COMMITTEE ON WAYS AND MEANS BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois E. CLAY SHAW, Jr., Florida NANCY L. JOHNSON, Connecticut AMO HOUGHTON, New York WALLY HERGER, California JIM MCCRERY, Louisiana DAVE CAMP, Michigan JIM RAMSTAD, Minnesota JIM NUSSLE, Iowa SAM JOHNSON, Texas JENNIFER DUNN, Washington MAC COLLINS, Georgia ROB PORTMAN, Ohio PHIL ENGLISH, Pennsylvania WES WATKINS, Oklahoma J. D. HAYWORTH, Arizona JERRY WELLER, Illinois KENNY C. HULSHOF, Missouri SCOTT MCINNIS, Colorado RON LEWIS, Kentucky MARK FOLEY, Florida KEVIN BRADY, Texas PAUL RYAN, Wisconsin	CHARLES B. RANGEL, New York FORTNEY PETE STARK, California ROBERT T. MATSUI, California WILLIAM J. COYNE, Pennsylvania SANDER M. LEVIN, Michigan BENJAMIN L. CARDIN, Maryland JIM MCDERMOTT, Washington GERALD D. KLECZKA, Wisconsin JOHN LEWIS, Georgia RICHARD E. NEAL, Massachusetts MICHAEL R. MCNULTY, New York WILLIAM J. JEFFERSON, Louisiana JOHN S. TANNER, Tennessee XAVIER BECERRA, California KAREN L. THURMAN, Florida LLOYD DOGGETT, Texas EARL POMEROY, North Dakota
Allison Giles, Chief of Staff Janice Mays, Minority Chief Counsel SUBCOMMITTEE ON OVERSIGHT AMO HOUGHTON, New York, Chairman
ROB PORTMAN, Ohio JERRY WELLER, Illinois KENNY C. HULSHOF, Missouri SCOTT MCINNIS, Colorado MARK FOLEY, Florida SAM JOHNSON, Texas JENNIFER DUNN, Washington	WILLIAM J. COYNE, Pennsylvania MICHAEL R. MCNULTY, New York JOHN LEWIS, Georgia KAREN L. THURMAN, Florida EARL POMEROY, North Dakota
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current  publication process and should diminish as the process is further refined.

Advisory of March 28, 2002, announcing the hearing

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

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

American Institute of Certified Public Accountants, James A. Dougherty

H&R Block, Inc.:
    Mark A. Ernst
    Robert Weinberger

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

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

National Treasury Employees Union, Colleen M. Kelley

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

2002 TAX RETURN FILING SEASON AND THE IRS BUDGET FOR FISCAL YEAR 2003

House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.

The Subcommittee met, pursuant to notice, at 2:05 p.m., in room 1100 Longworth House Office Building, Hon. Amo Houghton (Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]

Chairman HOUGHTON. Good afternoon, ladies and gentlemen.

Good afternoon, Commissioner, glad to see you here.

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

As we all know, voluntary compliance is the foundation of our tax system. I cannot tell you how troubled I am about recent reports that show an erosion of trust in its fairness. This apparent erosion coincides with the persistent decline in enforcement statistics. The percentage of taxpayers who are audited has declined, and some say tax professionals can no longer convince clients to fear the Internal Revenue Service (IRS). One tax adviser has taken to posing a depiction of heaven and hell on her wall to supply the fortitude that fear of an IRS audit once supplied.

I don't want to add to this problem by failing to observe that the vast majority of taxpayers are indeed honest and comply faithfully and with great integrity. But we do need to address this problem, and I will ask each of our witnesses today what we can do to turn the situation around.

Our witnesses have specific knowledge or experience with different aspects of IRS operations. In addition to sharing their views on tax compliance, they will focus on the 2002 filing season, the President's budget request, and also current developments at the IRS.

Despite the progress of the IRS is making in customer service, as highlighted in the Commissioner's testimony, there is still troubling reports that IRS performance is lagging in some areas. For example, taxpayers continue to complain about various aspects of the Offer in Compromise Program, and independent reviewers have expressed concerns about the quality of telephone assistance and walk-in assistance to taxpayers.

On the other hand, the IRS appears to be doing better this year to encourage electronic filing and a whole variety of other things.

On Wednesday, I hope, the House is scheduled to consider the Taxpayer Protection and IRS Accountability Act of 2002, legislation that some of us have sponsored. Commissioner Rossotti played an important role in advocating the modification we are making to the so-called 10 deadly sins -- I guess there are 11 of them now -- provisions of the 1998 IRS Restructuring Act; and the President, in his budget request, proposed a 15-day extension for electronic filers that we are adopting. I hope that that 15-day extension will further accelerate the pace of electronic filing and that the change of the 10 deadly sins improves morale at the IRS while continuing to protect taxpayers from arbitrary and unlawful conduct.

Additionally, I would like to note that the Administration will be submitting to Congress a series of recommendations on individual tax simplification in the next several weeks. I look forward to reviewing those recommendations, and I hope we can act on them in the near future.

Now, let me turn to Commissioner Rossotti for a moment. The Commissioner has transformed the IRS. He has transformed it from an outdated structure based on geography into a modern customer-focused agency organized around the tax needs of American citizens. He has also laid the groundwork for technological change that will carry the IRS into the 21st century. We are just beginning to see the fruits of those innovations today. For example, the electronic funds transfer payment system has greatly simplified payroll taxes.

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

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

[The opening statement of Chairman Houghton follows:]

Mr. COYNE. Thank you, Mr.  Chairman.

Once again this year, the Subcommittee on Oversight is holding a hearing on the current tax return filing season and the pending IRS budget. I thank Subcommittee Chairman Houghton for conducting this important annual oversight review of the Internal Revenue Service.

More than 137 million tax returns will be filed during the 2002 tax return filing season, which ends in 6 days from today. During the filing season, the IRS will issue over 100 million tax refunds and answer over 100  million telephone calls from taxpayers seeking assistance. I want to commend IRS Commissioner Rossotti and all IRS employees for a job well done.

Of particular interest to this Subcommittee is the proposed budget for the IRS for the year 2003. The Administration's IRS request is $10.4 billion for funding general operations plus additional amounts to continue systems modernization and earned income tax credit (EITC) compliance initiatives. We need to make sure that such funding is adequate.

I look forward to the views of the witnesses scheduled to testify before us here today. With Commissioner Rossotti, as the Chairman pointed out, planning to finish his term and leave the IRS at the end of the year, I would hope that we could use today's hearing to solicit his advice about what Congress needs to do to keep the IRS on track in implementing the IRS reform legislation of 1998.

I want to also commend the Commissioner on a job well done. His outstanding service as Commissioner of the IRS has set a high mark against which future commissioners will be judged. I want to thank Mr. Rossotti and wish him the best in his future endeavors.

[The opening statement of Mr. Coyne follows:]

Chairman HOUGHTON. Thank you very much, Mr. Coyne. Now, is there anyone else on the Committee who would like to make an opening statement?

All right, Mr. Commissioner, you are on.

Mr. ROSSOTTI. Thank you very much. I want to thank you and Mr. Coyne for the kind comments you made about me. It has been a great honor coming before you each of these years and serving in this position, I can assure you of that.

I will comment on the topic of the filing season and the budget, which is the scheduled topic, but I would be more than happy to come back and answer your questions about the compliance and enforcement issues during the hearing.

I want to also say that I think the progress that we have made, which I think has been significant, has been in no small measure due to the support that you and your Committee have provided over this period; and in particular I want to thank Chairman Thomas as well as Congressmen Portman and Coyne for sponsoring the amendments that were made to the most recent act. We think those will be very, very helpful.

I am pleased to report, with respect to the current filing season, that we are, I believe, improving performance across the board; and I think it is important to note that over the last few years our improvement in performance has been recognized by the most important judge of our performance, which is the American public. We are going to put up a chart here which just shows the trend in how the public thinks about the IRS, as measured by two very well respected surveys, one of which is the Roper Starch survey, which showed our rating, as you can see on that bottom line there, increasing in each of the last 3 years quite significantly, after regrettably reaching an all-time low in 1998.

The top line is a more recent survey done by the University of Michigan, which also measures customer satisfaction for a number of agencies, in this case the IRS; and it showed the largest gain of any Federal agency in the last 2 years.

I don't mean to put too much focus just on surveys, but I do believe that the public's rating of the IRS is fundamentally important to the health of a tax system. I really don't believe it is acceptable for a government agency that affects more Americans than any other institution to be also rated, as we were in 1998, as the lowest-rated institution that they deal with. Changing that rating, that point of view of the public, was one of the mandates of the restructuring act which the Congress passed; and I think, as noted here, we are beginning, but I do stress beginning, to deliver on that mandate. The trend is positive, but, as I will note, there is a lot more to be done.

Turning to the specific details of the current filing season, it has been smooth, with returns being processed on time, electronic filing increasing substantially, and improved quality of phone service. So I think this demonstrates how we can build on positive trends for service to taxpayers, especially as our technology and organizational initiatives take effect.

We have encountered a significant number of taxpayer errors concerning one particular item on the return having to do with the rate reduction credit, but despite encountering a number of these problems, about 6 percent of the returns are having this error, we have nevertheless been able to meet our schedules and get our refunds out in time. I actually view this as a clear demonstration of how our new organization enables us to respond rapidly identify and fix problems which inevitably occur from time to time during the filing season.

Chairman HOUGHTON. Could I interrupt a minute? I know my eyes are old, but I cannot see that. Maybe if someone could sort of bring it up part way, in this lower level desk.

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

The basic idea is to show the trend lines, as opposed to any specific numbers on this chart. This chart shows some of the trends over the last 2 years on a number of the key indicators of service that taxpayers are receiving during the filing season, and of course it is during the filing season that most individual taxpayers do interact with the IRS.

You will notice there is a couple of lines up there on the left which are literally going off the chart, and those reflect the use by taxpayers of our Web site, which is IRS.gov. In January, at the beginning of the season, we introduced the newly-designed Web site, which was designed to be more accessible and easier to navigate for taxpayers, and that has helped the usage of this great resource really grow dramatically.

What it means to taxpayers is that there is less time and effort getting the information they need to file their returns. They can get forms, for example, without having to make last-minute trips down to the post office; and they can get information about almost any aspect of the tax system with just a few clicks on their home computer.

The second line up there that is growing quite nicely is the growth in electronically filed individual returns. For this fiscal year, 2002, we set an aggressive goal of receiving 46 million 1040 returns, which would be a 15-percent increase over last year; and I am pleased to say that, as of this time, we project we will even exceed the 46 million goal. As a matter of fact, as of yesterday, we actually already exceeded the total number of electronically filed returns that we received all year last year. So we are doing quite well.

I want to note that the provision that this Committee reported out to extend the filing date and the paying date for those that file and pay electronically will be of great help in continuing, maybe even accelerating this trend which should help us reach the congressional goal of 80 percent filing by 2007.

There are some other charts on there that show both the quality and accessibility of phone service, which is the way that most taxpayers who need help get it during the filing season. And I want to show one other chart here, which just shows by month how many calls we were receiving and what the level of accessibility was. I think what you can see is that we had, as a result of the issues I mentioned about the rate reduction credit, a bump-up in demand well above what was expected during February, which did temporarily, for a few weeks, drive down our service. But we quickly recovered and we have now, since then, been reaching more than our goal of a 71-percent level of access.

I should also note that another measure that is important to taxpayers is how long they have to wait to get through. On tax law calls, for example, we were down to a 2.58-minute wait, which is down from 4.27 minutes last year. So we are making a significant improvement in making it faster for taxpayers to get through.

The other very important dimension of our service, if you want to put the other chart back for this, is quality. It is very, very important that when taxpayers call in and ask a tax law question or ask us to update their account that it be done accurately. That is not an easy thing to do, given the complexity of the subject matter. There are a couple of those lines up there that you can see that reflect inequality of tax law and tax account service, and they, in particular, have improved substantially this year. For tax law and tax account questions we are up to 83 and 89 percent accuracy this year, as compared with 75 to 88 percent last year.

I also should note that, since September 24, only 13 days after the September 11 attack, we established a special phone line for victims of the terrorist attacks, and we have provided over 90 percent service to taxpayers on that.

So I think as we conclude the home stretch of this filing season, we do take pride in the improvement in the service that we have offered. But I also note that, while we are headed in the right direction, we are not at the end of the journey by any means. We still have a lot of work to do. We have improved service, but we were starting from a very low level, very honestly, as I noted at the beginning. And even now, a 71-percent level, which is our goal for this year, and an 89 percent accuracy rate does not meet our long-term standard of being as good as the private sector delivers.

So the continuation of modernization, adequate funding for operations and our own internal aggressive performance improvement goals are all going to be necessary year by year in order to achieve ultimately the level of service that the public expects and that we aim to deliver. I do believe that if we stay focused on these goals and that we get consistent funding and support from the Congress, we can achieve them; and I believe the main point I want to make today is that we are on the path of doing that.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Rossotti follows:]

Chairman HOUGHTON. Thank you, very much. I will ask Mr. Coyne if he would like to ask the first question, but let me ask a preliminary one.

Why do the charts dive south in 2001, particularly in the tax law wait and the time index? What happened then?

Mr. ROSSOTTI. During that period we had an increase in the wait time that was due to just the volume of calls relative to how fast we were answering them. That drove down service for a period of time during 2001. But, as you can see, we have dramatically improved that back in 2002.

Chairman HOUGHTON. Now, the accounts wait time index is a little below 100 percent. Now, 100 percent was your goal, is that right, for 2000?

Mr. ROSSOTTI. No, 100 percent is just basically taking fiscal year 2000 as the base. This chart shows the increase and the decrease from year to year. So in both accounts, wait time and account quality had a decrease in fiscal year 2001. It was a goal, obviously for this year, to get that back up. It would have gone up even more if it were not for the fact, which is displayed on the other chart, that the volume of calls in February was way over what we expected due to the rate reduction credit.

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

Mr. COYNE. Thank you, Mr. Chairman. Commissioner, thank you for your testimony.

As was pointed out, you will be leaving towards the end of the year the position that you hold now, and I was wondering if there was a way you could provide for us any recommendations of what the next Commissioner ought to possess in the way of qualifications to be picked as the next Commissioner. What would you advise to be able to continue the work that has been going on at the IRS under your tenure?

Mr. ROSSOTTI. Actually, I think, as has been publicly stated and as is consistent with the Restructuring Reform Act (RRA), the IRS Oversight Board, together with the Treasury Department, is actually conducting a search, and they have laid out criteria for the next Commissioner, and they are well under way of doing that. I think the criteria they have put out I would agree with.

They tend to focus on management and leadership qualifications predominantly, work in change management in a large organization and experience with technology. Those are some of the key things that I think they have laid out, and I think those are, from my perspective, quite appropriate.

Mr. COYNE. Based on your experience, would you care to comment on what priorities you think a new Commissioner ought to emphasize?

Mr. ROSSOTTI. Well, of course I have a little prejudice here, but I really think and I have often said to myself that the problem at the IRS is not so much coming up with a vision or a concept. As a matter of fact, the commission that Congressman Portman co-chaired did an excellent job of laying out a vision. I think others have similarly laid it out. It is more an implementation problem. It is getting it done. I think that that is a big job.

There are a lot of changes that need to be made and a lot of technology that is quite complex. We have made some of those changes. I think the results are showing that those changes have an effect, but they are far from complete. So my view is that what is needed is someone who will continue along that path and I believe will be able to make way more progress than I have been able to make because we had sort of a start-up period we had to cope with.

What I think is most important is not to be diverted from the task of keeping this vision in mind and really achieving the IRS of the future.

Again, I refer back frequently to the commission report because I thought it really laid out what needed to be done. I think we are doing that. They are not strange things. They are reasonable, obvious things in sort of a broad sense. They involve understanding who your customer is, delivering the services those customers need, achieving accountability internally, and modernizing technology.

On the enforcement and compliance end, a lot of that has to do with making sure you target your resources where the problems are and not wasting them on things that are not necessary, that you leverage your enforcement people with technology. Those things are all laid out. They are all, I think, quite powerful. But implementing them is not a small job and it does require sustained attention over a period of time.

So I think over the next Commissioner's term there will be some opportunities that will be very exciting to continue on this path and to realize the benefits of some of this modernization, which I think will deliver. Those lines will continue to go up. We didn't have lines on this chart for compliance activities and enforcement and the degree to which we are being effective in that area, but I think we would show some up trends in those areas, too, over the next few years.

Mr. COYNE. You seem to be recommending implementation of things that are already laid out; and, relative to that, I would like to ask about the current proposed budget for the IRS, where it is at a level of $10.4 billion, a $482  million increase over last year. On the other hand, it is $92  million lower than what the Oversight Board had recommended. Are there things that the Oversight Board saw in recommending that additional $92 million that will not be able to be accomplished as a result of not having that funding?

Mr. ROSSOTTI. I think I would be lacking in plausibility if I denied we could do more if we had $92 million more. Any agency head would say that, and the speed with which we could accomplish things would obviously be improved to the extent we had more funding.

On the other hand, I have to say that Secretary O'Neill, in a tight budget year, went to bat for us to get us increases in both operational funding and modernization funding, and I really am appreciative of that.

The other thing that I want to stress, and I want to put a chart up -- and I am sorry to be using so many charts, but I hope they help to convey some information -- one of the key things we are trying to do in the IRS, recognizing the budget is always going to be significantly limited, is to figure out how we can make use of the resources we have, to apply them in a more productive way, to free up resources through technology especially but also through other management improvements.

What you can see here from this chart is that what we are doing is identifying the highest priority needs for 3,452 full-time equivalent personnel, which would cost $259 million. That is at the top of the chart, and they are just summarized into compliance and customer service, primarily. But we knew it would be very hard to get that much money in new money, so what we have done is identified specifically 2,287 full-time equivalent personnel, for a total of $196 million that we are going to be able to free up from tasks to apply and to improve efficiency to meet those needs. So, basically, that means that 76 percent of the need is being met through improved efficiency and only 24 percent from new resources.

When we talk about improved efficiency, what do we mean? A lot of that is the fruits of modernization and what the modernization is all about. E-filing is one example. That is an easy one to understand, but not by any means all of it. If you get more E-filed returns, you free up people that would otherwise just be processing returns and you can use those resources for something such as providing better phone service. There are dozens of other examples like that.

As we begin over the next 3 years to realize some of the bigger projects that we have in the business of modernization, we will continue to improve efficiency. Our strategy is to meet most of the needs that we think we will have for additional operational resources in order to provide adequate service to compliant taxpayers and focus on all those cases of people who are not paying what they owe or not reporting what they owe.

How do we get the resources to do this? Well, part is in additional budgetary resources, part of it is freeing up resources we already have and to make them more efficient. That is what we are attempting to do in this budget. Obviously, the more we have, the faster we could get there. But we think we have a strategy that will move us on the right path.

Mr. COYNE. Thank you.

Chairman HOUGHTON. Thank you, Mr. Coyne. Mr. Portman.

Mr. PORTMAN. Thank you, Mr.  Chairman.

This is your last testimony before us in this capacity, Mr. Commissioner, I understand, and this will be your last filing season. You are smiling broadly.

Chairman HOUGHTON. Well, wait a minute. Let us not be too fast. We might ask him to come back.

Mr. PORTMAN. Maybe we will ask you to come back in your private sector capacity and tell us what is really going on.

I have to say, just to have survived almost 5 years as Commissioner of the IRS, you deserve a medal. It is a tough job. You took on an agency that was in disrepair. You said it started at a low ebb. I think that is an underestimate. We saw that earlier by the chart in terms of the public perception, but, more importantly, in terms of the actual inefficiencies, the lack of computer technology, software, hardware, the lack of organizational morale, and an agency that was fraught with problems and had been for years. So you have done a good job, I believe, in the last 4½ years in beginning to move the agency toward a higher level of service to the taxpayer.

There are still considerable problems, and you have outlined some of them today. My first question to you would be, what do you think the single biggest problem is that your successor will face?

Mr. ROSSOTTI. Well, you are limiting me to one, so -- I answer in terms of our mission, as opposed to the internal management. Where we really have significant problems, as the Chairman alluded to in his opening statement, is with a substantial number of taxpayers who are simply not paying what they owe, not reporting what they owe and, in some cases, just hiding income. I don't know, because we have not had statistics, whether it is worse than it was a few years ago or not. But I can tell you that we are getting better and better data all the time that tells us this is a very significant problem, and it really is something that needs to be addressed, not only because of the money that is being lost to the Treasury but because of the health of the tax system.

While addressing this compliance problem, I think we need to continue to deliver the proper service to the 90 percent or so of the taxpayers who are compliant.

So I think that being more effective in addressing some of these compliance issues is an important goal.

Now, that is in terms of mission. If I go back and say what do we need to do to accomplish those compliance goals, I come back to the fact that modernization really does have something to do with that. Some people have a perception that technology modernization is only useful as a way of supporting improvements in service to taxpayers, to compliance services, to telephone service and electronic filing. I think that is not a correct perception. Because some of the very same modernization projects that we are working on are going to support improvement in our ability to conduct compliance operations as well as service operations. I could go into more detail about it, but they really support more effectiveness and more efficiency across the board in the whole agency.

Mr. PORTMAN. The fruits of modernization, which is one of the three or four key pillars of your tenure, as you look back on your legacy, would probably be the restructuring itself, literally restructuring the IRS to focus on the individual taxpayer. It would be the entirely new formulation of how to measure performance rather than how much money you squeeze out of the taxpayer, how much service you are providing. It would probably be the modernization, as we said, of the computer system?

Mr. ROSSOTTI. Those are the three.

Mr. PORTMAN. And that will relate not just to better taxpayer service -- and we still have a ways to go there, but we have made substantial improvements -- but also being able to target enforcement and to be able to use existing enforcement personnel more efficiently?

Mr. ROSSOTTI. Exactly.

Mr. PORTMAN. That seems to me to be probably the biggest challenge.

Just a couple of recent reports trouble all of us. As you know, the Oversight Board recently did a survey which indicated that from 1999 until today there has been a substantial erosion in people's sense as to the acceptability of cheating on taxes. We have also got a recent report that there are 2 million taxpayers who have offshore credit cards who are trying to hide income through that. So I think it is more than a perception problem.

Although that is out there, it may be that there are some noncompliance problems that need to be focused on. But what I hope we will not take from this is that the improvements that have been made in terms of taxpayer service, modernization, and restructuring are mutually exclusive with increased compliance enforcement. I think, as you do, that they go hand-in-hand.

I am also disturbed by some of the analysis recently indicating that somehow you cannot have decent service for the taxpayers and at the same time have a system which enforces this voluntary compliance system in an appropriate way. I think the two go hand-in-hand, and I think the fruits of your labor may not be seen for a couple of years.

You said in response to Mr. Coyne that you expect to see up trends over the next few years on enforcement and compliance.

Mr. ROSSOTTI. Yes.

Mr. PORTMAN. Is that correct?

Mr. ROSSOTTI. I do. Of course, part of that is dependent on budget resources. But, actually, our goal last year was to stabilize. They had been going down not just for the last 2 years but for many years, all of the indicators, audit rates and all the statistical indicators. We knew that, obviously, couldn't continue, and we were successful in most cases, not in all, to generally level those off last year. We hope to see some modest increases on a purely statistical basis this year and next year due partly to this reallocation of resources.

But I do want to stress -- and I think this is important in your statement, Mr. Portman -- it is not just statistics. People ask what is the right audit rate. Well, how do we know whether ½ of 1 percent is the right number or 1 percent? We really don't. But what we do know is when we can identify, which we are now starting to be able to do much more specifically, where are the cases, do we have names of people that are not paying or underreporting, whether that be because they have not paid what is owed or they have not reported or they have hidden income. We are starting to get this information. When we do, we will be able to use our enforcement resources very effectively to target those who are really not complying.

I agree with you that it is a false dilemma to believe that you are either providing good service to taxpayers or you are doing good enforcement. Most of the taxpayers that are wanting to comply, which is where we get most of our money, we do not need enforcement for them because they are already complying, with maybe a modest amount of encouragement, sometimes in the form of a notice or a phone call, they will pay and comply. But there are other taxpayers, fortunately a small percentage but still a large number in absolute terms, who are not complying, who are not paying or are hiding income or are using various kinds of abusive devices or who are just basically cutting corners.

I think, while we need to respect the rights of those taxpayers, as is indicated in the RRA, I think we view that when we take enforcement action against those taxpayers we are on the side of the honest taxpayer.

So the important thing is to understand your customer base and understand what is the appropriate treatment for each type of customer, and that is where the new restructuring of our organization is making us more effective.

Mr. PORTMAN. Thank you, Mr. Commissioner. My time is up, but I hope that thinking succeeds you. We look forward to working with you over the next several months.

It should be noted that this Subcommittee worked on the Restructuring Reform Act and came up with a system where there would be an oversight board that had 5-year staggered terms, so there is expertise on that board as well as accountability with that board, but also importantly, as you transition, continuity. So there will be people on that board who have gone through this process with you, at least through the last few years, once they finally got up and going, and those people will continue. We hope that you will work with them to be sure the transition is indeed smooth.

Thank you, Mr. Chairman.

Chairman HOUGHTON. Thank you. Mrs. Thurman.

Mrs. THURMAN. Thank you, Commissioner, for being here, and thank you for your service. I know that you personally have tried to continue to bring the IRS into this new decade here, and we appreciate that. I know it has been tough, because you have not always been given the resources necessary.

In fact, I have to tell you in one of our papers at home today they actually said we ought to be helping you with some resources. But at the same time they actually also are editorializing and asking some questions about the New York Times article, that was, I guess, on Sunday, specifically, "Wealthy Taxpayers Avoiding IRS Audits Despite Warnings That Cheating Is on the Rise."

Something we have heard about over and over in this Committee is the earned income tax credit, and I noticed in the suggestions by The Taxpayers Advocate and yourselves on the bill we will potentially be taking up tomorrow is that there will be recommendations as to how do you define, what do we do differently, and how do we get better compliance. So I guess the question I have for you is, if we can bring compliance or talk about compliance from the standpoint of what we are going to do with the earned income tax credit, can you give me suggestions as to how we might get to the lost taxes on this partnership income, which has not been included in this Taxpayers Bill of Rights tomorrow?

I think it is important for us to understand that and know that, because it is my understanding that if we just spent an additional $9 million in auditing tax returns from these partnerships we could recover somewhere around $1.8 billion, if this number is correct. But I would be curious if you could give us any ideas of what we ought to be doing in tomorrow's bill to help us.

Mr. ROSSOTTI. As a matter of fact, that is one of our top priorities. Because you are quite right and the article is right. I don't know about those specific numbers, but there has been an enormous growth in the last 10 or 15 years in the use of partnerships, trusts and S corporations, which are flow-through type organizations. But they all have the same type of characteristics, where the taxes are paid not at the entity level but by the owners. There has been growth not only in the number of these pass through organizations but also the total amount of income that flows through them, and it is really quite substantial.

It is also accurate that the IRS was not keeping up with that on the whole. We really recognized that point about 2 years ago; and, in fact, in the budget request for 2001, there was some request specifically for some additional funding to take one of the steps that we think is necessary, which is to begin matching the K-1 documents. The K-1s are the documents that are reported to the shareholders or the partners of these entities.

Mrs. THURMAN. Did you receive those dollars? I don't recall.

Mr. ROSSOTTI. Pardon me?

Mrs. THURMAN. Are you doing that now?

Mr. ROSSOTTI. Yes. We got that money, and we have started to do that. I do stress it was only the starter kit for the money, because it was only what we needed for the matching, and we will have more cases that flow out of the information we gain from this program.

In fact, I was out at one of our centers just 2 weeks ago where they are starting to do K-1 matching, and we will begin to get cases out of that which will show us whether people are not reporting some of that pass through income.

This is only one technique. The other thing we are doing is focusing on another part of this problem, which is use of devices, especially trusts, as an abusive tax evasion device. People set up and promote, in some cases, various schemes where the idea is that if you are, let's say, a businessperson or a professional of some sort, for example a medical professional or even a lawyer, you allegedly transfer your business to one of these trusts and have multiple layers of them taking out various kinds of expenses at each layer. In some cases, people actually incorporate the trust in a tax haven, which is more aggressive aspect of tax avoidance, so that the income is actually moved offshore completely. This is, we think, one of the most significant of the actively promoted schemes that people are using to hide income.

We began about 2 years ago, as was laid out in our strategy, to reallocate resources to this problem. This means not only the K-1 matching, which is one strategy, one technique, but also training field agents. We, frankly, had a small number of agents trained to do this work. So we began to train people to do this.

We also tried some techniques that are now starting to pay off, such as issuing summonses to get at the money hidden offshore. We issued a summons, initially, to one of the major credit card companies to give us records that had been issued by banks in some of these tax havens to people who were spending money in the United States. This was one of the techniques being used to repatriate the money. We started that 2 years ago, and we are now starting to get some rather substantial information out of it.

Also, if you have seen the papers, we issued some additional summonses to other credit card companies, and we are finding that there are very significant numbers of taxpayers who seem to be taking advantage of this device to put income overseas in tax havens.

I don't mean to imply that everybody using a trust or an S corp, by any means, is using them to hide income, but there are some who are. And even the ones who are not have a lot of income going through there, which we had not been paying as much attention to as we should have.

It is unfortunate that it takes a little bit of time to crank up these initiatives. It just does not happen overnight, because there are quite a few steps that you have to go through. But I am, I think, pleased that we are now at a point where we are starting to see some of the things come out of the pipeline on this; and over the next 2 years, if we can continue this, I think this will be a very, very important compliance initiative.

Mrs. THURMAN. I am trying to help you give a response to this, too, but, in saying all of that, one of the things that the paper reported was that, "When unreported partnership income is found, the IRS will send notices demanding taxes or an explanation, but the IRS was given no additional money for the actual casework," I guess to follow up, "when unreported income is found."

Is that accurate? And if it is, are there recommendations?

We are going to take this bill to the floor tomorrow. I don't know how much we can change tomorrow, but certainly it has another body to go through that we should be expediting this.

This is my concern. These are the kinds of articles that, when people don't feel that they are being treated fairly, will undo everything that you have tried to do. And when you have got somebody out there working, who doesn't get to take their health care expenses off, who doesn't get to take their travel expenses off, who doesn't get their lunch expensed, but gets hit 1 out of every 45 times, versus somebody who is having that advantage, that is not going to be a good report. And I don't want that to be the report that we hear about IRS. I would rather hear the other issues.

But I am concerned that some of these low and middle income payers are going to feel like their government is working only for those that have more than those who have less.

Mr. ROSSOTTI. I could not agree with you more. I have stated that numerous times. We feel we are on the side of the honest taxpayer, the ones you are talking about, the person who really does pay their taxes. That is why we have taken the resources that we have and begun to refocus them as strongly as we can on these larger amounts and, in some cases, more egregious forms of noncompliance and the use of these trusts and partnerships as a technique to do that.

Again, I want to stress that most of them are very legitimate, and most people that use partnerships are doing them very appropriately, but there is a significant amount that are not.

Mrs. THURMAN. We agreed with you on that on the earned income tax credit. But it always seems every time we get in this debate, the earned income tax credit was the bad guy. Now we are hearing there is another story out there.

Mr. ROSSOTTI. The truth is, as I see it after being in this job, there is noncompliance at all levels and of all kinds. Taxpayers at all levels comply, and there is a minority of taxpayers who abuse the system at all levels, too. What I believe we should do is be as effective as we can in finding those cases at all levels and especially those that are more egregious and are larger and use our resources for them.

Now, on the question about our not getting more money for these cases, initially this was in the 2001 budget. We went for the money necessary in order to do the matching. We didn't know how many cases were going to come out of that. We did not specifically request the money for that. However, in the 2003 budget, there is money in this highest priority needs.

You will notice the biggest part of this, this 1857 (FTEs, full-time employees) for compliance, some of these will be what we would use to do those kinds of cases.

Mrs. THURMAN. Thank you.

Chairman HOUGHTON. Mr. Weller.

Mr. WELLER. Thank you, Mr.  Chairman.

Commissioner, good to see you today. Welcome back before our Subcommittee. I would like to focus on the Electronic Tax Administration.

Of course, the Restructuring Reform Act of 1998 set a goal for the IRS to have 80 percent of returns filed electronically by the year 2007; and, while you have made progress, the U.S. General Accounting Office (GAO) and the Electronic Tax Administration's Advisory Committee said you may not be on track to achieve that 80 percent goal. Can you report on what kind of progress you are making towards this 80 percent goal, where you are today and where you expect to be?

Mr. ROSSOTTI. Yes, I can; and let me tell you exactly. We set a goal this fiscal year -- and I am going to speak of the 1040s now, the individual returns -- of 46 million electronically filed, which was a 15-percent increase over last year and which was actually a million more if you just did a statistical trend line. And I am pleased to say that, based on the results as late as yesterday, that I think we will not only meet the 46 million but we expect to go over the 46 million. So 46 million would be a 15-percent increase, and we will probably come close to a 16-percent increase, which is a greater increase than we had last year.

Now, if you extrapolate that all the way out to 2007, we would actually need a little bit higher rate of increase to reach 80 percent. We would actually need 19 percent. The reason for that is because we not only have to reach 80 percent of the returns currently being filed but the number of returns grows every year. There is about a 1.8 percent a year growth in the number of returns. So between 1998 and 2007, where Congress set the goal at 2007, when this goal comes in there will be actually 20 more million returns filed than in 1997, due to the increase in the number of filers.

The bottom line is, we are close to the track but not quite on the track; and I think that is why the provision that this Committee reported out concerning setting the filing date, which the Administration had proposed and the Committee supported, I think is an important step. We need some steps like that to give us that little more boost we need to get up to the 80  percent level. We are close to it with the percentage that we have this year.

Mr. WELLER. As you pointed out, the President proposed extending the deadline to April 30, essentially 2 weeks beyond the deadline, if you file electronically. We, of course, had moved legislation a few weeks ago out of this Committee for that purpose, and I expect we will be voting on it within the week. From your standpoint of administering this, how will that help you?

Mr. ROSSOTTI. I think it will help us and the taxpayer, by giving an incentive, for the taxpayers who file late, to file electronically.

See, if you were to look at the percentage of returns we have gotten in today, we are already getting a majority. If you looked at it as of this minute, April 9th, the majority of returns that have come in so far have been filed electronically. The problem is the ones that come in late are usually filed on paper, and those are also the most expensive ones to handle.

Why do the later returns come in on paper predominantly? One of the reasons is because more of them, obviously, have balances due with the returns, as opposed to refunds. Clearly, there is more of an incentive to get in quicker if you get a refund. So that is one reason.

Well, the later filing date and the payment date would give an incentive for those people.

Finally, there are just procrastinators. Some of us will procrastinate even when we are getting a refund. And the fact this gives you 2 weeks more to file gives you an opportunity to get your return in on time even later. So I think those are the reasons. It would give an incentive for people who would file in the last, say, week of the filing season and who have balance due returns to file electronically.

We have done analysis of this and have, through market research, determined that we would tap a significant block of taxpayers that would otherwise not be tapped. And I think by adding that to the growth that we otherwise would have, it would definitely boost it, and it would also be a benefit to the taxpayers because they would have that much longer.

Mr. WELLER. It will be interesting to see how this experiment works come May.

Mr. ROSSOTTI. I am quite confident it will work. I think there are a few practitioners who are concerned about extending the filing season, but I think from the point of view of the taxpayer it will be a benefit.

Mr. WELLER. Commissioner, in talking about the issue of convenience, some State agencies allow tax filings based on a Web-based application, which means that the taxpayer has no need to purchase software or to download software; and, of course, there is no cost in doing that. I was wondering, is the IRS considering offering any similar Web-based filing options?

Mr. ROSSOTTI. First, let me point out one thing. There are a number of options that a taxpayer can use for filing on the Web from various commercial providers that then transmit to us, although they usually charge a fee, usually about $10 or so to do that. So the service is available, but it is available through tax preparation software companies. And in the Administration's budget for this year, proposed by the President, there is an initiative to try to find a way to work with the private sector, to find a way to offer that service to at least some block of taxpayers in a way that will be either at no cost to the taxpayer or more accessible to the taxpayer.

As a matter of fact, we have an active program under way right now working with the software industry, some of whose members are here, I know, in the audience, to try to find a way to implement the Administration's proposal. The objective of that would be to do exactly as you say, without stepping into the problem that we really don't want to step into of getting the IRS into being a software provider. We have enough trouble with our own software.

Mr. WELLER. Well, Commissioner, there would be, I believe, certainly in the House, would be significant concern, if you were to put yourself in a position where you are competing with the private sector which is offering this service. And I would note that at least one company I know of who does provide this software at no cost to low income families to help them. I know they have done that in communities that I represent.

Mr. ROSSOTTI. What we are trying to do is exactly build on those kind of offerings, but make them something that we could make a little bit more accessible and maybe something that the IRS could join with the industry in publicizing. Right now we are very limited in what we can do to let them know about it.

Mr. WELLER. I would ask if you could keep us informed if you move forward on any initiative and keep the Members of this Subcommittee informed on what you may be doing.

Mr. Chairman, may I have one additional question?

Chairman HOUGHTON. Yes.

Mr. WELLER. Thank you, Mr. Chairman.

It has also been reported that the IRS may be delaying refunds on electronically-filed returns. And, of course, as we have just discussed, many taxpayers find it convenient to file electronically, and we want to encourage taxpayers to filed electronically.

Can you explain why there is a delay in providing refunds to those who file electronically?

Mr. ROSSOTTI. The answer is there is no difference in the way that we evaluate filings, whether they are filed on paper or electronically. We have made that commitment many times because we don't want to discriminate in any way between people that file electronically or that file on paper.

We do have various screening devices to hold certain refunds based on the risk that there could be a problem with those refunds. But those screening tools are applied equally to paper and electronic returns. I know that some people get the impression that if they had a refund that was frozen for a compliance reason, and it happened to be filed electronically, people will sometimes include that, the refund was held because the return was filed electronically.

If the same exact return had been filed on paper, it would have been held for the same reasons, because we apply the same filters, if you will, to those returns.

Mr. WELLER. So you are saying that refunds for paper filing versus electronic filing are essentially treated the same if received in the same period of time?

Mr. ROSSOTTI. Well, it takes a while longer for the paper to go through the system. But, I mean, we have -- as part of our processing in order to identify potentially invalid or incorrect refunds, we have various screening devices. And that includes some that are aimed at finding potential fraudulent refunds, because we do get submissions for fraudulent refunds. We have a set of techniques that we apply to try to identify those. But those techniques are applied after the return is submitted. They are applied equally to both kinds.

Mr. WELLER. What is the average period of time between electronic filing and someone receiving a refund?

Mr. ROSSOTTI. On an electronic filing, you typically get your refund in 10 to 14 days. On paper it is about 6 weeks.

Mr. WELLER. Thank you, Mr. Chairman. Thanks for the courtesy of an additional couple of minutes.

Chairman HOUGHTON. Mr. Commissioner, I would like to ask you a couple of questions. The reason, I understand it, that the lower income returns are monitored more than the higher income returns is because it is easy to match. Now, the question is, in terms of real estate trusts, in terms of partnerships and things like that, is it going to be easier to be able to put your hands on those issues? Whereas, you have never been able to get information as far as the K-1 or the forms sent to partnerships? Talk a little bit about that.

Mr. ROSSOTTI. Could I clarify a few terms here, because I think one of the things that gets a little confusing is what is an examination.

We publish statistics on what percentage of people are examined. And an examination has a specific definition in the Code, in our Internal Revenue manual. It basically has to do with us requesting or requiring a taxpayer to submit books and records to us. But we have a huge range of what we call an examination. Most of the examinations, almost all of the examinations of the earned income tax credit population, which is funded under a separate appropriation, I should note, are very, very simple exams, which have to do with -- basically can be conducted by letter, almost all cases. We call them correspondence exams. They are very simple and usually they involve us sending a letter to the taxpayer and requesting them to send us substantiation for certain information about why they claimed a certain child as a qualifying child under the earned income credit or why they claimed, for example, head of household status, you know.

Those examinations are  relatively low cost to do, because all they involve is sending a letter and getting information back. And we do a significant number of those in quantity because we have a large number of earned income tax credit claims that come in.

One of those is counted as an exam the same as an exam where we might send a revenue agent out to audit a high income individual and spend several weeks in their office actually auditing their books and records. They are still counted as one exam. So when you look at these statistics, they really are not necessarily revealing in and of themselves. You have to look behind them.

We do audit, in terms of pure numbers, a significant number of earned income tax credit taxpayers. But, in terms of the use of our resources it represents, I believe it is something like 6 percent of our total audit resources.

Chairman HOUGHTON. Can I just interrupt here a minute? Maybe I am not making myself clear. I guess what I am getting at is, you have the source of income which is taxable, and another way of checking it, that it is easy to sort of monitor so that there is  a trust, a truthfulness going on here. If you have only have one statement, it is very difficult to do that. I mean, for example, with gross receipts on the Schedule C, or cost of assets sold or things like that. So how do you get around that?

Mr. ROSSOTTI. Well, basically, if you look at individual returns, about 75 to 80 percent of the total income, and I am only looking at income now that is reported on individual returns, is reported by a third party, what you are referring to. Okay? So for that purpose we can use matching techniques and other kinds of techniques for that.

The business income, and this includes some income that comes in through Schedule Cs as well as other sources, there is no third party source.

So the only way that you can verify that income is to go out and check the books and records of the taxpayer, which is one of the reasons we need audits, to be able to check those kinds of records. Now, some of the income that has increased that is coming in, and this is heavily concentrated in upper income individuals, does come in through partnerships and trusts on these K-1s. That is an opportunity. It is reported through a third party. And we can match that. It was not previously being matched until starting fairly recently. But we are now starting to use that. So the answer is that we need a variety of techniques. We use obviously the most efficient one. Where we can match documents, we do. And that is a very efficient way to verify income. Where we cannot match documents, we need to go out and check books and records.

Chairman HOUGHTON. Let me -- the overall question which I wanted to ask you is this, and then maybe some of the others will have some additional questions. In terms of your priorities, if I were sitting in your seat, there would be three issues. One would be tax simplification. Two is moving from a pencil and pad form to an electronic system. The third is buttressing up this concept of trust and truth.

And, you know, it has been touched upon by so many people. And I guess the thing that worries me is that I don't know whether we are leveling off, if the trend is going to go up or we are continuing down, because the difference between the survey information in 1999, I guess it was, and what it was in 2001 is a big difference, big drop.

And I think one of the things that has always impressed me about our system is that there is an understanding of the value literally of paying taxes in order to be able to supply those things which our government needs and our people need. And there is a trusting relationship there. And I just don't know what the underlying erosion is. You may want to make a comment.

Mr. ROSSOTTI. Well, let me just say that I think I totally agree with you that the total system depends on trust, and it depends on the belief that people who are paying are not getting victimized or taken for suckers by someone who is getting away with it. There is indication, you know, that although I don't know how reliable that is, that there may be some erosion in that.

I do want to point out that we began an initiative called the National Research Program which we have briefed many Members of the Committee on, which was sorely needed, in my opinion, to actually to get a real handle quantitatively and to measure who is paying and who is not paying, who is reporting, I should say, and who is not reporting. And that, you know, was long overdue. The last time that was done was in 1988. It will take us about 2 years. We are starting it this year. But it will take us to the end of next year, end of 2003 to get that. That information, I think, will be extremely valuable in helping us to measure whether there is an erosion, not only in sort of surveys, but in actual behavior of taxpayers and will also help us to pinpoint where the most serious problems are. I must say we are not waiting for this survey. We know there are compliance problems. We have got cases, and we have got millions of them that we can work right now. So we are not waiting for the survey. But, in order to get the point of what the trend is and whether there is an erosion, I think we do need some information that we don't have right now. And we are going to get it. We are going to get it reasonably soon by our standards, which means possibly by the end of 2003.

Chairman HOUGHTON. All right. Let me ask you, have you got any questions, Ms. Thurman?

Mrs. THURMAN. Commissioner, just -- based on just what the Chairman said and your response to me, and looking at the budget and particularly where you put the highest priority resource needs in compliance, and to help build this trust with the American public that we are talking about, would it be safe to say then that under the 2003 budget that we might see an increased auditing and/or individuals on partnerships and overseas trusts similar to what we see in the 1 out of every 45 working poor that are subjected? Can we get to those numbers?

Mr. ROSSOTTI. Well, I got -- you are definitely going to see an increase. But we are not going to wait until 2003. We are actually going to see an increase this year. The statistics, frankly, are not comparable, because we are talking about a letter audit versus something much more complicated. To give you an example, it can take us 300 to 500 hours of actual direct audit time to audit an individual with an offshore account. That can be a couple of hundred times as long as it takes to do this other audit. So these are not the same. There is a lot more money at stake. Frankly, just counting audits doesn't tell you a whole lot.

But I think what is important is looking at what we are doing with that audit and what we are targeting. I could not agree with you more. We need to target those resources where people are really abusing the system.

Mrs. THURMAN. I think that once we target some of them, we may not have so much abuse in the system.

Mr. ROSSOTTI. I hope not.

Mrs. THURMAN. Thank you.

Chairman HOUGHTON. Just one final question.

You know, this is such an important time. Not only in terms of what you have done, the way the IRS has turned, but some of these huge problems out there. I am going to request that we might have another go at this thing prior to you leaving, maybe in October, so that you can give your final swan song and we can make -- make absolutely sure what you think are important as you move along these next 5 years.

Mr. ROSSOTTI. I would be delighted, Mr. Chairman. I would be honored to do that.

Chairman HOUGHTON. Thank you very much. Appreciate it.

We will now have the next panel. Mr. James L. White, Director of Tax Policy and Administration Issues, U.S. General Accounting Office, and Colleen Kelly, National President, National Treasury Employees Union. Will you please come to the stand? Thank you.

All right. Well, Mr. White, will you begin your testimony. Thank you very much. And, Ms. Kelly, nice to see you.

STATEMENT OF JAMES R. WHITE, DIRECTOR, TAX ISSUES, U.S. GENERAL ACCOUNTING OFFICE

Mr. WHITE. Mr. Chairman and Members of the Subcommittee. I am pleased to participate in your review of IRS's budget request and filing season performance. I would like to begin by commending IRS for several actions.

First, IRS used its new strategic planning, budgeting and performance management process to identify internal savings that it expects will allow it to redirect over 2000 staff to higher priorities.

Second. Unlike past years, IRS's request for business systems modernization funding is grounded in analyses that meet the requirements for such capital investment funding.

Third, with one major exception, the processing of returns this filing season has gone smoothly and there have been some improvements in telephone service.

Having said that, we have several cautions and concerns regarding both the budget request and filing season performance. One important caution about the budget request is that it is based on a series of assumptions that can prove optimistic, a result, to some extent, of the fact that budgets are prepared in advance.

The assumptions include the likelihood that the savings of over 2000 staff years that I just mentioned will be realized and there will be no major unexpected expenses. Unrealized savings or unexpected expenses could lead to cutbacks in planned hiring; cutbacks that historically have hit IRS's enforcement programs the hardest.

In addition, IRS's budget request does not always provide an adequate link between the resources requested and what IRS proposes to accomplish with its resources. In some cases, such as telephone service, good links exist. IRS asked for $14 million for additional staff and projects to increase the percentage of callers getting assistance by about 5 percentage points.

However, in other areas linkages are not adequate. For example, IRS asked for additional resources to fight systematic noncompliance such as abusive trusts and failure to pay employment taxes. But it is unclear how many resources will be devoted to each problem or what results are expected. Thus, it will be difficult to judge progress or hold IRS accountable. Consequently, the Subcommittee may want to ask IRS for more specifics about spending in areas with inadequate linkages to projected results.

In addition, IRS requests a continuation of the separate appropriation for earned income credit compliance. Considering other compliance problems facing IRS, the Subcommittee may want to ask IRS for its views on the value of this separate appropriation for the credit versus a combined appropriation for all compliance programs.

A third concern about the budget is the lack of justification for $1.63 billion for operation and maintenance of information systems. Rather than assess the costs, benefits and risks of specific projects, an approach taken by leading private and public organizations, IRS officials said they simply took least years spending and added an amount to fund cost of living and salary increases.

While we cannot tell from the budget information whether any spending cuts are justified, we are recommending that future information system budget requests be in accordance with leading organization practices.

On a related matter, this year's investment and business systems modernization, we have reported our concerns about the number and complexity of systems acquisition projects and the continued lack of certain management controls and capabilities. In response, IRS has committed to align the pace of the program with the maturity of management controls and is reassessing projects it plans to deploy in 2002.

Now, I want to discuss the filing season. This year, the one exception to the smooth processing of returns has been the large number of errors taxpayers are making related to the rate reduction credit and advance refund checks sent out last summer and fall. Although the errors have not affected the timeliness of processing, they have resulted in a significant error correction workload for IRS, the rejection of some electronically filed returns, and an increased demand for telephone assistance that is affecting taxpayers' access to IRS's assisters.

So far, about 7 percent, or over 3 million of the returns filed to date, contain such errors. Although IRS took steps to deal with the problem, in retrospect, IRS may have been able to prevent some of the errors if the instructions on tax returns had been clearer.

A key question related to filing season performance is whether IRS is improving its performance management so it will be better able to improve future performance. To this end, IRS has some useful performance measures but misses certain important aspects of service to taxpayers. For example, IRS does not have a measure of the service it provides to about 70 million callers who use its automated telephone services. At your request, Mr. Chairman, we are reviewing IRS's filing season performance measures and plan to issue a separate report on our results.

Mr. Chairman, that concludes my statement. I would be happy to answer any questions.

[The prepared statement of Mr. White follows:]

Chairman HOUGHTON. Thanks very much. Ms. Kelly.

STATEMENT OF COLLEEN M. KELLEY, NATIONAL PRESIDENT, NATIONAL TREASURY EMPLOYEES UNION

Ms. KELLY. Thank you. Chairman Houghton, Ranking Member Coyne and Member Thurman, as the National President of the National Treasury Employees Union (NTEU), representing over 97,000 IRS employees, I very much appreciate having the opportunity to appear before you today.

The past 7 months have been a very trying time for the American public. Never before has it been so clear how vulnerable our Nation is to a variety of attacks. And never before has the need to invest in a highly trained, highly skilled, and dedicated Federal work force been so clear.

There are nearly 20,000 fewer employees at the IRS today than there were just 10 years ago. But as the size of the IRS work force has decreased, the workload has grown and become more complex.

The number of total tax returns filed each year continues to increase, and the Tax Code continues to undergo congressionally-mandated changes. The good news is that the American taxpayers are receiving better service from the IRS and this past filing season has improved even further on that service to taxpayers.

Unfortunately, it is no coincidence that the examination coverage of tax returns has declined during this same period, due to decreased staffing and increased workloads. NTEU urges your support for increased funding for the IRS in the fiscal year 2003 budget so that the workforce has the resources necessary to continue to perform current operations while simultaneously meeting its modernization goals.

Unless funding or staffing levels are increased, the IRS will not be able to increase tax compliance and enforcement activity while at the same time continuing to improve customer service to taxpayers.

In addition to increased staffing and funding for the IRS, I would also like to make some additional recommendations that will help to improve the efficiency and the effectiveness of the IRS.

As we all know, audit rates and tax compliance are down. One reason is lack of staff. Another is Section 1203 of the IRS Restructuring and Reform Act which has had a chilling effect on the ability of the IRS employees to do their jobs.

Employees continue to work in fear of Section 1203, commonly  known as the 10 Deadly Sins. The Administration's fiscal year 2003 budget endorsed a package of proposals that includes changing the mandatory termination provisions of Section 1203 to allow the IRS Commissioner to provide appropriate discipline for offenses, up to and including termination.

The President, the Secretary of the Treasury, Commissioner Rossotti, the IRS Oversight Board, and NTEU all agree that this package of changes will make Section 1203 fairer. NTEU is very appreciative of the efforts of this Committee and all of you for the modifications that were included in H.R. 3991, the Taxpayer Protection and IRS Accountability Act of 2002. Without your help, I know that those changes would not have been included in H.R. 3991.

In addition to changes to Section 1203, NTEU urges this Subcommittee to reject the Administration's competitive sourcing initiative which sets arbitrary quotas for the IRS and other Federal agencies to open up thousands of jobs to the private sector.

The Office of Management and Budget has directed every agency to open up to the private sector in fiscal year 2002, 5 percent of the work on the Fair Act inventory list and an additional 10 percent in 2003 with a final goal of 50 percent.

The arbitrary privatization quotas are wrong. The one-size-fits-all quotas give no consideration whatsoever to unique circumstances at agencies like the IRS who are still in the middle of a sweeping reorganization that was mandated by Congress.

And this directive is having a negative impact on the morale of the IRS workforce. Contracting out government work does not in and of itself improve government operations. For example, last year we learned that Mellon Bank, a contractor hired by the IRS, lost or shredded 70,000 tax returns and checks worth $1.2 billion in tax revenues for the government.

Fortunately, that contract has been terminated by the IRS. But we urge this Committee to reject the use of these quotas so that the IRS can focus on achieving its mission in the most reliable, most cost-effective and efficient manner.

And finally, recent changes in the estate and gift tax laws will lead to fewer estate and gift tax attorneys, because there will be fewer returns filed each year. This will mean that most of the estate and gift tax attorney jobs at the IRS will be eliminated over the next 10 years. All of the attorneys who work on estate and gift tax returns at the IRS are in what is called excepted service, and as a result, they are not eligible to transfer into other competitive service jobs even within the IRS, which would be an excellent redeployment of resources similar to what Commissioner Rossotti already testified to.

NTEU urges this Subcommittee to work to retain these valuable employees who bring a wealth of experience to the IRS by providing them with competitive service status so that they are given fair opportunities to transfer to other jobs in the Federal Government.

The bottom line is that IRS employees are committed to delivering first class customer service to the taxpayers, and they are committed to enforcing the Tax Code in a fair manner. But without some important changes, including adequate funding, they will continue to have a difficult time meeting these goals.

And I thank you again for the opportunity to be here and look forward to any questions you may have.

[The prepared statement of Ms. Kelly follows:]

Chairman HOUGHTON. Thank you very much, Ms. Kelly. I would like to ask Mr. Coyne if he would like to inquire.

Mr. COYNE. Thank you, Mr. Chairman. Mr. White, according to IRS statistics, more than 20 percent of callers to the IRS received legally incorrect answers to tax questions.

Why, in your judgment and your agency's judgment, is this happening?

Mr. WHITE. This has been a long-standing problem at IRS, not just the accuracy of the answers but also the access to the telephones. This year service on the accuracy side has actually improved considerably compared to last year. You are correct, they still have a long way to go. And I think essentially it is a matter of better management across the board. One issue we found, for example, is that managers of telephone assistance often miss opportunities to evaluate the performance of their own operations. And the advantages of doing those kind of evaluations mean that they get a better understanding of the reasons for performance. And armed with that understanding of the reasons for performance, then they would be in a better position to take actions to improve performance in the future.

Mr. COYNE. Ms. Kelly correctly points out that there is 20,000 fewer employees at the IRS currently. In your agency's assessment of the operations of the IRS, is that a contributing factor to some of the problems that still exist?

Mr. WHITE. It is undoubtedly a contributing factor. The question is the extent to which it contributes. As I indicated, there is an issue of how well you are managing the resources you have, as well as the question about the level of the resources. And right now, because of those missed opportunities to evaluate the reasons for performance, we don't have and IRS does not have as good an understanding of the reasons for the performance right now as you would like to have.

Mr. COYNE. I find it quite strange that the EITC has a separate allocation for its performance. And you ask why -- you let us know that we should ask the Commissioner about that or ask someone at the IRS about that. What is your idea about why that exists? What have you been able to find out about why that separate allocation exists?

Mr. WHITE. Well, I don't know the history. I know it has existed for the last 5 years. So this -- the continuation that is requested now would be the 6th year of this separate allocation. And I think it does raise the question, given the compliance issues that are there across the board, why for this one area of compliance there is a separate appropriation. And that is the reason why we felt the Subcommittee might want to ask IRS if they see any advantages to the separate appropriation.

Mr. COYNE. Now you don't in your examinations find any good reason for it?

Mr. WHITE. We don't have a position one way or the other on it. We did think the Subcommittee might want to ask IRS whether they see any advantages to combining all of the compliance appropriations into one appropriation.

Mr. COYNE. Ms. Kelly, are you confident that the taxpayers will be protected from any, quote, bad apples at the IRS under the Taxpayer Rights Bill scheduled for floor action this week?

Ms. KELLY. Yes. I am very confident of that. I believe that the issues that are on the list to be amended in Section 1203, for example, are all issues that identified behavior that was unacceptable of IRS employees before the restructuring act was ever passed. They were serious offenses, and when they were identified, they were dealt with appropriately.

The problem with Section 1203 is it just allows no consideration, if you will, of any alternative discipline should the Commissioner deem that to be appropriate. It is an automatic proposal to termination. And the mere threat of that is what is having the chilling effect on employees. But I do believe that it will be, as it was before Section 1203, appropriately administered by the IRS.

Mr. COYNE. Under the current regulations, and since the implementation of the restructuring, how many employees have been fired under current law?

Ms. KELLY. There have been very, very few. I could not even give you an exact number. I am sure that Commissioner Rossotti could because he tracks this very closely. The bottom line is there have been very few. That is because of the way in which Commissioner Rossotti, as the Commissioner, has implemented the language of Section 1203.

But the problem, if you step back from the termination, is the mere threat. And the threat itself has been issued to over 1,200 employees who were accused of something that proved to have no merit to it. But the mere fact that they were under an allegation let them know that they would face termination unless they could prove the allegation false.  That is a terribly frightening threat to live under.

Now, as I said, Commissioner Rossotti has been very level-handed about this and has gone to great lengths, I think far and above what he had to do, which NTEU and IRS employees really appreciate.

But with that language in there, if someone else were the Commissioner and chose not to do it, did not make it a priority on behalf of employees, it could have a devastating effect.

Mr. COYNE. I had asked Mr. White earlier about the incorrect information that was going out to taxpayers. What do you think of this problem? Why do you think that incorrect information is being disseminated?

Ms. KELLY. I think there is not any one easy answer. I think it is about staffing. I think it is about training. I think it is about the ability of front line managers to interact with employees. I think it is about steps the IRS has taken successfully, but with more work that needs to be done to be able to direct phone calls to employees who are specifically trained on an issue.

That is an ideal situation, if every taxpayer calls with one question so they can be routed to an employee who has had that specific training. Very few taxpayers call with only one question, they often have a variety of questions. And sometimes, that could lead to error that employees want to correct through more training. They want nothing more than the reports to show a high accuracy rate and accountability and dependability.

Mr. COYNE. Thank you.

Chairman HOUGHTON. Thank you, Mr. Coyne. Ms. Thurman.

Mrs. THURMAN. Thank you, Mr. Chairman. And thank both of you for being here today. Mr. White, were you at all surprised by this New York Times article at all, as far as "Poorly Aimed Audits" is the name of one of them? This was the one that talked about -- gosh, what did I do with it? I love it when my Chairman comes to my rescue.

Wealthy taxpayers avoiding IRS despite warnings that cheating is on the rise. Does that surprise you at all?

Mr. WHITE. I don't know that I have enough information to be surprised or not. One of the fundamental problems with IRS in the compliance area, and one they are working very hard to address, is the lack of information about compliance. So they have a national research program underway right now which, if successfully implemented, should give them much better compliance information than they have had for a decade and a half. And with that kind of information, they will be -- they will have a much better sense of what is going on with different categories of taxpayers and how well they are targeting noncompliance in those different groups.

Mrs. THURMAN. Okay. I noticed on your report on page 8, you basically talk about, there is an example of missing performance goals, involves IRS efforts to address major areas of systematic noncompliance. Is there something that we can do congressionally or through the bill that may be up today or tomorrow that we are not doing that we could have helped in bringing these performance goals into realty for the IRS or to help us to track what is going on?

Mr. WHITE. I think the main thing is continued oversight, hearings like this, attention to IRS's budget, and demands to see linkages between the resources that IRS is requesting for particular areas of their operation and the results they expect to get. And they are getting better at developing those linkages. But they are not there in the compliance and collection area yet.

I gave as an example telephones where they are asking for additional money this year, and in the performance plan they showed that that should increase accessibility by 5 percent. That is the kind of linkage that would be helpful.

Mrs. THURMAN. Okay. So then if we have a hearing next year at the same time, we should be asking did you have that 5 percent or better compliance?

Mr. WHITE. Yes. Exactly. It is a method that can be used to hold them accountable for performance. Up front they tell you what performance should be expected given the resources they are going to get. And then they can be held accountable for that.

Mrs. THURMAN. Ms. Kelly, I notice that you were pleased with some of the changes that we have made in the bill for tomorrow on the floor. Are there some other suggestions you would have given based on -- I know you also talk about the morale at the department, what is going on because of all of the people that are gone. Also, then you hear about not getting the right answers to taxpayers, those kinds of things.

Are there some other things that we should have been doing that would have also been beneficial to the taxpayers that would have also solved some of these problems?

Ms. KELLY. You know, in my experience both as the National President of NTEU, but also as a former revenue agent -- I was a revenue agent in Pittsburgh for almost 15 years for the IRS. So my answer to that is really not about legislation, but it is more about the message that is sent by Congress on the support that they provide to the agency. And over the past couple of years that has definitely been a positive one. It is an important message for taxpayers to hear, to know that not because you are going to rubber-stamp everything that the IRS does, but that you are supportive of its mission, acknowledge it as a respected institution, and are going to provide it with the resources it needs to do the tax collection work that our country needs to be done.

So I think that message is important for taxpayers, but it is also important for employees. On the heels of the Senate hearings back in the late 1990s, employee morale was in a very bad place because they felt very unsupported, unvalued in the work that they were striving to do every day. So that would be the one thing that consistently I know employees watch for, whether it is in newspaper articles or in statements made from congressional offices, it is very important.

Mrs. THURMAN. Ms. Kelly, also you talked about the outsourcing a little bit here. And I am curious. And you said that the Mellon Bank actually was -- I guess basically terminated their contract. Do you know of any things that we -- that IRS has done to eliminate this kind of a problem if they were continuing to do the outsourcing or could we see some more of these kinds of things take place? Have you seen any changes?

Ms. KELLY. I actually have not seen many changes. But I would say it is not just about the IRS. The oversight and accountability of contracts that are let by the Federal Government are something that I believe, and NTEU believes, needs much more accountability and oversight. And I think we need to focus on this more and more as the Administration's initiative to competitively source more work to outside contractors is implemented. What will the accountability be, what will the oversight be, what will the requirements be of the contractor versus what they would be of Federal employees?

There is legislation pending that addresses all of those things. The Truthfulness, Responsibility, and Accountability in Contracting (TRAC) Act is one of the things out there that would put more accountability in place, and I think would support agencies in their interests in overseeing better the contractors. I can tell you I am taking a very personal interest these days in what kind of oversight does exist in all of the Federal agencies. And, in my opinion, it is not where it needs to be. And that is in large part because there is not a requirement for it through any kind of legislation and I am hoping that will change in the future.

Mrs. THURMAN. What do you think the objective of outsourcing was? And have we met that objective? And maybe Mr. White can tell us also in looking at the IRS.

Ms. KELLY. I really don't know what the objective was. What many will say is that the object is to see if the work can be done cheaper by someone other than Federal employees. I believe that if Federal employees are provided with the resources, the support and the encouragement to do the work, there is no one who can do the work of the Federal Government better than Federal employees, and them having the opportunity to do that is something that has to be there.

I have heard it is about cost, that is about the only thing that I hear. And in some cases that doesn't prove to be the case. It might start off cheaper, but very shortly ends up being more expensive. Then it is very difficult to bring the work back into the Federal Government. You don't hear many stories about work coming back in, only going out.

Mrs. THURMAN. Explain this to me. It said, for example, last year we learned that Mellon Bank, a contractor has lost, shredded and removed 70,000 taxpayer checks worth 1.2 billion in revenues for the Government. I am not sure I understand what that means.

Ms. KELLY. The contractor was serving as a lockbox operation for the IRS and the Finance Management Service, and taxpayers were mailing their tax payments in to Mellon Bank. And the records as well as the payments -- in the numbers that I identified in my testimony -- disappeared. Employees of the contractor were shredding returns, removing them from the work place, destroying them. I never interviewed the contractor or the employees. But all of the reports talked about employees of the contractor doing this, I guess because they either couldn't get the work done or didn't choose to do it. So they were just disposing of the work.

Mrs. THURMAN. So we could have then lost like $1.2 billion.

Ms. KELLY. Yes.

Mrs. THURMAN. Mr. White, do you know what that contract was worth to the Mellon Bank, what they were paid?

Mr. WHITE. We have some work that we are doing at the request of the Senate Finance Committee looking at the management of IRS's lockbox program, the entire program. We have started that work, but we are not finished developing our findings. So I will be in a better position to answer that question when we are done with that work.

Mrs. THURMAN. Mr. Chairman, I would hope that, and Mr. White, I will certainly hopefully stay in contact with the Senate Finance, but I think that would be very important for us to understand and know. Because $1.2 billion is a lot of money, in my book. Plus we don't know how much money we were paying outside just for this contract in itself. So not only is it the $1.2 billion, but it is also what the costs might have been for them to have this contract. And so I think that is a very important area for us to look at as we move on and listen to more of this lockbox area.

Mr. WHITE. I don't believe that the $1.2 billion was lost. I believe that IRS became aware of the situation and is aware of the taxpayers that were affected. This occurred last filing season and they took some steps to deal with the problem then. As I said, I will have more details when we are done with this work that we are doing with Senate Finance.

Mrs. THURMAN. We appreciate that. Thank you very much.

Chairman HOUGHTON. Thanks, Mrs. Thurman.

I think one of the reasons that I suggested that Mr. Rossotti come back is because there are certain things that are going on that he has put into place and we would like to get a measure of them before he leaves. And I think what you said, Mr. White, is true. It is the linkages between the resources and the management here. What they are -- as a matter of fact, it is sort of difficult for this Committee because you got different layers. I mean the IRS reports to Treasury and obviously they give them the signals. And then on top of that you have the IRS Oversight Board which Larry Levitan is the head of, and then our board. And we don't want to sort of superimpose our own feelings, but we ought to know and we have got to be able to have those linkages and understand it very clearly before the next person comes on.

Let me just move off here, because there are two issues. One is the internal issue and the other is the external issue. Internally, are we dancing as well as we know how? That is what we keep talking about. The other thing is -- that I am worried about is that as you look out over the next hill, you can see more and more opportunities to go overseas or to expand the international market. That is going to make it very difficult. So the question, I think, for you, Mr. White and Ms. Kelly, as we look at that, are we structured properly? Because there is going to be more emphasis on this than ever, next year, the year after, the year after. Or, is this just going to be a matter of better electronic equipment or more employees ? Tell us a little bit about that, the structure versus just more resources.

Mr. WHITE. IRS has reorganized itself to focus on individual taxpayer groups. That is one important aspect of their overall modernization effort. That part has been implemented. There are a number of other aspects to the overall modernization effort that are still ongoing. For example, information systems modernization is another key aspect. Also, performance management and improving performance management are key aspects of IRS's structure and how well they are able to manage themselves. They have made some progress in that area. They still have a lot more to do to develop measures that will be useful both internally for management purposes and outside for purposes such as this, oversight purposes.

Chairman HOUGHTON. Would you like to make a comment, Ms. Kelly?

Ms. KELLY. I believe that the structure that is in place now with LMSB for the large and mid-size businesses and small business and self-employed, those two divisions will need to coordinate and communicate very effectively so that what you described that is most likely to happen doesn't get lost between the divisions and functions. And that is from a structure standpoint.

From an employee standpoint, I believe that employees of the IRS are highly trained, accountants by education, and they are very interested in looking at more complex issues. They would welcome the opportunity, as they are with the partnerships that Commissioner Rossotti talked about, and in the complex partnership schemes that we are seeing. But I also believe that it is going to be about staffing and it is going to be about the right training and identification of issues.

The IRS has recently started looking at a number of processes, one of which is the examination process. And they have a project that NTEU is working jointly with them on called examination reengineering. It is looking at just this. Moving employees, their audit skills as well as their training and technical tax skills into areas to be able to do the partnership schemes that didn't exist 10 years ago, and as they will exist in the future with the international schemes you described.

So I think employees are very up to the challenge. I think that the structure, as long as the communication continues, will support it.

Chairman HOUGHTON. Okay. Any other questions? Thank you very much. It has been very helpful testimony. And we hope to see you again. Thank you.

Now I would like to call the next panel, the last panel. There are four panelists. James Dougherty, Chairman, Relations with the IRS Committee, American Institute of Certified Public Accountants; Mark Ernst, President and Chief Executive Officer of H&R Block . Welcome back, Mr. Ernst. Roger Harris, President of the Padgett Business Services in Georgia, and Chair of the Legislative Affairs Subcommittee of the National Association of Enrolled Agents; and William Stevenson, President of the National Tax Consultants in Merrick, New York, and Chairman of the Federal Taxation Area, Right to Practice Committee, and also the National Society of Accountants in Virginia.

So thank you very much for coming. And maybe, Mr. Dougherty, you would like to begin your testimony.

STATEMENT OF JAMES A. DOUGHERTY, CHAIRMAN, RELATIONS WITH THE IRS COMMITTEE, AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

Mr. DOUGHERTY. Thank you.

Mr. Chairman and Members of the House Ways and Means Subcommittee on Oversight, the American Institute of Certified Public Accountants (AICPA) thanks you for the opportunity to appear here today. I am James Dougherty, Chairman of the AICPA, Relations with the IRS Committee. The AICPA is a national professional organization that certifies public accountants with over 350,000 members.

Before discussing the feedback we have received about the 2002 filing season, we would like to urge Congress to support full funding of the Internal Revenue Service fiscal year 2003 budget.

The AICPA has long advocated funding levels that would allow the IRS to efficiently and effectively administer the tax laws and collect taxes. Without sufficient funding, taxpayers and practitioners will encounter unnecessary problems and frustrations. The American taxpaying public is just beginning to benefit from the Internal Revenue Service that the Congress envisioned when it passed the 1998 IRS restructuring legislation.

While the preliminary results are promising, it is critical that Congress move the reform process ahead without delay by providing the necessary funding. As regarding the 2002 filing season, the IRS has implemented a number of improvements in the electronic filing program for 2002 filing season.

The AICPA especially appreciates nearly all 1040 forms and schedules have been made available to electronic filing; two, the electronic filers are no longer required to use a paper signature document and, three, the electronic payment options have been expanded. Similarly, the IRS has expanded electronic filing options for business taxpayers over the last year.

The AICPA looks forward to being a positive partner in the electronic filing system and to that end has recently formed a task force. We appreciate the many hurdles on the roads to achieving the goals established by Congress for the electronic filing program. For example, last year's struggles to implement the mandated electronic filing of large partnerships ought to provide a road map of things to avoid in future implementations. The IRS and its constituency can improve significantly on future electronic initiatives, but only through collaboration with critical stakeholders, collaboration that begins early and which is taken seriously by the agency.

On March 9, 2002, President Bush signed into law the Job Creation and Workers Assistance Act. The retroactive provisions of the 2002 act have contributed significantly to making this a difficult filing season for taxpayers and practitioners. Some provisions that have been problematic are, one, an additional first-year depreciation deduction equal to 30 percent for qualified property purchased after September 10th, 2000; and two, an extension in the general net operating loss carry back for 2 to 5 years. In order to take advantage of the depreciation and Net Operating Loss provision, many taxpayers and practitioners found it necessary to file extensions on business returns otherwise due on March 15, 2002.

Also we expect to see more individuals file on extensions as well as many taxpayers will have to consider amending returns that they already have filed. The IRS has done a commendable job in releasing guidance and tax forms on 2002 tax law. Nevertheless, we believe Congress should remain cognizant of the difficult task it imposed on the Service as a result of complex and constant changes in the law, particularly with respect to effective dates that do not permit adequate time to adjust.

Advance consultation with the IRS and the practitioners could do much to improve the quality and administration of our tax laws. The IRS announced a few months that the taxpayers and practitioners could obtain employer identification numbers (EINs) by calling one toll-free number or they could fax requests 24 hours a day, 7 days a week. Similarly, the IRS announced last fall to the practitioners hotline program changes that were made effective January 2002.

Since the implementation of these changes were announced, two very important administrative programs, taxpayers and practitioners have experienced significant busy signals with the toll-free numbers involved as taxpayer demand has exceeded the IRS capacity to answer these calls.

While the IRS has announced steps to address these problems, we must point out the extreme urgency in fixing the EIN and the practitioner hot line programs.

During the filing season, the AICPA has received numerous complaints from certified public accountant (CPA) members who have encountered problems in obtaining taxpayer account information from the IRS. This appears to be a direct result of the IRS difficulties with computer modernization and its inability or effect on IRS when trying to access taxpayers accounts.

This a clear contrast to the ability of financial institutions to access customer financial transactions immediately based on up-to-the-minute data, regarding the customers.

The IRS must continue to foster access to taxpayer account information through improvements in telephone services and by making secure Internet access available, with the ultimate goal of providing one-stop shopping for taxpayers so they can resolve the tax accounts in a timely, efficient way.

The AICPA appreciates this opportunity to offer our comments to the Subcommittee and would be happy to discuss any of these matters in further detail with you.

[The prepared statement of Mr. Dougherty follows:]

Chairman HOUGHTON. Thank you very much, Mr. Dougherty. Mr. Ernst.

Mr. ERNST. Thank you, Mr. Chairman, Mr. Coyne, Mrs. Thurman.

Thank you for the opportunity to our present our views.

From our perspective, the good news is the filing season has gone smoothly with a few exceptions. Overall the IRS and the tax preparation industry are working very well together.

The IRS is likely to beat this year's target of 46 million electronically filed returns. But increasing effort will be needed to advance from this year's 35 percent of all filers to Congress's target of 80 percent by 2007.

H&R Block has electronically filed 90 percent of the 12 million returns we prepared as of March 15th.

This has been an especially challenging year for the IRS, sending millions of advance refund checks, quickly responding to families affected by September 11th, and planning for return processing contingencies in case of terrorism.

The IRS, from our perspective, has earned praise for simplification of Schedule D, innovative E-filing promotions, improved communication with practitioners, and making personal identification number (PIN) signature alternatives easier to use.

Commissioner Rossotti deserves a special salute for his leadership. He has made a profound contribution for which all citizens should be grateful.

At H&R Block we continue to provide financial as well as tax advice to help clients meet their goals and we are integrating on-line and off-line tax services. Combining services is an increasing trend.

All in all, the tax season is going well.

The bad news is that it is not glitch-free. Two new tax laws have caused some problems.

This year's main problem is the rate reduction credit which caused confusion and over 3 million errors. The ordering rules applicable to the newly-refundable child tax credit has also caused confusion and IRS errors. The economic stimulus package made retroactive tax law changes that required new forms, software updates and amended returns. Midstream changes made implementation of those very difficult.

Finally, poor IRS enforcement for the second year in a row gave an unfair advantage for tax preparers who file returns early without proper W-2s over firms that are in compliance with the rules.

On budget initiatives, I would make three points. First, we strongly support full funding for the IRS. One pay-off of modernization will be faster refunds for electronic filers.

Second, on E-Z tax filing, we are pleased that the Administration is backing away from an ill-advised proposal to build a free IRS on-line tax prep and e-filing system, and instead is working toward a constructive partnership with private-sector firms.

I believe that one of the reasons IRS customer satisfaction is rising is the effective public-private partnership delivering electronic filing. Let's not lose the important progress that we have been making.

Third, on extending the filing deadline to April 30th for taxpayers who file and pay electronically, we are concerned about losing focus on April 15th, creating compliance difficulties, and imposing extra costs on the tax preparation industry, all to attract only an estimated 3 percent of tax filers in the first year.

What is really needed to stimulate a massive shift to e-filing is the incentive of a tax credit available to all tax filers, not just those who have a balance due.

Briefly, on several other issues. On simplification, we welcome simplification efforts and submit for the record our annual "top 10" suggestions.

On the earned income tax credit, industry hopes to work with Congress and the Treasury to improve due diligence and simplify the law to reduce noncompliance.

On the national research audits, we commend the IRS for its design of a new compliance measurement system. Better information will lead to a fairer tax system.

On tax preparer regulation, we look forward to commenting on coming proposals. Our own training, continuing education and code of ethics reflect our longstanding commitment to integrity and professionalism and support for a system requiring meaningful minimum standards.

On helping low-income taxpayers, we support well-focused government assistance. If expanded services are needed, we hope that outsourcing tax preparation and electronic filing to private sector tax professionals will be considered.

On privacy, consideration should be given to updating 30-year old rules. The standards for tax preparation firms' use of client information should be consistent with the 1999 rules Congress adopted for financial firms. The IRS should also clarify that electronic signatures can be used for online consent.

Finally, on accounting reforms, the vast majority of the accounting profession reflects competence and ethical behavior. In crafting post-Enron reforms, care should be taken to ensure that audit firms can continue to provide tax compliance and most tax planning services and that small privately-owned business and family firms without large executive staffs should continue to be able to use CPAs to advise on a broad range of tax and business issues.

We appreciate the chance to testify, Mr. Chairman, and would be happy to respond to questions.

[The prepared statement of Mr. Ernst follows:]

Chairman HOUGHTON. Thank you very much, Mr. Ernst. Mr. Harris.

Mr. HARRIS. Good afternoon, Mr. Chairman. Thank you for the opportunity to be here. On behalf of the National Association of Enrolled Agents and its 10,000 members, it is a pleasure to be here to talk about the filing season and the upcoming budget.

I guess the good news is for the most part we would say the filing season has gone well. A couple of observations we have seen is that taxpayers are coming in earlier, and also coming in in increasing numbers. I think the people who are coming in early probably are a reflection of the economy and their desire to get their refunds back sooner.

I think the fact that our business is growing is a signal that complexity is still very much an enemy of the average taxpayer, and as long as they are uncomfortable preparing their own return they are going to seek out professional help.

I think the IRS has done a good job in what could have been some difficult circumstances this filing season. We have had a lot of talk about the rebate checks. I think the IRS did a good job in anticipating that taxpayers, when they receive their check, would take it and spend it and not remember how much it was for, or keep the letter that came with it. Anticipation of that the IRS set up a toll-free number that has worked extremely well to verify taxpayers rebate amounts.

Also, we have heard a lot about the stimulus bill and the retroactive changes that it created. I think the IRS reacted as well to that situation as we could have expected, given the impact that it had. I think we will not know for a while what the real impact on the filing season will be. I know there is going to be a tremendous amount of amended returns that are going to have to be filed. I know I talked to one gentleman whose office alone is going to have to review 9,000 returns to see how many of them have to be amended, that many returns had already been filed prior to the passing of the bill. So the true cost of that we will find out in the coming months.

A couple of specific things. Electronic filing --

Chairman HOUGHTON. Could I interrupt a minute? I may be misreading what you are saying. Are you saying that a wave of complications are coming in because of the rebates and  a variety of things this past year which may further complicate what the IRS is doing?

Mr. HARRIS. Well, I am speaking more specifically of the stimulus bill that had some retroactive provisions this year that people had already filed, had gone and filed early and now are faced with amending to comply with the benefits of the new law. Most of the people, obviously, will be better off in terms of their taxes, but there will be an offset cost of amending returns.

A couple of other things on electronic filing. Again, I think we are seeing an increase in electronic filing. I think the system is far from perfect. The self-selected PIN and the elimination of the signature has gone a long way to helping the system. I would hope that we will continue to look for ways in the future to work together, the IRS, practitioners, and Congress, to find ways to reach the 80 percent goal.

As I think the Commissioner said earlier, at the current rate of increase, we are not going to make the 80-percent goal. So I think we are going to have to look for things that will help us in that area. The extension to April 30, and let me caution you first, make sure all States are going to honor that or this will have no effect, because as a practitioner or taxpayer if I have to file by April 15 through my State I am not probably going to wait 2 weeks to file my Federal return. So I hope there is a recognition we need to get the States on board here if we want this to have a significant impact.

And I think it will have an impact, because it will make a practitioner who does not file electronically noncompetitive the last 2 weeks of the filing system. So I think it may have a surprising effect.

In reading the other members of my panel's testimony, and hearing them, I found the complaints were pretty universal in all of our testimonies. We all had concerns about the inability to get a Federal ID number, an EIN number, and we had concerns about practitioner hotlines. So I think there are things there that we all agree have some issue that needs to be dealt with.

I think the heart and soul of what we hear about is the future and the issue of balancing service and compliance, and I think what we all want to see is the pendulum stop swinging, where we see compliance getting a lot of emphasis 1 year and the next year it is service. We want to have a steady pattern of going forward where the IRS is doing their two roles, which is service and compliance, and I think, obviously, that requires an improvement in technology and it requires better staff and training. I would hope we could focus more on technology and less on people. People are just a very inefficient way to go out and build compliance in the Tax Code.

The interesting discussion I heard today, and I don't have a lot of time left but I would certainly be willing to answer any questions, in my role as a member of the IRS Advisory Council we have looked at this K-1 matching program very closely. And while I think there is a tremendous opportunity here to catch a lot of unreported income, there is an equal opportunity to embarrass the Service if it is not done properly, and I would certainly be willing to share my concerns in that area at a later date.

I could not continue my opening comments without joining all the Members of this Committee that have praised Commissioner Rossotti's 5-year term. I think we have seen remarkable change in that 5 years, and I think the Service has come a long way. It is unfortunate we cannot convince him to stay another 5 years, but I hope we can bring someone in with his vision and his understanding of what a good tax administration system should look like, because it can be very easily turned back around if we do not bring in someone like Commissioner Rossotti.

So I thank you for opportunity to be here, and I look forward to any questions you might have.

[The prepared statement of Mr. Harris follows:]

Chairman HOUGHTON. Thanks, Mr. Harris. Mr.  Stevenson.

STATEMENT OF WILLIAM STEVENSON, PRESIDENT, NATIONAL TAX CONSULTANTS, MERRICK, NEW YORK, AND CHAIRMAN, FEDERAL TAXATION AREA, RIGHT TO PRACTICE COMMITTEE, NATIONAL SOCIETY OF ACCOUNTANTS, ALEXANDRIA, VIRGINIA

Mr. STEVENSON. Thank you, Chairman Houghton. My name is Bill Stevenson. I represent the National --

Chairman HOUGHTON. Could I just interrupt a minute? Mr. Ernst, I understand you have to go, and that Mr. Weinberger is going to sit in in your seat.

Mr. ERNST. If that is okay with you.

Chairman HOUGHTON. Do you have full trust and confidence in Mr. Weinberger?

Mr. ERNST. I have mostly full trust and confidence.

Chairman HOUGHTON. We appreciate very much your being with us. You can go at any time. Mr. Weinberger, we are delighted to have you with us. Sorry, Mr. Stevenson.

Mr. STEVENSON. I am representing the National Society of Accountants and its 30,000 members and affiliates. We are the professional preparers of people's taxes, and not only their individual taxes but their businesses as well.

The first time I appeared before you was March 24, 1995. I have the videotape. I deviated for a moment, as I am going to do now, and ask the Committee to address two issues. One of the issues was to figure out some way of providing more oversight to the Internal Revenue Service. While my remarks were more prophetic than they were influential, history has shown you have done this and I think we are a better Nation for it.

The second issue I asked you to address was the offer-in-compromise program, and we went a long way in trying to straighten it out during the Commissioner's restructuring the IRS, and there was some direction in the history of the Committee reports. But I must say I was disappointed when I found out that some provisions were stripped from your legislation that is going to go to the floor tomorrow. I will tell you that we are working with the Senate and, hopefully, we will get some of these provisions back in and you will have time to revisit that issue. It is a very serious matter.

But let us get to the shocking story of electronic filing. Our firm is fully committed to it. My partner and I process approximately 800 tax returns one at a time, one person at a time, and this year we have fully committed to the program. Ten years ago, the National Society of Accountants asked me to take a look at the electronic filing program and then, with the IRS's invitation as a stakeholder group, to tell them what our thoughts were. So I took it very seriously and I produced a 3-year horizontal case study using a microcosm of 50 tax preparing organizations of large and small practitioners, and I personally processed several hundred tax returns myself electronically.

I met with the IRS every 6 months for 3 years and I presented to them what they needed to do to get the practitioner community on board with electronic filing. In spite of the fact that they invited us to provide them with feedback, not only did they pretty much ignore our remarks but they came out with a more restrictive program, and the history will show there are 1 or 2 years where electronic filing instead of going up went down.

During that period of time, the professional practitioner community took electronic filing off of our radar screen, and we kept it off. And that is why the Commissioner said today if we file tax returns between April 15 and April 30 we will get more of the big returns in. These are the returns that we do. And the only reason that we electronically file is not because our clients have asked us to do it, it is because we have told them we are going to do it.

So after 9-11, our organization stepped up to the plate and told our membership that, look, this is a tough program to get started in, but it is an inconvenience of honor and this is something we can do to help this Nation defeat some potential terrorist problem. So we stepped up to the plate. My firm has prepared 99.9 percent of its returns electronically.

Now I am at the other end of tax season, and I am telling you the problem in getting the practitioner community aboard is that it takes a lot of extra time. I figured it took my partner and me 150 extra hours to produce 600 tax returns in a 9½ week period. The amount of input that individuals like me have to put into providing an electronic package is very heavy in the first year. And if the IRS wants to sell this program, they have to reduce that burden and they have to explain to practitioners that this is a new way of doing business. It is not easy.

It is kind of odd that the National Commission to Restructure the IRS sent a team of people, including a commissioner, to my office to learn about electronic filing. It is kind of odd that the Government Accounting Office is sending a team of people to learn about electronic filing before they present you with their final report. And it is kind of odd that the director of practice, who doesn't know anything about computerization, has spent a couple of days in my office over the last 2 years to learn about the process, but not one person from the IRS responsible for writing the program has been there to see what the practitioner has to go through with it to process this.

And my time is up.

[The prepared statement of Mr. Stevenson follows:]

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

Mr. COYNE. Thank you, Mr.  Chairman.

Mr. Harris, the EITC program continues to be one of the most common errors that both taxpayers and tax preparer professionals make in filing individual tax returns. Seems to be still a high percentage.

Mr. HARRIS. Yes.

Mr. COYNE. Can you cite any reasons why you think that is the case?

Mr. HARRIS. I think probably the best thing that could be done, which I guess is the reason we have a problem, is clarifying definitions of something like a dependent, that we all understand who that qualifying dependent is. I think if you asked people on this panel and the IRS, that would go a long way, just clarification of a lot of the rules, at least from the practitioner side.

I think perhaps from people who self prepare returns, it is just another sign of complexity; that they just really do not understand it all.

Mr. COYNE. Do you see the EITC issue largely one of innocent errors or intentional fraud, in your experience?

Mr. HARRIS. Certainly from the people that we deal with it would be innocent, but I am aware of many cases where there are intentional claims made. There is no question that that exists. I think any time you make money available there are people who will abuse that opportunity.

Mr. COYNE. But could you put a percentage on it? Is it 10 percent intentional fraud or 5 percent?

Mr. HARRIS. It would simply be a guess, but I would say 10 percent is intentional, in my opinion.

Mr. COYNE. And the rest is just through complexity?

Mr. HARRIS. Complexity and confusion.

Mr. COYNE. And definitions, as you point out?

Mr. HARRIS. Definitions; right.

Mr. COYNE. Thank you.

Chairman HOUGHTON. Mrs. Thurman.

Mrs. THURMAN. Mr. Stevenson, you said you were talking with the Senate because there were some things left out of our bill. Can you give me what those were?

Mr. STEVENSON. There was a whole section on the offer-in-compromise program. The House had originally in there items that directed the IRS to consider hardship and be very specific about what the rules of hardship was, because the IRS misinterpreted hardship. Their interpretation of hardship for an offer-in-compromise program was that if a taxpayer has all the assets to pay for the tax but it is inconvenient for them to pay it, that is considered hardship. But if the person was poor enough and didn't have the assets to pay for the tax, then they could not be considered as a hardship case. It is right on their Form 656 as one of the rules for determining an offer-in-compromise.

Mrs. THURMAN. Maybe to the other three, or to all four, Mr. Coyne asked about the EITC, and I think all of us understand why that is not getting taken care of, because there are winners and losers if you expand it. If you lose, that is a problem there. However, I still think if it is causing problems out there we ought to be finding out how to fix it. But in saying that, and since it seems we have had an experience with that, we have heard some of the situations as I have referred to in this New York Times article and you all have been sitting here, what recommendations would you make to us in this matching issue the Commissioner has talked about? How do we match this money and make sure we are able to go over to these offshore trusts that we are not receiving the benefit from?

Any one of you.

Mr. HARRIS. I will be happy to comment since, as I have mentioned, we worked with the Commissioner and the IRS on this in some areas. I think you are going about it in the right way, trying to match the tax returns of the partnership to the individual tax returns. Where the potential for problem is, in our experience, and most of us were relating matching to something like a W-2 that has a standardized format that goes on a single place on a tax return, when you get into this matching of K-1's, first of all you have a variety of different K-1's where information can go on many, many places on that tax return and in some cases correctly not be on the tax return. Our caution to the IRS was while you need to catch the underreporting of income, the last thing you want to do is send out a lot of erroneous notices where you have not been able to find that it was correctly reported. And I think you do a lot more harm to the agency by sending out millions of notices proposing assessments of tax when the return was prepared correctly.

Mrs. THURMAN. Mr. Harris, don't you also think that at some point, as these kinds of reports come out, that we also hurt the IRS on the other end of it; that there are specifically, or at least seemingly, instances where the IRS might be targeting lower income, middle income people? That is the opposite potential you have, too.

I think there are two sides to that, and I am very concerned because I agree I think we have moved much further and have really taken some steps to help, but I do worry that there will be a feeling on either side. Somebody is not going to be happy with this.

Mr. HARRIS. I think we need to go forward with matching. I think it is part technology, in terms of giving the IRS the ability to standardize forms. It is a more encompassing problem than I think we think it is. We think it is taking K-1's, matching against returns, and we are going to find income, but I think we have to look at the bigger picture of form design standardization.

Clearly, I think this tax system is built on a belief that there is compliance being done out there, and if we don't shore up compliance I think the whole system is at risk.

Mr. STEVENSON. There is another issue, too, and I am sure Roger would agree with this. The problem really is training. The IRS will run a computer program, such as matching, and then automatically send out notices. But there is nobody really eyeballing the notices to say do they make sense. What he is saying is a lot of them, if anybody really looked at them, they would say they do not make sense.

But let me give you another foreign issue, which I am sure no one has even touched. I got a call about a year ago from a man from Belgium. He called me up to say, you know, I have set up 400 United States corporations in Delaware, and he wanted to know if these corporations were required to file a Federal tax return and get a Federal ID number. This is one man, 400 corporations in Delaware.

I have a contact in Delaware who sets up corporations all over the world, and apparently Delaware sets up a corporation for a foreign company and there is no matching with the IRS that these corporations have been set up. So there could be tens of thousands or hundreds of thousands of corporations that people set up throughout the world, acting under the rubric of an American corporation, with all the rights and privileges, but they do not even have an ID number. The guy nearly had a heart attack when I told him that, yes, you need an ID number and you are out of compliance for not filing these returns.

And the reason he got caught was because one of his clients was using a corporate return and they reported him to the IRS, and the IRS said that there was no such corporation. And the fraud people from Belgium had contacted him and he was getting quite ill about it.

Mrs. THURMAN. So you are saying that we need to be working with the States, who do this corporation set-up, so that we make sure that we in fact can do what Mr. Harris and others have said, be able to match these corporations with the IRS? Is that what you are suggesting?

Mr. STEVENSON. I am saying, first of all, Delaware seems to be the real problematic area in this, and these are not American citizens setting up these corporations. These are foreigners setting up American corporations, using our system to their benefit, and we are not getting anything out of it.

Mrs. THURMAN. I don't know if either one of you want to respond.

Mr. WEINBERGER. Just on the earned income tax credit. Congress gives the Internal Revenue Service about $147 million a year not just for increased compliance with respect to that program but also for education and outreach, because a number of the taxpayers who are eligible for the credit do not claim it, and some who claim it do not claim the full amount that they are entitled to. So it is not just a question of overpayments; there are in some cases underpayments.

As you know, it is one of the most effective anti-poverty programs we have, and Congress has supported it because it gives an incentive for people who are poor to continue to work. It is also one of the most complex provisions in the Tax Code.

Several years ago the Treasury Department worked with us to develop due diligence procedures where tax practitioners could question claimants to make sure they were properly qualified to apply for the earned income tax credit. We believe that tax professional industry, working with Treasury and Congress, should sit down to look at the earned income tax credit and ask whether there are simplifications or adjustments that can be made.

Congress recently passed some changes to simplify the tie-breaker rule that helps determine which member of a family is eligible to claim a child, for example. Unfortunately, that will require some additional clarification, as is often the case when a new law is passed. But we think there may be additional simplifications that can be enacted and it is worth trying to get that program into a better posture of compliance.

Mrs. THURMAN. I would just say that one of the things in one of the articles talked about, and specifically what you talk about with regard to the EITC, it says that in the Manhattan tax office, and they suggested it is the richest in the Nation, there are only 23 auditors that remained on a staff that numbered actually 150 just a few years ago. So there certainly is a resource issue in trying to bring about compliance.

Let me ask one last question. I think all of you agreed on this issue, and that was that in our making changes so close to the tax season and not giving an opportunity to put things in it to work before tax season comes out. It is an excellent comment, because I think we so often do that thinking we are just going to hurry this up and everything is going to be wonderful.

Let me ask you this, and maybe it is something we can put everybody on notice now. We also know through the stimulus package, which was mentioned, that there will be some new requirements and some additional tax issues that will be coming into effect in 2004, 2005, and 2006. And then all of that goes away and we start another whole group of tax issues coming down the road, which of course I am very concerned about for a couple of reasons other than the complexity, but also the revenue side of it.

Are you at this time being asked or giving any input, or do you believe the rules and regulations which you might have to work under when these new tax issues come into effect -- are we seeing any advance notice as to the way this might work, and would we have then a better opportunity to use the tax issue as it was intended by Congress?

Mr. WEINBERGER. Well, with respect to the stimulus package, of course that is a classic example, because that made some changes that were retroactive and made them right in the middle of the tax season. And as hard as the Internal Revenue Service works to get forms ready and so on, it is sometimes --

Mrs. THURMAN. But we also will be going into the tax bill. I think there is a new IRA, there are some educational issues, and there are some things in there. What you are telling me is that in fact we know that there is a problem when we push things too quickly or they are retroactive or right in the middle of the season, like the depreciation issue that you mentioned from this stimulus package. Are we seeing at this time IRS having the rulemaking authority to start putting rules out that would have an effect on these new tax issues that will be coming due, or not due but in place in the 2004-2005 time frame?

Mr. STEVENSON. Well, first of all, the IRS is really historical. They are still auditing 2 years ago or year and a half ago. So a large  percent of the IRS is looking back. Another large percentage is just getting ready for the next filing season.

From our perspective, they are really very -- I mean, talk about chaos and confusion. They do not have enough people to deal with the future. That is really our job. And, frankly, from our perspective, we hope some of the things will change, because we know you rush some things through. And we really love the fact that you are concerned, and you are trying to do the best we can. We really understand that.

We are really struggling with this new thing because we are all still suffering and reacting to 9-11. I am from New York, as the Chairman is, and we really have not recovered from this event, I have to tell you right now. So we know that some things that have happened will change. And in the last several years, the amount of oversight and the fabulous staff that you have in bringing us together and bringing things to your attention, we just feel that things will change in the future. We cannot do a lot of tax planning for it because historically they have changed.

I don't know if that answers your question. It is hard to prepare for things. How do you prepare for the estate tax that is going to disappear in 10 years or maybe come back and be back to $1 million? We know you have to change that.

Mrs. THURMAN. Can I quote that?

Mr. STEVENSON. You have to change it.

Mr. HARRIS. If I could respond a little bit to that. I think the average taxpayer doesn't do a lot of tax planning, so right now they are not really that concerned about the changes. They find out when they have their taxes prepared where they won and where they lost.

The IRS is certainly addressing this, but I don't think there is a big demand from the average taxpayer; tell me about the changes that are coming this year, next year, the year after. Unfortunately, maybe that is an indictment of the taxpayers. They have just given up hope on figuring it out. They just gather everything together, get their taxes done after the first of the year, and they hope they won more than they lost in changes. And sometimes they do, sometimes they do not.

Mr. WEINBERGER. Two aspects of that. One, the Internal Revenue Service does consult with tax practitioners as it develops new forms and instructions and tries to identify areas where the forms and instructions are not as clear as they should be. And I am sure as they prepare for some of the changes that the Congress has mandated for 2003 and 2004, and so on, those forms and schedules will come in due course.

The other aspect that Mr. Harris was just alluding to, however, I think is even more significant, and that is that Congress passes many, many programs and tax provisions that are beneficial to individuals, and a lot of Americans simply don't know they are eligible for them. We find that we are increasingly becoming a financial counselor to our clients to help them understand provisions that may be available to them that they were not aware of.

So I think there is a financial education component which is important, an additional education component with respect to tax provisions that Congress intends to apply to Americans that they are not fully aware of.

Mr. DOUGHERTY. In the passing of the act, and, of course, everything cannot be perfect in life, so it came along at a time and so we are reacting to it. It was a little bit of a problem. We will get over that. And I think the Service has done a good job. I didn't mean to tell you that I don't think the Service has done a good job. I think the Service has done a good job. It was late. They have come out afterwards and said we are going to have to amend some returns and that is going to cause some problems.

But the Service normally does a very good job if the law is there. Normally the information does come out. They do consult with you. They try to. Sometimes they don't listen to everything we tell them, but everybody in life doesn't do that. So I think they do do a good job.

And as for the future, are we doing planning? Obviously, we do some planning, too, and our clients do look at this law. We do take it serious, it is on the books to see whether it will affect them in the future. So, yes, we do have clients that are looking at the law and into the future.

Mrs. THURMAN. I appreciate your indulgence, Mr.  Chairman. So I guess the bottom line is it is just us. The IRS is doing fine, if we would just quit changing things in midstream.

Mr. DOUGHERTY. No, we didn't say that.

Mr. WEINBERGER. Well, our tax preparers do --

Chairman HOUGHTON. Well, now, wait a minute. We cannot go on forever here. I appreciate your comments. This is 15 minutes and we are usually on a 5-minute basis.

I want to thank you very much for being here. It has been very helpful, and we will be in touch with you again. Thanks so much.

[Whereupon, at 4:21 p.m., the hearing was adjourned.]
[A submission for the record follows:]

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