Statement of the Hon. Charles O. Rossotti, Commissioner, Internal Revenue Service
Testimony Before the Subcommittee on Oversight
of the House Committee on Ways and Means
Hearing on the 2002 Tax Return Filing Season and the IRS Budget for Fiscal Year 2003
April 9, 2002
INTRODUCTION
Mr. Chairman, I thank you for this opportunity to testify before the Subcommittee on the 2002 tax filing season, our FY 2003 budget request and some of the initiatives we are undertaking on behalf of America’s taxpayers.
On a personal note, let me also thank you for your continued leadership and guidance. The progress we have enjoyed to date is due in no small measure to your active support of our modernization program and what we must do to provide quality service to America’s taxpayers while meeting our other critical goals and responsibilities. I particularly want to thank Chairman Thomas, Chairman Houghton and Representatives Coyne, Portman and Cardin for your support in passing the President’s proposed modifications to the IRS Restructuring and Reform Act of 1998 (RRA 98).
Mr. Chairman, I am pleased to report that we are gradually improving our performance across the board. As demonstrated by the 2002 filing season results, we are seeing further improvements in key areas, such as e-filing growth and telephone service. It is important to note that our most important judge of the IRS, the American public, has begun to respond to our efforts.
As illustrated in the attached chart, two respected surveys show a strong turnaround in IRS public approval. The Roper Starch Surveys found our rating increased each of the past three years after an all time low in 1998. And the University of Michigan’s American Customer Satisfaction survey showed greatly improved customer satisfaction among individual taxpayers – the largest favorable gain of the 30 federal agencies surveyed.
Mr. Chairman, the turnaround in the public’s rating of the IRS is fundamentally important to the health of the tax system. It is not acceptable for the government agency that affects more Americans than any other to also be the lowest rated. Changing this was a mandate incorporated in the RRA 98, and we are beginning, and I stress beginning, to deliver on it. While the trend is positive, much more remains to be done.
2002 FILING SEASON
Mr. Chairman, the 2002 tax filing season has been smooth, with returns being processed on time, electronic filing increasing substantially and improved accessibility and accuracy of telephone service. It continues to demonstrate how we can build on positive trends in service to taxpayers, especially as our major technology and organizational initiatives take effect. We have encountered some confusion and a significant number of errors concerning the rate reduction credit, but we have been able to keep up with these and get taxpayers their refunds on time.
Projected net collections for FY 2002 will be approximately $2 trillion. During FY 2002, we also project to receive 231 million returns, including over 132 million individual returns, and expect to issue over 99 million individual refunds – 3 million more than the previous year. As of March 23, 2002, the average dollar amount per refund is up over 12 percent over last year, and the average refund is $1,980.
Mr. Chairman, so far, we discovered 3.1 million Rate Reduction Credit errors. The credit is on line 47 of Form 1040, line 30 of Form 1040A, and line 7 of Form 1040EZ. The credit is for those taxpayers who did not get the maximum benefit through last summer’s Advance payments, and whose 2001 income or tax amounts qualify them for an additional amount.
We are checking all returns to see that the Rate Reduction Credit line is handled properly and will notify taxpayers of any changes we make. We are also rejecting e-file returns that show the Advance Payment amount on this line, or that show a dependent claiming this credit, so that the taxpayer or return preparer may quickly fix the problem and transmit a corrected return.
Although it is not directly related to the filing season, let me also note that we corrected a problem for taxpayers trying to obtain an Employer Identification Number (EIN) through our new toll-free service. This was a start-up glitch that was quickly resolved and we are now enjoying an 85 percent level of service (success rate of taxpayers seeking assistance for toll-free EIN service).
Electronic Tax Administration
In 2001, a little more than 40 million taxpayers filed electronically – a 13.7 percent rise from last year. Since 1997, e-filing increased by 110 percent, and on-line filing grew by a staggering 1,700 percent. Clearly, the value taxpayers receive from all our e-programs is one reason behind the growth. Faster refunds, positive acknowledgement of receipt and fewer errors that require time consuming letters and telephone calls to correct are key benefits to taxpayers.
One of the important reasons for the IRS’ strong showing in the ACSI survey was the very high satisfaction rate among electronic filers. It was 77.2 points (out of 100) – higher than the previous year and the third year in a row that e-file taxpayers expressed increased satisfaction.
The2002 filing season statistics underscore that an increasing number of taxpayers are taking advantage of filing their returns, receiving their refunds or paying their taxes electronically. Through April 4, 2002, almost 39 million individual taxpayers filed using one of the three e-file options; a 14.4 percent increase over the same period last year. Let me point out that the number of taxpayers e-filing from their home computers is up a very impressive 39 percent over last year.
For the fiscal year, we set an aggressive goal of receiving 46 million returns electronically a 15 percent increase over last year, and I am pleased to say that we are on track to meet or exceed this goal.
The following are some of the key 2002 filing season e-file statistics through April 4, 2002 except where noted.
New for Individuals for the 2002 Filing Season
In order to improve our ETA program and ease taxpayer burden, the IRS created a series of enhancements for the 2002 filing season and the remainder of the fiscal year. These initiatives include:
ETA Also Easing Business Taxpayer Burden
A strong ETA program may be even more important for reducing burden for businesses than for individual taxpayers. In addition to their annual income tax returns, businesses also have to file various employment tax returns and information returns. Businesses also make a lot of payments to the federal government, such as withholding and unemployment taxes. In fact, payments are a business’ most frequent transaction with the IRS.
These requirements add up to a lot of transactions between businesses and the IRS – 23 million employers’ quarterly tax returns; 5.5 million employers annual unemployment tax returns; 5.5 million corporate tax returns and 2 million partnership returns, including the processing of over 11 million K-1s. That is an enormous amount of paper and it does not include the millions of checks that accompany them.
We want to eliminate this blizzard of paper and convert all of these transactions to fast, accurate, paper free electronic methods. In 2002, the IRS continues to make progress serving the electronic tax administration needs of this important sector.
Mr. Chairman, to promote business e-filing, we have placed advertisements in publications, including Fortune Magazine. Businesses can now file electronically both their 940 and 941 employment tax returns. Some businesses may even qualify to file using a telephone. We have also opened the door for a number of other key forms to be filed electronically, such as Form1099 to report other income. We are particularly pleased that we can now offer electronic filing of Form 1065, to report partnership income, and the K-1s that accompany them. We are also hard at work designing Form 1120, Corporate Tax Return e-file program. Implementation is slated for a year from now.
I mentioned that payments from businesses, especially payroll deposits and quarterly returns are the most common transactions businesses have with the IRS. The Electronic Federal Tax Payment System (EFTPS) is an enormous success story in this regard. Through EFTPS, both businesses and individuals can make federal tax payments electronically. Since its inception in November 1996, businesses have used it to pay more than $5.7 trillion in federal taxes.
On September 6, 2001, we successfully launched IRS’ first on-line payment system – EFTPS-OnLine. It provides a convenient and secure method for paying all federal taxes through a secure web site. Let me stress that confidentiality and privacy of taxpayer information are our highest priorities. EFTPs-OnLine users can feel confident that their private information will be protected.
Spurring Further e-file Growth
Mr. Chairman, in its December 21, 2001 report to you, “Assessment of IRS’ Tax Filing Season,” the GAO observed that in spite of the growth in electronic filing and our efforts to identify and eliminate impediments, the 13.7 percent growth in 2001 was still below our goal of 20 percent. Of particular concern to both the GAO and IRS is why approximately 40 million individual income tax returns were prepared on computer but filed on paper in 2001. The IRS and the Administration are taking and proposing actions to address the problem.
This year, we focused our e-file marketing campaign on taxpayers who prepare their returns by computer but file on paper, and taxpayers who use the services of tax professionals but file on paper. We also agree with GAO on the need to further survey these filers to determine why they did not file electronically and how we can overcome these barriers.
In addition, the President proposed in his FY 2003 budget that the due date for returns filed and paid electronically be extended. During the March 20th mark up of the “Taxpayer Protection and IRS Accountability Act of 2002,” the House Ways and Means Committee included a provision that will extend next year’s filing date for electronic returns to April 30.
The Administration also proposes in its budget submission “an easy, no-cost option for taxpayers to file their tax return online.” Unfortunately, there has been some confusion regarding this proposal. The Administration’s proposal to give taxpayers the option to file their tax returns on-line without charge is based on two principles: no one should be forced to pay extra just to file his or her tax return, and the IRS should not get into the software business.
In a statement issued on January 30, 2002, Treasury Secretary O’Neill stated, “I don’t intend for the IRS to get into the software business, but rather to open a constructive dialogue with those who already have established expertise in this field. In the end, this effort should come up with a better way to save time and money for both taxpayers and the government.” The IRS totally concurs with the cooperative approach enunciated by the Secretary and we will follow it to the letter.
Web-Based Help
The IRS web site at www.irs.gov continues to be extremely popular with taxpayers. As of March 14, the IRS web site was listed as Number 3 in the Lycos Top 50 searches. In 2001, it posted 2.7 billion hits with more than 336 million forms and publications downloaded. For fiscal year 2002 through March 31, there were 1.95 billion web site hits, up 36 percent over the same period last year.
I should note that in January, the IRS introduced a newly designed web site, aimed at making it easier for taxpayers to find the information they want on the web. Following our overall strategy of making the IRS customer-focused, the home page immediately provides taxpayers a way to find information based simply on whether you are an individual or business taxpayer.
The Small Business/Self-Employed Community section on our web site is an excellent example. It is dedicated to the needs of this important taxpayer group who often confront more complex tax issues than those who have their taxes withheld by an employer.
Our ultimate goal is to transform our web site from an information-only portal to a world-class transaction based gateway. However, some things have not changed. Anyone with Internet access can receive: tax forms, instructions, and publications; the latest tax information and tax law changes; tax tables and rate schedules; and hypertext versions of all taxpayer information publications, including the very popular Publication 17, “Your Federal Income Tax”; all TeleTax topics; answers to the most frequently asked tax questions; a library of tax regulations; and the weekly Internal Revenue Bulletin that contains all the latest revenue rulings, revenue procedures, notices, announcements, proposed regulations and final regulations.
Mr. Chairman, let me point to another benefit of our web site. It is an excellent tool for alerting taxpayers and the media to various fraudulent schemes, including the slavery reparations scam, being perpetrated upon them by unscrupulous promoters. There is a quick link from our portal page to IRS Criminal Investigation “Tax Frauds Alert” page that provides in one place a comprehensive overview of the different schemes and what we are doing to combat them. It also lists the number (1-800-829-0433) for taxpayers to report suspected tax fraud activity.
Telephone Assistance
To improve customer service, and based on an AT&T usage study, the IRS aligned its toll-free service hours last year to meet customer demand. Beginning October 7, 2001, IRS assistors are available 7 a.m. to 10 p.m. Monday through Friday local time. During the filing season (January 2 through April 15, 2002), assistor services are available on Saturdays from 9 a.m. to 5 p.m. Assistor services are also available on President’s Day and Sunday April 7 and April 14, 2002. IRS automated assistance systems continue to be available 24 hours a day, 7 days a week.
Primarily because of increased calls concerning refunds and the rate reduction credit, the total volume of incoming calls on our toll-free lines for the fiscal year through March 30 has been up 13 percent over last year, totaling 51.1 million calls for the first half of the fiscal year.
Despite this substantial increase in the volume of calls, for the first half of the year through March 30, 2002 approximately 66 percent of taxpayers who wanted to talk to a customer service representative got through, compared to 68 percent last year. In the last four weeks, service improved further, with 74 percent of taxpayers getting through to customer service representatives. We have set a goal for the whole year of 71 percent.
Of great interest to taxpayers, the average wait time for questions on tax law was 2.58 minutes – down from 4.27 minutes last year. Wait time for calls on account questions was 4.76 minutes compared to 6.11 minutes last year.
In addition, 45.3 million taxpayers used our automated services to get information, including refund status, an increase of 8 percent since last year, and the upward trend continues.
Once connected, taxpayers must get prompt, accurate and courteous answers to their account and tax questions. Here too we have made substantial progress towards providing better service to taxpayers. The telephone correct response rates for tax law and tax account questions showed a marked improvement in FY 2002. They were up to 83 percent and 89 percent respectively as compared to 75 percent and 88 percent over the same period last year.
Let me note too, that by September 24, 2001, we established a special telephone line for victims of the terrorist attacks and since then, we have provided over 90 percent level of service on this line.
Mr. Chairman, to increase productivity and quality of service, we must give our employees the technology and tools they need to do their jobs at a high level. In this regard, our Business Systems Modernization (BSM) program is delivering both short- and long-term improvements.
The first of the BSM projects, Customer Communications 2001, was deployed in July 2001, which allows us to route calls more precisely to assistors with the necessary expertise. We must also give our assistors specialized knowledge so they can better answer taxpayer questions about a very complex, difficult and changing Tax Code. Our new technology will allow us to route calls more precisely to assistors with the necessary expertise.
Practitioner Priority Service
This new nationwide toll-free, accounts-related service for all tax practitioners is being rolled out in three phases at 45-day intervals; the first was launched on January 2, 2002. This service, which will replace the former Practitioner Hotline, will be the practitioners’ first point of contact for assistance regarding taxpayers’ account-related issues.
Calls will be routed to one of five IRS campus sites (Brookhaven, NY; Cincinnati, OH; Memphis, TN; Ogden, UT; and Philadelphia, PA) based on the practitioner’s area code. All sites will handle both individual and business inquiries, and any issues outside the scope of the employees’ authority will be priority routed to other IRS functions.
Expected benefits for practitioners include improvements in overall consistency and quality of service; improved accessibility into the system and reduced wait times; and dealing with the employees who are specially trained to handle practitioner issues.
Forms By Fax and Phone
Taxpayers can receive more than 100 frequently used tax forms 7 days a week, 24-hours-a-day from IRS TaxFax. Taxpayers can request up to three items per-call. Taxpayers use their fax machine to dial the service at 703‑368-9694. The only cost to the taxpayer is the cost of the call. Taxpayers can also request forms and publications by calling 1-800-TAX-FORM.
Recorded Tax Information
TeleTax has 150 topics available 24 hours a day using a Touch‑tone phone. Taxpayers can call (toll‑free) 1‑800‑829‑4477 to hear recorded information on tax subjects such as earned income credit, child care/elderly credit, and dependents or other topics, such as electronic filing, which form to use, or what to do if you cannot pay your taxes. As of March 30, 2002, over 1.9 million have taken advantage of the recorded tax information features of TeleTax this fiscal year.
Automated Refund Information
In FY 2001, more than 54 million taxpayers used the Automated Refund Information system on TeleTax to check on the issuance of their refund checks. As of March 30, 2002, the number stands at over 35.8million – up .5 million from this time last year. Taxpayers may call 1‑800‑829‑4477 to check on their refund 24 hours a day, 7 days a week.
Filing Burden Reduction
In addition to our many popular electronic programs, such as e-file, the IRS is also making other efforts to reduce the time and effort it takes taxpayers to file and pay their taxes. For example, Schedule D, the form that millions of taxpayers use to calculate their capital gains and losses, was redesigned for the 2002 tax-filing season. The goal of the revision, which cuts 14 lines from the schedule, is to reduce the difficulty that individuals face when filling out their return. As noted in our press release announcing the change, “Calculating capital gains and losses should not be a capital pain.”
This year’s tax form for individuals also contains a small change that we hope will make a big difference to the millions of Americans who make minor errors filling out their returns. Taxpayers who fill out a new Form 1040 box selecting a third party designee will enable that person – be it friend, family member or paid preparer – to talk directly with the IRS to correct questions during the processing of the return.
Such errors include simple math errors and data omissions, such as an incorrect Social Security Number. The designation also enables the third party to discuss the status of a refund, payment or other notice with IRS representatives.
This new option balances the taxpayer’s need for privacy with the reality that for millions of people a friend, family member or tax professional plays a key role in the preparation of their return. The taxpayer retains privacy but has the ability to make it easier to resolve routine problems. The bottom line is this improves customer service and reduces headaches for taxpayers, practitioners and the IRS.
The new third party designation, located just above the signature line of Form 1040, expands on the success of the paid-preparer checkbox on last year’s Form 1040 by enabling the taxpayer to designate a friend or a family member as well. More than 37 million taxpayers marked the checkbox option during last year’s tax season. However, the third party designation does not eliminate the need for a Power of Attorney for issues dealing with examinations, under reported income, appeals and collection notices.
CD‑ROMs
The IRS has also developed a number of innovative products for small business taxpayers. The Small Business Resource Guide 2002 on CD-ROM is a must for every small-business owner, or any taxpayer about to start a business. This handy, interactive CD contains all the business tax forms, instructions and publications to manage a business successfully. It also includes valuable information concerning the IRS Disaster Relief Efforts and the Welfare-to-Work Credit. Up to five free copies can be ordered on-line from the IRS.
The IRS has developed two new CD-ROMs to help educate small business owners on their tax responsibilities. The first, Introduction to Federal Taxes for Small Business/Self-Employed, introduces business students, new small business owners, and self-employed entrepreneurs to IRS tax law in an easy to understand format.
The second CD-ROM is A Virtual Small Business Workshop. This powerful tool replicates the best of the IRS’s years of presentations of workshops for small businesses. It provides information on all the key aspects of the tax implications involved in establishing and running a small business. The user sees the instructor along with an outline of the presentation. In addition, the closed caption option provides the instruction in English, Spanish, and Mandarin Chinese.
These two CD-ROMs are also free and can be ordered by calling 1-800-829-3676 (no on-line ordering at this time).
Taxpayer Assistance Centers
For those taxpayers who prefer to visit an IRS office, walk-in service is available at more than 400 locations nationwide. At many sites, walk-in service will be offered on 12 Saturdays between January 27 and April 14. As of March 16, 2002, we have served over 3.3 million taxpayers at all Taxpayer Assistance Centers – slightly more than at this time last year.
The Saturday Service sites were selected based on their weekend accessibility, year-round operational status, and high traffic volume. They include non-traditional locations, such as shopping malls, community centers and post offices.
Mr. Chairman, in the past, the IRS did not place as high priority as it should have on what were called, “walk-in” sites. The services offered at them was limited and often of poor quality. However, through our new Field Assistance Concept of Operations, we will better serve taxpayers at our taxpayer assistance centers. We will help them meet their filing and paying responsibilities including answering their tax law questions and providing forms and limited courtesy return preparation.
Taxpayers with incomes of $33,000 or less can receive help filing their individual income tax returns. This courtesy return preparation ensures assistance for all taxpayers qualifying for the Earned Income Tax Credit, without placing the government in competition with private industry. Taxpayers whose income or preparation needs exceed the basic service will receive service options, such as referrals.
Free tax preparation is available through the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs in most communities. Volunteers help prepare basic tax returns for low-income taxpayers, persons with disabilities, the elderly, and non-English speaking people. Taxpayers can call 1-800-829-1040 to find their nearest VITA or TCE site. They may also call AARP – the largest TCE participant – at 1-877-227-7844 to see if there is a Tax Aide site in their community.
Throughout the year, and at a variety of locations, we also schedule the highly acclaimed Problem Solving Days – the last was held on November 3, 2001 at 46 Taxpayer Assistance Centers – to resolve long-standing taxpayer issues for those who cannot take advantage of weekday problem solving services.
Problem Solving Days have an excellent track record. But we must bring what we learn from them to our daily operations. Every day should be problem solving day at the IRS, not just three or four times a year. That means using a cross-functional approach to resolve most tax account issues with a single visit or phone call at any time throughout the year.
To help us meet this need, we created a new job at the IRS, “Tax Resolution Representative.” These IRS employees will receive the training and authority to provide “one-stop-service” for a broad range of issues ranging from answering tax questions to resolving payment problems.
Mr. Chairman, I want to make one more important point about out Taxpayer Assistance Centers. In its assessment of the 2001 filing season, the GAO noted that the IRS did not previously measure TAC quality; the 2002 filing season is the first year we will measure it. Indeed, this process is just beginning, much as it was for telephone service several years ago.
The Treasury Inspector General for Tax Administration (TIGTA) was also asked by Congress to perform accuracy reviews. It is our sincere desire to work closely with TIGTA to analyze their data to help us meet the challenges we confront at our Taxpayer Assistance Centers.
Spanish-speaking taxpayers can receive information through recorded tax topics, free tax publications, toll-free telephone assistance, our web site, and at Taxpayer Assistance Centers.
TeleTax provides the same helpful 151 tax topics and refund information in Spanish and is available 24 hours a day, 7 days a week at 1-800-829-4477. Free Spanish publications are also available by calling 1-800-TAX-FORM (1-800-829-3676). Some of the more popular ones are:
Publication 1SP, “Derechos del Contribuyente (Your Rights as a Taxpayer)”
Publication 579SP, “Como Preparar la Declaración de Impuesto,” explains who has to file a federal tax return and other important topics, such as which form to file, who are dependents, what income is taxable and nontaxable, and what some of the more common tax credits are
Publication 596SP, “Crédito por Ingreso del Trabajo,” provides details on the Earned Income Tax Credit.
Taxpayers can also talk with a Spanish-speaking IRS representative by calling toll free 1-800-829-1040 between the hours of 7:00 a.m. and 10:00 p.m. on weekdays and 9:00 a.m. and 5:00 p.m. on Saturdays through April 13. This year we provided our Customer Service Representatives with both Spanish Language supplemental training and a new Spanish language Probe and Response Guide and glossary of Spanish language technical terms. Spanish-speaking taxpayers can also go to a new special Spanish section on our web site. Spanish and English services are available too at all IRS kiosks, as well as Russian, Korean and Chinese at our Flushing, NY kiosk in the Queens Public Library.
In addition, we offer Spanish language services in every one of our approximately 416 Taxpayer Assistance Centers nationwide. Many are located in areas with high-density Spanish-speaking populations and include employees recruited from these same communities. We offer this in-person service as a matter of routine.
In these and at all other offices, we also have contract telephone interpreter services available to help us to provide service to any customers who do not speak English. These interpreter services include Spanish as well as almost every other common language in the world.
MODIFICATIONS TO THE IRS RESTRUCTURING
AND REFORM ACT OF 1998 (RRA 98)
Mr. Chairman, in the FY 2003 budget submission, the Administration proposed modifications to RRA 98. On March 20, 2002, the House Ways and Means Committee reported out the “Taxpayer Protection and IRS Accountability Act of 2002” that contains five of these proposals. We commend the Committee for its actions and believe that these modifications preserve the intent of the Act while allowing us to administer it more efficiently and effectively.
There are six parts to the Administration’s proposed modifications. The first modifies infractions subject to Section 1203 of RRA 98 and permits a broader range of available penalties. Our ability to efficiently administer the tax code is currently hampered by a strong fear among our employees that they will be subject to unfounded 1203 allegations, and perhaps lose their jobs as a result. This proposal will reduce employee anxiety resulting from unduly harsh discipline or unfounded allegations.
The second part adopts measures to curb the large number of frivolous submissions and filings that are intended to impede or delay tax administration. The third allows IRS to terminate installment agreements when taxpayers fail to make timely tax deposits and file tax returns on current liabilities. (This provision was not contained in the Committee-reported bill.) The fourth part streamlines jurisdiction over collection due process cases in the Tax Court, thereby reducing the cycle time for certain collection due process cases.
The fifth part permits taxpayers to enter installment agreements that do not guarantee full payment of liability over the life of the agreement. It allows the IRS to enter agreements with taxpayers who desire to resolve their tax obligations but cannot make payments large enough to satisfy their entire liability and for whom an offer in compromise is not a viable alternative. The sixth and last provision would eliminate the monetary threshold for IRS Chief Counsel reviews of offers in compromise.
NATIONAL RESEARCH PROGRAM
Earlier this year, the IRS proposed to reestablish a key component of its ongoing compliance effort to help ensure fairness for America’s taxpayers. The National Research Program (NRP) is designed to accurately measure tax compliance while minimizing the need to contact taxpayers during the process.
The NRP is developing innovative approaches to measure taxpayer compliance with the tax law. It will: (1) be far less intrusive and burdensome on taxpayers than previous compliance studies; (2) help the IRS build better compliance programs to more effectively catch tax cheating and help ensure all taxpayers pay a fair share; and (3) help reduce audits of taxpayers who filed an accurate return by at least 15,000 tax returns a year.
As part of ongoing compliance operations, NRP will focus on measuring three key areas of tax administration – filing compliance, payment compliance and reporting compliance. A key element involves measuring the accuracy of reporting information on tax returns. The IRS has overhauled the reporting component to minimize disruptions to taxpayers during the study.
Ultimately, this project will help all taxpayers by giving the agency timely, accurate information about tax compliance. This information will allow the IRS to replace outdated audit selection formulas and develop compliance efforts directed toward the tax returns most likely to have errors, rather than those from honest taxpayers.
In late fall of this year, the NRP will begin reviewing a small, statistically valid sample of individual returns from the 1040 family. The IRS will work closely with tax practitioners, Members of Congress and other key stakeholders to finalize the project.
Mr. Chairman, the IRS budget request for FY 2003 is $10.418 billion and full-time equivalent employment (FTE) of 101,080. The request is $482 million more than last year’s $9.936 billion appropriation. The largest programmatic component of this increase is $259 million to enhance customer service and compliance, of which $196 million will be funded through a redeployment of resources within our base budget.
Overall as shown in the attached chart, the IRS is proposing to achieve $259 million in increased program resources and program delivery at a net requested increase of only $63 million. Therefore, 76 percent of the improvement is being achieved by improved internal efficiency and redeployments.
The funding increase request also maintains momentum in the IRS Business Systems Modernization projects with $58 million. The budget increase for FY 2003 will allow us to fund these critical projects as they move from the planning and design phase to development and implementation. The remaining increase would fund pay raises, and inflation, $10 million for Tier B Projects and adjustments for Homeland Security funds appropriated in FY 2002.
In addition, $39 million of the total increase is requested as part of a legislative proposal to change the accounting of pension and retiree benefits costs. Please note that although the increase of $39 million is the incremental change from the FY 2002 appropriation (as adjusted), the actual increase to our FY 2002 base for this proposal will be $503 million. These costs are transfers of funds that were previously included in other agency budgets and do not represent any net increases in IRS programs.
To help create a “World Class Treasury Department,” Secretary O’Neill challenged each bureau to review all programs on a continual basis and redirect resources to meet needs, rather than asking for funding increases. Budget and performance integration, as part of the President’s Management Agenda, requires this kind of business review, with an emphasis on best results at the lowest total cost.
Indeed, let me stress the process that underlies the FY 2003 request. For the first time, we fully integrated the development of our budget with the establishment of performance measures. First, we determined the highest priority resources needed to increase customer service and compliance. In addition, as part of the budget process, IRS’ senior team conducted a review and prioritization of agency-wide needs for FY 2003 and searched for the most efficient allocation of resources. The realignment of resources woven throughout the FY 2003 budget comes through reengineering, efficiencies and investment in modernized systems. To this end, the review developed 2,287 FTE that could be re-deployed to high priority areas in customer service and compliance.
OPERATIONS
Highest Priority Resource Needs
Customer Service and Workload Increases (+1,595 FTE, $91M)
In FY 2003, the IRS must build on the gains it has made in customer service if we are to achieve our first strategic goal, “top quality service to each taxpayer in every interaction.” We are still not providing a consistent high level of service that taxpayers expect and deserve. We must continue to improve taxpayer access to our toll-free telephone lines and the accuracy of the responses we give to tax law and account questions. We must continue to improve the service at our taxpayer assistance centers. We must further reduce taxpayer burden. We must continue to increase e-file options. We must better administer the RRA 98 taxpayer rights provisions. And we must give our employees the training and tools to meet these needs. The highlights of some of the following initiatives will help us meet our goals.
Enhanced Compliance Strategies (+1,857 FTE, $125 M)
In 2001, we began to stabilize the long-term decline in compliance activities while beginning to focus effectively and efficiently on the four key areas of non-compliance and maintaining adequate coverage of other areas. However, we still must address a number of challenges. For example, from 1993 to 2001, the number of returns reporting adjusted gross income in excess of $100,000 grew by 163 percent. We must keep pace with this increase by expanding the number of these returns that are examined in IRS field and office programs. We must also tackle the $66 billion in our total potentially collectable inventory. And we must focus on the proliferation of tax scams ranging from sophisticated illegal offshore trust programs to the slavery reparations scheme being perpetrated upon African-Americans. The following are the highlights of our enhanced compliance strategies for FY 2003. A detailed description can be found in our congressional justification.
Contract Services (+$44M)
The IRS must also pay for a number of non-labor program increases, many of which are mandated by Executive Order or departmental regulations. For example, in response to concerns raised by GAO and TIGTA, we must provide for enhanced guard services at our submission processing and computer centers. In addition, we are requesting funding for physical security upgrades such as more secure gates and entrances, and barriers that can be raised and lowered. Other items include the Public Transportation Subsidy, which was increased from $65 to $100/month.
A combination of strategic redeployment of staff and labor saving programs will allow the IRS to improve its level of taxpayer service without commensurate increases in the number of FTE applied. Targeted improvement projects, such as Reengineering/Quality efforts and labor savings from e-file and e-Services can be reapplied to other high priority programs. Technology modernization programs will generate the bulk of the FTE savings.
Improvement Projects (Redeployment of 1,779 FTE, $107M)
The IRS identified FTE redeployments from improvement projects that are expected to come to fruition in FY 2003 and are highlighted below. The FTE will be reinvested to fund the top priority needs identified below:
Workload Decreases (Redeployment of 508 FTE, $50.5M)
Targeted Efficiency Improvements (Redeployment of $39M)
Redeployment is expected from the Treasury’s approach to better business practices to remove or reduce current efforts that do not have significant programmatic value. This is targeted to produce $39 million in redeployments.
MAINTAIN CURRENT OPERATIONS
The IRS is still a labor-intensive organization and a stable work force is critical to carrying out our mission. We must maintain current operations, protect the integrity of the tax filing season, oversee tax administration programs and continue to implement organizational modernization. To do so, the IRS must have the resources to pay for the inflationary costs associated with statutory pay and other mandatory increases described below.
In FY 2003, funding requirements for the Earned Income Tax Credit (EITC) Compliance Initiative Appropriation are projected to be $154,346,000, an increase of $406,000 over the FY 2002 funding level of $153,940,000. The FTE level of 2,353 is unchanged from FY 2002.
This appropriation provides for customer service and public outreach programs, enforcement activities and research efforts to reduce overclaims and erroneous filings associated with the EITC.
BUSINESS SYSTEMS MODERNIZATION AND
The IRS’ antiquated computer systems do not efficiently or effectively serve America’s taxpayers, nor meet today’s business needs. They are one of the fundamental obstacles to providing consistent top-quality service. Failing to modernize IRS’s tax administration business systems would require a significant increase in resources to maintain the old legacy systems while not addressing their underlying deficiencies that will only worsen with time.
Business Systems Modernization will update our antiquated technology and change the entire way the IRS interacts and conducts business with taxpayers and stakeholders. Indeed, we do not view systems modernization as a separate entity, but rather as one of the major ways we can achieve all of RRA 98’s goals within realistic budget resources.
Over the past two years, BSM graduated from strategic planning and systems design to business results. As shown in the attached chart – the green blocks in FY 2001 and FY 2002 – the IRS will put in place three critical building blocks. In 2001, we established a communications infrastructure to manage the enormous volume of taxpayer phone calls. In 2002, we will move the records of some taxpayers out of the 1960’s tape-based system to a modern, reliable database. And we will establish an IRS-wide security system providing internal and external secure access and communications to our systems.
These three deliveries are some of the most essential and difficult building blocks of the modernization program. Their lack severely impeded our ability to modernize our systems and imposed enormous risks and costs on the entire tax administration system. As BSM progresses, these programs will continue to be enhanced and deployed on an ever-increasing scale until they eventually support the entire tax system
Valuable lessons were learned as we developed and implemented these projects, and we are giving equal attention to improving the quality and rigor of our management processes. Completing the first two versions of the Enterprise Architecture, as shown in the chart, was a major step. Based on my 28 years experience in the IT business, I believe that this Enterprise Architecture is the most complete and useful of such architecture in industry or government.
We are also utilizing the rigorous management processes of the Enterprise Life Cycle, while at the same time ensuring that all BSM projects adhere to the Enterprise Architecture. In addition, we are addressing remaining management weaknesses, including those identified by GAO and we are striving to achieve a standard know as the Software Acquisition Capability Maturity Model Level 2 – a recognized standard that has not been achieved in any Federal Agency with the exception of DoD’s Abrams Tank Division.
I want to stress, Mr. Chairman, that we will continue to use a formal methodology to prioritize, approve, fund and evaluate our portfolio of BSM investments. This methodology enforces a documented, repeatable and measurable process for managing investments throughout their life cycle. Investment decisions are approved by the IRS Core Business System Executive Steering Committee, chaired by the Commissioner.
FY 2003 BSM Request
The proposed $450 million FY 2003 BSM budget request includes an increase of $58.4 million over last year’s appropriation. Let me summarize the key BSM projects that are addressed in the funding request. A complete description of each can be found in our congressional justification.
Customer Account Data Engine (CADE)
CADE is the foundation for all of IRS’ tax administration systems. It will replace the tape-based Master Files that currently contain the only authoritative information on all individual and business tax accounts. The IRS dependence on this 1960s Master File system today constitutes an insurmountable barrier to efficient service and compliance operations and is a very serious risk to the whole tax system.
CADE will incrementally move individual filers from the 1960s tape system to a modernized database. CADE Individual Master File (IMF) will build the database that will replace the existing IMF processing systems. CADE will create applications for daily posting, settlement, maintenance, refunds processing and issue detection for taxpayer tax accounts and return data. The database and applications developed by CADE will also enable the development of subsequent modernized systems that improve customer service and compliance. Once implemented, modernized applications, such as Customer Account Management (CAM), will allow on-line posting of data in addition to daily batch processing.
CADE will be deployed over time in five releases, each related to a specific taxpayer segment, phased in over a period of six years. At the conclusion of Release 5, CADE will have replaced IMF.
Integrated Financial System (IFS)
IFS has three clear goals: (1) provide core financial capabilities and financial reporting; (2) meet Joint Financial Improvement Program requirements; and (3) provide an integrated framework for retirement of current financial systems.
IFS will be accomplished in two releases, each representing a distinct usable segment. Release 1 will replace the Core Financial Systems (CFS) as defined by the Joint Financial Management Improvement Program (JFMIP). In addition to CFS, Release 1 will include budget formulation as well as implementation of a Cost Accounting System to allow the IRS to move into compliance with Statement of Federal Financial Accounting Standard Number 4. Release 1 creates a logical design for the core financial applications including Cost Accounting. The core financial applications consist of General Ledger (G/L), Accounts Payable (A/P), Accounts Receivable (A/R), Cost Management, Funds Management, Core Financial Management and Financial Reporting.
Custodial Accounting Project (CAP)
GAO identified the lack of an acceptable accounting system for the $2 trillion collected in tax revenue as one of the most significant material weaknesses in IRS’ financial management. CAP will provide the IRS with the critical control and reporting capabilities mandated by Federal financial management laws.
It will also support the appropriate custodial subledgers containing data from tax operations and help the IRS meet compliance issues with both the Federal Financial Management Improvement Act (FFMIA) and federal mandates related to custodial revenue management. CAP will also help us to better manage, control and focus resources.
Enterprise Data Warehouse (EDW)
The ability of the IRS to make effective use of information about its operations is limited by the numerous fragmented databases that evolved over time. EDW provides the foundation for data mining and decision analytic tools. In addition, it enables risk-based analysis for case selection and provides the tools to report on IRS balanced performance measures.
e-Services
The e-Services project will support our ability to meet the overall goal of conducting most transactions with taxpayers and their representatives in an electronic format, as required by RRA ‘98. e-Services will provide to third parties over the Internet the four most requested applications: electronic taxpayer identification number matching, electronic transcript delivery, disclosure authorization and Electronic Account Resolution. e-Services also directly supports the President’s Management Agenda’s government-wide initiative to expand electronic Government.
Customer Account Management (CAM)
The Customer Account Data Engine cannot be deployed beyond its initial limited releases without Customer Account Management. CAM allows us to go into CADE and update the data and will help taxpayers to receive timely and accurate responses to requests and inquiries.
The CAM Individual Assistance and Self Assistance Operating Models will provide improved technology and business processes that will enable the IRS to: (1) better manage customer service functions; (2) maintain and utilize customer data to improve taxpayer interactions with the IRS; (3) provide comprehensive account and tax law assistance to taxpayers and practitioners; and (4) manage the case work flow of customer inquiries.
Delivering customer assistance through a live IRS Customer Service Representative (CSR) is the Individual Assistance operating model’s main function. In order to provide world-class service, CSRs must be equipped with the tools to access taxpayer information quickly and accurately in response to complex customer inquiries. Individual Assistance will provide this capability from a desktop information system.
By being able to access and update comprehensive, current account information, CSRs will be able to respond quickly and accurately to customer inquiries.
Workflow management tools and processes will also allow them to automatically inform relevant parties throughout the organization of actions taken on a particular customer’s account and manage outstanding cases for follow-up work or to identify the status of an inquiry for a taxpayer.
The CAM Self-Assistance operating model delivers many of the same capabilities. The main objective, however, is to provide taxpayers with the flexibility and convenience of accessing by telephone or the Internet on a 24/7 basis IRS-related information to resolve relatively simple inquiries.
Filing and Payment Compliance (FPC)
FPC is an end-to-end strategy to resolve collection issues quickly and fairly. Using industry best practices, it augments, refines and replaces existing processes and technology to enable the IRS to interact with taxpayers in a seamless and efficient manner. Protection of taxpayer rights is an important component of this strategy. The ultimate goals are to resolve all balance due cases above a minimum threshold, shorten the filing compliance lifecycle to ensure resolution before the next filing due date and shorten the payment compliance lifecycle to six-months for non-enforcement cases.
Information Technology Projects
The Business Systems Modernization program is aimed at developing major, IRS -wide systems that are the underpinnings of overall tax administration. BSM also sets forth the enterprise architecture that defines required standards of equipment, software, communications and data. This program is not intended to meet every need for every business application in the IRS, even in the long term. However, by establishing a well-defined architecture, it assures that specific business applications developed for specific business purposes will operate consistently and use common equipment while meeting required standards, such as security.
Through the strategic planning process, the IRS operating units identify specific business needs and prepare business cases for business applications that will not be met through the overall BSM process. There are many more projects with high returns than can possibly be funded. Therefore through the strategic planning process, these are then evaluated and those with the highest returns are selected. Many of the gains in performance projected in FY 2003 and FY 2004 are enabled by these so-called Tier B projects. Tier B project implementation time is two to three years and the projects are monitored within the Business Performance Review process.
The President’s FY 2003 budget includes a $10 million increase for Tier B projects beyond the FY 2002 operating level of $39.8 million. They cut across the entire spectrum of IRS activities and functions. For example, Information Systems projects will support Criminal Investigation’s activities by modernizing the equipment used to analyze forensic evidence. They will support the electronic filing of business forms and schedules and e-services will provide products and services to practitioner as well as the foundation for safe and secure electronic customer account management.
Other projects will redesign and consolidate systems to support casework and the Taxpayer Advocate Service. Correspondence will be imaged and we will be able to convert existing collection systems to electronic case processing. The Employee Plan Determination System Redesign will also reduce cycle time and improve the quality of determination letters from our Tax Exempt and Government Entities operating division. The Remittance Transaction Register will improve submission processing efficiency by providing information payment online.
The President’s budget requests $503 million (a $39 million increase over the FY 2002 appropriation as adjusted) for proposed legislative changes that change the accounting of certain pension and retiree benefit costs. These costs are transfers of funds that were previously included in other agency budgets and do not represent any net increases in IRS programs. The $39 million increase will be used as follows:
Mr. Chairman, in conclusion, I believe that we are making steady progress on our goals. We are providing improved service to America’s taxpayer. We have begun to stem the decline in compliance activities. And we are doing our job more efficiently and effectively enabling us to better leverage our precious resources. Of course, we must measure our progress against the larger goals that RRA 98 and we have set for ourselves. We still have along way to go.
So, what must we do to ensure the success of IRS modernization for next year and the years beyond? I believe that we must stay focused and committed to the intent of the Restructuring Act, making adjustments as necessary; but not losing sight of the goal. If we do, I am convinced we will succeed.
