over
the past 5 years in terms of increase?
Commissioner Rossotti. I think we would be talking about
somewhere in the 2 or 3 percent range. I didn't bring the other
chart with me but I do have a chart which I can supply to you
which goes back over the last three or 4 years.
Chairman Houghton. Anyway, in that range?
Commissioner Rossotti. Yes, and you would see that it
hasn't kept up even with the inflation rate.
Chairman Houghton. I would like that information.
Commissioner Rossotti. I will get it for you, Mr. Chairman.
Chairman Houghton. The last question has to do with
security. In the GAO report, there was a quote here about
deficiency in computer security controls that ``may allow
unauthorized individuals to access or alter the propriety IRS
information.'' This has been with us for several years.
Commissioner Rossotti. Yes.
Chairman Houghton. I am not only interested in what you
feel the security problems are and the resolution of those but
also how this affects the Internet age which we are moving
into?
Commissioner Rossotti. It just happens I do have the chart
with me and I am distributing the chart you asked for. For once
I am well prepared and have the data.
On the security issue, the IRS was way behind frankly, as
acknowledged by itself as well as GAO, in a whole variety of
areas, ranging from very simple things like physical security
like fences around the building to more intangible things such
as detecting unauthorized accesses.
Before I ever got there, I have to say there was an
important initiative underway to try to deal with these over a
long term plan. I think as GAO acknowledged in its report,
there has been very significant progress made in that area over
the last 3 years. Yet, there is still a significant amount to
be done.
We are taking two paths to accomplish this goal. First, is
we are attempting to deal with the problems that we can with
our current security system. There is no reason we can't deal
with physical security; there is no reason we can't do
background checks even on our temporary employees. Those kinds
of things can be done and we are doing them. I think in the
short term, the next year or two, we will have that part of the
problem licked.
We are also doing what we can within the confines of our
old computer systems. On the computer system side, as I
answered Mr. Portman's question, the real critical thing is to
build the appropriate security mechanisms into the new systems
that we build. In our new architecture, we are including our
security standards as one of the paramount principles that we
have to build into all these new systems.
In terms of going to the Internet, this slows us down. It
needs to slow us down because if we were to go to the Internet
without appropriate security, you would have a terrible
backlash from the public and everyone if there was a potential
security problem.
I would say in terms of using the Internet, this whole
security issue is the paramount problem; it is the limiting
factor in terms of our ability to move forward. It is a problem
even in the private sector. Many of the problems aren't so much
having the technology as the question of how to administer and
implement technology.
Chairman Houghton. Any other questions?
Mr. Portman. I just want to follow up on your Internet
point and Mr. Houghton's question about how we prepare for the
Internet age.
A month or so ago you issued a statement regarding the IRS'
interest in providing free access, electronic filing through
the Internet. Reading your testimony today, I noticed you say
again the IRS does not intend to get into the tax software
business. I see this as a potential conflict for us going
forward.
There are companies now selling software for $9.95 so
people can file their taxes through the Internet. There are
also companies providing web-based tax preparation for free.
This is becoming more widespread and it is something that is
providing a great benefit to the IRS because it is part of our
16-percent increase in electronic filing this year.
I just wonder how you, given your background in the private
sector and your familiarity with this technology and its
potential benefits are going to deal with the concern that you
have the IRS making what I view to be an appropriate general
statement that we want to bring down the barriers to access for
Internet filing and we don't want to get into the tax software
business and yet the IRS going to be moving toward what the
private sector is currently providing and really intervening in
the marketplace to a certain extent. I don't think even the
most efficient IRS can keep up with what is going on in the
outside world in terms of the latest software technology.
How are you going to deal with this issue and what are your
personal thoughts on it?
Commissioner Rossotti. That is an important question and
there is a note in the President's budget in that regard. I
appreciate the opportunity to clarify it.
Let me first make it clear what I don't think we should do.
There is no possibility I can think of where the IRS could
effectively compete in offering tax preparation software which
is a consumer product, pretty complex, needs to be user
friendly and up to date with what the private sector offers.
There are quite a few excellent providers and there are more
coming out all the time. As you note, they are going onto the
Web and I believe this whole thing is going in this direction
very soon.
There is also a section in the Restructure and Reform Act
that deals with the electronic filing which actually addresses
this issue and encourages the IRS to something like ``stimulate
robust competition in the private sector in order to drive down
the cost'' and that is really the strategy that I think we are
going to try to follow.
We want to try to use whatever techniques we can and we
will work with ETAC and our industry groups on how to stimulate
competition and provide incentives of whatever kind we can for
the private sector to provide ultimately what we hope will be
no cost to the taxpayer electronic preparation and filing over
the Web. It would not be our intention that we would provide
this in any form ourselves.
We would like to find some ways of stimulating and driving
the trend. It is already happening, as you noted, where
basically any individual taxpayer would be able to go onto a
Web site, prepare their taxes, send them to the IRS without any
direct, out-of-pocket costs to the taxpayer. That is our goal.
Mr. Portman. Again, I think there is a potential issue here
as the IRS begins to develop that technology. There will be I
think private sector options that may be displaced and maybe
some more innovative solutions that the IRS might not look to
in the future. I hope you never leave the IRS but perhaps the
next Commissioner won't be as interested or as knowledgeable
about some of these products. That is my concern, that we don't
want to displace that.
Commissioner Rossotti. It is not our intention to offer any
products ourselves. I want to make that clear. I don't think we
need to do that and I don't think that would be a wise thing to
do for the very reasons you are giving.
I think we can build on the trend that is already happening
to stimulate competition among the private sector providers. We
may have to provide some incentives to them and this was also
provided in the Restructure and Reform Act, but the idea is not
that we would provide the software or have direct interchange
with the taxpayer ourselves, but rather that we would stimulate
various private sector providers to do this. That is the
intent.
I think it is fully consistent with the direction we were
given in the RRA 1998 Act which actually explicitly said that
was what we were supposed to do.
Mr. Portman. The simpler filings including telefile, I
think the IRS has a good story to tell as well. Your telefiles
are up again this year?
Commissioner Rossotti. Actually, telefile is down a little
because the people are filing more from home on their
computers. Computer filing has almost doubled, so it has
displaced a little bit of the telefile. Nevertheless, it is a
good product.
As you noted, there are many who offer filing over the Web.
Most of those are about $9.95 and some of them are for free. We
want to drive them down even further.
Mr. Portman. Thank you, Mr. Chairman.
Chairman Houghton. Ms. Dunn?
Ms. Dunn. No.
Chairman Houghton. In giving us the information about the
average cost increase, if you could give us your assumptions on
inflation in that also, I would appreciate it.
Commissioner Rossotti. Sure.
Chairman Houghton. Thank you very much. We appreciate your
testimony.
Chairman Houghton. I would like to now call Mr. James R.
White, Director of Tax Policy and Administration Issues, GAO.
We are delighted to have you here. You may proceed.
STATEMENT OF JAMES R. WHITE, DIRECTOR, TAX POLICY AND
ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION, U.S.
GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY RANDY HITE, ASSOCIATE
DIRECTOR, GOVERNMENTWIDE AND DEFENSE INFORMATION SYSTEMS,
ACCOUNTING AND INFORMATION MANAGEMENT DIVISION AND DAVE
ATTIANESE, ASSISTANT DIRECTOR, TAX POLICY AND ADMINISTRATION
ISSUES, GENERAL GOVERNMENT DIVISION
Mr. White. Thank you, Mr. Chairman.
I am accompanied by Randy Hite on my right and Dave
Attianese on my left, also from GAO.
Mr. Chairman and Members of the Subcommittee, I am pleased
to be here today to discuss the current tax filing season and
IRS' fiscal year 2001 budget request.
With respect to the ongoing 2000 filing season, I want to
make three points. First, despite the potential for
complications due to Y2K and other systems changes, IRS' tax
processing systems have operated without any significant
disruptions of IRS' ability to process tax returns and issue
refunds. In fact, data from various sources indicate that these
systems are actually performing better than in 1999.
Second, the use of electronic filing with its potential for
faster refunds and fewer errors continues to grow. So far this
year out of about 53 million returns filed, almost half have
been electronic. The continued growth is due in part to IRS'
initiatives to make electronic filing truly paperless through
the use of personal identification numbers and electronic
payments and IRS efforts to better promote the program.
Third, compared to last year when IRS experienced a
significant decline in the quality of its telephone service,
service this year has improved. However, it is still not back
to the level achieved in 1998. Telephone service is important
because of the number of taxpayers that call IRS. From January
1 to March 4 of this year, for example, there were 21 million
calls attempted to IRS.
IRS officials we talked to cited two factors that have
played a part in keeping service below 1998 levels--a drop in
productivity and fewer staff dedicated to answering calls.
I want to switch gears and discuss IRS' budget request for
almost $9 billion which includes a 9-percent increase over
fiscal year 2000's proposed operating plan. IRS is also
requesting a supplemental appropriation of $40 million for
fiscal year 2000 and an advance appropriation of $375 million
for fiscal year 2002 for its capital account. I want to make
four points about that request.
First, we have concerns related to parts of IRS' initiative
to increase full-time equivalent staff in tax compliance and
customer service programs (know as STABLE). Because many of the
new staff associated with STABLE will work only part of fiscal
year 2001, IRS may have to ask Congress for additional funding
in 2002 when these staff will work a full year. Moreover, IRS
has a history of being unable to fill enforcement positions
that were funded by Congress.
In addition, although we agree that IRS needs to improve
its toll free telephone service, we do not believe that IRS has
provided adequate justification for increasing the number of
FTEs devoted to that service. The level of service during the
current season, while still not at 1998 levels, has improved
significantly even though IRS reduced staffing this year. Based
on these results, IRS does not need additional staff to achieve
the 2001 performance goal of a 60 percent level of service it
set in its budget request.
Accordingly, we believe Congress should consider
withholding approval of this part of the STABLE request until
IRS provides a revised estimate of the level of telephone
service it can expect to provide in fiscal year 2001 with
increased staffing.
Second, the $119 million requwsted for IRS' capital account
funding for 2001 and the $375 million requested for 2002 are
not justified. We believe Congress should consider denying
these requests and directing IRS to develop a credible request
based on defined modernization requirements and formal
estimating methods. Such congressional action should not affect
the continuity of IRS' systems modernization efforts because
IRS' own plans leave $211 million in the capital account to
cover funding needs in 2001.
Third, IRS' reorganization costs will peek at $182 million
in fiscal year 2001 and end in fiscal year 2003. However, other
costs associated with IRS' ongoing modernization such as
training and systems investments will continue well past 2003.
Fourth, and last, as I alluded in my discussion of
telephone service, IRS' budget request does not provide clear
links between the resources being requested and expected
results. We recognize that establishing such links is difficult
and other Federal agencies are struggling with this issue. We
believe nevertheless that as IRS proceeds with reorganization
and development of new performance measures, it has an
opportunity make future budget requests more useful to
Congress.
Mr. Chairman, that concludes my statement. I would be happy
to answer any questions.
[The prepared statement follows:]
Statement of James R. White, Director, Tax Policy and Administration
Issues, General Government Division, U.S. General Accounting Office
Mr. Chairman and Members of the Subcommittee:
We are pleased to participate in the Subcommittee's inquiry
into the status of the 2000 tax filing season and the fiscal
year 2001 budget request for the Internal Revenue Service
(IRS).
Our statement is based on (1) the preliminary results of
our review of the 2000 tax filing season; (2) our review of
IRS' fiscal year 2001 budget request and supporting
documentation; and (3) past and ongoing reviews of various IRS
activities, including those related to information systems and
IRS' reorganization. Much of our analysis is based on data
provided by IRS that we did not verify. However, those data
generally came from management information systems that we have
used in the past to assess IRS operations.
With respect to the 2000 filing season, our statement makes
the following points:
IRS made several important changes to its tax
processing systems before the 2000 filing season, and those
systems have operated without significant problems. Various
data sources indicate that the systems are actually performing
better than in 1999.
The use of electronic filing continues to grow,
which is partly attributable to various IRS initiatives to make
electronic filing paperless and to better promote the program.
Compared to last year, when IRS experienced
serious problems, telephone service has improved, but it has
yet to reach the level of service achieved in 1998. IRS
officials cited two factors that have likely played a part in
keeping the level of service below the 1998 level--a drop in
productivity compared to 1998 and fewer staff dedicated to
answer telephone calls.
IRS is requesting about $8.986 billion for fiscal year
2001, an increase of about $729.8 million, or 9 percent, over
IRS' proposed operating level for fiscal year 2000. IRS is also
requesting (1) a supplemental appropriation of $39.8 million
for fiscal year 2000, which is included in the proposed
operating level for that year, and (2) an advance appropriation
for fiscal year 2002 for its multiyear capital account. With
respect to those requests, our statement makes the following
points:
The supplemental appropriation and a significant part of
the increase for fiscal year 2001 is for an initiative that
would increase staffing levels in several of IRS' program areas
and which has budget implications for future years. While many
aspects of the initiative seem appropriate, we are most
concerned about (1) IRS' ability to implement the initiative
given its past history of being unable to fill enforcement
positions funded by Congress and (2) that part of the
initiative that would increase staffing for IRS' toll-free
telephone assistance program. Congress should consider
withholding approval of the requested increase for telephone
service until IRS provides a more realistic estimate of the
level of service it can expect to provide in fiscal year 2001.
IRS' request includes $1.58 billion for its Information
Systems appropriation and $494 million for its multiyear
capital account, $375 million of which would be an advance
appropriation for fiscal year 2002. Because the $494 million
request is not adequately justified, Congress should consider
denying the request and directing IRS to develop a credible and
verifiable fiscal year 2001 budget request for the capital
account that it can use in seeking, if necessary, a
supplemental appropriation.
IRS' includes $182 million to cover expenses
associated with its reorganization. Over the past year, IRS has
developed detailed designs, selected management officials, and
put in place management structures for several of its new
operating units. IRS plans indicate that reorganization costs
will peak in fiscal year 2001 and end in fiscal year 2003.
Other costs associated with IRS' modernization, such as the
costs of training and systems modernization, should continue
well past 2003.
IRS' budget request does not provide clear links
between the resources being requested and expected results. We
recognize that establishing such links is difficult and that
agencies throughout the federal government are struggling with
the same issue. As IRS proceeds with its reorganization and its
efforts to develop new performance measures, it has an
opportunity to make future budget requests more useful to
Congress.
Preliminary Data on the 2000 Filing Season
At the Subcommittee's request, we are reviewing IRS'
performance during the 2000 tax filing season. Our testimony
focuses on three specific issues--the performance of IRS'
processing systems and IRS' efforts to increase electronic
filing and improve telephone service. Our preliminary results
show that (1) computer systems for processing returns and
remittances appear to be working well; (2) the number of
individual income tax returns filed electronically has
continued to increase; and (3) taxpayers have been better able
to reach IRS by telephone than they were last year, although
service has not yet reached the level IRS attained in 1998.
Tax Processing Systems Have Operated Without Significant
Problems
Despite the potential for complications due to the
replacement of critical equipment, consolidation of operations,
and other Year 2000-related changes, IRS' tax processing
systems have operated without any significant disruption of
IRS' ability to process returns and issue refunds. In fact,
various IRS performance measures and comments from IRS
officials and a representative of the largest tax return
preparation company indicate that IRS' tax processing systems
have been performing better this year than in 1999. For
example, as of March 10, 2000, the processing time for paper
returns was at least 14 percent faster than at the same time
last year. Also, according to IRS data as of that same date,
IRS had experienced fewer system problems that caused work
stoppages than in 1999 and was able to resolve these types of
problems in less time than it took in 1999. According to the
Commissioner of Internal Revenue, IRS' ``smooth transition to
Year 2000 can be directly attributed to our thorough planning
and preparation.''
In the last few years, IRS has been involved in three major
system-related efforts that affect the processing of returns
and remittances: (1) replacing service center return and
remittance processing equipment, (2) consolidating the tax
processing computer operations of IRS' 10 service centers to 2
computing centers, and (3) rewriting applications software to
make systems Year 2000 compliant. The equipment replacement
project was completed before the start of the 2000 filing
season. The consolidation project is ongoing--five centers were
consolidated before the start of the 2000 filing season, and
the other five are scheduled for consolidation by the end of
this year. IRS' efforts to make its computer systems Year 2000
compliant were also substantially completed before the start of
the 2000 filing season.
For the past several years, IRS has been processing returns
and remittances without any significant problems. However,
considering the volume of tax returns and remittances that IRS
has to process during a filing season and the need for IRS to
annually reprogram its systems to accommodate tax law changes,
some ``glitches'' are to be expected. In that regard, IRS has
experienced some relatively minor problems this filing season.
According to IRS, those problems affected a relatively small
number of taxpayers, and prompt action was taken to address the
problems once they were identified. For example:
IRS reported that in the first week of January
2000, it issued about 440 balance due notices with erroneous
due dates. The notices were sent to taxpayers owing more than
$100,000 and account for less than 1 percent of the balance due
notices issued during that week. According to IRS, it contacted
all affected taxpayers and provided the correct payment dates.
IRS' electronic filing system improperly rejected
about 40,000 individual returns that claimed a child care
credit or reported dependent care benefits from an employer.
According to IRS officials, the problem began in mid-January
and was corrected by February 10, 2000. According to a
representative of the largest national tax return preparation
company, most taxpayers filing through his company opted to
resubmit their electronic return after IRS corrected the
problem rather than submit a paper return. According to the
representative, the problem resulted in only minor delays in
taxpayers receiving their refunds.
IRS' systems could not identify taxpayer accounts
that were affected by a power of attorney designation. As a
result, a few hundred refunds that should have been mailed to
the third party were mailed directly to the taxpayer, and at
least 81,000 notices or letters were delayed in being sent to
third party representatives. In the event the notices related
to unpaid tax liabilities and those tax liabilities are not
paid on time, IRS may need to abate certain penalties and
interest because of the error. According to IRS, it has
corrected the system-related errors to avoid further problems.
Use of Electronic Filing Continues an Upward Trend
Pursuant to a provision in the IRS Restructuring and Reform
Act of 1998 (RRA98), IRS has as its goal that 80 percent of all
tax and information returns be filed electronically by 2007.
Electronic filing has several advantages for taxpayers and IRS.
For example, IRS acknowledges receipt of an electronic return,
electronic filers receive their refunds faster, up-front checks
in the electronic filing system help to ensure more accurate
returns and thus reduce the number of taxpayer errors that IRS
has to correct, and returns filed electronically bypass the
error-prone manual procedures that IRS uses to process paper
returns.
For the past several years, we have been tracking IRS'
progress in getting individual income tax returns filed
electronically. As noted in our report on the 1999 filing
season, the number of electronically-filed individual income
tax returns increased substantially between 1997 and 1999.\1\
As shown in table 1, that upward trend is continuing.
---------------------------------------------------------------------------
\1\ Tax Administration: IRS' 1999 Tax Filing Season (GAO/GGD-00-37,
Dec. 15, 1999).
---------------------------------------------------------------------------
Efforts to Increase Electronic Filing
To encourage taxpayers to file electronically this filing
season, IRS has, among other things, (1) expanded tests aimed
at making electronic filing paperless, (2) allocated $7 million
to promote electronic filing, and (3) increased the types of
forms that can be filed electronically.
Table 1: Individual Income Tax Returns Received by IRS
[In Thousands]
----------------------------------------------------------------------------------------------------------------
Percent Percent
1/1/98 to 1/1/99 to change: 1/1/00 to change:
Filing type 3/13/98 3/12/99 1998 to 3/10/00 1999 to
1999 2000
----------------------------------------------------------------------------------------------------------------
Paper 31,936 30,168 -5.5 27,817 -7.8
Electronic
Traditional a 13,649 15,853 16.1 18,404 16.1
On-line b 550 1,431 160.2 2,800 95.7
TeleFile c 4,598 4,353 -5.3 3,911 -10.2
Subtotal 18,797 21,637 15.1 25,115 16.1
Total 50,733 51,805 2.1 52,932 2.2
----------------------------------------------------------------------------------------------------------------
a Traditional electronic filing involves the transmission of returns over communication lines through a third
party, such as a tax return preparer or electronic return transmitter, to an IRS service center.
b On-line returns are prepared and transmitted by the taxpayer through an on-line intermediary using a personal
computer and commercial software.
c Under TeleFile, certain taxpayers who are eligible to file a Form 1040EZ are allowed to file using a toll-free
number on touch-tone telephones. Officials in IRS' Office of Electronic Tax Administration suggested that
TeleFile use is down over the last 2 years because taxpayers who could have used TeleFile might have switched
to on-line filing.
Source: IRS' Management Information System for Top Level Executives.
A major criticism of the electronic filing program has been
that it is not paperless--electronic filers had to send IRS a
paper signature document (Form 8453) and, if they owed money, a
check and payment voucher. According to IRS, feedback from the
tax practitioner community indicated that making electronic
filing paperless would significantly increase taxpayers' and
tax preparers' willingness to file electronically.
IRS, in 1999, implemented two tests that provide
alternatives to paper signature documents and two tests that
provide electronic payment alternatives for taxpayers who owe
money. For the 2000 filing season, IRS expanded each of those
tests.
The two alternative signature tests waive the need for
participating taxpayers to submit paper signature documents and
copies of their Wage and Tax Statements (Forms W-2). \2\ The
first test allows certain tax practitioners' clients who choose
to file electronically to use a self-selected personal
identification number instead of completing a signature
document. IRS data show that about 500,000 taxpayers used this
option in 1999. IRS increased the number of practitioners
allowed to participate in the test from 8,100 in 1999 to 18,000
this year. IRS data show that about 3.95 million taxpayers had
already used this option as of March 9, 2000--a significant
increase over last year.
---------------------------------------------------------------------------
\2\ These tests are consistent with a provision in RRA98, which
required that IRS ``develop procedures for the acceptance of signatures
in digital or other electronic form'' and that further authorized IRS
to waive the requirement of a signature or provide for alternative
methods of signing until such time as such procedures are in place.
According to a cognizant IRS official, IRS can waive the submission of
W-2s because there is no statutory requirement that these forms be
attached to tax returns.
---------------------------------------------------------------------------
The second alternative signature test involves taxpayers
who used tax preparation software to prepare their previous
year's tax return. Instead of sending those taxpayers a paper
tax package, IRS sends them a postcard with a unique customer
number that they can use in lieu of mailing in a signature
document, if they decide to again file through their computer.
About 660,000 taxpayers used this option in 1999. IRS increased
the number of taxpayers who could participate in the test from
about 12 million in 1999 to about 16 million this year.
According to IRS, about 778,000 taxpayers had used this option
as of March 9, 2000.
IRS also expanded two tests involving alternative payment
methods for taxpayers who owe money, both of which eliminate
the need for taxpayers to send checks and payment vouchers. One
test, involving the use of credit cards, was expanded to
taxpayers who file Estimated Tax Payments (Form 1040ES) or an
Extension of Time to File (Form 4868). IRS also did more to
publicize this option's availability to paper filers. The other
test, involving payments via direct debit, was expanded to
include TeleFile users. As of March 10, 2000, according to IRS,
28,200 taxpayers had used one of these two payment
alternatives, compared to 7,286 at the same time last year. Of
those 28,200 taxpayers, 20,697 were electronic filers who paid
by direct debit (including 6,367 TeleFilers) and 7,503 were an
unknown combination of electronic and paper filers who used
credit cards.
Another effort to increase electronic filing this year
involved additional marketing of the electronic filing program.
IRS allocated $7 million to market individual electronic filing
for the 2000 filing season, compared to $5 million for 1999.
This year's marketing effort includes expanded television and
radio advertising, advertising in several magazines and
newspapers, and the use of outdoor billboards. IRS officials
from a regional office we visited told us that many more
taxpayers have been coming into IRS walk-in sites to have their
returns filed electronically, which the officials attributed,
at least in part, to the increased marketing.
IRS also added five forms to the list of forms that can be
filed electronically this year. Practitioner feedback to IRS
indicated that providing the ability to electronically file
additional forms, such as those used for averaging farm income
or reporting passive activity gains, would allow practitioners
to file more electronic returns because they had clients who
were required to file those forms with their returns. IRS
estimated that about 250,000 of these types of forms would be
filed electronically in the 2000 filing season. As of March 16,
2000, about 9,800 had been filed.
Telephone Service Shows Some Improvement But Is Still Below
1998 Performance Level
An important indicator of how well the filing season is
going is the ease with which taxpayers can reach IRS over the
telephone to ask questions about the tax law or respond to a
notice they received.\3\ In the few years before 1999, there
had been a steady improvement in this indicator. That trend
ended in 1999, when IRS experienced problems that significantly
reduced taxpayers' ability to reach IRS by telephone. IRS
addressed some of the problems that contributed to the service
problems in 1999 and, as shown in table 2, service has improved
this year. However, the level of service as of March 7, 2000,
was still below the level achieved in 1998 partly because,
according to IRS officials, the productivity of telephone
assistors has declined compared to 1998 and fewer staff years
have been dedicated to answering the telephone in 2000.
---------------------------------------------------------------------------
\3\ An equally important indicator is the quality of the response
taxpayers get to their questions once they reach IRS. We had not done
enough work at the time this statement was prepared to comment on IRS'
performance in that respect.
Table 2: Toll-Free Telephone Level of Service for the First 2 Months of
the 2000, 1999, and 1998 Filing Seasons
[in Millions]
------------------------------------------------------------------------
1/1/00 to 3/ 1/1/99 to 3/ 1/1/98 to 3/
Telephone service 4/00 6/99 7/98
------------------------------------------------------------------------
(a) Calls answered............ 13.4 14.7 16.3
(b) Calls abandoned........... 3.9 4.6 3.8
(c) Subtotal--calls that got 17.4 19.3 20.2
into IRS' system.............
(d) Busy signals.............. 4.1 14.8 2.2
(e) Total call attempts....... 21.4 34.1 22.3
Level of service a............ 63% 43% 73%
Percentage of calls that 19% 44% 10%
received busy signals b......
Percentage of calls that got 23% 24% 19%
into IRS' system but were
abandoned c..................
------------------------------------------------------------------------
Note 1: This table combines data on three of IRS' toll-free telephone
lines--tax law assistance, account inquiry, and refund.
Note 2: Totals may not add and percentages may not compute due to
rounding.
a Level of service is the number of calls answered divided by the total
call attempts--computed in this table by dividing row (a) by row (e).
b Computed in this table by dividing row (d) by row (e).
c Computed in this table by dividing row (b) by row (c).
Source: GAO analysis of data in IRS' Weekly Customer Service Report.
The 63-percent level of service IRS had achieved as of
March 4, 2000, was a significant increase compared to the 43-
percent level of service achieved as of the same time last
year. According to a cognizant IRS official, unlike last year
when IRS faced many problems that affected access, there has
been only one major problem this year that had a significant
impact on the telephone system. In late January 2000, contract
delays resulted in the bulk of over 1 million notices being
mailed out over a 2-week period instead of being staggered over
7 weeks as intended. As taxpayers received the notices, there
was an unexpected increase in the number of telephone calls
that IRS was unprepared to answer. According to the official,
the level of service decreased over about a 3-week period as a
result of this unexpected demand, but then increased back to
levels achieved before the erroneous mailing. In that regard,
according to IRS data, the level of service was 67 percent for
the week ended January 22, dropped to 44 and 48 percent the
following 2 weeks, then rose to 66 percent the week ended
February 12. For the most recent week for which data were
available when we prepared this statement (the week ended March
4, 2000), the level of service had risen to 72 percent.\4\
---------------------------------------------------------------------------
\4\ According to IRS, at the ``best in class'' private sector
companies, 85 percent of callers are connected to an assistor within 30
seconds.
IRS Addressed Some of the Problems That Contributed to Poor
---------------------------------------------------------------------------
Telephone Service in 1999
As noted in our report on the 1999 filing season, despite
several changes IRS made to improve its toll-free telephone
operations, service actually declined in 1999.\5\ For the 2000
filing season, IRS has addressed some of the problems that
contributed to that decrease; however, issues surrounding
declining productivity and optimal staffing levels have not yet
been resolved.
---------------------------------------------------------------------------
\5\ GAO/GGD-00-37.
---------------------------------------------------------------------------
Before 1999, IRS used a messaging system to handle calls
from taxpayers with questions on certain complex topics that
were known to usually require long conversations. Taxpayers
were asked to leave their name and telephone number with the
expectation that someone in IRS would return their call within
2 to 3 days. Because of an expected increase in the
productivity of its telephone assistors in 1999, IRS believed
that it could answer all calls, even the more complex ones, as
they came in. Thus, at the start of the 1999 filing season, IRS
discontinued use of the messaging system. IRS subsequently
reinstated the system when it realized that its expectations of
increased productivity had not materialized and that the
system's discontinuance had a negative effect on telephone
access.
IRS is continuing to use a messaging system this filing
season. However, it modified the messaging procedure to improve
management of the message workload. Now, instead of being
routed to a voice messaging system, calls involving certain
complex topics are routed to an assistor who adds the
taxpayer's name, phone number, and question to a centralized
database. IRS compliance staff nationwide can then access the
database and return the taxpayer's call to answer the question.
Inadequate staffing plans and work schedules for IRS' 24
call sites also contributed to the reduced level of telephone
service in 1999. Those plans and schedules were created using
faulty productivity assumptions and demand data and were not
completed until just before the start of the 1999 filing
season. According to cognizant officials, IRS improved the
timeliness and accuracy of its work schedules this year,
allowing them more time for planning and providing the ability
to better match staffing at sites with call volumes.
Because it assumed that it would have adequate staffing for
the 1999 filing season, IRS initially decided not to use a
feature of the telephone system, known as selected expanded
access (SEA), that gives taxpayers access to automated services
when they would have otherwise received a busy signal because
of high call volume. If the service the taxpayer desires is not
available through automation, the only option is to hang up and
call back later. In response to high levels of busy signals and
resulting low accessibility in the early part of the 1999
filing season, IRS began using SEA in early February 1999. This
year, IRS has used SEA from the start of the filing season.
IRS' use of SEA is most likely reflected in the reduction of
about 10.7 million busy signals during the first 2 months of
the 2000 filing season compared to the same period in 1999.
What is not clear is to what extent the automated information
satisfactorily answers the taxpayer's question. We will be
following up on taxpayer use of SEA as we continue our review
of the filing season.
Decline in Productivity and Fewer Staff May Be Keeping
Telephone Service Below 1998 Levels
Although the 63-percent level of service as of March 4,
2000, was a significant increase over the 43-percent rate
achieved as of the same time last filing season, it was still
about 10 percentage points lower than in 1998. IRS officials
cited two factors that have likely played a part in keeping the
level of service below the 1998 level--a drop in productivity
compared to 1998 and fewer staff dedicated to answer telephone
calls.
According to IRS officials, productivity--the rate at which
assistors answer telephone calls--is down considerably from
1998. Although they speculate that some of the decline may be
due to their emphasis on assistors taking as long as necessary
to fully resolve a taxpayer's question or problem, IRS does not
conclusively know what factors have contributed to the
productivity decline and whether this has resulted in better or
worse service. IRS has undertaken two studies to determine the
reasons for declining productivity and what, if any, corrective
action should be taken. We will monitor the results of those
two studies as we continue our review.
Another factor that may be keeping level of service during
this filing season from reaching the level achieved in 1998 is
the decision to reduce the staff dedicated to providing toll-
free telephone assistance. For fiscal year 2000, IRS allocated
fewer positions to provide telephone service and shifted the
remaining positions to non-telephone work, such as responding
to taxpayer correspondence and contacting taxpayers who owe
taxes. Cognizant officials said that when a disproportionate
number of staff are diverted to any one type of service, the
other services suffer with large and aged inventories. They
added that the resources and demand for telephone and
correspondence assistance are highly interrelated because
taxpayers who have not received a timely response to their
correspondence call IRS, thus increasing telephone demand.
IRS' Fiscal Year 2001 Budget Request
For fiscal year 2001, IRS is requesting $8.986 billion and
100,133 full-time equivalent (FTE) positions, including $145
million and 2,082 FTEs to be funded outside the discretionary
spending caps for the Earned Income Tax Credit compliance
initiative.\6\ As shown in appendixes I and II, that request is
about 9 percent more than IRS' proposed operating level for
fiscal year 2000 ($8.256 billion) and is the net result of
several increases and decreases, including increases for (1) an
initiative called ``Staffing Tax Administration for Balance and
Equity'' (STABLE), (2) information systems and technology
investments, and (3) organizational modernization.\7\
---------------------------------------------------------------------------
\6\ Fiscal year 2001 will be the fourth year of funding for this 5-
year initiative.
\7\ In our report on IRS' fiscal year 1999 financial statements,
Financial Audit: IRS' Fiscal Year 1999 Financial Statements (GAO/AIMD-
00-76, Feb. 29, 2000), we discussed certain issues related to IRS'
budget, such as concerns about IRS's ability to ensure compliance with
the laws governing its use of budget authority and IRS' controls over
property and equipment. We are not discussing those issues in this
testimony.
---------------------------------------------------------------------------
In analyzing the request for STABLE, it became apparent
that several portions of IRS' request do not contain clear
links between the resources being requested and expected
results. Given IRS' ongoing reorganization and its efforts to
develop new or revised performance measures, we believe that
IRS has an opportunity to make future budget requests more
useful to Congress.
IRS Requests Funds to Stabilize Its Workforce
IRS is requesting $144 million and 1,633 additional FTEs to
stabilize and strengthen tax compliance and customer service
programs in fiscal year 2001. IRS has also proposed a
supplemental fiscal year 2000 appropriation of $39.8 million
for this initiative, collectively known as STABLE, to allow it
to hire some of the new staff in fiscal year 2000. According to
IRS, approval of the supplemental appropriation would allow IRS
to train those new hires in fiscal year 2000, thus maximizing
their impact in fiscal year 2001.
As shown in table 3, the STABLE initiative includes
staffing increases for several IRS program areas.
Table 3:--FTEs Requested for STABLE Initiative
----------------------------------------------------------------------------------------------------------------
Fiscal year Fiscal year Fiscal year
Budget activity 2000 2001 2001 Total
supplemental annualization initiative
----------------------------------------------------------------------------------------------------------------
Submission Processing............................ 50 150 208 408
Telephone and Correspondence
Toll Free........................................ 63 189 248 500
Automated Collection System.................... 75 225 150 450
Document Matching
Underreporter.................................. 40 120 40 200
Combined Annual Wage Reporting.......... 10 30 64 104
Examination...................................... 11 33 778 822
Collection
Field Collection............................... 0 0 50 50
Walk-In........................................ 48 142 43 233
Tax Exempt and Government Entities........... 4 12 52 68
--------------------------------------------------------------
Total FTEs....................................... 301 901 1,633 2,835
----------------------------------------------------------------------------------------------------------------
Note: The FTEs shown in the column headed ``Fiscal year 2000 supplemental'' reflect IRS' assumption that the
persons hired under the supplemental appropriation will be coming on board around July 1, 2000, and thus will
be working for only 3 months of the fiscal year. Thus, for example, the 50 FTEs for Submission Processing in
that column represent 200 persons working for 3 months in fiscal year 2000. Because those 200 persons would be
expected to work a full year in 2001, the number of FTEs needed that year would be 200--or 150 more than
provided for in the fiscal year 2000 supplemental. That 150 increase is reflected in the column headed
``Fiscal year 2001 annualization.'' The same rationale applies to the other numbers in that column.
Source: IRS' Fiscal Year 2001 Congressional Justification.
Before discussing specific parts of this initiative, we
have two overall comments.
Because IRS' request for fiscal year 2001 assumes
that many of the new staff will not be brought on board until
April 1, 2001, the number of FTEs associated with STABLE in
fiscal year 2001 reflects the fact that many of the new staff
will not be working the entire fiscal year. Because they will
be working full time the following year, the number of FTEs
associated with STABLE will increase to 4,003 in fiscal year
2002, according to IRS. Thus, if Congress funds the initiative
and IRS implements it as intended, IRS can be expected to seek
a further increase in fiscal year 2002 to fund the additional
staffing costs associated with this growth in FTEs.
However, there is ample precedent to question
whether IRS will be able to implement STABLE as intended. Many
times in the past, IRS has not filled enforcement positions
that were funded by Congress because shortfalls in other areas
caused IRS to use those funds elsewhere. In that regard, IRS'
budget justification says that, for fiscal year 2000, it has
had to ``adjust projected spending on personnel, operational
support, and other support costs,'' which ``required that we
not fill 2,339 FTE devoted to tax law enforcement in the
[fiscal year] 2000 President's Budget.''
In responding to our second overall comment, IRS' Budget
Office said the following:
``We agree that for the past few years we have had to divert
labor resources to fund unfunded mandatory items such as
telecommunications and contracts, as well as reduce the number
of FTE due to an unfunded labor shortfall. This could happen
again if we do not receive our full [fiscal year] 2001 budget
request. However, as currently submitted, our [fiscal year]
2001 budget is balanced and will allow us to fund all requested
FTE. If fully funded we expect to be able to recruit and fill
all of the requested positions.''
The rest of our discussion of STABLE focuses on those
elements related to (1) telephone service, (2) submission
processing (3) examination, (4) collection, and (5) the
underreporter program.
Telephone Service
STABLE includes 500 additional FTEs for IRS' toll-free
telephone service. With the additional staffing, according to
the budget request, IRS plans to provide a 60-percent level of
service for toll-free assistance in fiscal year 2001 and reduce
its dependence on revenue agent detailees from Examination.
Of the 500 FTEs being requested for toll-free telephone
service, 200 will be used to free Examination staff from having
to support customer service activities. In effect, IRS will be
hiring Customer Service staff to replace Examination staff who
have been detailed to answer the phone. Since the net effect of
those 200 FTEs is not to increase the resources available to
answer the telephone but rather to increase the resources
available to do examinations, we will discuss that part of the
request in the next section. The other 300 FTEs would actually
increase the number of resources devoted to answering the
telephone.
Although we asked IRS for documentation further justifying
this proposed staffing increase, IRS did not provide sufficient
detail on how it determined the size of the staff increase or
how such an increase would affect service. In addition, IRS
cannot project the level of service it can expect from its
current staffing, much less the level of service it can expect
from more staff. In that regard, IRS has shown that it may be
able to provide better service with even fewer staff than
before. As we discussed earlier, the level of service during
the current filing season has improved significantly over last
year--63 percent as of March 4, 2000, compared to 43 percent at
the same time in 1999--even though IRS allocated fewer staff to
toll-free service this year.
Although we agree that IRS needs to improve its toll-free
telephone service, we do not believe that IRS has provided
adequate justification for increasing the number of FTEs
devoted to that service. Although IRS' stated goal (a 60-
percent level of service) may have seemed reasonable at the
time the fiscal year 2001 budget was prepared, it appears
clear, based on the preliminary results of this year's filing
season, that IRS does not need additional staff to achieve that
level of service.
Matter for Consideration by Congress
We believe that Congress should consider withholding
approval of this part of the STABLE request until IRS provides
a revised estimate of the level of telephone service it can
expect to provide in fiscal year 2001 with the increased
staffing and clearly demonstrates that the revised estimate
considers (1) the service level achieved this filing season,
(2) reasonable expectations for further improvements in
management and processes, and (3) any planned technological
changes.
Submission processing
The STABLE initiative includes 408 additional FTEs that IRS
says will be used to transcribe data from 18 million Schedules
K filed on paper.\8\ According to IRS, these paper schedules,
together with those filed electronically, represent in excess
of $500 billion in total income. IRS says that processing of
these documents will allow IRS, as part of its document
matching program, to reconcile K data with information reported
on individual tax returns.
---------------------------------------------------------------------------
\8\ Schedules K provide information on income (or losses)
distributed by business entities to individual partners, beneficiaries,
and shareholders.
---------------------------------------------------------------------------
IRS' plan is consistent with a recommendation we made in
1995--namely that IRS devise ways to enter all Schedules K onto
the computer so they can be used in the document matching
program and for other compliance programs.\9\ We presented
cost/benefit information in the report and said that IRS could
reduce the cost of transcribing this information if it could
encourage more partnerships to file the schedules
electronically. At that time, only 1.7 million of the total
17.3 million Ks were filed electronically. IRS has made
progress in that regard--about 4 million are now processed
electronically and IRS is projecting about 11 million by 2001.
---------------------------------------------------------------------------
\9\ Tax Administration: IRS' Partnership Compliance Activities
(GAO/GGD-9551, June 16, 1995).
---------------------------------------------------------------------------
It should be noted that the transcription of K data
starting in fiscal year 2001 could significantly increase IRS'
document matching workload starting in fiscal year 2002. It
remains to be seen what IRS is able to do with that increased
workload since, as discussed later, IRS is currently unable to
investigate many of the discrepancies identified by its
document matching program. Thus, the increased matching
workload resulting from the processing of K data could affect
IRS' budget request for fiscal year 2002.
Examination
STABLE would increase Examination staffing in two ways.
First, as discussed earlier, the telephone service portion of
STABLE includes 200 FTEs to free up Examination staff who have
been detailed in the past to help the Customer Service function
answer taxpayers' questions. Second, the Examination portion of
STABLE includes 822 FTEs, which would allow IRS to hire
additional staff for the Examination function. IRS says that
the staffing increase will lead to an increase in audit
coverage for high-income individuals (those with taxable income
of more than $100,000) from 0.76 percent to 1.10 percent. We
have no way of knowing what an appropriate level of audit
coverage would be. Assuming 1.10 percent is a reasonable goal,
the question becomes whether IRS needs additional staff to
achieve that goal or whether it can be achieved by using
existing resources more efficiently.
Because there was insufficient information in IRS' budget
justification to address that question, we obtained additional
data from IRS. The data we received showed that
the number of revenue agent FTEs has declined by
about 17 percent between fiscal year 1995 and fiscal year 1999,
with a further decline of 4 percent expected in fiscal year
2000;
between fiscal years 1995 and 1999, the number of
returns filed by high-income individuals and corporations (the
type of returns generally audited by revenue agents) increased
by about 36 percent;
primarily because of an increase in the amount of
FTEs spent in training and helping Customer Service, the
percent of revenue agent FTEs spent doing examinations (known
as direct examination time) decreased from 53.9 percent in
fiscal year 1997 to 45.2 percent in fiscal year 1999; and
time spent per examination case has increased due
to such factors as (1) changes in the mix of work; (2) the
learning curve associated with new laptop computers; (3) the
stops and starts associated with details to Customer Service;
and (4) various new documentation, taxpayer notification, and
other requirements associated with implementation of RRA98.
Although direct examination time and time per case could
improve as details to Customer Service become less necessary
and staff become more familiar with the provisions of RRA98 and
although other increases in efficiency are surely possible, we
find it hard to argue against increasing Examination staff in
light of the 21-percent decline in revenue agent staffing since
fiscal year 1995 while the number of filed returns in
categories audited by revenue agents has been increasing at an
even greater rate.
Collection
STABLE includes 283 additional FTEs for IRS' Collection
activity--50 for the Field Collection function and 233 for the
walk-in program. According to IRS, much of this initiative is
designed to address (1) declining staffing levels among revenue
officers, (2) a downward trend in collection case closures, and
(3) substantial increases in the time required per case due to
provisions of RRA98.
IRS' budget request did not contain details on the downward
trends in revenue officer staffing and case closures or the
upward trend in case times. We pursued those issues with IRS
and obtained the following information:
Revenue officer FTEs declined from about 8,130 in
fiscal year 1995 to about 6,480 in fiscal year 1999--a drop of
20 percent--and have continued to decline this year.
The number of tax delinquent accounts and tax
delinquency investigations closed by the Field Collection
function decreased by 30 percent and 49 percent, respectively,
between fiscal years 1997 and 1999.
The Collection function is expected to spend about
1,400 FTEs in fiscal year 2001 administering various provisions
of RRA98, which, according to IRS, more than offsets the
productivity gains associated with the recently completed
national roll-out of the Integrated Collection System.
In addition to the decline in overall staffing levels, some
revenue officer FTEs have been used to provide assistance at
IRS walk-in sites. According to data obtained from IRS, the
number of revenue officer FTEs devoted to that effort increased
from 289 in fiscal year 1998 to 542 in fiscal year 1999.
According to IRS, of the 233 FTEs being requested for the walk-
in program under STABLE, 200 are intended to allow IRS to
reduce this reliance on revenue officer help. We agree in
principle with the desirability of replacing revenue officer
detailees with persons hired and trained specifically to
provide customer service. Doing so should not only allow the
revenue officers to concentrate on collection case work but
also improve customer service. A person who has been hired and
trained for a customer service position should be able to
better assist taxpayers than a person who has been hired and
trained to collect taxes.
Unlike the 200 FTEs discussed above, which would increase
the staffing devoted to collecting taxes, the other 33 FTEs
being requested for the walk-in program would increase the
number of FTEs devoted to providing walk-in assistance. IRS'
budget request provides little information that can help
Congress evaluate the need for additional walk-in staff. IRS
says that funding of its request will ``increase the level of
customer service.'' However, although IRS has efforts underway
to measure such service indicators as wait time and quality,
its budget currently includes no such measure. In fact, one
measure in IRS' budget request (customer satisfaction with
walk-in assistance) indicates that service might already be at
an acceptable level. According to that measure, customers gave
the walk-in program a satisfaction rating of 6.4 on a scale of
1 to 7, with 7 meaning ``very satisfied.'' That rating is the
highest of all the customer satisfaction ratings reported in
IRS' budget request.
Information we received from IRS' Budget Office indicated
that the additional walk-in staff would allow IRS to enhance
the accessibility of its walk-in assistance by expanding the
hours of service at walk-in offices and expanding efforts to
help taxpayers (through such nontraditional outlets as shopping
malls and taxmobiles) who cannot easily reach a walk-in office.
However, the budget request does not reflect any impact from
that expanded service. In fact, the request shows that IRS
expects 10.0 million walk-in contacts in fiscal year 2001--the
same number as in 1999 and 2000.
Underreporter Program
STABLE also includes 200 FTEs for additional document
matching within IRS' Underreporter Program. IRS' budget
justification contains no performance measures related to the
Underreporter Program that can be used to help assess the
reasonableness of this request. In our report on IRS' fiscal
year 1999 financial statements, however, we presented the
following information on IRS' performance in this area.\10\
---------------------------------------------------------------------------
\10\ GAO/AIMD-00-76.
---------------------------------------------------------------------------
``For tax year 1996 [the most recent year for which
substantially complete matching program results were
available], IRS' matching program for individual taxpayers
screened about 155 million individual income tax returns and
found that about 12 million (8 percent) had potential
underreported taxes due totaling at least $15 billion. However,
IRS investigated only about 3.1 million (26 percent) of these
returns, accounting for estimated underreported taxes due of
about $5.2 billion (35 percent). . . According to IRS, resource
constraints precluded them from investigating more of these
discrepancies and the related estimated underreported taxes
due.''
Fiscal Year 2001 Information Technology Budget Request:
Observations and Suggestions
Beginning in 1995, we reported on serious and pervasive
information technology (IT) management and technical weaknesses
at IRS and made recommendations for correcting them.\11\ To
minimize the risk of IRS investing in systems before the
recommendations were fully implemented, we suggested in 1996
that Congress limit IRS' IT spending to cost effective
activities that (1) support ongoing operations and maintenance;
(2) correct pervasive management and technical weaknesses, such
as a lack of requisite systems life cycle discipline; (3) are
small, represent low technical risk, and can be delivered in a
relatively short time frame; or (4) involve deploying already
developed systems that have been fully tested, are not
premature given the lack of a complete systems architecture,
and produce a proven, verifiable business value.\12\ Since
1996, we have reported on IRS' progress in implementing our
recommendations and reviewed IRS' annual budget requests to
ensure their consistency with IRS' IT management capability and
these spending categories.\13\ While IRS has made progress over
the last 4 years in addressing our recommendations, it has yet
to fully implement them, and thus they remain operative in
assessing IRS' fiscal year 2001 IT budget request.
---------------------------------------------------------------------------
\11\ Tax Systems Modernization: Management and Technical Weaknesses
Must Be Corrected If Modernization Is to Succeed (GAO/AIMD-9556, July
26, 1995).
\12\ Tax Systems Modernization: Actions Underway But IRS Has Not
Yet Corrected Management and Technical Weaknesses (GAO/AIMD-9606, June
7, 1996).
\13\ Tax Administration: IRS' Fiscal Year 2000 Budget Request and
1999 Tax Filing Season (GAO/T-GGD/AIMD-9940, Apr. 13, 1999); Tax
Administration: IRS' Fiscal Year 1999 Budget Request and Fiscal Year
1998 Filing Season (GAO/T-GGD/AIMD-9814, Mar. 31,1998); Tax
Administration: IRS' Fiscal Year 1997 Spending, 1997 Filing Season, and
Fiscal Year 1998 Budget Request (GAO/T-GGD/AIMD-97-66, Mar. 18, 1997);
Tax Administration: IRS' Fiscal Year 1996 and 1997 Budget Issues and
the 1996 Filing Season (GAO/T-GGD-96-99, Mar. 28, 1996).
---------------------------------------------------------------------------
For fiscal year 2001, IRS' Information Systems
appropriation request is $1.58 billion and includes 7,531 FTEs.
Of the $1.58 billion, $1.54 billion is to fund the operation
and maintenance of existing systems. The remaining $40 million
is for what IRS terms ``Business Line Investments.'' The
investments are intended to add new capabilities to five
operational systems and develop three new systems that,
according to IRS officials, address business needs that are
unique to some of IRS' newly formed operating divisions and are
not related to, or dependent upon, IRS' core business systems
modernization program.
In addition to the $1.58 billion, IRS is requesting $119
million for fiscal year 2001--and an advance appropriation of
$375 million for fiscal year 2002--for IRS' multiyear capital
account that is intended to fund contractor costs associated
with IRS' core business systems modernization program. This
account, referred to as the Information Technology Investments
Account (ITIA), currently contains $438 million in
appropriated, but unobligated, funds.\14\
---------------------------------------------------------------------------
\14\ Of the $438 million, $227 million is to expire on September
30, 2000, and the remaining $211 million is to expire on September 30,
2002.
---------------------------------------------------------------------------
Pursuant to legislation,\15\ funds from the ITIA are not
available to IRS for obligation until IRS and Treasury submit
to Congress for approval an expenditure plan that (1)
implements the IRS Modernization Blueprint; (2) meets Office of
Management and Budget (OMB) investment guidelines; (3) is
reviewed and approved by IRS' Investment Review Board,\16\ OMB,
and Treasury's IRS Management Board and is reviewed by us; (4)
meets requirements of IRS' life cycle program; and (5) is in
compliance with acquisition rules, requirements, guidelines,
and systems acquisition management practices of the federal
government. In May 1999, IRS submitted its first expenditure
plan, seeking to spend about $35 million for modernization
initiatives through October 31, 1999. We reported to Congress
that the plan was an appropriate first step toward successful
modernization, but that the key to success for IRS would be to
effectively implement the plan.\17\ Subsequently, the relevant
appropriations subcommittees agreed to IRS' obligation of $35
million from the ITIA.
---------------------------------------------------------------------------
\15\ The fiscal year 1998 Treasury and General Government
Appropriations Act (P.L. 105-61) and the fiscal year 1999 Omnibus
Consolidated and Emergency Supplemental Appropriations Act (P.L. 105-
277).
\16\ According to IRS, the Investment Review Board has been
replaced by the Core Business Systems Executive Steering Committee,
which is chaired by the Commissioner of Internal Revenue.
\17\ Tax Systems Modernization: Results of Review of IRS' Initial
Expenditure Plan (GAO/AIMD/GGD-99-206, June 15, 1999).
---------------------------------------------------------------------------
IRS was unable to finalize its second expenditure plan
before the original $35 million was obligated and on December
14, 1999, it requested approval to obligate $33 million from
the ITIA as a ``stopgap'' measure until the next expenditure
plan was submitted. In briefings to the relevant appropriations
subcommittees and IRS, we reported our concerns about IRS' lack
of progress in completing and implementing an enterprise
systems architecture and system development life cycle and the
risks associated with IRS' plans to develop selected systems
without these critical management controls in place. In
approving IRS' $33 million request, the appropriation
subcommittees directed IRS to, among other things, (1) expedite
completion and implementation of the architecture and system
life cycle methodology and (2) explain in future expenditure
plans how IRS plans to manage the risk of performing detailed
design or development work if the architecture is not completed
or the life cycle is not implemented.
In response to these and other concerns raised by the
appropriations committees, OMB, and us, IRS has reassessed its
plans and is in the process of restructuring its modernization
program to scale-back its new system development efforts until
it first puts in place the requisite modernization management
capability, including developing its enterprise architecture
and implementing its system life cycle methodology. In early
March 2000, IRS submitted its second expenditure plan to
Congress seeking approval to obligate $176 million of the $438
million currently in the ITIA.
Fiscal Year 2001 Information Systems Budget Request Appears
Consistent With Established Spending Categories
The vast majority (97 percent) of IRS' fiscal year 2001
request of $1.58 billion for its Information Systems
appropriation appears in line with the aforementioned spending
categories. Specifically, $1.54 billion is being requested to
operate and maintain existing information systems that support
day-to-day tax administration functions and activities. The
remaining 3 percent, or $40 million, is for eight relatively
small ``Business Line Investments'' that are to enhance
existing operational systems and develop new ones.
Specifically, five investments, estimated at about $13 million,
are to add capabilities to operational systems, such as the
Integrated Case Processing System and the Chief Counsel Case
Management System. The other three investments, estimated at
about $27 million, are to develop new systems for some of IRS'
new operating divisions.
For example, one of these investments--referred to by IRS
as the Near Term Electronic Filing and Electronic Fraud
Detection System project--is for the Wage and Investment Income
Division and the Small Business and Self Employed Division.
This system is to provide the capability to accept additional
tax forms and schedules that IRS is currently not capable of
receiving electronically. According to IRS, the system will
support IRS' goal of enabling more taxpayers to file their tax
forms and schedules electronically.
Fiscal Years 2001 and 2002 ITIA Requests Are Not Adequately
Justified
Key provisions of the Clinger-Cohen Act, the Government
Performance and Results Act, and OMB Circular No. A1 and
supporting memoranda, require that, before requesting multiyear
funding for capital asset acquisitions, agencies develop
accurate, complete cost data and perform thorough analyses to
justify the business need for the investments. For example,
agencies must show that needed investments (1) support a
critical agency mission; (2) are justified by life cycle cost-
benefit analysis (i.e., business case); and (3) have cost,
schedule, and performance goals.
IRS' Chief Information Officer (CIO) acknowledged that IRS
has not yet performed the above-cited analyses to justify its
fiscal year 2001 investment account request of $119 million and
its fiscal year 2002 advance request of $375 million. Instead,
IRS officials told us that the funding requests for both years
were based on a $300 million average annual rate of spending,
which, according to the CIO, was derived 6 months ago based on
full contractor staffing of the maximum number of projects that
IRS assumed its human capital capacity would allow it to manage
effectively at one time. However, the reliability of this
estimate is questionable because we were not provided any
verifiable documentation supporting the above-described
estimating approach, and the estimate is not based on a
complete definition of what IRS' fiscal year 2001 and 2002
investments will be. Moreover, even using the above-described
rationale for how the 2001 and 2002 funding requests were
derived, the estimate is likely overstated for two reasons.
First, IRS has recently reassessed its human capital capacity
to manage projects and has determined that the number of
projects it can effectively oversee needed to be scaled back,
which in turn has reduced contractor staffing needs. Second,
the $300 million estimate represented the upper bound of IRS'
funding requirements for a given year, according to the CIO.
Matter for Consideration by Congress
We suggest that Congress consider denying the $119 million
requested for fiscal year 2001 and the $375 million requested
for fiscal year 2002, and that it direct IRS to develop a
credible and verifiable fiscal year 2001 ITIA budget request
(i.e., a request that is based on defined modernization
requirements and formal estimating methods) and to seek, if
necessary, a supplemental appropriation for this amount in time
to meet its fiscal year 2001 needs. Neither of these
congressional actions should affect continuity of the
modernization because (1) IRS' own plans for obligating
available ITIA funds will leave $51 million in the account for
the remainder of fiscal year 2000,\18\ and $211 million to
cover funding needs in fiscal year 2001, even if IRS does not
receive a supplemental, and (2) IRS can still request funding
for fiscal year 2002 in its fiscal year 2002 budget submission,
when it should be in a better position to reliably estimate its
funding needs.
---------------------------------------------------------------------------
\18\ This $51 million, if not obligated by September 30, 2000, will
expire.
---------------------------------------------------------------------------
IRS' Reorganization Effort Is Continuing
IRS has requested $182 million to cover reorganization
expenses--$140 million in base funding from the fiscal year
2000 budget plus an additional $42 million requested for fiscal
year 2001. According to IRS, reorganization costs will peak in
fiscal year 2001, decline in 2002, and end in 2003. This
funding pattern is consistent with IRS' plan for implementing
the reorganization, which shows a significant amount of
activity in fiscal year 2001 with lesser amounts continuing
into 2003. Other costs associated with IRS' modernization, such
as the costs associated with training staff and upgrading IRS'
computer systems, should continue well past 2003.
Over the past year, IRS has made progress in shifting to
the new organizational structure. IRS has selected the
Commissioners and Deputy Commissioners for each of the four
operating divisions and has put in place management structures
for several new units, including the Taxpayer Advocate Service
and the Tax Exempt and Government Entities Division. The two
largest operating divisions, those serving individual taxpayers
and small businesses, are expected to become operational this
fall, but key aspects of the organizational designs are to be
phased in over the following 2 years. Plans for the Wage and
Investment Income Division, for example, include new compliance
approaches that IRS plans to implement or pilot test in fiscal
year 2002.
In our testimony on IRS' fiscal year 2000 budget request,
we commented that IRS did not separately identify an amount for
the Office of the Taxpayer Advocate, but instead included it
within the Telephone and Correspondence budget activity in the
Processing, Assistance, and Management appropriation.\19\ We
suggested that congressional oversight of the Advocate's Office
and IRS' efforts to solve taxpayer problems would be further
enhanced and any concerns about the Advocate Office's
independence would be further mitigated if funding for that
Office was separately identified in IRS' budget. IRS created a
separate budget activity for the Taxpayer Advocate Service in
fiscal year 2000, which it has included in its fiscal year 2001
budget request.
---------------------------------------------------------------------------
\19\ GAO/T-GGD/AIMD-9940.
---------------------------------------------------------------------------
In that same testimony, we discussed how IRS' budget
request commingles resources for enforcement and assistance.
The Telephone and Correspondence budget activity, for example,
includes resources for several forms of assistance, such as
answering telephone calls and correspondence, as well as
several enforcement activities, such as audits handled through
correspondence and attempts to collect overdue taxes via the
telephone. When we raised the same issue in our report on IRS'
fiscal year 1999 financial statements, IRS said that it would
be addressing the issue in its new organizational
structure.\20\
---------------------------------------------------------------------------
\20\ GAO/AIMD-00-76.
Fiscal Year 2001 Budget Request Not Clearly Linked to
---------------------------------------------------------------------------
Performance
As noted in our earlier discussion of STABLE, several
portions of IRS' budget request do not contain a clear link
between the resources being requested and expected results. As
we have noted in the past, the Government Performance and
Results Act of 1993 aims for a closer and clearer link between
the process of allocating resources and the expected results to
be achieved with those resources.\21\ We further noted that an
agency's performance goals are of little value to congressional
appropriation decisions without a connection to the resources
that an agency is requesting.\22\
---------------------------------------------------------------------------
\21\ Performance Budgeting: Fiscal Year 2000 Progress in Linking
Plans With Budgets (GAO/AIMD-99-239R, July 30, 1999).
\22\ Performance Budgeting: Initial Agency Experiences Provide a
Foundation to Assess Future Directions (GAO/T-AIMD/GGD-99-216, July 1,
1999).
---------------------------------------------------------------------------
While we recognize that it is not easy to clearly link
budget levels and performance results, we believe that IRS
could do a better job of making that connection. For example,
IRS' request does not clearly link the various budgetary inputs
that affect toll-free level of service with IRS' goal in that
area. What the budget shows is a request for about $1 billion
for the Telephone and Correspondence activity and a performance
goal of 60-percent level of service associated with that budget
activity. What is unclear from the budget is (1) that much of
the Telephone and Correspondence request is not for toll-free
telephone service; (2) that some of the resources requested for
other activities, such as Examination and Information Systems,
are for toll-free telephone service; and (3) the projected
level of service IRS can expect from its current staffing.
IRS is in the process of implementing a major
reorganization. That reorganization and any related budget
restructuring, along with IRS' ongoing efforts to develop new
or revised performance measures, could provide an opportunity
to make future budget requests more useful to Congress by more
clearly linking requested resource levels with the achievement
of performance goals.
That concludes my statement. We welcome any questions that
you may have.
Appendix I
IRS' Fiscal Year 2001 Budget Request Compared with Proposed Fiscal Year 2000 Operating Level
[Dollars in thousands]
----------------------------------------------------------------------------------------------------------------
FY 2000 FY 2001 Percent change
----------------------------------------------------------------------------------------------------------------
Budget activity Dollars FTEs Dollars FTEs In dollars In FTEs
----------------------------------------------------------------------------------------------------------------
Submission Processing.................. $930,325 15,682 $1,036,818 16,040 11.45 2.28
Telephone and Correspondence........... 932,190 20,480 1,026,742 21,291 10.14 3.96
Taxpayer Advocate Service.............. 133145 2,294 141,095 2,294 5.97 0.00
Document Matching...................... 59,036 1,437 73,023 1,690 23.69 17.61
Management Services.................... 609,771 6,694 686,155 6,694 12.53 0.00
Rent and Utilities..................... 695,579 67 735,666 67 5.76 0.00
Subtotal: Processing, Assistance, and $3,360,046 46,654 3,699,499 48,076 10.10 3.05
Management Appropriation..............
Criminal Investigation................. 384,549 3,750 399,065 3,750 3.77 0.00
Examination............................ 1,772,371 22,089 1,885,882 22,900 6.40 3.67
Collection............................. 676,676 10,548 721,547 10,785 6.63 2.25
Tax Exempt/Government Entities......... 156,600 2,102 168,654 2,166 7.70 3.04
Statistics of Income................... 28,390 471 29,696 471 4.60 0.00
Chief Counsel.......................... 225,059 2,378 234,176 2,372 4.05 -0.25
Subtotal: Tax Law Enforcement $3,243,645 41,338 3,439,020 42,444 6.02 2.68
Appropriation.........................
Operations and Maintenance............. 1,258,155 7,292 1,543,565 7,531 22.68 3.28
Year 2000.............................. 250,426 239 0 0 NA NA
Investments............................ 0 0 40,000 0 NA NA
Subtotal: Information Systems $1,508,581 7,531 1,583,565 7,531 4.97 0.00
Appropriation.........................
Information Technology Investments..... 0 0 119,000 0 NA NA
Earned Income Credit (outside caps).... $144,000 2,082 $145,000 2,082 0.69 0.00
Total.................................. $8,256,272 97,605 $8,986,084 100,133 8.84 2.59
----------------------------------------------------------------------------------------------------------------
Source: IRS' Fiscal Year 2001 Congressional Justification.
Appendix II
Comparison of IRS' Fiscal Year 2000 Proposed Operating Level and Fiscal
Year 2001 Budget Request
[Dollars in thousands]
------------------------------------------------------------------------
Subtotal Total
------------------------------------------------------------------------
Fiscal year 2000 proposed operating $8,256,272
level (includes Earned Income Tax
Credit appropriation)...............
Decreases for fiscal year 2001
Information Systems (non-recur).... ($ 50,897)
Transfer of resources to Treasury (732)
Inspector General for Tax
Administration......................
Subtotal-decreases ($51,629)
Increases for fiscal year 2001
Adjustments necessary to maintain 347,596
current levels....................
Program annualization.............. 40,736
Staffing Tax Administration for 144,071
Balance and Equity................
Electronic Tax Administration...... 3,000
Operational support contracts...... 43,631
Organizational modernization....... 42,407
Business line investments.......... 40,000
Information Technology Investment 119,000
Account...........................
Earned Income Tax Credit compliance 1,000
initiative........................
Subtotal-increases................... 781,441
Fiscal year 2001 budget request...... $8,986,084
Difference between fiscal year 2000 $729,812
operating level and fiscal year 2001
budget request......................
------------------------------------------------------------------------
Source: IRS' Fiscal Year 2001 Congressional Justification.
Chairman Houghton. Thank you, Mr. White.
Mr. Coyne?
Mr. Coyne. Thank you, Mr. Chairman.
You have reported that while only about 1 million returns
were audited in 1997, 10 million additional returns were
subject to other forms of IRS reviews. How does the IRS review
tax returns beyond full fledged audits?
Mr. White. You are referring to non-audit contacts and you
are correct, those are the overwhelming majority of audit type
contacts. The contacts in this category, include math errors
contacts, reviews of Social Security numbers to make sure the
taxpayer is using a valid number, the document matching program
and various items IRS refers to as soft notices which are in
effect an advance warning to taxpayers about potential
problems.
Mr. Coyne. What are the current audit rates for individual,
small business and corporate taxpayers?
Mr. White. I don't have all of those numbers but the rate
for high income individual taxpayers that is expected for
fiscal year 2000 would be .76 percent. The numbers I have for
fiscal year 1999, are 1.03 percent for high income individuals
and 1.51 percent for corporate returns.
Mr. Coyne. There has been an improvement this year relative
to telephone service that fell sharply last year. I guess it is
up by about 30 percent this year. To what do you attribute
that?
Mr. White. Last year, IRS switched to 7 day a week, 24-hour
a day telephone service. As they did that, they experienced a
pretty severe decline in productivity. This year productivity
appears to be up, although staffing this year is actually down
somewhat. In fact, they have actually achieved the goal this
year with less staffing that they set for themselves next year
if they got the additional staffing they requested as part of
the STABLE request.
Mr. Coyne. In your review, have you been able to find out
what types of telephone calls are being answered and which are
not?
Mr. White. They are doing some things differently.
Mr. Attianese. Last year, IRS did away with a process where
they would take complex calls and route them to a messaging
system and the taxpayer would leave a name and number and
somebody that knew about that issue would call back and give
them an answer.
At the beginning of last year, IRS decided not to use that
process because they thought they would have enough people to
answer all the calls as they came in. That was one of the
reasons they had a problem last year because they didn't have
enough people to answer the calls.
Those kinds of complex calls this year are getting routed
to a system whereby the taxpayer leaves a message and somebody,
generally a revenue agent who knows that issue, will call the
taxpayer back in a couple of days and give an answer to the
question. So those complex calls are actually getting answered
better this year than they were last year because of that
messaging system.
Mr. Coyne. Does your review enable you to determine how
long a taxpayer waits to talk to an IRS assisted, someone to
respond to them, what the average telephone wait is?
Mr. White. We don't have that information for this filing
season. We have some work ongoing that was actually requested
by the Subcommittee, so later this year, we hope we will be
able to report on that.
Mr. Coyne. Thank you.
Chairman Houghton. I have three questions. One is the use
of the additional 2,500 people for the IRS. I would like your
comments on that. Second is an updating on the 1997
modernization plan. How is it going? Third, I would like to ask
about some of your comments in the audit on page seven.
Mr. White. With respect to the staffing, a couple of points
to make. One is that most of the staffing would go to
enforcement and compliance activities. With respect to the part
going to customer service, there is about 300 FTEs.
Chairman Houghton. I don't mean the allocation. Do you feel
it is an effective use of people and increased funds?
Mr. White. With the exception of the 300 FTEs going to
telephone service. We don't think right now that part of the
request is adequately justified because they have already met
their goal with their current staffing level.
With respect to modernization, a couple of points there.
First of all, the reorganization that I mentioned in my oral
statement and that the Commissioner talked about is well
underway but that is only one part of the overall modernization
efforts at IRS. There are other key parts to the overall
modernization.
In addition to reorganizing IRS into four operating
divisions by taxpayers, the other key parts of the
modernization effort include systems modernization, development
of a balanced set of performance measures and the development
of new business processes, new ways of interacting with
taxpayers.
Before we see significant results from modernization at
IRS, we are going to have to see significant parts of
modernization enacted.
Chairman Houghton. How do we get a handle on that? You talk
about systems and performance measures and the business
processes. In the next 12 months, how do we get a handle on
those?
Mr. White. I think partly it requires recognizing this is
going to take time. IRS is well into the reorganization part of
this but systems modernization, because of the age of IRS'
systems and the complexity of those systems, the number of
taxpayers involved, and the size of the investment, it is going
to take time to do that right.
The reorganization and the fact that executives have been
named to manage the new operating units is designed now to
allow those newly named executives to begin to think about
redesigning business processes. That is how those units would
actually interact with taxpayers. Those people are just getting
into place, so that kind of thought and planning is just
beginning.
Randy, do you want to expand on the systems part?
Mr. Hite. You asked the question with regard to the 1997
modernization blueprint. That blueprint included a number of
things: An enterprise architecture which would define in both
business and technical terms the environment IRS wants to get
to; some high level business requirements that would be used as
a basis for developing new systems; and a systems life cycle
which would be the cradle to grave set of processes and
procedures for managing those systems.
We reviewed that back in 1997 and said that was a good
first step but it wasn't complete and more needed to be done in
order for it to be the basis for modernizing. The Commissioner
agreed. As of today, we are still waiting for an update to the
enterprise architecture and the blueprint. We are still waiting
for implementation of the system life cycle methodology.
I believe it was about 9 months ago when they requested and
received a first draw down from the investment account for
modernization. During that time, they have been working to put
these things in place. I think it is fair to say they have gone
through some growing pains in getting to the point where they
have these type of program management and technical controls in
place to guide the modernization.
Chairman Houghton. This Committee has to keep an eye on
this. We have to have some milestones, so what are the
milestones we have to have in order to understand and our job
responsibly?
Mr. Hite. When Mr. Rossotti responded to that question he
mentioned these expenditure plans that are required under the
1998 and 1999 Appropriation Acts. They submitted the first plan
in May of last year. We reported on that in June. We concluded
that was a reasonable first step, a reasonable plan for
launching the modernization effort. The key to it would have
been implementation of the plan.
He also mentioned they submitted the second expenditure
plan about a month ago. We are reviewing that now and we are
under obligation to report to the Appropriations Committees in
a few days on the results of that. We would be happy to brief
your staff on the results of that also.
Those plans include the details on the projects in terms of
what is going to be accomplished by when and it makes
commitments in terms of deliverables. That is what you should
hold them to.
Chairman Houghton. Thank you. On page seven of the report
put out in February, you mention ``The key issues IRS faces
include the following.'' The Commissioner has said that some of
these things are management receptive. In others words, you can
change them. The other things have to wait until better
equipment, better computers are involved. Do you agree with
that?
Mr. White. Yes, we do. To do this right is going to take
some time, to redesign IRS' business processes and to develop
the kinds of systems that will support those processes given
the place they are starting from, it is going take time.
Chairman Houghton. Mr. White, gentlemen, thank you very
much for being with us. It has been very helpful. I hope we can
keep in touch with you.
Chairman Houghton. Now we have another panel. Our panel is
Mr. Gregory Steinbis, Enrolled Agent, Immediate Past President,
National Association of Enrolled Agents from California; Bryan
Gates, Enrolled Agent, National Society of Accountants from
Florida; and Deborah Pflieger, Chairman, American Institute of
Certified Public Accountants Relations Internal Revenue Service
Committee. Thank you for being with us.
Ms. Pflieger.
STATEMENT OF DEBORAH PFLIEGER, CHAIR, RELATIONS WITH THE IRS
COMMITTEE, AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
Ms. Pflieger. Mr. Chairman, Mr. Coyne, thank you for
inviting the AICPA to testify before you today. I am Debbie
Pflieger, Chair of the AICPA Relations with the IRS Committee.
The AICPA's members provide tax services to all types and
sizes of taxpayers and it is from this broad base of experience
that we offer our comments today.
The AICPA has been a long-time advocate for adequate
funding of the IRS. Providing sufficient funding is
particularly important now as the IRS strives to perform its
tax administration duties, implement the numerous taxpayer
rights provisions recently enacted by Congress and at the same
time reorganize its structure and modernize its technology.
The IRS has had its share of problems in the past and in
RRA 1998, Congress directed the Service to change. We believe
the change process is well underway and that this movement is
in the right direction. We look forward to seeing the final
results but those results will not occur without adequate
funding.
The Administration has proposed a fairly significant
increase in the IRS' budget. While the specific dollar amounts
and allocations are beyond the scope of our review, given the
day-to-day, practical experiences of our members, we offer the
following general views and insights on the subject.
Included in the administration's proposed budget increase
is funding for the STABLE initiative. We welcome this new
initiative as a means to achieve a balance between taxpayer
service and enforcement since both are critical for effective
tax administration.
News reports about the extremely low audit levels and lack
of collection activity by the IRS are widespread. Commissioner
Rossotti discussed them here again today. The AICPA believes
strongly that it is vital to our voluntary tax system that this
lack of audit and collection activity be reversed immediately
and that the increase in enforcement be widely publicized.
When the IRS is or appears to be unable or unwilling to
actively administer and enforce the tax laws, serious damage to
our tax system results. Those who normally flaunt the law will
continue to do so at no risk. Those who have reluctantly
complied in the past only because of a fear of enforcement may
become noncompliant and the normally compliant taxpayers will
lose all faith in the system.
For the voluntary tax compliance system to operate
effectively, taxpayers must perceive that everyone pays their
fair share and that, if they do not do so voluntarily, the IRS
will force them to do so.
The current lack of enforcement is a matter of great
concern to our members who see on a day-to-day basis its impact
on the attitudes of taxpayers. This is a problem that must be
addressed quickly. We fear that any damage to the voluntary
nature of our tax system will be difficult to reverse.
Therefore, we urge Congress to provide the Service with funds
for additional personnel as well as for the proper training of
its staff.
Through recent legislation, Congress has taken much needed
and much heralded steps to improve the IRS and our Nation's tax
system. Commissioner Rossotti has assumed responsibility for
leading the IRS in making the comprehensive changes to its
structure, manner of operation and technology that you
mandated. He has made impressive strides in doing so.
It is crucial that Congress follow through on the reforms
it started by providing the IRS with the necessary funds to
accomplish its goals. At this point, a failure to support the
continuing implementation of these reforms through adequate
funding will cause havoc not only on the reforms but to our
entire tax system.
We were also asked to discuss the status of the current
filing season. However, at this time, we have heard little from
our members regarding this filing season, probably because as
we sit here today, they are totally immersed in it.
Related to filing season issues, however, is the matter of
electronic filing. We are completely supportive of the
expansion of the electronic filing program. However, we have
concerns about the inability to electronically transmit all
forms and all schedules, including white-paper schedules,
elections and related compliance disclosures. We see this
inability as the greatest barrier to widespread use of
electronic filing by our members, who tend to prepare more
complex returns.
Given that effective disclosure is central to our current
tax reporting system, it is unrealistic to believe that
electronic filing can be used for complex returns until all
forms and all schedules can be filed electronically.
In conclusion, the AICPA is encouraged by the progress the
IRS has made in becoming more responsive to taxpayer needs.
Although we are concerned about the decline in audit and
collection activity, we regard the administration's budget
proposal as indicative of the Service's attempt to correct that
decline. Therefore, we urge Congress to continue to support
Commissioner Rossotti and the IRS in those efforts by providing
them with adequate funding.
Congress instituted the massive and much needed reforms now
going on within the IRS. It is crucial that you now support
appropriate appropriations for their implementation.
Thank you.
[The prepared statement follows:]
Statement of Deborah Pflieger, Chair, Relations with the IRS Committee,
American Institute of Certified Public Accountants
Mr. Chairman and members of this distinguished
Subcommittee:
Thank you for inviting the American Institute of Certified
Public Accountants to testify before you today. I am Deborah
Pflieger, Chair of the AICPA Relations with the IRS Committee.
The AICPA is the national, professional organization of
certified public accountants comprised of more than 330,000
members. Our members advise clients on Federal, state, and
international tax matters and prepare income and other tax
returns for millions of Americans. They provide services to
individuals, not-for-profit organizations, small and medium-
size businesses, as well as America's largest businesses. It is
from this broad base of experience that we offer our comments
today.
IRS Budget
The AICPA has long advocated that funding for the IRS must
be sufficient for the Service to efficiently and effectively
administer the tax laws and collect tax. Providing adequate
funding is particularly important currently as the IRS both
performs its tax administration duties, including implementing
numerous new taxpayer rights provisions enacted by Congress,
and, at the same time, is reorganizing its structure and
modernizing its technology.
The IRS has had more than its share of problems in past
years and, in the Internal Revenue Service Restructuring and
Reform Act of 1998 (RRA98), Congress directed the Service to
change. We believe the change process is well under way, and
the movement is in the right direction. We look forward to
seeing the final results. But, those results will not occur
without adequate funding.
The Administration has proposed an increase in the IRS's FY
2001 funding by $769 million more than the FY 2000 budget; the
majority of this amount would be for ``current'' day-to-day
operations and the balance would be for the reorganization of
the IRS's structure and the modernization of its technology.
The merits of the specific dollar amounts and allocations in
the budget proposal require knowledge of facts and an analysis
beyond the scope of our review; however, given the insights
gained by the day-to-day practical experiences that our members
have working with the IRS, we offer the following general views
on the subject.
``Current'' Operations
Included in the Administration's proposed budget increase
for IRS's ``current'' operations is funding for additional
employees to strengthen the tax compliance and customer service
functions of the IRS; FY 2001and supplemental FY 2000 funding
is requested for this purpose. This initiative to increase IRS
staffing, aptly called STABLE (Staffing Tax Administration for
BaLance and Equity), is a welcome measure. We applaud the IRS
for recognizing its weaknesses and commencing numerous taxpayer
service initiatives since the passage of RRA98. We also applaud
the STABLE initiative as a means to achieve a balance between
taxpayer service and enforcement. Both are necessary for
effective tax administration.
Reports about the extremely low audit rates and lack of
collection activity by the IRS are widespread. In his recent
testimony before the House and Senate Appropriations
Subcommittees, Commissioner Rossotti indicated that, because of
a reduction in staff, an increase in return filings, and
additional workload created by RRA98, there has been a ``steady
erosion'' in audit coverage, enforcement, and case closures.
It is vital to our voluntary compliance tax system that
this lack of audit and collection activity be reversed
immediately and that the increase in enforcement be widely
publicized. When the IRS is, or appears to be, unable or
unwilling to actively administer and enforce the tax law,
serious damage to the effectiveness of our tax system results.
Those who normally flaunt the law will continue to do so at no
risk; those who in the past have reluctantly complied only
because of a fear of enforcement may become noncompliant; and,
the normally compliant taxpayers will lose faith in the system
and may be tempted to become noncompliant as well. For the
voluntary tax compliance system to operate effectively,
taxpayers must perceive that everyone pays their fair share and
that, if they do not do so voluntarily, they will be forced to
do so by the IRS.
The current lack of enforcement is a matter of great
concern to our members who see on a day-to-day basis the impact
it is having on the attitudes of taxpayers. It is a problem
that needs to be addressed--and addressed quickly, for we fear
that the damage to the voluntary nature of our tax system will
be difficult to reverse. We support the IRS in its decision to
add additional personnel to its staff to strengthen its
enforcement activities.
Furthermore, emphasis should be placed on the training and
knowledge of IRS personnel. Well trained, well paid, and
knowledgeable enforcement personnel would be welcome. Some of
the most frustrating experiences for taxpayers and tax
practitioners in dealing with the IRS occur because of the lack
of training and knowledge of the IRS employees. It is a lot
easier to work out a solution that is fair to both the tax
system and the taxpayer if the individuals dealing with the
issues are knowledgeable of the subject matter.
We urge Congress to provide the Service with funds for
additional personnel and for the proper training for its entire
enforcement staff.
Restructuring of Organization and Modernization of Technology
By the enactment of RRA98, Congress took much-needed, and
much-heralded, steps to improve the IRS and our nation's tax
system. In the year and a half since Congress directed it to do
so in that legislation, the IRS has initiated plans for
comprehensive changes to its structure, manner of operation,
and technology. Commissioner Rossotti has assumed
responsibility for leading the IRS in making those changes and
has made impressive strides in doing so. It is crucial that
Congress follow through on the reforms it started, by providing
the IRS with the necessary funds to accomplish its agenda. At
this point, a failure to support the continuing implementation
of these reforms through adequate funding would wreak havoc not
only to the reforms but also to our entire tax system.
The American taxpaying public is beginning to get the
Internal Revenue Service that Congress looked for when it
passed the IRS restructuring legislation. It is critical that
Congress facilitate moving the reform process ahead without
delay by providing the necessary funding.
2000 Filing Season
Having heard little from our members regarding the current filing
season (as we meet today, they are totally enmired in it), it appears
that the filing season is progressing without major problems. It is the
experience of our members, however, that many of the more complex
returns are yet to be filed at this point in a filing season. Also,
since historically we have not solicited input from our members
regarding the positives and negatives of a filing season until after
the season has ended, it is not unusual for us to have had little
feedback at this time unless there is a major systemic problem. If in
the future we become aware of any items of significance regarding the
current filing season, we will provide you with that information.
Related to filing season issues is the matter of the electronic
filing program. We are completely supportive of the expansion of
electronic filing. However, we do have some concerns about, and
accordingly express our disappointment in, the inability of the
electronic filing program to accept all forms and all schedules. This
inability to accept all forms and all schedules, including white paper
schedules, elections and related compliance disclosures, is the
greatest barrier to widespread use of electronic filing by AICPA's
members (who tend to work with the more complex returns). Given that
effective disclosure is key to the modern tax reporting system, it is
unrealistic to believe that electronic filing can be used for complex
returns until all forms and all schedules, including white paper
schedules, elections and compliance disclosures, can be filed
electronically.
At the present time, many CPA tax return preparers cannot be
certain that the returns they will prepare in the current filing season
can be filed electronically. Given that uncertainty, the vast majority
of these preparers have not elected to use the electronic filing
system; to do so would require the establishment and operation of two
separate filing procedures in their offices, which would result in a
needless increase in workload and costs. Only when it its clear that
all forms and all schedules can be accurately filed electronically can
preparers be expected to begin the natural migration from filing paper
returns to filing electronic returns.
We all have heard the reports about the marked increase in the use
of electronic filing and we hope that the trend continues. Nonetheless,
we would expect that the vast majority of taxes continue to be assessed
on paper returns. Electronic returns are only available for the less
complex scenarios in which most taxpayers are being charged only
relatively modest amounts of tax. While the exact statistics are not
available to us, a key question that should be asked and answered is:
What percentage of the personal income tax is assessed on paper returns
versus electronic returns? Evidence of a successful electronic filing
system should at least be partially based on the amount of tax
ultimately collected through the electronic return submission process.
Conclusion
The AICPA is encouraged by the progress the IRS has made in
becoming more responsive to taxpayers. Although we are concerned about
the decline in audit and collection activity by the IRS, we regard the
STABLE initiative as indicative of the Service's acknowledgment of the
problem and attempt to correct it. We are optimistic that, under
Commissioner Rossotti's leadership, the IRS soon will attain an
appropriate balance between taxpayer service and enforcement.
We urge Congress to continue to support Commissioner Rossotti and
the IRS in those efforts by providing adequate funding for the IRS's
day-to-day operations as well as its organizational restructuring and
technology modernization. Congress instituted the massive and much-
needed reforms in the IRS; it is crucial that it now support their
implementation.
We appreciate this opportunity to offer our comments to you and
would be happy to discuss any of these matters in further detail with
you or members of your staff if you so desire.
Chairman Houghton. Thank you, Ms. Pflieger.
Mr. Gates.
STATEMENT OF BRYAN E. GATES, ENROLLED AGENT, AND MEMBER,
FEDERAL TAXATION COMMITTEE, NATIONAL SOCIETY OF ACCOUNTANTS,
ALEXANDRIA, VIRGINIA
Mr. Gates. I represent the National Society of Accountants
which is much smaller than the American Institute of CPAs and
generally represents very small business.
We circulated the request regarding the filing season to
our members throughout the United States and heard specifically
from about seven or eight States and felt we had made a pretty
good inquiry.
The report was what everyone is saying here now. This
filing season is beyond anything in anybody's recent memory as
going well. The glitches that the newspapers have picked up are
of no interest to our members. They don't engage in those
activities, they don't know about them. The electronic
machinery is operating just fine. The only thing they would
like to see is it operate better.
The electronic filing contemplates an intermediary. The
Internal Revenue website is so wonderful that I wish I could
take my entire time to explain to you what that is doing to
practice out there. Practitioners now are communicating with
the Internal Revenue Service daily through its website. In
fact, it wasn't mentioned by the individual from GAO who talked
about the phone service, but we can see the phone service
disappearing very quickly.
It is not widely known but the Service will answer a
question on the web now. They give an e-mail answer within
about 24 hours, a written answer. It is very beautiful. I am
afraid if word got out to the public right now, IRS would be
totally overwhelmed by e-mail requests for information.
I have asked personally very difficult questions just to
test the ability of the system to work and in fact have gotten
correct answers in writing, in e-mail within 24 hours. If the
Service could ever get to the point where every taxpayer who
has a question could simply go to the web, type in the question
and get an e-mail answer, they will have done it. That would be
tax administration at its highest.
Specifically, the only things that were really mentioned a
problems were the ones you are well aware of. The earned income
tax credit is a nightmare for practitioners, return preparers.
They never know, we don't know, whether our clients are telling
us the truth when they give us information about the earned
income tax credit and their eligibility. If they have the
misfortune to live in a family with multiple members in the
household, the complexity becomes absolutely unbelievable.
The original idea of the earned income credit was to give
back money to people who need it, the earning people. Once they
get in a controversy with the Internal Revenue Service over the
credit they were supposed to get, it is unending. Specifically,
one member said, what am I going to do filing the 1999 return
when I am still arguing over whether they were eligible for the
1997 credit they took. It is a nonending thing.
We find people who don't even know where the United States
Tax Court is being handed petitions and told you can work it
out by petitioning the United States Tax Court. This is a
person who is eligible for their earned income credit.
Absolutely unbelievable.
It was suggested to one of the IRS citizens advisory
panels, that the Internal Revenue set up, that perhaps it is
time for Congress to reconsider whether the Internal Revenue
Service should even be administering this form of return of
earnings to the American citizen. There might be a better way
to do it.
Chairman Houghton. I am not going to interrupt now but I
wish you would explain that later on in the questioning.
Mr. Gates. Yes, sir.
The increasing incidence of the alternative minimum tax is
hitting more and more people as a result of inflation and also
to the extent that some of their credits are phasing out. It is
beginning to grate on taxpayers our members don't believe it
was ever intended to affect. They are not high income people;
they are medium income people. They are finding that the
alternative minimum tax requires them to pay more tax than they
would otherwise have to pay.
One other thing brought to our attention was the difficulty
of the Service to stay up with changes in our lives. The web
now permits trading, day trading, and our members are having to
fill out Schedule D's designed years ago to put hundreds and
hundreds of gains and losses involving pennies. How the Service
can ever keep up with the rapid change of this nature, I think
they will need all the help they can possibly get.
Last, with my time gone, we are still are having and our
members can never stop talking about the difficulty of getting
just the signup number, their Federal Employer Identification
Number. Some day when the Service is able to change this
technology so it is as easy to get a Federal ID number as it is
a library card, our members and their clients will have a new
faith.
They can't open bank accounts without those numbers, the
Service says they need the personnel to answer the telephone.
They need more staff to serve these people who are complying.
I would love to tell you how wonderful Commissioner
Rossotti is doing but I think you already know it. Our members
were skeptical at first but we think this is the greatest
experiment ever done in Federal taxation. If he is successful
in teaching people what is expected of them, how to do it and
then making it easy and convenient for them to do it, we think
he is going to revolutionize the way this country collects tax.
The few people that are talked about and not audited enough
and so forth, as many former commissioners can tell you, you
tighten up the screws a little bit, you can audit so many
people in this country that the hissing would be heard for
miles around. The Federal tax lien stays in place for 10 years
anyhow. I hope the press will leave him alone a little bit and
you will trust him with the budget he needs so we can see if
his experiment is going to work.
I am sorry I ran over.
[The prepared statement follows:]
Statement of Bryan E. Gates, Enrolled Agent and Member, Federal
Taxation Committee, National Society of Accountants, Alexandria,
Virginia
Introduction
The National Society of Accountants appreciates the
opportunity to testify before the Ways and Means Subcommittee
on Oversight and offers this statement concerning the 2000 tax
filing season, the Fiscal Year 2001 Budget for the Internal
Revenue Service, and IRS Restructuring and Reform.
Through our national organization, and affiliates in 54
jurisdictions, the National Society of Accountants represents
the interests of approximately 30,000 practicing accountants
and tax practitioners. Generally, our members are sole
practitioners or partners in small to medium-sized accounting
firms. They provide accounting, tax preparations,
representation before the Internal Revenue Service, tax
planning, financial planning and managerial advisory services
to approximately nineteen million individuals and small
businesses. The members of NSA are pledged to a strict code of
professional ethics and rules of professional conduct.
I am Bryan E. Gates, a federally authorized tax
practitioner (Enrolled Agent), who has represented taxpayers
before the IRS for over twenty-five years. I offer this
testimony in my capacity as a member of the National Society of
Accountants' Federal Taxation Committee. NSA has been given the
privilege of testifying before this Committee on several other
occasions, and, as always, we greatly appreciate the
invitation.
Our statement is based on (1) our reaction to the 2000 tax
filing season to date; (2) our thoughts on the administration's
fiscal year 2001 budget request for IRS; and (3) our view on
the IRS restructuring effort.
Year 2000 Filing Season
NSA keeps in touch throughout filing season with its
members. Through our online communications and surveys, we gain
insight from front-line practitioners who are seeing taxpayers.
NSA also maintains a tax research hotline for its members which
gives us a basis on which to comment on some of the filing
issues our Tax Manager, Bernie Phillips, has received so far
this season. In addition, after we were invited to testify, we
requested information from NSA members in all fifty states as
to any problems or concerns they may have had with the filing
season to date. We are able to report that there were few
complaints or concerns expressed by our members this year. We
heard from members who practice in Hawaii, Florida, Wisconsin,
California, and more. Typical of their comments were, ``a
relatively calm filing season'' to ``filing season 2000
involves, so far, fewer problems than in recent years.'' The
lack of problems may be the result of the increasing ability of
the IRS to process return information electronically and the
increasing expertise of our members in submitting electronic
data. In terms of IRS processing operations, there are several
issues our members would like to bring to your attention. Our
members have told us that the following specific issues are of
greatest concern:
The first issue is information returns. Our members realize
that every financial institution cannot become adept in
handling the intricacies of the Internal Revenue Code. But,
they believe the Service should demand greater compliance with
information reporting requirements. Incomplete and inaccurately
completed forms in the IRS 1099 series cause unbelievable
problems for taxpayers, practitioners and IRS personnel during
filing season. This is particularly true with respect to the
returns required of mutual securities funds. Our members report
a neverending struggle to separate combined reporting of
dividends and short-term gains. Other members report continuing
difficulties with Roth versus regular IRA reporting, Roth
conversions and re-characterizations, and brokerage reports.
These are practitioners who are familiar with and who have read
IRS publications 590 devoted to the matter. NSA believes the
Service should make special education outreach efforts to the
entities who are required to prepare these information reports.
The second issue surrounds the Earned Income Tax Credit.
Many taxpayers and practitioners alike remain confused by the
eligibility requirements. They are particularly concerned in
light of specific due diligence requirements and the
repercussions of making a mistake. For example, multiple family
households present a myriad of questions having little to do
with the credit. Moreover, there are many types of income which
must be considered to determine if they apply for purposes of
the Earned Income Tax Credit. In our view, the rules are
unacceptably difficult for the taxpayer, the tax practitioner,
and the IRS: those who believe this program should be
administered under another section of the United States Code
may be correct.
The third issue is the Alternative Minimum Tax (AMT). More
and more of our members' clients are being subjected to the AMT
and we are beginning to hear complaints about the increasing
incidence of this tax. Since the AMT was designed to prevent
circumstances in which high-income taxpayers enjoyed little or
no tax liability it is particularly unwelcome when it strikes
taxpayers who do not enjoy a high income in the real sense. We
feel strongly that Congress needs to address the dramatic
growth in the numbers of taxpayers becoming subject to the AMT
as it was never intended to have such a broad application.
The fourth issue concerns the effect of ``day trading'' on
tax reporting responsibilities. Our members realize that this
phenomenon is relatively new to the world of tax practice but
are finding the impact on clients to be overwhelming. Following
the existing reporting requirement that each transaction be
listed in detail is overly burdensome in many cases. Some NSA
members report the frustration of pages and pages of details
concerning tiny individual gains and losses. We are confident
that IRS personnel are hearing these concerns and changing the
reporting requirements to reflect the reality of current
financial markets.
The fifth issue is logistical in nature. Since the IRS
mailed postcards instead of return packages, many taxpayers had
difficulty obtaining forms and instructions. Taxpayers appeared
at practitioner offices in search of forms saying that their
requests for forms had not been answered by the Service and
that they were unable to obtain forms in banks, post offices,
or libraries. NSA's President, Jeffrey Adelstone in Tucson,
Arizona, among others, reported a considerable number of
taxpayers unable to obtain needed forms without a visit to IRS
offices. NSA believes taxpayers should have to go no further
than the closest bank to get the instructions and forms they
need to prepare a simple tax return.
An issue which will go unnumbered since it does not involve
the year 2000 filing season was mentioned repeatedly by our
members. Members are unable to obtain Federal Employer
Identification Numbers for their new clients in a prompt and
convenient manner. This complaint is continuous and widespread.
It goes without saying that a new businessman's introduction to
the world of employment tax should not include difficulty in
obtaining an account number which will prove necessary to
deposit, report and pay tax withheld from employee wages. NSA
strongly urges that an end be put to this systemic failure.
Employer identification numbers should be easier to obtain than
telephone numbers. Immediate assignment of numbers is a crucial
enhancement to the prospects for voluntary compliance.
Lastly, Electronic Tax Administration remains an NSA
concern. The IRS is requesting $3 million for ETA to continue
progress toward the Congressional goal that 80 percent of all
tax and information returns be filed electronically by 2007. In
RRA 98, Congress established the interim goal that all returns
prepared electronically, but filed on paper, be filed
electronically by 2003. Increasing taxpayers' awareness and
understanding of IRS e-file services and benefits will require
expanded marketing efforts that communicate the benefits of IRS
e-file to both taxpayers and practitioners. The IRS should not
only advertise the benefits of electronic filing but also, at
the same time, the benefits of web access. As the public
becomes more comfortable with the web and security available on
the web, taxpayers will be less hesitant to trust e-filing for
tax transactions. Since more than 50% of all tax returns are
prepared by a professional tax preparer or accountant, IRS must
also make the process of electronic filing more advantageous
and less complicated for the practitioner. Continual dialogue
between the IRS and organizations such as NSA are essential to
the ultimate realization of Congressional objectives. Ongoing
refinements and improvements can happen if both practitioners
and the IRS explore in partnership the underlying reasons for
the unwillingness of many taxpayers and practitioners to file
their returns electronically. NSA, for its part, is eager to
continue discussions on this matter with members of Congress
and IRS personnel.
Administration's Fiscal Year 2001 Budget Request for IRS
Congress sought by means of the IRS Restructuring and
Reform Act to provide a more balanced environment in which IRS
would focus on both compliance and taxpayer service. The Act
directed IRS to revise its mission statement to achieve this
balance. In addition, the Act directed the IRS to reorganize
its structure by moving away from a geographical, region and
district organization toward a structure that focuses on groups
of similar taxpayers with unique needs. This directive
essentially ended a way of doing business which had existed for
nearly fifty years. Since the IRS performs an essential
government function, however, it could not be closed down while
it was being restructured but must, instead, maintain
operational activity at acceptable levels. Some have likened
this directive to the task of rebuilding an airliner while it
is still flying.
The National Society of Accountants foresees a new era when
Commissioner Rossotti has fully implemented the '98 Act and
accomplished tangible and visible changes in service,
compliance and productivity that taxpayers expect and deserve.
Commissioner Rossotti has testified before other committees
saying that the IRS will be able to perform all aspects of its
new mission more effectively and efficiently, and in line with
the best private and public sector practices, by reengineering
IRS business practices and IRS technology, which will require
only a limited staff increase. NSA believes that Commissioner
Rossotti has made excellent progress and that he should be
trusted with the additional funding he is requesting. He has
assembled an impressive group of top executives to make the
four planned customer type/unique need operating divisions a
reality. Although some are saying the IRS is now in a position
where it is not yet meeting the legitimate service expectations
of compliant taxpayers who voluntarily pay their taxes and is
letting compliance activity, such as examination coverage and
collection enforcement activity, drop rapidly NSA believes it
is too early to judge.
Commissioner Rossotti's idea that increased, pre-filing
taxpayer education will reduce the need for post-filing
examination has not yet been tested. His critics who point to a
declining percentage of tax returns examined do not consider
that deterrence may not be tomorrow's answer to voluntary
compliance. Commissioner Rossotti's idea that increased
alternatives for paying taxes will reduce the need for enforced
collection measures has not been tested yet. His critics who
point to declining IRS seizure statistics ignore the fact that
the federal tax lien created by Congress remains in effect
against the income and assets of taxpayers who do not pay for
ten years. They also ignore Commissioner Rossotti's business-
like theories that effective collection practice in the future
consists of rapid problem solving intervention with taxpayers
before taxes become past due.
Restructuring of necessity involves retraining IRS
personnel. NSA understands that some two million hours of
training were necessary to acquaint IRS employees with RRA-98's
specific administrative provisions. Training will continue to
be an expensive challenge in FY 2001 to insure that business
practices and strategies are actually changed and that new
information technology is instituted. NSA believes Commissioner
Rossotti's commitment to continue a high level of training
necessary to implement every taxpayer rights provision and make
them work as intended while still collecting taxes that are due
should be funded fully.
NSA believes that full implementation of the Act's
legislative intent will require years of dedicated effort and
may require continued appropriation of additional funds to the
Service to support Congress's long overdue reform efforts.
Oversight by your Subcommittee, other committees who share
oversight responsibility, the taxpaying public, and
professional organizations such as NSA must, of course continue
as to whether additional funds are actually needed and whether
the funds are being used appropriately to accomplish the
reforms. While NSA is not prepared to suggest specific dollar
amounts which might achieve the continuing reforms, NSA urges
this Subcommittee to advocate sufficient resources to support
the IRS continuing efforts to carry out its Congressional
mandate. NSA believes the increases will mean the 88,000
remaining IRS employees will turn the corner with Commissioner
Rossotti and finish re-engineering the IRS. NSA believes the
increases will result, for the taxpayers, in an IRS which views
the majority of taxpayers as customers whose willingness to pay
their fair share deserves quality help and assistance. NSA is
confident that the re-engineered IRS providing top quality
service to the majority of American taxpayers will also be able
to deal decisively with the few taxpayers who do not pay unless
forced to do so and the even smaller number of taxpayers who
attempt to evade tax by violating the criminal statutes.
IRS Restructuring
In recent NSA/IRS meetings with Commissioner Rossotti, we
experienced a new degree of IRS openness and a new spirit of
cooperation. Commissioner Rossotti and his senior management
team are open to new partnerships with professional
associations such as ours who work for the wellbeing of the
American taxpayer. The partnerships they are forging recognize
that our members individually and collectively can help, not
hinder, them in helping taxpayers comply voluntarily and
willingly with our tax laws. It is our view that Commissioner
Rossotti and his new staff are working diligently to create the
IRS that the American people want and deserve.
Our only concerns with the IRS restructuring and reform
program are beyond the control of IRS personnel. Our first
concern is that Congress will become impatient prematurely as
headline-seeking reporters focus on temporary shortcomings and
urge us to return to the overly intrusive tactics of imprudent
enforcement. Secondly, NSA is concerned that the delay in
confirming members to the oversight board for the IRS is
sending mixed signals to IRS employees, tax law practitioners,
and the American people. Congress intended the board to help
the IRS set and maintain its objectives, including such
important matters as its annual budget and modernization
program. Further delay or use of the nominees as political
footballs will not contribute to accomplishment of the
Congressional mandate or create the IRS taxpayers deserve.
NSA is particularly pleased with the progress the IRS has
made in implementing a transition from the office of Taxpayer
Advocate into the Congressionally mandated National Taxpayer
Advocate and the Taxpayer Advocate Service. The change in title
accompanied by increased authority and new independence is
already being administered effectively.
The Taxpayer Advocate Service has implemented a modernized
structure as called for in RRA '98. It is now an independent,
modernized organization ready to deliver service to each
taxpayer through individual casework and to every taxpayer
through systemic analysis. Taxpayer Advocate managers are now
in place and the managers are selecting the remaining staff.
The new organization establishes a career for Taxpayer Advocate
caseworkers to begin working on routine cases. Based upon their
skill level, caseworkers can now earn promotions to technical
advisors, advocacy analysts, or even Taxpayer Advocates. NSA
understands that more than 8,000 IRS employees applied for
positions in the new Taxpayer Advocate Service. We applaud this
indication of new interest by IRS employees in taxpayer
service. The new and dedicated employees of the Taxpayer
Advocate Service appear to have taken the new TAS Mission
Statement, ``We help taxpayers solve problems with the IRS and
recommend changes that will prevent the problem'' to heart. NSA
members report that TAS personnel are enthusiastic in their
efforts to assist taxpayers who need help. For many years, the
former PRO program fixed problems and made the system better.
Personnel with the new Taxpayer Advocate Service appear poised
to do even more. For example, the National Taxpayer Advocate
recently identified, reported to Congress and made
recommendations on the top 20 problems affecting taxpayers.
Addressing and managing the changes needed to reduce or
eliminate these problems may require significant IRS management
attention and may require additional resources.
Finally, NSA would like to join the chorus of praise for
the IRS website. The IRS has greatly expanded its web site and
continues to provide vast amounts of information to both
taxpayers and tax practitioners. IRS forms, instructions and
publications are easily accessed. Official forms can be filled-
in on line and printed or downloaded blank. The site includes
searching features and interactive calculation whereby
taxpayers and practitioners can determine acceptable
installment payment terms. Another assistance feature is a tax
law research site: taxpayers can enter their query in a
question box and e-mail it for a prompt IRS reply. For
professionals, the site provides each issue of the Internal
Revenue Bulletin and even some portions of the once secret
Internal Revenue Manual. There is more information now on the
IRS website for a taxpayer who wants to know than there was at
one time in an entire IRS office. Experienced NSA members
contrast this to the time when ``two'' was the limit on IRS
publications, the comprehensive Publication 17 cost 50 cents,
and IRS employees threw out more information at the end of a
filing season than they gave out during the filing season.
Conclusion
I would like to conclude by thanking the Committee and
Chairman Houghton for their leadership and attention to the
issues which, when adequately addressed, help the IRS and
taxpayer representatives achieve a more effective, efficient,
and progressive tax collection system under the law. NSA, for
its part, plans to remain an active part of the process and
continue helping the IRS achieve its modernization and reform
objectives. We are greatly encouraged by the achievements made
thus far. Thank you.
Chairman Houghton. Thank you, Mr. Gates.
Mr. Steinbis.
STATEMENT OF GREGORY H. STEINBIS, ENROLLED AGENT, AND CERTIFIED
PUBLIC ACCOUNTANT, MORGAN HILL, CALIFORNIA; AND IMMEDIATE PAST
PRESIDENT, NATIONAL ASSOCIATION OF ENROLLED AGENTS,
GAITHERSBURG, MARYLAND
Mr. Steinbis. Thank you, Mr. Chairman.
My name is Greg Steinbis. I am from Morgan Hill,
California, a suburb of San Jose which is the heart of Silicon
Valley.
On behalf of my fellow Enrolled Agents, I would like to
thank you and express their appreciation to the Oversight
Subcommittee for your annual review and evaluation of the
filing season and the IRS budget request.
Over this past tax filing season, you have heard there has
not been too much. We have heard that customer service has
finally arrived at the IRS. It has a home there. IRS personnel
are exceptionally professional now. They volunteer to give
their name and their ID number immediately; they are going that
extra mile to answer questions and solve problems.
The electronic filing administration continues to receive
accolades from the practitioners. Taxpayers are getting their
refund checks in much quicker time if it is direct deposit,
well within the tolerances posted by the IRS.
There has been a cost for this great success at the IRS and
that is because all employees of the IRS, including auditors
and highly trained staff, are sitting at the front desks, at
the walk-in offices handing out forms and answering tax
questions.
What is falling apart, you heard, is that the innocent
spouse relief is not being resolved, offers and compromises are
being held up, abusive trusts are not being looked at. In fact,
there seems to be a new animal out there called LLC where
people are putting their houses into the LLC to then write off
that house as if it was a rental property just like it was in
the old abusive trust.
Our members are voicing concern that the lack of resources
will lead to greater noncompliance. As you have heard from the
press as well as from my fellow member sitting here, there have
been fewer audits which can only translate into lower
compliance, with more taxpayers willing to play the audit
roulette, the lottery you don't want to win.
This year, the glitches are few but the IRS has responded
quickly and professionally.
What we would like to see is all forms capable of being e-
filed. Our members too are starting to fill out those complex
returns. By not being able to e-file all forms, there is more
paper being filed to the IRS, especially if the IRS is going to
meet its 2007 goal of 80 percent of tax returns being filed
electronically.
We would also like to see elimination of the two signatures
on the 8453. When someone sits home with the telephone and can
do a telefile and not have to submit a form, why can't
taxpayers who come to my office not have to submit a form?
Generally, I only have one taxpayer, either the spouse or the
husband there, so the administration in my office of that form
becomes very complex.
We need to standardize the 1099. The 1099 dividends are
starting to look like W-2s a few years ago. They are not
standard. Even though they have the same box numbers, the paper
comes in different sizes, the 1099 interest comes in different
sizes and the 1099 dividends are being attached to the 1099(b)
for brokerage statements. Our tax clients are not sure what
they are supposed to bring to their appointment, so we have to
send them back home and can't complete the returns in a timely
manner.
The IRS budget it very important. Even though the request
is more than it was last year, NAEA believes the IRS is in a
very critical position during the next several years to respond
to some extraordinary challenges that lay ahead. We feel the
full budget needs to be there.
What are those challenges--to continue to transform itself
into a customer service agency base; to respond to those
changes you mandated in RRA 1998; and modernization. Most of us
in our practices change our computers every 2 years. Our
software requires us to keep on changing our computers.
You wouldn't want a policeman chasing you in a car that was
built in 1970 and we don't want the IRS chasing us with a
computer built in 1970. So the investment in modernization of
computers will eliminate some of the problems you heard about
like staffing. The more computers, the more efficient you are
and you can balance the people that are needed.
We believe that the budget request of the IRS is a
reasonable budget to continue the work you set out for them. It
meets the three challenges I described. As professional tax
practitioners, we see the results firsthand.
Thank you very much for your time.
[The prepared statement follows:]
Statement of Gregory H. Steinbis, Enrolled Agent, and Certified Public
Accountant, Morgan Hill, California; and Immediate Past President,
National Association of Enrolled Agents, Gaithersburg, Maryland
Mr. Chairman, Members, staff and guests, my name is Gregory
Steinbis and I am an Enrolled Agent and CPA engaged in private
practice in Morgan Hill, California, near San Jose. In my
practice I work primarily with individual and small business
taxpayers.
As Immediate Past President of the National Association of
Enrolled Agents, I am very pleased to have this opportunity to
present testimony on behalf of my fellow Enrolled Agents. As
you know, Enrolled Agents are licensed by the U.S. Department
of the Treasury to represent taxpayers before the Internal
Revenue Service. Enrolled Agents, along with attorneys and
CPAs, are governed by Treasury Circular 230 in our practice
before the IRS. Enrolled Agents were created by legislation
signed into law by President Chester Arthur in 1884 to remedy
problems arising from claims brought to the Treasury after the
Civil War. Today, we represent taxpayers at all administrative
levels of the IRS and provide tax preparation assistance as
well, thereby affording us a front-line perspective on the
administration of our nation's tax laws. There are
approximately 35,000 Enrolled Agents, more than 10,000 of whom
are members of NAEA. Each year our members work with more than
5 million individual and small business taxpayers.
On behalf of my Enrolled Agent colleagues, I would like to
express appreciation to the Oversight Subcommittee Chair, to
the Members and staff for your annual review and evaluation of
filing season and the IRS budget and operations. We believe you
are making an invaluable contribution to improving our system
of tax administration by regularly scheduling these hearings.
They offer an opportunity for the practitioner community to
share its views and an occasion for the IRS to provide
information on its needs. This hearing is an annual benchmark
against which we can measure accomplishments, highlight
problems and seek remedies.
Mr. Chairman, you are to be commended for taking a
fiduciary interest in the management of the IRS. In the
advisory announcing this hearing, you asked the questions: Why
does the IRS need such a large increase in resources? What does
this increase mean for the IRS and what will be its impact on
the American taxpayer? From the perspective of front line tax
practitioners, we hope to respond to your questions in our
testimony.
2000 Filing Season Report Card: An Overview
As we have done in the past, NAEA has kept in touch
throughout filing season with our members. Through our online
communications and surveys, we have gained insight as to what
Enrolled Agents, as front line practitioners are seeing. Our
members have told us that this has been an extremely smooth
filing season so far as IRS operations are concerned. The
glitches--the few that have occurred--have been minor.
In terms of IRS operations, there are several successes we
would like to bring to your attention. Customer service seems
to have found a home at IRS. IRS personnel have been
exceptionally professional in their demeanor over the telephone
this filing season. Members report that IRS employees
automatically provide their name and an identification number.
They ask how they may help sincerely and enthusiastically and
go the extra mile to answer questions or solve a problem. The
following two statements are typical of the scores of messages
we received commenting very positively on IRS personnel this
filing season:
``Aside from filing season, there is one thing I would like
to get out. And that is the Tax Practitioner Hotlines and
especially ours in Jacksonville, Florida. This is one of the
best actions from my perspective that IRS has ever taken. The
people in our office are all very knowledgeable, most helpful
and eager to be helpful. I really enjoy working with them. The
other day I had reason to speak to the Hotline in Ogden, UT.
The gentleman there was just like our group in Jacksonville,
very helpful and knowledgeable. I hope that the Hotlines
continue.''
``[The] Northern California Practitioner Hotline has been
very helpful in getting us information on a new corporation.
The response would have taken 2-3 weeks in the old days. We had
our response in 2 hours with a critical filing deadline
approaching.''
NAEA members are increasingly comfortable with the modern
technology IRS is using and would like to see it available in
more applications. For example, requests to NAEA for copies of
federal and state tax forms have declined markedly as our
members shift to using the IRS CD-ROM which is sold for less
than $20 through the Commerce Department's NTIS or to the IRS
web site where forms and publications can be downloaded easily
24 hours a day, 7 days a week.
Our members also find useful the IRS Help with Tax Law
Questions site which enables practitioners and taxpayers to
send the IRS questions by e-mail and receive a reply by e-mail,
often within a day or two. This year the replies include the
name and identification number of the researcher, along with a
1-800 telephone number. Very customer friendly.
The IRS Electronic Tax Administration (ETA), responsible
for advances in e-filing, continues to receive accolades from
practitioners for the smoothness of this year's e-filing
operation. Members report that clients are receiving their
refunds well within the tolerance posted by IRS. Practitioners
like having access to error codes to figure out what went wrong
on an e-filed return.
A typical, enthusiastic reply to the success of e-filing
this season: ``I got a call this morning from a client who
asked if a $1,000 deposit to her checking account could be her
federal tax refund. I checked the file and the figure she had
was the same as her tax refund. I e-filed her return on March
8. It was in her account on March 16. That is fantastic!''
From a Maryland practitioner, ``Electronic filing is
stunningly successful. People are suddenly more interested. I
appreciate the efforts of the Service to further shorten the
delay between e-filing and the direct deposit of the refund.''
Last season, we told you that the Treasury Offset Program
for non-tax debts such as child support and student loans was
poorly handled, disorganized and dysfunctional. This filing
season we are hearing that it is providing quick, courteous
service.
This year, more taxpayers than ever have turned to paid
preparers to assist them in the completion of their tax
returns. Our members report business up anywhere from 10% to
20%. Many report working 14 hours a day and 7 days a week. Some
advised that by March 15 they were considering putting clients
on extension because they knew they wouldn't make the April 15
deadline given the volume of work.
Our members report that, where there have been declines in
business, it is because taxpayers are using software to do
their own returns. Clients who used to do their returns at home
and then bring them in to be checked and e-filed are now
skipping that process and e-filing them directly themselves.
Where taxpayers do bring their returns in to be checked our
members find that they may not take all the deductions or
credits to which they are entitled because they are not as
familiar with the tax code as someone who is a tax
professional. More often, our members find they are handling
the more complex tax returns. The easy ones are being done at
home.
Our members tell us that while the tax season has been
remarkably smooth, it is because IRS is using every available
employee to get the filing season work handled in timely
fashion. Auditors and other highly trained staff are sitting at
front desks in walk-in offices, handing out forms and answering
taxpayer questions.
However, these improvements in filing season operations
come at a price. As one exasperated California EA put it,
``What is wrong with the IRS? I have three offers in compromise
that have taken over a year to work. . . no word from San Jose
district about them except when I call. I find they have been
reassigned and a new Form 656 must be filed. They are
overwhelmed with the numbers of OICs coming in. They can't work
them. Needless to say, this is putting the clients in a
precarious position.''
A Massachusetts EA writes, ``I've got two requests working
for Innocent Spouse relief. Each time I follow up on them I'm
told that 'we're swamped and have a huge backlog.''' The EA
continues, ``Is this true?'' Unfortunately, it is. More than
46,000 innocent spouse cases wait to be worked.
An Oregon EA writes, ``A problem I've encountered this
filing season involves the collections department. I have a
corporate client that owes over $300,000 in payroll taxes to
the IRS. We are in the process of obtaining financing and
needed subordination. The tax collection officer assigned to
our case was also required to spend most of his time at the
downtown office of the IRS--handing out forms and assisting
taxpayers with their filing questions. This meant he was only
in his own office one morning a week. I estimate this delayed
our financing by approximately three weeks. This is a highly
skilled officer whose expertise was essential to the process of
keeping my client in operation. I question the use of his time
in this way.''
From Washington State: ``It still takes too long to get an
Offer in Compromise through. I have one OIC that wasn't even
assigned to an OIC specialist until 5 months after I was
notified that the package was processable.''
A Florida Enrolled Agent comments, ``IRS needs well trained
personnel in sufficient quantities to do the job and that
requires adequate funding. As we can all attest, it takes years
to become really conversant with the [tax] Code and able to
handle inquiries quickly and correctly. As long as Congress
wants to use the Code to handle social problems such as
stimulating the economy, helping the poor, promoting education,
etc., they must be willing to provide the resources to handle
that complex task.''
Finally, some of our members are voicing concern about the
lack of resources leading to greater noncompliance. As a Texas
Enrolled Agent wrote, ``The public is becoming aware that there
have been very few audits. This can only translate into lower
compliance. The audit rate needs to increase back up to [a
respectable level].''
Ours is a tax system based on voluntary assessment. If we
are to maintain compliance, taxpayers in every income bracket
must have confidence in the integrity of the system.
The Glitches
This year, the glitches are very few. We have heard about
sporadic telephone overloads and occasional problems with e-
filing when too many returns were submitted. Members whose
clients are turning from paper returns to e-filing are having
to contend with the inevitable glitches--names that don't
correspond precisely to what the Social Security Administration
has on file, taxpayers who have failed to provide SSA with a
name change when they married, and so forth. Inevitably, these
problems would have to be resolved anyway. Our members advise
their clients that it is better to do so now rather than wait
until retirement, death or disability.
Empty boxes
Every year there is a new glitch. This year, we have had
reports of problems where clients had a Form W-2 with nothing
in box 1 but sick leave pay, which was stated, in box 13. Due
to box 1 being empty, the electronically filed return was
rejected. Paper returns were filed instead.
Form 5500EZ
Coordination between federal agencies can be difficult.
Last year practitioners experienced difficulty with the
Treasury Offset Program. This year, it's coordination between
the Department of Labor and IRS involving Form 5500EZ, which
provides reporting of certain types of pension plans. While
technically not a filing season problem, it has increasingly
been handled during filing season.
Since 1994 tax practitioners have had to alert their small
business clients to the requirement to file Form 5500-EZ for
their one-participant (Keogh) plans that held more than
$100,000 at year-end. The $25 per day penalty (up to $15,000)
is an attention-getting incentive to motivate them to file,
even though the filing requirement itself is not well
publicized. The return isn't due until the end of July for
calendar year taxpayers, however many practitioners have
trained their clients to include the information in their tax
prep folders so that it can be addressed routinely as they
prepare their tax returns.
The 5500EZ has never been an easy form to integrate into a
regular practice since many software vendors did not support
it. This year it appeared to be almost mission impossible, yet
even more sole-proprietor, small businesses need to file it
because of the asset growth in the stock market. Since it was
not included in the tax pros' super forms disk, one of our
Members accessed the IRS web site and quickly discovered why.
``Form 5500-EZ has been revised to take advantage of a new
computerized system that will process the form (``;EFAST'').
The new form is printed on special paper with green dropout
ink. Filers were advised that they should not substitute a
reproduction of these machine-readable pages. A copy of the
hand-printed form is available in Package 5500-EZ. The
instructions refer taxpayers to the IRS web site, ``How to Get
Forms and Publications'' where they would discover they could
not download the form for use anyway.
We are pleased to report that once alerted to the problem,
the IRS Office of Public Liaison responded quickly. Through e-
mail messages to practitioner groups, they advised that the
forms had been revised, that Package 5500 and Package 5500 EZ
had been mailed to all filers of record beginning the last week
of February 2000 and that these packages contained the
necessary computer-scannable forms and schedules. They also
advised where the green ink forms could be obtained 24 hours a
day, 7 days a week, by calling 1-800-TAX-FORM (1-800-829-3676).
It is our hope that this marks the end of the Form 5500EZ
debacle. However, without the outreach to practitioner groups
done by IRS in recent years, the word could not have gotten out
and the problem could not have been resolved. Technology and
personnel made the difference.
The Wish List: Improvements for Next Filing Season
All Forms Can Be E-filed
For the fourth year in a row, we bring to your attention
the dilemma of tax practitioners who would be willing to
convert their operations completely to e-filing but who are
still finding too many forms which cannot be filed
electronically. NAEA understands the priority the IRS gave to
ensuring its computer systems were Y2K compliant. With that
problem behind us, it's now time to focus on bringing all forms
online. It is particularly important if IRS is to meet the goal
of 80% of tax returns filed electronically by 2007. If this is
to happen, IRS must pick up a very substantial portion of tax
returns done by paid preparers.
Eliminate the Requirement of Two Signatures on Form 8453
There is a disconnect between reaching a goal of 80% of
returns e-filed and requiring original signatures on Form 8453
before a return is e-filed. We are pleased that through pilot
programs this year IRS is attempting to resolve this issue.
They include a PIN pilot under which taxpayers use a PIN
instead of a signature to verify their tax return. While
practitioners and taxpayers appear ready to embrace the
technology, this is still a cumbersome approach.
Standardize the Form 1099
Practitioners need the IRS to require a standardized Form
1099. Our members tell us that the proliferation of 1099s is
very confusing to taxpayers and contributes to stress for
practitioners during filing season. As an EA from New York
observed, ``Two forms--1099-DIV and 1099-B--appear on standard
size pages, legal size pages, 12 by 12 inch pages. The
information is late. The information is less correct this year
than in prior years.'' In an era of computer generated forms,
there is no excuse for nonstandardization. We will leave aside,
for now, the issue of accuracy which the Commission on
Restructuring the IRS considered. Among the solution, extending
filing season for another few weeks.
Simplify the Earned Income Credit
EIC remains a morass of complexity burdened further by fine
distinctions that only King Solomon could reconcile. The
personal nature of the questions practitioners may be required
to ask EIC clients to avoid penalty are off-putting, to say the
least. We are hearing of more and more practitioners who are
simply turning away EIC clients.
Incentive Stock Option Publication
The taxpaying public and tax practitioners would benefit
from one clear publication on how the IRS wants incentive stock
options treated, particularly when the alternative minimum tax
applies as well as when it does not.
Complete Tax Legislation Early
While it may seem frivolous to mention it, delayed
Congressional action on pending tax legislation creates
enormous problems for the IRS, for software vendors who provide
the software used in tax preparation, and for practitioners and
taxpayers who need forms and instructions in order to complete
the tax preparation process. We would respectfully request that
every effort be made to complete legislative action over the
summer so that adequate time and attention can be given to
these important functions in order to ensure a smooth filing
season.
The IRS Budget
Congress has done much in the last several years to transform the
IRS into a modern, customer-focused agency. The National Commission on
Restructuring the IRS, and the subsequent legislation, the Internal
Revenue Service Restructuring and Reform Act of 1998 (RRA 98), both
addressed this vision for the IRS and put the IRS on a path towards
achieving this vision. Our members in the field tell us that progress
is being made, but clearly much more needs to be done.
Even though the requested FY 2001 budget of $8.9 billion is $795
million than the FY2000 budget, NAEA believes that the IRS is in a very
critical position during the next several years as it responds to some
extraordinary challenges, and the full budget is needed to meet these
challenges. The first challenge is to transform itself in an agency
that has a customer-service focus. The IRS has worked to achieve this
transformation through a massive reorganization into four customer-
oriented operating units. This reorganization has been thoroughly
planned and is now being implemented. IRS needs the funding to carry it
through to completion.
The second challenge facing IRS is to respond to the legislative
mandates of the RRA 98. Congress is to be commended for passing such
sweeping legislation that provides taxpayers with more rights. However,
the IRS needs funding to be able to implement the new provisions into
its operating procedures and systems. Without this funding, the new
provisions will not deliver the benefits to the taxpayer that Congress
expected.
The third challenge facing the IRS is modernizing its antiquated
computer systems. Much attention has been focused in the media recently
on the decreasing IRS resources dedicated to compliance. The proposed
Staffing Tax Administration for Balance and Equity (STABLE) program
will resolve some of these issues by increasing IRS staffing levels by
2,835 Full Time Equivalent (FTE) personnel, half of which would be
assigned to customer service and half to compliance. Until the IRS
computer systems are modernized, however, the IRS will face the
constant dilemma of balancing resources between customer service and
compliance. The investment in modernized computer systems will
eliminate the need for this balancing act by providing IRS workers the
data they need when they need it. Particularly with the successful
passage into the new millennium and eradication of the Year 2000 (Y2K)
computer problem, now is the time to move forward aggressively on
modernization. Your support is needed to fund both the business systems
modernization program, which provides the necessary long-term
technology solution to customer service and compliance problems, and
the STABLE program, the immediate remedy to these problems.
The NAEA believes the request for fiscal year 2001 is a responsible
budget for continuing the work the IRS has begun. NAEA has testified to
both the National Commission on Restructuring the IRS and Congress on
the necessity for modernizing the IRS, and believes strongly that the
three challenges described must be met. As professional tax
practitioners, we see the results first hand. For example, cuts in
compliance programs delay resolution of tax cases, and cost taxpayers
more in interest and penalties. The challenges the IRS must resolve are
serious, so serious that failure to meet them will undermine the entire
tax collection system. Cutting the budget at this time makes it more
difficult for IRS to succeed.
Conclusion
In our view, the management team now in place at IRS, led by
Commissioner Rossotti, has demonstrated its ability to get the job
done. We believe IRS is making significant progress. We are getting
results--whether it is the smooth filing season, the emergence of
customer service programs such as Problem Solving Days, or a new
appreciation for the taxpayer as customer. Our members and their
clients are pleased with the changes they are seeing in the
restructuring. However, as the reorganization continues, we
respectfully urge you to give IRS the support it needs to conclude this
endeavor.
Chairman Houghton. Thank you, Mr. Steinbis.
Mr. Coyne.
Mr. Coyne. I would like to ask this generally of the panel.
The IRS has spent a lot of its resources in an outreach program
to practitioners. I was wondering if you could comment on how
this has helped or has not helped your members?
Mr. Gates. It has helped tremendously. Twenty-five years
ago, the Internal Revenue Service would not talk to
practitioners. We were the enemy, we represented the taxpayer,
we were adversaries, so why give away any secrets. It took a
Supreme Court case to get the Internal Revenue Manual away from
the Internal Revenue. They didn't want anybody to see it.
Practitioners could not understand what their internal workings
were like, they only had access to the Code but didn't have any
internal operating procedure knowledge.
The IRM was wrested away by a Supreme Court case. As a
result, the Service got much more free, now that they had to,
with their inner workings. They began publishing more pubs,
they began sharing portions of the Internal Revenue Manual and
handing it out.
That made it easier for us to do our job and they finally
realized maybe we weren't the enemy, that we were active
players in the tax administration system and contributing to
the greater good.
As they began to think that was true, they became more and
more generous. I think Commissioner Rossotti realized the truth
of what I am saying because he has accelerated all of that.
There are not going to be districts anymore, but the people who
are going to become the area and territory managers are getting
clear instructions that they are not only to send out
publications, instruction sheets and share materials, but are
to actively conduct classes, briefings, anything necessary to
get the practitioner up to absolute full speed so that we can
help do the job. So they have done an outstanding job in that
area.
Mr. Coyne. I wonder if your positive response to the
general idea outreach by the IRS extends to the EITC
educational outreach activities on EITC?
Mr. Gates. That is a very, very difficult one because of
necessity. An earned income tax recipient is not the best
client in the world, so a lot of people take a lot of pride in
saying I don't have to know anything about the earned income
tax credit because none of my clients are eligible for it. So,
since it is of necessity for low earnings people, the quality
of people that are trying to help them with their tax returns
is not necessarily as high. When it is not as high, the probing
to see if they are really qualified for it can stop pretty
early.
In addition, in certain parts of the country, certain
areas, a practitioner knows the truth is being withheld, that
only enough information is being given to appear eligible. Once
getting around those two shortcomings, then you have the
unbelievable complexity, if it is not straightforward.
A straightforward, eligibility case is very easy but if
they are in a multiple household where there are three families
living, perhaps one is unmarried with children and one is a
bachelor with high income, trying to sort through the
complexity to find out whether they are eligible or not can be
mindboggling.
With the Service reacting to the lack of diligence in this
area, the preparer will then, on top of this, it is so
difficult and so complicated, think, if I mess it up, I am
going to have a due diligence charge against me, so there is a
tendency then to back off and say I don't want anything to do
with this because it can be a nightmare.
The poor people who are questioned come in and don't
understand what the IRS revenue agent is asking for. You want
statements from my principal where he goes to school, he wants
this, he wants that. The laundry list of what you have to do to
substantiate a questioned earned income tax claim is
unbelievable.
The Service only has so much time, they dispose of these
cases relatively rapidly with a determination that, no, you are
not eligible, or worse, you did not bring in all the
substantiation that is required in the time we have to give
you. Then this puts them in a situation where they are told
they can go to appeals. This level of people do not know the
IRS appeals procedures. So they use up their time. They only
have 30 days to decide whether they want to take advantage of
their appeal rights or not. They lose their time, they get
discouraged, they don't respond and the Service does the only
thing it can do, it issues a notice of deficiency which now
requires the taxpayer to submit a petition to the United States
Tax Court before they can be given any further consideration.
Even though this only costs $65 and the Court is very
generous in that they will take a petition literally prepared
on toilet paper, they don't hold the people back, but imagine
the formidable idea of a United States court trial over this
matter. The number of people who go on from there even if they
could fill out a petition, never go to trial.
The revenue officers get the collection cases and then the
Service is left to deal with this tax liability that they
shouldn't have to pay.
Mr. Coyne. Thank you.
Chairman Houghton. If I understand what you are saying,
Commissioner Rossotti is doing a great job, probably the best
job that has been done around there for a long, long time. The
procedures are good, the attitudes have changed, there are
suggestions to be made, and you think the increase in the
budget is right. Yet I would like to ask some questions.
Ms. Pflieger, this is something we have worried about here.
You said on page two of your testimony, ``The current lack of
enforcement is of grave concern to our members who see on a day
to day basis the impact it has on the attitude of taxpayers.''
Do you want to elaborate on that a little bit?
Ms. Pflieger. Yes. An example would be someone who says:
``I read in the papers that audit rates are at an all-time low
and there is a real good chance I am not going to be audited
with respect to this return, so, instead of claiming the $600
of charitable contributions that I would be entitled to, I am
going to put down $1,800. I am never going to get caught.''
That is the type of concern that we certainly have when low
audit rates are so well publicized.
Likewise on the collection side, when it is so well known
that the IRS is not going to come in and levy or place liens on
certain pieces of property, a taxpayer might say: ``Well, yes,
I owe the IRS money but who cares, it is not going to do
anything to collect that tax.
Again, I think the real concern is not just that we are
losing the specific tax dollars attributable to those taxpayers
but rather that, that attitude will spread across the American
tax paying public and undermine our voluntary tax system.
Chairman Houghton. Our counsel has indicated that half of
the 2,500 new people would be on the enforcement side. Do you
think that will be sufficient now? Once you get that attitude
eroded, it is very hard to get it back.
Ms. Pflieger. I think it depends on how well publicized
that increase is. I am not here saying I want to go back to a
mean, nasty IRS. I think the Commissioner has come a long way
in making the IRS, if not kinder and friendlier, certainly a
fairer and more interested organization, but I think if the
enforcement mechanisms are put there and are publicized, then
yes.
It would be wonderful if we could give the Commissioner
billions of dollars, but we cannot. So I would hope that with
increased support and appropriate publicity, he could do what
he needs to do.
Chairman Houghton. Mr. Gates, you remember I interrupted
you during your testimony about whether the IRS should be
involved in certain dollar returns and things like that? Do you
want to elaborate on that a bit?
Mr. Gates. The interesting thing, the earned income tax
credit, when Congress passed it, some people even said is this
not a form of welfare because it is actually distributing money
in the form of a tax credit which, to a certain extent, might
be the same thing as giving money and questioned whether or not
the Internal Revenue Service should even administer a program
like that since they have been a collecting agency.
The Service in early examinations of earned income tax
credit eligibility, many agents said I don't know why I am even
involved in this but it is my job and I am going to do it. They
are trained to apply a very stringent Internal Revenue Code to
the facts.
People who get earned income tax credit don't generally
have lives that can stand that kind of precise scrutiny. So we
revisited that question with a member of one of the IRS
citizens advisory panels that has been convened pursuant to the
administration's response to the restructuring effort,
particularly the one in New York. The chairman of that
Committee talked about what they do their problem solving days
and invite people from the community to talk to them and so
forth. He talked about the tremendously high percentage of
earned income tax difficulties that people from Manhattan and
the low income of Brooklyn and so forth bring to them and the
frustration they feel in being unable to even come up with a
way of changing the law, changing the rules, changing anything
else because it is so difficult for that segment to understand
complex law.
Chairman Houghton. So it is just a matter of questioning
the ability of the IRS to handle something like this?
Mr. Gates. Indeed. I found it interesting that this fellow
who is on the citizens advisory panel because he represents
some multiple of 60,000 to 70,000 people in New York who are
trying to raise the standard of housing in the boroughs of New
York, represents the very people that quite frequently are
eligible for this.
When he considered the concept of maybe this is being
administered by the wrong agency, it was like a light bulb went
off, and he began to wonder if that wasn't right, if there
wasn't a better way to accomplish the objective than to have
the Internal Revenue Service administer it like a tax law.
We came to the conclusion if this Committee wanted to hear
that and give it any thought, it might do so.
Chairman Houghton. Mr. Steinbis, I have one final question.
You and your members are on the frontlines in the effort to
comply with the tax law. Based on the experience of your
members, what do you believe should be done to simplify the tax
law? Have you any general comments you would like to make on
that?
Mr. Steinbis. A lot of people would like to get rid of it
but the easiest one would be to standardize all the
limitations. You have the different cutoffs for standard
deductions, the AGI limitation on standard deductions is
different than the AGI limitation on IRAs or regular IRAs.
There are 18 different cutoffs. Standardize those if you are
going to continue to use the Tax Code in the manner it is being
used. At least standardize those.
Chairman Houghton. Anything else? It is the cancer of the
tax system.
Mr. Steinbis. AMT, the alternative minimum tax, has to be
modified in some way. We had a press conference today to show
the complexity of AMT. Like Bryan said earlier, it is picking
up more people into the system.
All of a sudden a gentleman has this phantom income, didn't
receive any money but he owes $50,000 in tax. What does he do?
He has to sell it now to pay some of that tax. Some of that tax
will be carried over into the future when he starts to sell in
the future. So AMT needs to be adjusted and the limits need to
be raised. That would be another one to make it simple.
Chairman Houghton. Thank you very much. We certainly
appreciate your input. If there is anything else, you can send
it to us in writing. If we have other questions, we will ask
them of you.
Thank you so much for being with us today.
The hearing is concluded.
[Whereupon, at 3:36 p.m., the hearing was adjourned.]
-