<DOC>
[DOCID: f:49104163.wais]
DEPARTMENTS OF TRANSPORTATION, TREASURY, THE JUDICIARY, HOUSING AND
URBAN DEVELOPMENT, AND RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR
2006
----------
THURSDAY, APRIL 7, 2005
U.S. Senate,
Subcommittee of the Committee on Appropriations,
Washington, DC.
The subcommittee met at 9:30 a.m., in room SD-138, Dirksen
Senate Office Building, Hon. Christopher S. Bond (chairman)
presiding.
Present: Senators Bond, Murray, and Dorgan.
DEPARTMENT OF THE TREASURY
Internal Revenue Service
STATEMENTS OF:
MARK W. EVERSON, COMMISSIONER
J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL FOR TAX
ADMINISTRATION
OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND
Senator Bond. Good morning. The Senate Appropriations
Subcommittee on Transportation, Treasury, Judiciary, Housing,
Urban Development, and Related Agencies will come to order. I'm
going to have to get used to that, Senator Murray. The
committee is often called the THUD committee but we will go
with the full name for this event.
We welcome Internal Revenue Service Commissioner Mark
Everson and J. Russell George, the Treasury Inspector General
for Tax Administration to this morning's hearing. I look
forward to hearing each of your views on the IRS's fiscal year
2006 budget as well as issues related to the administration and
enforcement of our Nation's tax code. With the April 15 tax
filing deadline rapidly approaching, you can see everybody
smiling about what a wonderful day that will be. As a result,
we're especially looking forward to Commissioner Everson's
testimony on the current state of the IRS and how the service
is responding not only to taxpayers' needs but what has become
popularly described as the ``tax gap''; namely, what taxes
should be paid and what taxes are actually paid.
We also are looking forward to the IG's perspective on the
strengths and weaknesses of the IRS's capacity to effectively
collect taxes.
As I understand the budget request for 2006, the IRS is
making renewed efforts to reduce the tax gap through an
increased investment in enforcement funding. I understand and
support these efforts. Closing this gap is especially important
as the Federal Government seeks to reduce the deficit and
reform Social Security. I believe that those of us who pay
taxes as we should bear a heavy burden when 15 percent of taxes
that are owed are not collected. Consequently, I've appreciated
discussions about how we can close that gap so that we can get
the taxes that are actually owed and enable the government to
lower the deficit that we face.
In particular, the IRS is proposing to close this gap by
increasing the Nation's investment in enforcement, proposing an
8 percent increase in enforcement. Moreover, the budget
proposes that no less than $6.446 billion must be used
exclusively for tax enforcement, which would result in an
additional $446.5 million in contingent funding for
appropriations. The use of this budget mechanism is justified
because the government collects $4 for every $1 spent for
enforcement. I'm not convinced of the arithmetic. I am
convinced, however, additional enforcement spending will result
in additional collections. This is true despite the fact that
the strength and weakness of our Nation's Federal income tax
system is its reliance on the voluntary compliance of American
taxpayers. Most Americans believe in the law and pay their
taxes. Nevertheless, there will always be some that fail to
comply or engage in outright fraud. This is the IRS's greatest
managerial challenge and I believe the IRS should have the
resources to meet that challenge.
That's why effective enforcement of the tax laws are so
critically important and why I support an increase in the
funding for enforcement efforts. Enforcement cannot be lax,
ineffective, or uneven; otherwise, more people will be
encouraged to commit fraud. We also must ensure enforcement
funds are used for enforcement and not other priorities. I'm
disappointed that the subcommittee does not get adequate credit
under the convoluted budget scoring principles for the savings
achieved through enforcement, especially since OMB has proposed
the underfunding of so many other parts of our bill. If we
could get credit for the additional collections coming from
enforcement, we would be able to meet many of our threshold
needs. However, the overall budget has been cut by 2 percent
with many functions in our budget requiring cost-of-living
increases which are not addressed. Housing, for example, does
not get 2 percent less expensive. As a result, this budget puts
us in a very difficult position, a theme that we will be
reiterating in our discussions with all of the other agencies
that come before us.
The primary mission of the IRS is to ensure the full and
fair compliance of all taxpayers to meet their tax obligations.
This is the underlying purpose of the IRS's budget. However,
I'm concerned about the proposed 1 percent decrease in taxpayer
service funding. The IRS needs to balance customer service with
its compliance and enforcement efforts. As a result, the IRS
must provide high quality and in-depth customer service to
assist taxpayers, especially low-income taxpayers. I believe
that most people who fail to comply with the code do so
unintentionally because of its difficulty and complexity.
Active and timely guidance from the service is imperative to
ensure taxpayer compliance.
Nevertheless, I remain concerned about the proposed
reduction in customer service, especially since the IRS has
improved its customer service and guidance over the past 2
years. I'm especially impressed over the improvement through
internet, telephone, and in-person assistance. E-file options
have become especially important, helping to reduce the burden
of filing tax returns both for the government and the taxpayer.
Unfortunately, the biggest hurdle facing taxpayers and the
IRS and all of us is the Federal Tax Code, its regulations and
other guidance, which constitute more than 54,000 pages. It is
too complex, too confusing, and too costly. On a daily basis, I
hear complaints from small tax practitioners and businesses
that the code has become unmanageable and confusing, resulting
in excessive cost and administrative burdens that far exceed
reasonable tax compliance. I believe it was Walt Kelly's
``Pogo'' who said those famous words, ``We have met the enemy
and he is us''. This is our responsibility and, unfortunately,
even with all the wisdom in the Appropriations Committee, we
don't write the tax code. Nevertheless, I firmly support a
comprehensive reform of the tax code based on simplicity and
reasonableness. This alone would result in substantially
reduced tax fraud by making the process simpler and the system
far fairer for all taxpayers.
Finally, I direct concerns to an area of particular
importance to me: the ongoing efforts of the IRS to modernize
the IRS computer system known as Business System Modernization
or BSM. The ultimate success of this system is critical to
collections. Historically, the IRS has long been dependent upon
antiquated computer systems to perform basic tax administration
activities. As a result, Congress created a special business
systems account to fund the replacement of these outdated
systems. Nevertheless, the cost for BSM is fast approaching $2
billion. The key feature of the modernization program and the
customer account data engine, with acronym being CADE, is
hampered by development problems and cost overruns while
remaining inadequate and ineffective. For example, the report
on Custodial Accounting Project, CAP, showed that it was
significantly behind schedule and over budget. This system was
designed to correct longstanding weaknesses in the IRS
financial management systems, which account for approximately
$2 trillion in tax collections annually. Additionally, TIGTA
found the IRS and CAP contractor did not adequately manage
system requirements. In another example, TIGTA reported that
the security audit system used to record the online activity of
IRS employees through audit trails was accepted by IRS even
though the required functions the IRS paid for were not
operating. The bottom line is that scheduling and cost
estimation have been a big problem. Almost every system is
behind schedule and over cost and is delivering less
functionality than originally planned.
Commissioner, your budget request is $199 million for BSM.
I'm not convinced this system works adequately, but ultimately
the IT system is the heart of the entire collection and
compliance system. BSM must be fixed and must be made workable
to establish clearer requirements and benchmarks for its
progress. As I understand it, the system was supposed to be
completed in 10 years. I don't believe anyone believes this
schedule is now achievable as schedule delays and cost over-
runs continue to rule--this is not the exception in this
ongoing effort: schedule slippages and cost over-runs have been
epidemic and, in fact, I believe the IRS is running late and is
over-budget on all seven core projects related to BSM. I'm
concerned BSM is becoming the 21st century version of the TSM
program which was the IRS's prior modernization effort that was
abandoned after 6 years and $4 billion. TSM was a total loss.
The current BSM effort began in 1998 and has already cost $2
billion. This program, like TSM before it, raises more
questions than answers.
PREPARED STATEMENT
Commissioner, I support your efforts in enforcement and
closing the tax gap. I applaud your efforts but an effective
BSM is critical. I'm looking forward to working with you and
the IRS on these efforts. I also applaud your commitment on
addressing the funding, schedule, and requirement needs of the
BSM. I thank you for coming to testify today and I look forward
to your testimony and the testimony of Mr. George on the many
challenges confronting the IRS in the 21st century. It's now my
pleasure to turn to my ranking member, Senator Murray.
[The statement follows:]
Prepared Statement of Senator Christopher S. Bond
The Senate Appropriations Subcommittee on Transportation, Treasury,
the Judiciary, Housing and Urban Development and Related Agencies will
come to order. We welcome Internal Revenue Service Commissioner Mark
Everson and J. Russell George, the Treasury Inspector General for Tax
Administration, to this morning's hearing. I look forward to hearing
each of your views on the IRS's fiscal year 2006 budget as well as
issues related to the administration and enforcement of our Nation's
tax code.
With the April 15 tax filing season deadline rapidly approaching,
we are especially looking forward to Commissioner Everson's testimony
on the current state of the IRS and how the Service is responding not
only to taxpayers' needs but what has become popularly described as the
``Tax Gap''; namely, what taxes should be paid and what taxes are
actually paid. We also are looking forward to the IG's perspective on
the strengths and weakness of the IRS's capacity to effectively collect
taxes.
As I understand the budget request for fiscal year 2006, the IRS is
making renewed efforts to reduce the tax gap through an increased
investment in enforcement funding. I understand and support these
efforts. Closing this gap is especially important as the Federal
Government seeks to reduce the deficit and reform social security.
In particular, the IRS is proposing to close this gap by increasing
the Nation's investment in enforcement by proposing an 8 percent
increase in enforcement. Moreover, the budget proposes that no less
than $6.446 billion be used exclusively for tax enforcement which would
result in an additional $446.5 billion in contingent funding for
appropriations. The use of this budget mechanism is justified because
the government collects $4 for every $1 dollar spent for enforcement.
While I am not convinced of the arithmetic, I am convinced that
additional enforcement spending will result in additional collections
to a point. This is true despite the fact that the strength and
weakness of our Nation's Federal income tax system is its reliance on
the voluntary compliance of American taxpayers. Most Americans believe
in the law and pay their taxes. Nevertheless, there will always be some
that fail to comply or engage in outright fraud. This is the IRS's
greatest managerial challenge and the IRS should have the resources.
That is why effective enforcement of our tax laws is so critically
important, and why I support an increase in the funding of enforcement
efforts. Enforcement cannot be lax, ineffective, or uneven; otherwise
more people will be encouraged to commit fraud. We must ensure
enforcement funds are used for enforcement and not other priorities. I
am disappointed that the subcommittee does not get adequate credit and
savings for its investment in enforcement, especially since the
administration has proposed underfunding of so many other parts of our
bill.
The primary mission of the IRS is to ensure the full and fair
compliance of all U.S. taxpayers with their tax obligations. These
efforts cannot through enforcement and compliance solely. Consequently,
I am very troubled by the proposed 1 percent decrease in Taxpayer
Service funding. The IRS needs to balance customer service with its
compliance and enforcement efforts.
As a result, the IRS must provide high quality and in-depth
customer service to assist taxpayers, especially low-income taxpayers.
I believe that most people who fail to comply with the code do so
unintentionally because of its difficulty and complexity. Accurate and
timely guidance from the Service is imperative to ensuring taxpayer
compliance.
Nevertheless, while I remain concerned about the proposed
reductions in customer service, the IRS has improved its customer
service and guidance over the past few years. I especially am impressed
over improvements through the internet, telephone and in-person
assistance. E-file options have become especially important, helping to
reduce the burden of filing tax returns for both the government and the
taxpayer.
Unfortunately, the biggest hurdle facing taxpayers and the IRS is
the Federal tax code, its regulations and other guidance, which has
morphed to more than 54,000 pages--this is too complex, confusing, and
costly. On an almost daily basis, I hear complaints from small tax
practitioners and businesses that the Code has become unmanageable and
confusing, resulting in excessive cost and administrative burdens that
far exceed reasonable tax compliance. I firmly support a comprehensive
reform of the tax code that is founded in simplicity and
reasonableness. This alone would result in substantially reduced tax
fraud by making the process simpler and the system far fairer for all
taxpayers.
Finally, I'd like to direct my concerns to an area of particular
importance to me: the ongoing efforts of the IRS to modernize the IRS
computer systems, known as Business Systems Modernization (BSM). The
ultimate success of this system is critical to collections.
Historically, the IRS has been long dependent upon antiquated
computer systems to perform basic tax administration activities. As a
result, Congress created a special business systems modernization
account to fund the replacement of these outdated systems.
Nevertheless, the cost for the BSM program is fast approaching $2
billion. The key feature of the modernization program, Customer Account
Data Engine (CADE), is hampered by delays in development and cost
overruns while remaining inadequate and ineffective.
For example, TIGTA's report on the Custodial Accounting Project
(CAP) showed that it was significantly behind schedule and over budget.
This system was designed to correct longstanding weaknesses in the IRS
financial management systems systems, which account for approximately
$2 trillion in tax collections annually. Additionally, TIGTA found the
IRS and the CAP contractor did not adequately manage system
requirements. In another example, TIGTA reported that the system
(Security Audit and Analysis System) used to record the online activity
of IRS employees through audit trails which was accepted by IRS even
though the required functions IRS paid for were not operating.
The bottom line is that scheduling and cost estimation have been a
very big problem for IRS. Almost every system is behind schedule, over
cost, and is delivering less functionality than originally planned.
Mr. Commissioner, your budget request seeks $199 million for BSM. I
am not convinced this system works, but ultimately the IT system is the
heart of the entire collection and compliance system. BSM must be
fixed. IRS needs to establish clear requirements and benchmarks for
progress. As I understand it, this system was supposed to be completed
in 10 years. I do not believe that anyone believes this schedule is now
achievable and schedule delays and cost overruns continue to be the
rule--not the exception--to this ongoing effort. These schedule
slippages and cost-overruns have been epidemic. In fact, I believe the
IRS is running late and is over budget on all seven core projects
related to BSM.
I am very concerned that BSM is becoming the 21st century version
of the Tax Systems Modernization (TSM) program, which was the IRS's
prior modernization effort that was abandoned after consuming 6 years
and $4 billion in Federal tax dollars. That effort was a complete loss.
The current BSM effort began in 1998 and has already cost almost $2
billion. This program, like TSM before it, raises more questions than
answers.
Commissioner Everson, I support your efforts in enforcement and
closing the tax gap. I applaud your efforts. However, an effective BSM
is critical to these efforts. I am looking forward to working with you
on these efforts. However, I also am looking to your commitment on
addressing the funding, schedule and requirement needs of the BSM.
I thank you again coming to testify before the subcommittee this
morning. I look forward to your testimony and the testimony of Mr.
George on the many challenges confronting the IRS in the 21st century.
I now turn to my Ranking Member, Senator Murray.
STATEMENT OF SENATOR PATTY MURRAY
Senator Murray. Thank you very much. Mr. Chairman, I want
to welcome back IRS Commissioner Everson and I want to welcome
Russell George who is our new Treasury Inspector General for
Tax Administration testifying before this subcommittee for the
first time. In 8 days, millions of Americans who play by the
rules will go to the post office to file their tax returns.
These honest taxpayers should be appalled by the IRS's findings
released last week that reveal that the agency will fail to
collect between a quarter and a third of a trillion dollars
it's owed this year because of tax cheats. That figure is the
equivalent of the amount we spent on the entire Department of
Defense a couple of years ago. It represents roughly $1 out of
every $5 that is owed by American taxpayers.
According to the IRS, the majority of these unpaid taxes
take the form of unreported income by businesses, partnerships,
estates, and so-called S corporations. Thankfully, the IRS now
recognizes they need to get serious with tax cheats. The agency
is asking for almost an 8 percent increase for tax law
enforcement and a budget that is extremely frugal when it comes
to other areas of domestic spending.
While some Senators have expressed concern that boosting
IRS's enforcement budget could cost the agency to return to its
troubled past when IRS agents used excessive force to harass
taxpayers, I want to believe the agency has learned from its
past mistakes and would use this funding boost to go after the
real criminals. But what troubles me about this proposed IRS
budget is the lack of balance between the desire to boost
enforcement and the need to fund critical services to
taxpayers. A detailed review of the budget request for the IRS
shows that buried within the overall funding increase for the
agency is almost a quarter billion dollars in anticipated cuts
in current activities. Most disappointing is that the majority
of those cuts come in the form of cuts in direct taxpayer
services. Proposals to achieve these cuts include closing as
many as one out of every four taxpayer assistance centers in
the United States. The IRS wants to eliminate phone filing, a
tool currently used by more than 5 million individuals and
business every year. Other proposed cuts in taxpayer services
include shortening phone service hours, discontinuing tax law
assistance through the internet, limiting distribution of some
outreach publications and face-to-face contacts with
practitioners, and eliminating phone-routing sites and
staffing.
In last year's hearing, the commissioner shared with us his
motto that ``service plus enforcement equals compliance''. That
motto is also prominently featured in his testimony this year.
However, I fear a review of the budget request might indicate
the motto should more appropriately be ``only enforcement
yields compliance so let's cut services to pay for it''. I
believe that service to taxpayers is still a critical mission
of the IRS and I know I'm not alone in believing this. While a
recent IRS Oversight Board Taxpayer Attitude Survey found that
62 percent of taxpayers thought the IRS should get more money
for enforcement, 64 percent of taxpayers said the IRS should
get more money to assist taxpayers on the phone and in person.
But it's precisely those types of services that the IRS wants
to cut.
PREPARED STATEMENT
Now, while she's not appearing before us today, I have
reviewed the submitted testimony of the Taxpayer Advocate, Nina
Olson. The Office of the Taxpayer Advocate was created by
Congress so there would be staffed professionals with access to
the commissioner to constantly look out for the interests of
individual taxpayers as the IRS develops his processes and
procedures. The Advocate is also charged with assisting
taxpayers in resolving problems with the IRS and communicating
the interests of taxpayers directly to Congress. According to
Ms. Olson, closing taxpayer assistance centers at this time
will irrevocably harm taxpayers. She points out that the IRS
has not offered alternatives to the face-to-face interaction of
these centers. It seems the only face-to-face alternative left
is for affected taxpayers to drive much farther to another
center. Especially because the IRS is moving so quickly on
these new proposals, I would like to use a portion of today's
hearing to discuss in detail precisely what the impact will be
on individual taxpayers resulting from IRS-proposed cuts, as
called for in the administration's budget. The tax code is
complicated enough without our cutting back on the level of
assistance our citizens have come to expect as they seek to
file the taxes accurately and on time. Thank you very much, Mr.
Chairman.
[The statement follows:]
Prepared Statement of Senator Patty Murray
Thank you, Mr. Chairman.
I want to welcome back IRS Commissioner Everson. I also want to
welcome Russell George, our new Treasury Inspector General for Tax
Administration, who is testifying before us for the first time.
In 8 days, millions of Americans who play by the rules will go to
the post office to file their tax returns. These honest taxpayers
should be appalled by the IRS's findings, released last week, that
reveal that the agency will fail to collect between a quarter and a
third of a trillion dollars it is owed this year because of tax cheats.
That figure is the equivalent of the amount we spent on the entire
Department of Defense a couple of years ago. It represents roughly $1
out of every $5 that is owed by American taxpayers.
According to the IRS, the majority of these unpaid taxes take the
form of unreported income by businesses, partnerships, estates, and so-
called ``S-corporations.''
Thankfully, the IRS now recognizes that they need to get serious
with tax cheats. The agency is asking for almost an 8 percent increase
for tax law enforcement in a budget that is extremely frugal when it
comes to other areas of domestic spending.
While some Senators have expressed concern that boosting IRS's
enforcement budget could cause the agency to return to its troubled
past, when IRS agents used excessive efforts to harass taxpayers, I
want to believe that the agency has learned from its past mistakes and
would use this funding boost to go after the real criminals.
What troubles me about this proposed IRS budget is the lack of
balance between the desire to boost enforcement and the need to fund
critical services to taxpayers. A detailed review of the budget request
for the IRS reveals that buried within the overall funding increase for
the agency is almost a quarter billion dollars in anticipated cuts in
current activities.
Most disappointing is that the majority of those cuts come in the
form of cuts in direct taxpayer services. Proposals to achieve these
cuts include closing as many as one out of every four Taxpayer
Assistance Centers in the United States.
The IRS wants to eliminate phone filing, a tool currently used by
more than 5 million individuals and businesses every year. Other
proposed cuts in taxpayer services include:
--shortening phone service hours;
--discontinuing tax law assistance through the Internet;
--limiting distribution of some outreach publications and face-to-
face contact with practitioners; and,
--eliminating phone-routing sites and staffing.
In last year's hearing, the Commissioner shared with us his motto
that, ``Service Plus Enforcement Equals Compliance.'' That motto is
also prominently featured in his testimony this year. However, I fear a
review of the IRS's budget request might indicate that the motto should
more appropriately be: ``Only Enforcement Yields Compliance--So Let's
Cut Services to Pay For It.''
I believe that service to taxpayers is still a critical mission of
the IRS--and I know I am not alone in believing this. While a recent
IRS Oversight Board Taxpayer Attitude Survey found that 62 percent of
taxpayers thought that the IRS should get more money for enforcement,
64 percent of taxpayers said that the IRS should get more money to
assist taxpayers on the phone and in person.
But it is precisely those types of services that the IRS wants to
cut.
Now, while she is not appearing before us today, I have reviewed
the submitted testimony of the Taxpayer Advocate, Nina Olson. The
Office of the Taxpayer Advocate was created by Congress so that there
would be staffed professionals with access to the Commissioner to
constantly look out for the interests of individual taxpayers as the
IRS develops its processes and procedures.
The Advocate is also charged with assisting taxpayers in resolving
problems with the IRS and communicating the interest of taxpayers
directly to Congress.
According to Ms. Olson, ``closing Taxpayer Assistance Centers at
this time will irrevocably harm taxpayers.'' She points out that the
IRS has not offered alternatives to the face-to-face interaction of
these centers. It seems the only face-to-face alternative left is for
affected taxpayers to drive much farther to another center.
Especially because the IRS is moving so quickly on these new
proposals, I would like to use a portion of today's hearing to discuss
in detail precisely what the impact will be on individual taxpayers
resulting from IRS-proposed cuts, as called for in the administration's
budget.
The tax code is complicated enough without our cutting back on the
level of assistance our citizens have come to expect as they seek to
file their taxes accurately and on time.
Thank you, Mr. Chairman.
Senator Bond. Thank you very much, Senator Murray. Senator
Dorgan, do you have a brief opening statement?
STATEMENT OF SENATOR BYRON L. DORGAN
Senator Dorgan. Mr. Chairman, first of all, thank you for
holding this hearing. I think recent announcements about the
size of the tax gap should cause all of us great concern. It's
something I want to visit with the IRS officials about. Also,
the issues of taxpayer assistance, I assume my colleague was
just discussing that as I walked in. Let me defer and hear from
the commissioner and then I will ask some questions.
Senator Bond. Thank you very much, Senator Dorgan, and
Commissioner Everson, we're making your full statement part of
the record and I believe you have provided a summary. We invite
you to give that now. Thank you.
STATEMENT OF MARK W. EVERSON
Mr. Everson. Chairman Bond, Ranking Member Murray, Senator
Dorgan, I'm happy to be here. I appreciate the opportunity to
testify on the President's request.
The President's 2006 request for the IRS is crafted to
continue the necessary rebuilding of our enforcement
capabilities, and it maintains a stable commitment to our
important IT modernization program. Enforcement and
modernization were categorized earlier this year by the GAO as
high risk areas of government-wide importance. The 2006 budget
request calls for a modest amount of belt-tightening in
taxpayer services. The cut to services of 1 percent is
consistent with the requests for domestic discretionary
programs other than those associated with homeland security. In
a report issued last year, the GAO stated, ``Taxpayer services
are much improved, raising a question about the appropriate
balance to strike between investing in further service
improvements and enforcement. At the same time, the use of
IRS's walk-in assistance sites is declining. The improvements
in telephone service, increased web site use, and the
availability of volunteer sites raise a question about whether
the IRS should continue to operate as many walk-in sites.
Reconsidering the level and types of services is an option--but
not a recommendation--to be considered by IRS management and
the Congress.''
[The information follows:]
GAO's Comments on Walk-In Assistance
``. . . the use of IRS's walk-in assistance sites is declining. The
improvements in telephone service, increased Web site use, and the
availability of volunteer sites raise a question about whether IRS
should continue to operate as many walk-in sites. Reconsidering the
level and types of service is an option--but not a recommendation--to
be considered by IRS management and the Congress.''--Statement of James
R. White, Director, Tax Issues.
PRESIDENT'S BUDGET REQUEST
The President's request for the IRS adopts just this
approach. I am comfortable with this request and support it
wholeheartedly. I want to stress to you, Senator Murray, that I
believe that we will provide good services. If enacted at the
requested level without constraining language, we will continue
to do our job on the service front.
The budget will hold Business System Modernization funding
steady at substantially the same level as 2005. In terms of
modernizing our big computer systems at the IRS, after years of
cost over-runs and missed delivery dates, we've finally turned
the corner. In the past 9 months, two important systems have
come on-line. We have a new financial system to help better
manage the agency, and more importantly, this filing season the
IRS has already processed over 1 million 1040EZ tax returns
using the first new processing system in 40 years. The 2006
budget continues investment in three critical areas: further
work on return processing, collections, and electronic filing.
ENFORCEMENT FUNDING
Let me turn to the need for more enforcement funding.
As you mentioned, 2 weeks ago we announced that the gross
tax gap--that's the difference between what taxpayers should
pay and what they actually pay on a timely basis--exceeds $300
billion per year. Average Americans pay their taxes honestly
and accurately and have every right to be confident that when
they do so, neighbors and competitors are doing the same. We've
taken some important steps to bolster this confidence.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
AUDIT RATES
We have ramped up our audits of individuals. You can see
they've gone from 618,000, 4 years ago to over 1 million last
year, and they will go up again in 2005. We've done this
particularly for high-income individuals. You can see they've
doubled from $192,000, pardon me, $92,000 to $195,000 over the
same period, and they're going to go up again in a double-digit
increase for 2005.
We are doing more with corporations and we're doing more
with criminal investigations. This next chart shows the
referrals we've made to the Justice Department, which have come
up significantly in the last several years. We recently
announced collections of over $3.2 billion in the settlement
initiative for Son of Boss, a particularly abusive shelter.
The 2006 budget calls for nearly 8 percent increase for
enforcement. This will enable us to expand our efforts over
strategic compliance by corporations, individual taxpayers, and
other contributors to the tax gap; ensure that attorneys,
accountants, and other tax practitioners adhere to professional
standards and follow the law; detect and deter domestic and
off-shore based tax and financial criminal activity; and, deter
abuse within tax-exempt and governmental entities and misuse of
such entities by third parties for tax evasion or other
unintended purposes. It's a very important subject that was the
subject of an inquiry by the Finance Committee just 2 days ago.
These investments will pay for themselves several times
over. The IRS yields more than $4 in direct revenue from its
enforcement efforts for the money invested in its total budget,
including our service and outreach activities. That's to say,
the $43 billion in enforcement revenue compares to the $10.2
billion we are appropriated. The $10.2 billion includes
everything we do, not just the enforcement, but the processing
and the outreach, all those activities.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
ENFORCEMENT REVENUE
Now, last year, the $43 billion, that represented a 15
percent increase from the year before, so you can see that is
coming up. That is a result of all the other things you saw. I
want to emphasize that these figures exclude the positive
impact on compliance that occurs when someone learns in a
casual conversation that their neighbor has been audited and
then thinks twice about fudging his or her own return. So this
is just the direct return.
Let me make one additional point that the chairman has
touched upon about enforcement.
The President's budget calls for the Congress to adjust its
302(a) allocation to the Appropriations Committee up to $446
million, once the base level of $6.4 billion for IRS
enforcement is fully funded and restricted for use only on IRS
enforcement. The $446 million consists of $265 million for new
enforcement initiatives and $182 million for maintaining
current enforcement levels.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
BUDGET RESOLUTION
The Senate Budget Resolution contains language which would
allow this proposal to proceed. The House Resolution does not.
I urge you to see the Senate position maintained during the
conference. This proposal will allow the IRS to devote
resources where needed: in enforcement. Thank you.
[The statement follows:]
Prepared Statement of Mark W. Everson
INTRODUCTION
Chairman Bond, Ranking Member Murray, and members of the
subcommittee, thank you for the opportunity to testify today on the
fiscal year 2006 budget request for the Internal Revenue Service.
Our working equation at the IRS is service plus enforcement equals
compliance. The better we serve the taxpayer, and the better we enforce
the law, the more likely the taxpayer will pay the taxes he or she
owes.
This is not an issue of service OR enforcement, but service AND
enforcement. As you know, IRS service lagged in the 1990's. In
response, we took important and necessary steps to upgrade service--we
significantly improved the answering of taxpayer telephone inquiries
and electronic filing to name just a couple areas.
Unfortunately, improvement in service coincided with a drop in
enforcement of the tax law. After 1996, the number of IRS revenue
agents, officers, and criminal investigators dropped by over 25
percent.
TAX GAP
We currently have a serious tax gap--the difference between what
taxpayers are supposed to pay and what is actually paid--in this
country. The results of the National Research Program indicate the
Nation's tax gap increased slightly to between $312 billion and $353
billion in tax year 2001. This compares to the old tax gap estimate for
2001 of $311 billion based on earlier studies. By our best estimates,
we lose almost $300 billion each year due to non-filing,
underreporting, and underpayment, although this number reflects the
fact that we do eventually recover about $55 billion of the gross tax
gap.
We launched the National Research Program (NRP) in 2001. We
designed the NRP to measure individual taxpayer reporting compliance
for tax year 2001. Over the course of the next 3 years, we randomly
selected about 46,000 returns for review and examination. We largely
completed these audits by the fall of 2004. To gather statistically
valid data, the return selection process for the NRP included an
oversampling of high income returns. This enables IRS researchers to
draw valid conclusions about important sub-categories of taxpayers.
For instance, slightly more than 6 percent of individual taxpayers
filed Schedule C as sole proprietors in 2001. These taxpayers reflect a
wide range of economic activity. To draw valid conclusions on Schedule
C filers, the NRP examined about 21,000 individuals who filed a
Schedule C, slightly less than 46 percent of the total sample.
The current data from the NRP are preliminary, so the results are
shown as ranges. As refinements are made to the tax gap analysis, some
of these estimates may change. It is unlikely, but possible, that the
final estimates of the tax gap will fall outside of the established
range.
The tax gap figure does not include taxes that should have been
paid on income from the illegal sector of the economy.
For Tax Year 2001, all taxpayers paid $1.77 trillion on time, a
figure that represents from 83.4 percent to 85 percent of the total
amount due. The 2001 tax gap, the difference between taxes owed and
taxes paid on time is from $312 billion to $353 billion for all types
of taxes.
Overall, the noncompliance rate is from 15 percent to 16.6 percent
of the true tax liability. The old estimate, derived from compliance
data for Tax Year 1988 and earlier, was 14.9 percent.
Late payments and other IRS enforcement and compliance efforts,
including taxpayer audits and collection activities (payment
arrangements, liens, levies and other legal actions) recover some of
the Tax Gap. For Tax Year 2001, we expect eventually to collect an
additional $55 billion of the tax gap, reducing the net amount of the
tax gap to between $257 billion and $298 billion.
Among the areas where taxpayer compliance appears to have worsened
are:
--Reporting of net income from flow-through entities, such as
partnerships and S corporations;
--Reporting of proprietor income and expenses, such as gross
receipts, bad debts and vehicle expenses; and,
--Reporting of various types of deductions.
Among the areas where compliance seems to have improved is the
reporting of farm income.
Overall, compliance is highest where there is information reporting
and/or withholding. For example, most wages, salaries and tip
compensation are reported by employers to the IRS through Form W-2.
Preliminary findings from the NRP indicate that less than 1.5 percent
of this type of income is misreported on individual returns.
IRS researchers anticipate identifying other specific areas of
deterioration and improvement in the coming months as they complete the
detailed analysis of the study's data.
Today I will give you an update on what we've accomplished over the
past year, speaking in particular about enforcement, the area where our
challenges remain the greatest. We must restore the balance between
service and enforcement, but that will not come at the expense of
taxpayer service. In recent years, we have begun to attack the decline
in enforcement by revitalizing our investigations, audits and
prosecutions against those who do not pay their taxes. The President's
fiscal year 2006 budget--if approved by Congress--will help with our
efforts to boost enforcement while maintaining our levels of service.
This budget includes $265 million for initiatives aimed at enhancing
the enforcement of tax laws.
Before I talk specifically about our fiscal year 2006 budget
request, let me first talk about our progress in service. By service,
we mean helping people understand their tax obligations and making it
easier for them to participate in the tax system.
Electronic filing continues to grow. Last year Americans filed over
61 million electronic returns. This year we expect that over half of
all individual returns will be e-filed. Thus, it appears that
individuals who file on paper will soon be in the minority. We take
every opportunity we can to proclaim the benefits of electronic filing,
including a reduction in processing errors and cost savings for
taxpayers and the IRS. E-filing is fast, convenient and gets your
refund to you in half the time of paper returns.
Use of our website, IRS.gov, is also up sharply. During the filing
season, it is one of the busiest websites in the world. We average more
than 1 million visits a day. Just to give you a frame of reference: one
major search engine reported that in a recent week we were surpassed
only by Paris Hilton, Clay Aiken, Pamela Anderson, Britney Spears, and
a poker game. During the past year, we have also rolled out important
new on-line services to tax professionals to help them better serve
their clients.
In terms of modernizing our big computer systems at the IRS, we've
finally turned the corner. Since March 2004, two important systems have
started operating. First, we have a new financial system to help better
manage the agency. And secondly, and more importantly, for the first
time in 40 years, the IRS is processing tax returns on a new computer
system. We started with 1040EZ returns and have processed over 1
million as of April 4. This is a big step forward in our effort to
modernize our antiquated computer systems.
CONTINUING SERVICE AND INCREASING ENFORCEMENT
We are quite aware of the need to operate efficiently, consolidate
operations and drive down costs wherever we can. In today's fiscal
environment, we recognize that resources are tight. Nevertheless, we
are determined to do all we can to improve service and modernize the
IRS. In the last several years, we have begun to arrest the decline in
enforcement and stabilize IRS enforcement staffing; now 73 percent of
taxpayers completely agree that it is every American's duty to pay
their fair share of taxes, up from 68 percent in 2003. A 2004 IRS
Oversight Board commissioned NOP World study revealed 79 percent of
taxpayers believe it is very important for the IRS to enforce
compliance from high-income individuals and 85 percent believe it is
very important for the IRS to enforce compliance from corporations. But
in order to continue to reverse the downward trend of compliance, we
must continue to use our resources wisely.
We are working aggressively to improve productivity and achieve
cost savings, which we will apply to other priority areas, such as
enforcement. The fiscal year 2006 budget reduction initiatives focus
mainly on targeted reductions in assistance, outreach, and processing
program areas. Reductions will also be achieved through improved
efficiencies and re-engineering of business processes in key program
areas in accounts management, submission processing, media and
publications, field assistance, and outreach and education.
Approximately 65 percent of these reductions will occur in assistance,
20 percent in outreach and 15 percent in processing. We will minimize
the impact on taxpayers by providing alternative means to obtain
service, wherever possible. Our budget estimates all these taxpayer
service reengineering initiatives will yield $134 million in savings we
can reinvest in other program areas. The reductions represent a
balanced approach in program delivery and service to taxpayers to
enable them to meet their tax obligations.
We estimate savings of $75 million to $95 million from additional
efficiencies in our field assistance, accounts management and toll-free
telephone operations. We will achieve these savings, in part, because
of our recent consolidation our Customer Accounts Service organizations
and revamping our business processes. For example, due to the steady
decline in taxpayers corresponding with us about their accounts, we
will need fewer resources to manage these accounts. We are also
adjusting the hours of our toll-free telephone operations from 15 to 12
hours daily, Monday through Friday in the local times zones, beginning
in 2005. We expect minimal impact to our level of service for taxpayers
who call us. Another portion of these savings will come from reducing
the number of walk-in sites. In recent years, the number of taxpayers
walking into a Taxpayer Assistance Center (TAC) site for assistance has
decreased from a high of nearly 10 million contacts in fiscal year 2000
to about 7.7 million contacts in fiscal year 2004. This trend reflects
the increased availability and quality of services that do not require
travel or waiting in line. Examples include improved access to IRS
telephone service, the increasing availability of volunteer assistance,
and the many services now available through IRS.gov, such as ``Free
File'' and ``Where's My Refund.'' In addition, the ability to download
forms online has also contributed to the decline in the number of
customers walking into a TAC. We have also continued to improve our
telephone service for taxpayers who call the IRS with questions. The
use of other alternatives, such as volunteer return assistance at
Volunteer Income Tax Assistance (VITA) sites and Tax Counseling for the
Elderly (TCE) sites, has steadily increased while the number of TAC
contacts decreased. In fiscal year 1999, for example, VITA sites filed
almost 584,000 returns, and TCE sites filed 446,000 returns. In the
next 5 years, the numbers of returns filed through these sites
increased 88 percent, reaching 976,000 VITA returns and 958,000 TCE
returns in fiscal year 2004.
Because of these other options, fewer taxpayers need to travel to
an IRS office to get the services they need. There are currently about
400 TAC sites across the country which are serviced by approximately
2,300 TAC employees. We believe that adjusting the TAC sites to more
closely align to this decreased walk-in volume will yield staffing and
building cost savings of $45 million to $55 million of the $75 million
to $95 million in savings, and allow us the flexibility to improve
efficiencies and concentrate more on front-line enforcement.
We have developed a criteria model that measures the impact on
taxpayers across the country. The criteria include: location, employee
cost, facilities cost, workload, and demographic measurements. In
anticipation of the closing of approximately 70 TACs and their
employees, we have requested authority to offer early-outs and buy-outs
to all eligible IRS TAC personnel. We expect to have further
announcements in the near future.
In addition to reducing the number of TAC sites, we will save $20
million to $31 million in outreach programs though reductions in
printing and postage and additional efficiencies in our outreach
organizations. For example, we will save more money in printing and
postage as taxpayers shift to e-filing, and as we eliminate redundant
services and publications.
We will save another $17 million to $23 million by retiring
Telefile, implementing program enhancements in the processing of
employment tax returns, and re-engineering processes in Submission
Processing. We will redirect taxpayers who previously used Telefile to
e-file alternatives, such as Free File, that are available through
IRS.gov so we maintain an acceptable level of service.
Though we are re-engineering how we provide service, we will
continually strive to improve service to taxpayers. Having stated this,
I must address the fundamental issue of enforcement.
While the President's Budget Request to Congress would increase IRS
enforcement activities by 7.8 percent, given the current budgetary
constraints, we responsibly proposed to reduce spending in other areas
throughout the Service. We are confronted with difficult choices.
Average Americans pay their taxes honestly and accurately, and have
every right to be confident that when they do so, their neighbors and
competitors are doing the same. Let me provide an overview of the steps
we have taken over the past year to bolster this confidence, turning
briefly to each of our four service-wide enforcement priorities.
Our first enforcement priority is to discourage and deter non-
compliance, with emphasis on corrosive activity by corporations, high-
income individuals, and other contributors to the tax gap.
--In 2004, audits of high-income taxpayers jumped 40 percent from the
year before. We audited almost 200,000 high-income individuals
last year--double the number from 2000.
--Overall, audits for individuals exceeded the 1 million mark last
year, up from 618,000 4 years earlier.
--In 2004, the number of audits of the largest businesses--those with
assets of $10 million or more--finally increased after years of
decline.
The centerpiece of our enforcement strategy is combating abusive
tax shelters, both for corporations and high-income individuals. I will
touch upon two important initiatives of the past 12 months.
We have continued our program of settlement offers for those who
entered into abusive transactions in the past but would like to get
their problems behind them. Last May, we made a settlement offer
regarding the Son of Boss tax shelter, a particularly abusive
transaction used by wealthy individuals to eliminate taxes on large
gains, often in the tens of millions of dollars. In this program, for
the first time, the IRS required a total concession by the taxpayer of
artificial losses claimed. I am pleased with the response to the offer.
So far, $3.2 billion in taxes, interest and penalties have been
collected from the 1,165 taxpayers who are participating in the
settlement initiative. The typical taxpayer payment was almost $1
million, with 18 taxpayers paying more than $20 million each and one
paying over $100 million. Processing of individual settlements
continues.
Based on disclosures we have received from promoter investigations
and from investor lists from Justice Department litigation, we have
determined that just over 1,800 people participated in Son of Boss.
When the project concludes in the coming months, we expect the
collected figure should top $3.5 billion.
In February 2005, we announced a second important settlement
initiative--this one involving executive stock options. This abusive
tax transaction involved the transfer of stock options or restricted
stock to family-controlled entities. These deals were done for the
personal benefit of executives, sometimes at the expense of public
shareholders. This shelter was not just a matter of tax avoidance but,
in some instances, raises basic questions about corporate governance.
Again, the settlement offer is a tough one: full payment of the taxes
plus a penalty.
A noteworthy point about the stock option settlement offer is that
our actions in this matter were closely coordinated with the Securities
and Exchange Commission and the Public Company Accounting Oversight
Board.
Our settlement initiatives and increased audits have sent a signal
to taxpayers: the playing field is no longer as lopsided as it once
was. Non-compliant taxpayers might have to pay the entire tax,
interest, and a stiff penalty. A taxpayer might have to wrestle with
questions like ``how much am I going to have to pay the lawyers and
expert witnesses to litigate this thing?'' Moreover, going to court is
a public matter. Damage to one's reputation is a potential factor. Many
wealthy individuals, otherwise seen as community leaders, may not want
to be identified as paying less than their fair share in taxes.
Another example of cooperation in the battle against abusive
shelters is in the international arena. A year ago, I announced the
formation of what has come to be known as the Joint International Tax
Shelter Information Centre. Since last Labor Day, we have had an
operational task force of personnel from Australia, Canada, the United
Kingdom, and the United States working together on-site here in
Washington. We are exchanging information about specific abusive
transactions. Results to date are promising. Thus far, we have
uncovered a number of transactions which, but for the Centre, we would
have unraveled only over a number of years, if ever. It makes sense
that we continue to work with other countries because, in this
increasingly global world, we are up against what is, in essence, a
reinforcing commercial network of largely stateless accounting firms,
law firms, investment banks, and brokerage houses.
The government stepped up its use of civil injunctions in 2001 to
prohibit promoters from selling illegal tax schemes on the Internet, at
seminars or through other means. Currently the courts have issued
injunctions against 99 abusive scheme promoters--81 permanent
injunctions and 18 preliminary injunctions. They have issued
injunctions against 17 abusive return preparers--all permanent
injunctions. And an additional 49 suits have been filed by Justice
seeking injunction action--28 against scheme promoters and 21 against
return preparers. Injunctions issued have involved schemes such as:
--Using abusive trusts to shift assets out of a taxpayer's name while
retaining control;
--Misusing ``corporation sole'' laws to establish phony religious
organizations;
--Using frivolous ``Section 861'' arguments to evade employment
taxes;
--Claiming personal housing and living expenses as business expenses;
--Filing tax returns reporting ``zero income''; and,
--Misusing the Disabled Access Credit.
The IRS has another 1,000 investigations ongoing for possible
referral to the Department of Justice; and individual examinations are
being conducted on thousands of scheme participants. Most of the
investigations and examinations are being conducted by the IRS Small
Business/Self-Employed (SB/SE) Division.
Our second enforcement priority is to assure that attorneys,
accountants, and other tax practitioners adhere to professional
standards and follow the law.
Our system of tax administration depends upon the integrity of
practitioners. Altogether, there are approximately 1.2 million tax
practitioners. The vast majority of practitioners are conscientious and
honest, but even honest tax professionals suffered from the sad and
steep erosion of ethics in recent years by being subjected to untoward
competitive pressures. The tax shelter industry had a corrupting
influence on our legal and accounting professions.
We have done quite a bit since March 2004 to restore faith in the
work of tax professionals. We have strengthened regulations governing
the standards of tax practice to discourage the manufacturing of bogus
legal opinions on the validity of tax shelters. The IRS standards set
forth rules governing what does and does not qualify as an independent
opinion about a tax shelter.
Last year, the government won a series of court opinions on
privilege. The cases established that promoters who develop and market
generic tax shelters can no longer protect the identity of their
clients by hiding behind a false wall of privilege.
Abusive tax shelters often flourished because penalties were too
small. Some blue chip tax professionals actually weighed potential fees
from promoting shelters, but not following the law, against the risk of
IRS detection and the size of our penalties. Clearly, the penalties
were too low. They were no more than a speed bump on a single-minded
road to professional riches.
But these speed bumps have become speed traps. Last fall, Congress
enacted the American Jobs Creation Act. The legislation both created
new penalties and increased existing penalties for those who make false
statements or fail to properly disclose information on tax shelters.
Under the new law, the IRS can now impose monetary penalties not just
on tax professionals who violate standards, but also on their
employers, firms, or other entities if those parties knew, or should
have known, of the misconduct.
Our third enforcement objective is to detect and deter domestic and
off-shore based criminal tax activity and related financial criminal
activity.
Last year, the IRS referred more than 3,000 cases to the Justice
Department for possible criminal prosecution, nearly a 20 percent jump
over the previous year. We continue our active role in the President's
Corporate Fraud Task Force. We are going after promoters of tax
shelters--both civilly and, where warranted, criminally. This tactic is
a departure from the past. Previously, during a criminal investigation,
all civil activity came to a halt. The result was that our business
units were reluctant to refer matters for criminal investigation lest
they lose their traditional turf. But, we are now moving forward on
parallel tracks with the Department of Justice. We have a number of
important criminal investigations. The enforcement model is changing.
Our fourth enforcement priority is to discourage and deter
noncompliance within tax-exempt and government entities, and misuse of
such entities by third parties for tax avoidance purposes.
Consider, for example, certain credit counseling agencies.
Increasingly, it appears that some credit counseling organizations have
moved from their original purposes, that is, to counsel and educate
troubled debtors, to inappropriately enrolling debtors in proprietary
debt-management plans and credit-repair schemes for a fee. These
activities may be disadvantageous to the debtors and are not consistent
with the requirements for tax exemption. Further, a number of these
organizations appear to be rewarding their insiders by negotiating
service contracts with for-profit entities owned by related parties.
Many newer organizations appear to have been created as a result of
promoter activity.
Some shelter promoters join with tax-exempt organizations to create
abusive shelters. The organization receives a large fee from the
taxpayer who is taking advantage of its tax-free status. That is an
unintended abuse of the tax exemption that our Nation bestows upon
charities.
It is heartening to see leading members of the nonprofit community
taking steps to address abuses. I particularly want to salute the
Independent Sector--which recently delivered a constructive report to
the Senate Finance Committee. The report states that ``government
should ensure effective enforcement of the law'' and calls for tougher
rules for charities and foundations. The report calls for stronger
action by the IRS to hold accountable charities that do not supply
accurate and timely public information. I encourage the accounting,
legal, and business communities to be as enthusiastic about confronting
abuses and the erosion of professional ethics as the nonprofit
community. An interesting point to note is that the report supports
mandatory electronic filing of all tax returns for nonprofits.
The threat to the integrity of our Nation's charities is real and
growing. At the IRS, we take it very seriously. We are augmenting our
resources in the nonprofit area. By the end of September, we will have
increased the number of our personnel who audit tax-exempt
organizations by over 30 percent from 2 years earlier. If we do not act
expeditiously, there is a risk that Americans will lose faith in our
Nation's charitable organizations. If that happens, Americans will stop
giving and those in need will suffer.
As we move forward with these priorities, we will leverage our
success to achieve greater results within our fiscal year 2006 budget
request.
BUDGET RESTRUCTURE
To facilitate full alignment and integration of the Service's goals
and measures with its resources, we are proposing to restructure our
budget beginning in fiscal year 2006. These changes will facilitate a
more accurate assessment of the overall value of IRS programs, simplify
the full costing of programs, and allow the IRS to demonstrate
incremental increases in an initiative's effectiveness based on the
level of funding received.
In addition, this new budget structure will enable us to manage
activities more effectively. The normal processing of tax returns
generally proceeds from pre-filing activities to filing activities, and
finally to compliance activities, should they prove necessary. Although
these activities are interrelated, we currently distribute their
resources among three appropriations, with unevenly distributed support
costs. This system makes it difficult to manage, track, and report the
full cost of a given Taxpayer Service or Enforcement program.
This new budget structure will enable us to prepare a true
performance-based budget by providing the capability to integrate
operational and support costs into one appropriation, thereby allowing
us to cost budget activities and programs fully for the first time. The
new structure will also facilitate the full incorporation of
performance measures into the budget, as the measures could be tied to
funds in one appropriation rather than a series of program activities
dispersed across multiple appropriations. The proposed new budget
structure will allow stakeholders to assess more accurately the overall
value of IRS programs, and make program reviews, such as the Office of
Management and Budget's Program Assessment Rating Tool (PART), more
effective, thus providing greater accountability and results-oriented
management focus.
The proposed budget structure combines the three major
appropriations accounts--Processing, Assistance and Management (PAM);
Tax Law Enforcement (TLE); and Information Systems (ISY)--into one
appropriation called Tax Administration and Operations (TAO).
The Taxpayer Service and Enforcement programs of the TAO
appropriation are divided among eight critical program areas. These
budget activities focus on Assistance, Outreach, Processing,
Examination, Collection, Investigations, Regulatory Compliance, and
Research. Full funding for each activity will be reflected in the
budget, along with key performance measures. As we continue to move
toward the development and implementation of this new structure, we
will refine these program areas and the associated resource
distributions to provide more accurate costing.
Let me now provide more details on the budget request for the IRS.
president's fiscal year 2006 budget seeks increase in enforcement
The President's fiscal year 2006 budget requests $10.7 billion for
the IRS, a 4.3 percent increase over the fiscal year 2005 enacted
level. This request represents a 1 percent decrease in Taxpayer Service
and a 2 percent decrease in Business Systems Modernization (BSM), but
an 8 percent increase in enforcement.
This budget includes $265 million for initiatives aimed at
enhancing the enforcement of tax laws. This request is above the
increases to fund the pay raise and other cost adjustments ($182
million), for a total of $446 million for new enforcement investments
and cost increases. It is important the Congress fully fund these cost
increases and new enforcement investments. The President's budget
proposal to fund them as contingent appropriations reflects the
importance of this investment to the administration.
To ensure full funding of the new enforcement investments, the
budget proposes to employ a budget enforcement mechanism that allows
for an adjustment by the Budget Committees to the section 302(a)
allocation to the Appropriations Committees found in the concurrent
resolution on the budget. In addition, the administration will also
seek to establish statutory spending limits, as defined by section 251
of the Balanced Budget and Emergency Deficit Control Act of 1985, and
to adjust them for this purpose. To ensure full funding of the cost
increases, either of these adjustments would only be permissible if the
Congress funds the base level for IRS enforcement at $6.4 million and
restricts the use of the funds to the specified purpose. The maximum
allowable adjustment to the 302(a) allocation and/or the statutory
spending limit would be $446 million for 2006, bringing the total
enforcement level in the IRS to $6.9 million.
We will use the additional funds for enforcement in several key
ways to combat the tax gap. Combating tax non-compliance is a top
priority for us. Americans deserve to feel confident that when they pay
their taxes, their neighbors and competitors are doing the same. These
investments will yield substantial results.
The IRS yields more than $4 in direct revenue from its enforcement
efforts for every $1 invested in its total budget. In fiscal year 2004,
we brought in a record $43.1 billion in enforcement revenue--an
increase of $5.5 billion from the year before, or 15 percent. Beyond
the direct revenues generated by increasing audits, collection, and
criminal investigations, our enforcement efforts have a deterrent
effect on those who might be tempted to skirt their tax obligations.
The nearly 8 percent increase for enforcement activities in the
administration's 2006 IRS budget request will increase audits of
corporations and high-income individuals as well as expand collection
and criminal investigation efforts.
DETAILED BUDGET SUMMARY
Our fiscal year 2006 request of $10.7 billion includes a transfer
from the Justice Department of $53.913 million and 329 FTE for our
portion of the Interagency Crime and Drug Enforcement (ICDE)
appropriation, $277.6 million for a 2.3 percent pay raise and non-labor
inflationary costs, and $264.6 million for initiatives aimed at
enhancing our enforcement efforts. This request also includes a $22
million rent reduction to result from consolidation of space, and the
$134.1 million reduction to taxpayer service activities that we will
responsibly leverage through productivity improvements and program
reengineering, as previously discussed. We will take a balanced
approach to these targeted reductions.
In addition to the taxpayer service reengineering initiatives, we
also expect to continue to realize savings, which we reinvest to other
key areas, through the following other reengineering initiatives:
--Savings from Increased Individual Master File (IMF) E-Filing
(Reduction: -$7,700,000 and -190 FTE; Reinvestment: +$7,600,000
and +12 FTE).--This savings is based on processing efficiencies
from the projected decrease in IMF paper returns and processing
costs for electronically filed IMF returns in Submission
Processing Centers. These savings will be reinvested to enable
us to continue our consolidation of IMF returns processing into
fewer Submissions Processing sites.
--Consolidation of Case Processing Activities to Maximize Resources
Devoted to Front-Line Operations (Reduction: -$66,654,000 and
-649 FTE; Reinvestment: +$66,654,000 and +585 FTE).--Staffing
for conducting case processing activities that support our
examination, collection and lien-processing programs will be
consolidated from nearly 100 sites and centralized among four
campuses (Philadelphia, Cincinnati, Ogden and Memphis).
--Consolidation of Insolvency Activities to Maximize Resources
Devoted to Front-Line Operations (Reduction: -$14,928,000 and
-134 FTE; Reinvestment: +$14,928,000 and +156 FTE).--Staff
conducting insolvency operations to protect the government's
interest in bankruptcy proceedings will be consolidated from
numerous sites and centralized at the Philadelphia campus.
--Detection and Deterrence of Corrosive Corporate Non-Compliance
(Reduction: -$6,711,000 and -52 FTE; Reinvestment: +$6,711,000
and +52 FTE).--By using improved issue-management and risk-
assessment strategies for examining corporations, the IRS
expects to realize productivity improvements. These savings
will be reinvested to fund front-line enforcement activities.
Finally, the fiscal year 2006 request includes several program
increases, totaling $264.6 million:
--Attack Corrosive Non-Compliance Activity Driving the Tax Gap
(+$149,700,000 and +920 FTE).--This initiative increases
coverage of the growing number of high-risk compliance problems
and addresses the largest portion of the tax gap--
underreporting of tax. It proposes a funding increase across
all major domestic and international compliance programs to
leverage new workload-selection systems and case-building
approaches from continuing reengineering efforts.
--Detect and Deter Corrosive Corporate Non-Compliance (+$51,800,000
and +236 FTE).--This initiative addresses complex, high-risk
issues in abusive tax avoidance transactions, promoter
activities, corporate fraud, and aggressive domestic and off-
shore transactions, resulting in increased corporate and high-
income return closures and audit coverage. This initiative also
includes critical post-filing support provided by outside
experts to expedite the resolution of issues at the field
examination level, reducing taxpayer burden, and increasing the
credibility of the Service's positions on the most complex and
potentially highest compliance impact issues sent to court.
--Increase Individual Taxpayer Compliance (+$37,900,000 and +417
FTE).--This initiative addresses the tax gap through: the
identification and implementation of actions needed to address
non-compliance with filing requirements; increased Automated
Underreporter resources to address the reporting compliance tax
gap; increased audit coverage; and expanded collection work in
Taxpayer Assistance Centers.
--Combat Abusive Transactions by Entities with Special Tax Status
(+$14,460,000 and +77 FTE).--This initiative focuses on the
most egregious cases of non-compliance and identifies
compliance risks sooner, reducing burden on compliant customers
and enabling the development of new interventions to curtail
the growth of abusive transactions.
--Curtailing Fraudulent Refund Crimes (+$10,772,000 and +22 FTE).--
This initiative is aimed at attacking the increased
questionable refunds and return preparer fraud identified
through expanded operations of the Fraud Detection Centers
located on IRS campuses. Fraudulent refund schemes are one of
the most serious threats to voluntary compliance and an IRS
investigative priority.
The fiscal year 2006 request of $10.7 billion funds the IRS's three
appropriations: Tax Administration and Operations (TAO) for operations,
service and enforcement; Business Systems Modernization (BSM) for
modernization; and, the Health Insurance Tax Credit (HITCA) for
administering a refundable tax credit for qualified individuals. I will
describe each in turn.
TAX ADMINISTRATION AND OPERATIONS (TAO)
For fiscal year 2006, we request funding of $10,460,051,000, an
increase of 4.6 percent over the fiscal year 2005 appropriation of
$9,998,164,640 for programs previously funded from the PAM, TLE, and
ISY appropriations.
The TAO appropriation provides resources for the IRS's service and
enforcement programs. The IRS is responsible for ensuring that each
taxpayer receives prompt and professional service. To that end, the
IRS's assistance, outreach, and processing activities funded in the TAO
appropriation are dedicated to providing assistance to taxpayers in all
forms--electronic interaction, published guidance, paper
correspondence, telephone contact, and face-to-face communication--so
that taxpayers may fulfill their tax obligations timely and accurately.
It also includes the resources the IRS requires to handle the
processing and disposition of tax returns, refunds, and other filing
materials.
We are also responsible for the fair enforcement of the Nation's
tax laws. Each year, a small percentage of taxpayers file erroneous
returns or, for reasons both innocent and less benign, fail to file a
return at all. The IRS conducts enforcement activities using a variety
of methods, including correspondence audits, matching reporting
documents (such as Forms W-2) to information on taxpayer returns, in-
person audits, criminal investigations of those suspected of violating
tax laws, and participation in joint governmental task forces. The
IRS's examination, collection, investigations, regulatory compliance,
and research activities funded in the TAO appropriation provide the
resources required for equitable enforcement of the tax code and the
investigation and prosecution of individuals and organizations that
circumvent tax laws.
BUSINESS SYSTEMS MODERNIZATION (BSM)
The IRS tax administration system, which collects $2 trillion in
revenues annually, is critically dependent on a collection of 40-year-
old, obsolete computer systems. Recognizing the long-term commitment
needed to solve the problem of modernizing these antiquated systems,
Congress and the administration created a special business systems
modernization account. They designed the BSM program to bring the IRS's
business systems to a level equivalent with best practices in the
private and public sectors while managing the risks inherent in a
program that is unquestionably one of the largest, most visible, and
most sensitive modernization programs ever undertaken.
In 2004, the modernization budget was $387 million. Based on the
challenges the modernization program was facing, we realized the
program needed to be smaller in 2005 so we requested a lesser budget of
$285 million. In the end, Congress appropriated $203 million. One of
the ways we are accommodating these changes is by substantially
lowering the costs of the core infrastructure as well as the
architecture, integration, and management parts of the BSM program in
2005. These two areas are the programmatic elements of the program, and
cost $160 million in fiscal year 2004. We certainly cannot justify that
level of continued investment for a program that is roughly $200
million. Therefore, we are dramatically reducing those core services to
$107 million in fiscal year 2005 and we anticipate making additional
reduction in fiscal year 2006. For fiscal year 2006, we request funding
of $199 million for all BSM activities, substantially the same funding
as the fiscal year 2005 appropriated level.
Our most successful year ever for the modernization program was
2004; we measured our success by the number of projects we delivered,
the schedule and cost targets we hit, and the substantial improvements
we made in program management.
We delivered the first release of the Customer Account Data Engine
(CADE) project in July 2004, allowing the IRS to process an initial set
of the simplest tax returns on a new computer system for the first time
in 40 years. We launched IRS's new Integrated Financial System (IFS),
and declared it the IRS's financial accounting system of record. IFS
will provide the capability for improved timeliness and accuracy of the
financial reports and information available to IRS management and key
stakeholders, facilitating continued clean financial audit opinions of
the IRS. We deployed a full suite of e-Services products, providing tax
professionals and businesses with new Web-based tools that dramatically
improve their interface with the IRS. Additionally, we released
Modernized e-File, whereby corporations and tax-exempt organizations
can file their annual income tax and information returns
electronically.
We have also made significant improvements in our cost estimating
and scheduling. In the Fall and Winter of 2003, we re-baselined the
cost estimates and delivery schedules for each of the BSM program
projects. Since then, we have shown a marked improvement in
significantly reducing our variances between cost estimates and actual
delivery costs from 33 percent in 2002 to 4 percent in 2004.
In terms of improving program management, we identified four key
areas that we had to address to enhance the performance of the
modernization program:
--Resizing our modernization efforts to better align with our
management and skill capacity;
--Engaging IRS business units to drive the modernization projects
with a business focus;
--Improving contractor performance on cost, schedule, and
functionality; and
--Hiring outside executives to achieve a better balance between large
project management and tax administration experience.
We have made significant progress in addressing each of these major
challenges.
First, the IRS will concentrate on a few key projects and will
develop a track record of improved management and successful delivery
of modernization projects.
Second, the IRS assigned a business unit leader to each project
with responsibility for leading the related BSM Governance Committee,
and sharing accountability for delivering the modernization project as
stated in their annual performance commitments.
Third, we are making real progress in improving the accountability
of the PRIME contractor. I meet monthly with the Chief Operating
Officer of the Computer Sciences Corporation (CSC) to reinforce the
accountability of the contractor to the IRS. Additionally, we have made
major progress in restructuring BSM project contracts with the PRIME
that shift an appropriate amount of financial risk to the contractor
and tie costs to performance. These steps have resulted in improved
contractor performance, as demonstrated in the deliverables in 2004 and
the general adherence to costs and schedules.
Fourth, we have made great progress in hiring experienced
executives and seasoned managers from outside the agency who have
expertise in running large-scale information technology programs and
projects. A little over a year ago the mix of leadership at the top of
the BSM program consisted of one outside expert and six internal IRS
executives. Today, that mix will soon be five outside experienced
outside experts and three internal IRS executives. This mix is a much
better balance of the project management and technology talent and tax
administration experience needed to successfully run the BSM program.
While we were very successful in 2004, we have a lot of work ahead
of us. It is critical that we continue this level of performance in
2005 and beyond.
Our focus for fiscal year 2005 is on maintaining substantial
modernization work for three key tax administration systems that will
provide additional benefits to taxpayers and IRS employees,
specifically:
--The Customer Account Data Engine (CADE) project;
--Modernized e-File; and
--Filing and Payment Compliance (F&PC).
cade
CADE replaces the IRS's antiquated system called the Master File
which is the Service's repository of taxpayer information. With CADE
being the core fundamental component of the modernized systems, it is
the IRS's highest priority technology project.
We cannot over-emphasize the importance of CADE. The current Master
Files have served the IRS for more than 40 years. However, they were
developed in a different era and rely on an obsolete programming
language and a flat-file system that still requires batch updates.
These systems are very expensive to maintain; development of new
applications costs the IRS two to three times what it would cost if
they were already retired. Yet the IRS must update the Master Files
every year to take into account tax law changes. As importantly, the
vast majority of the workforce who are familiar with these old systems
will be retiring over the next few years and we cannot hire individuals
with these obsolete skills. Until the Master Files are replaced, the
IRS can not offer service approaching what a typical financial services
firm offers today (such as full account views for employees and real-
time account updates and settlement).
The returns we are processing in CADE are the most basic of 1040EZ
forms and have a narrow range of taxpayer information, but it marks the
first time since the 1960's that the IRS has processed individual tax
returns in a new way. The success of CADE proves that we can deliver
technology that will process tax returns on a 24-hour cycle, breaking
the 40-year-old standard of processing on a weekly cycle. As of March
25, 2005, CADE had processed 965,000 returns and generated nearly $318
million in refunds to taxpayers. This achievement is significant. CADE
will have processed over 1 million 1040EZ tax returns by the time of
this hearing and for the 2005 filing season that figure should reach
over 1.3 million returns.
The CADE system is scheduled to be phased in over several years,
processing increasingly more complex tax returns. When fully
operational, CADE will be a modern database that will house tax
information for more than 200 million individual and business tax
returns. It will provide a variety of benefits to taxpayers, such as
faster refunds (by over 50 percent) along with daily postings of
transactions and updating accounts, which (with other technology
elements) will significantly improve customer service and enforcement.
With CADE, we will have the flexibility necessary to respond quickly to
our complex tax law and tax reform changes.
One of the most significant changes that we introduced in 2004 was
the segmentation of CADE releases into two annual deliveries--one in
July and one in January. The July delivery will involve higher risk,
more complex functionality, and the January delivery will include
filing season changes combined with additional changes as capacity
permits. For the July release, returns will be available from the
previous 6 months which will enable us to test the higher risk, complex
changes with high volumes, and then go live with reduced volumes, which
will mitigate the operational risks.
MODERNIZED E-FILE
Modernized e-File will provide a single point Federal/State filing
option for Forms 1120, 1120S (corporations) and 990 (tax-exempt
organizations) returns in many States via a Web Services interface. Our
work on Modernized e-File will be comprised of Release 3.1, which
includes additional Forms 1120, 7004 (Application for Automatic
Extension of Time to file Corporation Income Tax Return) and 990, and
tax law changes for filing season 2004. Release 3.1 deployed initial
operating capabilities on schedule on January 10, 2005. Release 3.2
will provide an interface with State tax information retrieval systems
and a redesign of the signature matching process for Form 8453 (U.S.
Individual Tax Declaration for Electronic Filing).
FILING AND PAYMENT COMPLIANCE/PRIVATE COLLECTION AGENCIES
In 2004, Congress passed the American Jobs Creation Act, allowing
the IRS to use Private Collection Agencies (PCAs). The legislation
authorized the IRS to augment our collection efforts by allowing us to
use PCAs to pursue what has been deemed as uncollectible tax
liabilities; these agencies will not have enforcement authority and
will only contact delinquent taxpayers to arrange voluntary, full-
payment installment agreements. We will use the Filing and Payment
Compliance (F&PC) system to analyze tax collection cases and divide the
complex cases requiring direct IRS involvement from the simple
``balance due'' cases that can be handled by PCAs. The use of PCAs is
to supplement--not supplant--current IRS personnel. Quite frankly, this
activity is geared for an inventory that the IRS currently can not
chase with existing resources.
PCAs will benefit the IRS in three major ways:
--PCAs will help reduce the significant and growing amount of tax
liabilities deemed uncollectible.
--PCAs will help maintain taxpayer confidence in our tax system.
--PCAs will allow the IRS to focus on more difficult cases and
issues.
We expect to issue a Request for Procurement (RFP) in the next
several weeks. We plan to award contract in June 2005, to begin an
initial limited release of the uncollected tax inventory in January
2006. We provided all interested parties notification via the IRS.gov/
Business Opportunity webpage and electronic letters.
Safeguarding taxpayer rights is paramount. The same IRS standards
for customer service and protection of taxpayer rights will be strictly
enforced. PCAs will be prohibited from threatening or intimidating
taxpayers or implying that enforcement action will be taken against
them. Specific safeguards to protect the taxpayer include:
--Fair Debt Collection Practices Act protections;
--Protections against unauthorized disclosures;
--Assistance from the National Taxpayer Advocate; and,
--Protections with respect to third party contacts, installment
agreements and communications.
The IRS expects to place cases with PCAs using the following
criteria:
--The taxpayer does not dispute the liability;
--The liability is reportable on the Form 1040 series of returns;
--The balance due is greater than $100; and,
--The case does not involve a restriction on collection or otherwise
indicate that discretion or enforcement action may be required
to resolve the liability.
The delivery of the CADE project was a major milestone, but we
still have a long way to go and a lot of work ahead of us as we
introduce technology changes and expand into processing more complex
tax returns at greater volumes. To that end, we recognize that a
project of this complexity must continually look at new technologies
that can support the level of development and implementation
productivity needed for a project of this scale.
We certainly hope, and expect, that we will build on the successes
of 2004, and we will continue to mature the modernization program by
gaining a solid reputation for on-time deliveries with high
productivity.
HEALTH INSURANCE TAX CREDIT ADMINISTRATION (HITCA)
In August 2002, the President signed Public Law 107-210, the Trade
Act of 2002, which, among other things, provides a refundable tax
credit for the cost of health insurance for certain individuals who
receive a trade readjustment allowance or a benefit from the Pension
Benefit Guaranty Corporation (PBGC). The Health Insurance Tax Credit
Administration (HITCA) Appropriation funds the costs to administer a
refundable tax credit for health insurance to qualified individuals.
The tax credit is equal to 65 percent of the health insurance premium
paid by eligible persons for themselves and qualifying family members.
For fiscal year 2006 we request funding of $20,210,000, a decrease of
41.5 percent below the fiscal year 2005 appropriation of $34,562,272.
Costs for the HITCA program have declined since implementation due to
our active program oversight and management, as well as several cost-
cutting initiatives we began to implement in March 2004. We developed a
comprehensive action plan outlining cost-reduction initiatives and are
following it to achieve these significant savings.
PROGRAM PERFORMANCE
The IRS expects to achieve the following levels of performance
after attaining full performance of the requested fiscal year 2006
initiatives:
--Increase in field examinations for high-income individuals with
complex returns; significant increase in collection processed;
and closing of over 40 percent more delinquent balance-due
accounts in fiscal year 2008 than in fiscal year 2004.
--Nearly double the audit coverage for individuals with income
between $250,000 and $1 million, from 1.5 percent in fiscal
year 2004 to 2.8 percent in fiscal year 2008.
--Auditing 15 percent more individuals earning above $1 million, from
3.4 percent projected for fiscal year 2004 to 3.9 percent in
fiscal year 2008.
--Significantly more collection cases processed, closing 50 percent
more delinquent accounts in fiscal year 2008 than fiscal year
2004.
--Double the audit coverage for mid-size corporations, from 7.6
percent in fiscal year 2004 to 16 percent in fiscal year 2008.
--Increased efforts to deter abusive tax shelters among corporations.
LEGISLATIVE PROPOSALS
The President's fiscal year 2006 request includes several proposals
that will assist me in managing the agency more efficiently and
effectively. These proposals, if enacted, will allow us to focus more
resources on high-income, high-risk areas, automate several routine
transactions, use electronic data to reduce costly manual transactions,
consolidate resources related to judicial and counsel review, and
broaden administrative authorities and accesses to support further
electronic administration and tax reform. We are seeking to:
--Make Section 1203 of the IRS Restructuring and Reform Act of 1998
more effective and fair;
--Curb the use of frivolous submissions and filings made to impede or
delay tax administration;
--Allow for the termination of installment agreements for failure to
file returns and for failure to make tax deposits;
--Consolidate judicial review of collection due process cases in the
United States Tax Court;
--Eliminate the monetary threshold for counsel review of offers in
compromise;
--Allow the Financial Management Service to retain transaction fees
otherwise paid from IRS appropriations from levied amounts to
recover delinquent taxes;
--Extend the due date for electronically filed returns to provide
additional incentive for taxpayers to e-file and expand the
authority to require electronic filing by businesses and exempt
organizations; and,
--Allow IRS to access information in the National Directory of New
Hires for tax administration purposes.
CONCLUSION
The IRS has lagged behind, for reasons that are understandable, in
tax enforcement. But that is changing. We will continue to improve
service and respect taxpayer rights. But we will also enforce the law.
We won't relax until taxpayers who are unwilling to pay their fair
share see that that is not a worthwhile course to follow.
Mr. Chairman, the great majority of Americans honestly and
accurately pay their taxes. Average Americans deserve to feel confident
that, when they pay their taxes, their neighbors and competitors are
doing the same.
The President's budget request will help us enforce the tax law
more fairly and efficiently. I am most grateful for your support of
increased enforcement, and I look forward to working with you on this
important budget request.
Thank you very much. I am happy to take your questions.
Senator Bond. Thank you very much, Commissioner. Now we
turn to Mr. George.
Now, again, as I said, your full statement will be
submitted as a part of the record and we invite you to give a
summary.
STATEMENT OF J. RUSSELL GEORGE
Mr. George. Thank you, Mr. Chairman. Chairman Bond, Ranking
Member Murray, Senator Dorgan. Thank you for the opportunity to
testify this morning. As you consider the fiscal year 2006
appropriation for the Internal Revenue Service, while I've held
the position of Treasury Inspector General for Tax
Administration for a little over 3 months, many of the issues I
will discuss today are issues that I worked on over a decade
ago. I served as a staff director and chief counsel of the
House subcommittee with oversight responsibilities of the
management and financial accounting practices of Federal
agencies including the Internal Revenue Service. Unfortunately,
many of the very same challenges facing the IRS not only
persist 10 years later but in some cases have actually
worsened. The office of the Treasury Inspector General for Tax
Administration or, TIGTA, has identified 10 significant
challenges facing the Internal Revenue Service.
They are: modernizing IRS systems, ensuring tax law
compliance, reducing tax law complexity, preventing erroneous
and improper payments, providing quality customer service,
protecting taxpayers and taxpayer rights, securing IRS
employees, facilities, and information systems, integrating
performance and financial management, managing human capital,
and finally processing returns and implementing tax law changes
during the tax filing season.
My written statement addresses each of these challenges.
Given the time constraints I will limit my comments to three of
these issues, those being modernizing IRS systems, providing
quality customer service, and ensuring tax law compliance.
The first issue, modernizing IRS computer systems, that's
been a persistent challenge for many years. Unfortunately, it
will likely remain a challenge for the foreseeable future. In
1986 the IRS initiated the tax systems modernization program to
replace its antiquated computer systems. After spending over 10
years and approximately $3 billion on tax systems modernization
the program was scrapped and a new effort was begun. The new
effort is called Business Systems Modernization. It is
estimated that this modernization effort will last up to 15
years and cost over $8 billion. While the program is
progressing the modernization effort is behind schedule, it is
over budget and it's still delivering less functionality than
originally planned. TIGTA, the government accountability
office, and the IRS oversight board have all expressed concerns
about the ability of the IRS to effectively manage its
portfolio or modernization projects. To succeed the IRS must
demonstrate that it can handle the overall management of the
modernization effort.
A second challenge facing the IRS is one that affects many
taxpayers this time of year, receiving quality customer
service. As the commissioner noted in his testimony the IRS has
made progress in customer service, however, I am concerned that
the IRS may take a step backwards on customer service if it
follows through with the proposal to close many taxpayer
assistance centers. The taxpayer assistance centers are walk-in
sites where taxpayers can receive answers to both account
questions and tax law questions as well as receive assistance
preparing their tax returns. The IRS is considering closing
nearly 20 percent of the approximately 400 taxpayer assistance
centers nationwide. As part of an ongoing audit we at TIGTA are
reviewing the methodology used by the IRS to determine which
taxpayer assistance centers to close. At this point I am
skeptical that the IRS has adequate data to assess the impact
that closing these centers will have on customer service. I'm
also concerned that the IRS has insufficient data to draw
conclusions on the likelihood that taxpayers who used these
centers in the past will be able to use other methods of
seeking help, such as the Internet or telephone. I strongly
recommend that the IRS further research these issues before
closing selected taxpayer assisted centers.
Finally, on the topic of improving tax law compliance the
IRS continues to and will always face challenges in ensuring
that taxes are paid of time. According to IRS estimates the tax
gap, which again is defined as the difference between what
taxpayers are supposed to pay and what is actually paid is as
noted approximately between $312 and $353 billion each year. To
improve tax compliance the IRS must begin to use private
contractors to collect taxes in the next year. While the use of
private collection agencies could result in significant
recoveries of unpaid taxes the potential for abuse exists. My
office has developed a three-phase strategy to monitor this
initiative. We will be vigilant in ensuring the IRS effectively
uses its new authority to use private debt collectors while
also ensuring that taxpayers due rights and privacy rights are
protected.
PREPARED STATEMENT
Mr. Chairman, members of the subcommittee, I hope this
brief discussion of three of the major challenges facing the
IRS aids you as you consider its fiscal year 2006
appropriation. Thank you for allowing me to share my views. I
look forward to taking whatever questions you might have at the
appropriate time.
[The statement follows:]
Prepared Statement of J. Russell George
INTRODUCTION
Chairman Bond, Ranking Member Murray, and members of the
subcommittee, I thank you for the opportunity to testify as you
consider the fiscal year 2006 appropriations for the Internal Revenue
Service. As the relatively new Treasury Inspector General for Tax
Administration--having been on the job for 16 weeks--my observations
are based on the body of work my organization has developed through
audits and investigations of the IRS. I will focus on the major
challenges facing the IRS to assist you in your consideration of the
IRS's fiscal year 2006 budget.
Though I have been the Treasury Inspector General for Tax
Administration (TIGTA) for only a few short months, my first experience
conducting oversight of the Internal Revenue Service (IRS) dates back a
number of years. In 1995, one of the initial charges I received as
staff director of the House Subcommittee on Government Management,
Information and Technology was to examine inefficiency at the IRS.
Under then Chairman Stephen Horn's leadership, we reviewed several
issues such as the IRS's tax systems modernization program, as well as
ways to improve Federal debt collection practices. A decade later, I am
disappointed to report that some of the same concerns Chairman Horn
reviewed 10 years ago continue at the IRS today.
While the IRS faces longstanding challenges, it deserves credit for
making marked progress in an area that will always be a challenge:
providing quality customer service to the American taxpayer.
Commissioner Everson's guiding principle for the IRS is
Service+Enforcement=Compliance. Over the past few years, TIGTA audits
have shown the accuracy of information provided by the IRS to taxpayers
with tax law questions has generally improved, the average time spent
by taxpayers waiting for IRS assistance on the phone or in person has
declined, and the general professionalism with which taxpayers were
treated by the IRS has increased. Since most interactions between the
IRS and taxpayers involve these types of customer services, it is
encouraging to see that the IRS's focus on customer service has made
headway.
CHALLENGES FACING THE IRS
Despite such progress in customer service, improvements need to be
made in this and other areas where significant challenges face the IRS
in accomplishing its mission. The Treasury Inspector General for Tax
Administration (TIGTA) has identified the following management and
performance challenges that confront the IRS:
--Modernizing IRS Systems;
--Ensuring Tax Law Compliance;
--Reducing Tax Law Complexity;
--Preventing Erroneous and Improper Payments;
--Providing Quality Customer Service;
--Protecting Taxpayers and Taxpayer Rights;
--Securing IRS Employees, Facilities, and Information Systems;
--Integrating Performance and Financial Management;
--Managing Human Capital; and,
--Processing Returns and Implementing Tax Law Changes during the Tax
Filing Season.\1\
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\1\ The filing season refers to the period from January through
mid-April when most individual income tax returns are filed.
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Each of these areas presents its own unique challenges, which will be
addressed individually in the remaining portion of my testimony.
MODERNIZING IRS SYSTEMS
Modernizing the IRS's computer systems has been a persistent
challenge for many years, and will likely remain a challenge for the
foreseeable future. As I noted above, back in 1995, under Chairman
Stephen Horn's leadership, the House Subcommittee on Government
Management, Information and Technology began reviewing what was then
referred to as tax systems modernization.
The IRS initiated the tax systems modernization program in 1986.
The purpose of the tax systems modernization program was to replace the
antiquated computer systems that the IRS still relies on today to
conduct tax administration. The tax systems modernization program
intended to create a tax processing environment that was virtually
paper-free, an environment where taxpayer information would be readily
available to IRS employees to update taxpayer accounts and respond to
taxpayer questions.\2\ The program, however, was plagued by management
and technical weaknesses.\3\ After spending over $3 billion on tax
systems modernization,\4\ the program was scrapped and a new effort was
begun under a fresh moniker, Business Systems Modernization (BSM)
program.
---------------------------------------------------------------------------
\2\ See General Accounting Office Report GAO/AIMD/GGD-98-54, Tax
Systems Modernization: Blueprint Is a Good Start But Not Yet
Sufficiently Complete to Build or Acquire Systems (Feb. 1998).
\3\ See General Accounting Office Report GAO/T-GGD-97-79, IRS
Management: Improvement Needed in High-Risk Areas (Apr. 14, 1997).
\4\ See General Accounting Office Report T-GGD-97-52, Modernization
of Processes and Systems Necessary to Resolve Problems (Mar. 4, 1997).
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This latest effort to modernize the IRS's systems, the BSM program,
began in fiscal year 1999. The purpose of the BSM program is to
modernize the IRS's technology and related business processes.
According to the IRS, this effort will involve integrating thousands of
hardware and software components. Through March 2005, the IRS has
received appropriations of approximately $1.8 billion to support the
BSM program, and the fiscal year 2006 budget requests an additional
$199 million. It is estimated that the BSM program will last up to 15
years and cost over $8 billion.\5\
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\5\ The Internal Revenue Service Has Appropriate Processes to
Accept Modernization Software From Developers (Reference Number 2005-
20-028, February 2005).
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Succeeding in the modernization effort is critical--not only
because of the amount of time and money at stake--but also to improve
the level of service provided to taxpayers. To accomplish the
modernization effort, the IRS hired the Computer Sciences Corporation
(CSC) as the PRIME\6\ to design, develop, and integrate the modernized
computer systems.
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\6\ The PRIME stands for Prime Systems Integration Services
Contractor.
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The joint effort between the IRS and CSC has shown progress. In
July 2004, the IRS released the first part of the Customer Account Data
Engine (CADE) project. The CADE is the foundation for managing taxpayer
accounts in the modernization plan. The CADE will replace the IRS's
existing Master File.\7\ Once fully operational, the capabilities of
the CADE will far surpass those of the Master File.\8\
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\7\ The Master File is the IRS database for storing taxpayer
account information on individuals, businesses, employee retirement
plans, and exempt organizations.
\8\ The CADE will include applications for daily posting,
settlement, maintenance, refund processing, and issue detection for
taxpayer account and return data. In conjunction with other
applications, the CADE will allow employees to post transactions and
update taxpayer account and return data on-line from their desks.
Updates will be immediately available to any IRS employee who accesses
the data and will provide a complete, timely, and accurate account of
the taxpayer's information. In contrast, the current Master File
processing system can take up to 2 weeks to update taxpayer accounts,
and IRS employees may need to access several computer systems to gather
all relevant information related to a taxpayer's account.
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The first release of the CADE allowed the IRS to process some of
the simplest tax returns, Form 1040EZ, using a new database of taxpayer
accounts. The IRS has also deployed projects that provide value to
taxpayers, such as ``Where's My Refund?,'' the web-based application
that allows taxpayers to check the status of their refunds. In
addition, the IRS and its contractors have built the infrastructure
needed to support these projects and have developed an enterprise
architecture to guide the Business Systems Modernization (BSM) program.
Although progress is being made, the modernization program is
behind schedule, over budget, and is delivering less functionality than
originally planned. TIGTA, GAO and the IRS Oversight Board have
expressed concerns over the IRS's ability to effectively manage its
portfolio of BSM projects. Both TIGTA and GAO have recommended that the
IRS slow the pace of the BSM program due to some of the risks that have
surfaced. Specifically, the imbalance between the number and pace of
the BSM projects and available management capabilities has added
significant cost, schedule, and performance risks that have continued
to escalate.
In addition, TIGTA has identified four primary challenges that the
IRS must overcome for modernization to be successful: (1) The IRS must
implement planned improvements in key management processes and commit
necessary resources to succeed; (2) The IRS must manage the increasing
complexity and risks of the modernization program; (3) The IRS must
maintain continuity of strategic direction with experienced leadership;
and, (4) The IRS must ensure that CSC's performance and accountability
are effectively managed.
Without these four challenges being addressed, modernization will
not succeed.\9\ In addition, IRS is reassessing its relationship with
the PRIME contractor. For the past 6 years, the PRIME contractor has
performed the role of system integrator and program manager for the BSM
effort. In the new operating model, the IRS assumes responsibility for
overall program management. The IRS must demonstrate that it can
effectively manage the BSM program before its chances for success
improve.
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\9\ Annual Assessment of the Business Systems Modernization Program
(Reference Number 2004-20-107, dated June 2004).
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ENSURING TAX LAW COMPLIANCE
The IRS continues to face challenges in ensuring that taxes owed
are paid on time. The importance of this issue cannot be overstated.
The Nation's ability to provide for the general welfare and protect its
citizens is based on the ability to raise revenue through taxes. Yet,
the tax gap, which the IRS defines as the difference between what
taxpayers are supposed to pay and what is actually paid, is at
staggering levels.\10\ On March 29, 2005, the IRS released updated
estimates of the tax gap. For tax year 2001, the IRS estimated the
annual gross tax gap \11\ to be between $312 billion and $353
billion.\12\
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\10\ See written statement of Commissioner of Internal Revenue Mark
Everson before the Committee on Finance United States Senate Hearing on
``Bridging the Tax Gap,'' (July 21, 2004).
\11\ The amount of tax that is imposed for a given tax year, but is
not paid voluntarily and timely.
\12\ It is worth noting that the recently released tax gap figures
noted above did not update key segments of the tax gap that are at
least 15 years old, such as nonfiled tax returns and underreported
corporate income tax for large corporations.
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For some time, the IRS, the Congress, and other stakeholders have
been concerned about the slow erosion of voluntary tax compliance. IRS
tax compliance programs must ensure that noncompliant taxpayers who do
not meet their tax obligations are identified and penalized. The
undermining of voluntary compliance begins when honest taxpayers
believe that others are not paying their fair share.\13\
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\13\ The IRS fiscal year 2006 budget requests a significant
increase in enforcement funds. As the IRS attempts to increase
enforcement, it is worth considering the results of a 2003 GAO report.
GAO found that the IRS's frontline enforcement employees understood--
but feared--section 1203 of the Internal Revenue Service Restructuring
and Reform Act of 1998. Section 1203 outlines conditions for firing IRS
employees for committing any of 10 acts of misconduct. These
enforcement employees also reported that, because of section 1203,
their work takes longer and the likelihood of their taking an
enforcement action, such as recommending a seizure has decreased. See
General Accounting Office Report GAO-03-394, IRS and TIGTA Should
Evaluate Their Processing of Employee Misconduct under Section 1203
(February 2003).
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To improve tax compliance, the IRS must fully exercise its
authority under the law. The American Jobs Creation Act of 2004 enables
the IRS to use private contractors to collect unpaid taxes. While the
use of private collection agencies could result in significant
recoveries of unpaid taxes, the potential for abuse exists. TIGTA has
developed a three phase audit strategy to monitor this initiative. In
the first phase, TIGTA will review the IRS's planning and initial
implementation of the program. In the second phase, TIGTA will review
the initiative after full implementation, which may not occur until
fiscal year 2007. In the third phase, TIGTA will review the
effectiveness of the program. The goal of this audit strategy is to
ensure that the IRS effectively uses its new authority to use private
debt collectors, while also ensuring that taxpayers' due process and
privacy rights are protected.
Congress has provided other statutory tools to the IRS to increase
tax compliance. The IRS has the legal authority to charge a monetary
penalty, called the Failure to Pay (FTP) tax penalty, against taxpayers
who fail to pay their taxes on time.\14\ The law also requires the IRS
to charge interest on FTP tax penalties.\15\ A recent TIGTA report
found that the IRS computer system would assess the FTP tax penalty on
taxpayers' accounts, but would not officially charge these assessments
to accounts. By not assessing these penalties periodically, the IRS has
foregone the interest associated with them. If the IRS had assessed all
penalty accruals at least quarterly, TIGTA estimates that for calendar
year 2002 alone, over $817 million in interest on accrued penalties
would be due to the IRS.\16\ This is one example of how the IRS could
better use the tools at its disposal.
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\14\ 26 U.S.C. 6651 (2004).
\15\ 26 U.S.C. 6601(e)(2)(A) (2004).
\16\ This report also found that the IRS's current practice results
in inconsistent treatment of taxpayers. Some taxpayers in hardship
situations, such as victims of natural disasters or military personnel
serving in combat zones, have accounts that are administered by the IRS
manually rather than by computer. IRS personnel periodically calculate
and manually assess penalties on these accounts. Because the manually
computer FTP penalties are periodically assessed, interest is charged
to these taxpayer accounts but not charged to taxpayer accounts
administered by computer. Procedures Regarding the Failure to Pay Tax
Penalty Result in Inconsistent Treatment of Taxpayers and Hundreds of
Millions of Dollars in Lost Revenue (Reference Number 2005-30-052,
dated March 2005).
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In addition to more fully exercising authority provided by
Congress, the IRS must obtain timely and reliable data on the tax gap
to improve tax compliance. To collect such data, the IRS launched the
National Research Program, a study of individual taxpayer reporting
compliance for tax year 2001. The National Research Program is intended
to produce timely and reliable data that will allow the IRS to better
target its limited enforcement resources on taxpayers who are not
complying with the tax law instead of law-abiding individuals.
While timely and reliable data will help the IRS quantify
noncompliant segments of the population, different approaches are also
needed to determine how to most effectively address noncompliance. The
Taxpayer Advocate's 2004 Annual Report to Congress depicts some of the
complexities involved in structuring an enforcement program to address
the tax gap. The Taxpayer Advocate also describes the efforts the IRS
still needs to make to analyze the effectiveness of various compliance
techniques.\17\ Similarly, in two recent audit reports, TIGTA
identified examination programs that the IRS implemented nationwide
before obtaining results on their possible effectiveness or before
implementing an effective strategy to measure the results of the
program.\18\
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\17\ National Taxpayer Advocate 2004 Annual Report to Congress
(Dec. 31, 2004).
\18\ In TIGTA's judgment, the IRS implemented the High-Income
Taxpayer Strategy, designed to target individuals with the financial
resources to use sophisticated methods of tax avoidance, without a
method and specific baselines to measure the strategy's success. In
addition, the IRS introduced the Limited Issue Focused Examination
(LIFE) process to reduce the length of examinations of large and mid-
sized businesses. While the LIFE process has merit, the IRS implemented
it nationwide before obtaining results on its possible effectiveness.
The High Income Taxpayer Strategy Was Effectively Implemented, Although
Its Success Still Needs to Be Determined (Reference Number 2005-30-012,
dated November 2004) and The Limited Issue Focused Examination Process
Has Merit, but Its Use and Productivity Are Concerns (Reference Number
2005-30-029, dated February 2005).
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Accurate measures of the effectiveness of actions taken to reduce
the tax gap are critical to the IRS for strategic direction, budgeting,
and staff allocation. The Department of the Treasury also needs such
measures for the purpose of creating tax policy. Additionally, the
Congress could use this information to develop legislation that
improves the efficacy of the tax system.
In addition to gathering better compliance data, TIGTA, other
oversight groups, and interested stakeholders have made a number of
recommendations to close the tax gap. These recommendations include:
reducing the complexity of the tax code; instituting withholding on
non-employee compensation; improving compliance with estimated tax
payments; using document matching to verify business income; addressing
escalating levels of late filed returns; increasing resources in the
IRS enforcement functions; and addressing delays in systems
modernization. While reducing the complexity of the tax code lies
outside the authority of the IRS, the remaining recommendations are
within the IRS's discretion and should be acted upon to further tax
compliance.
REDUCING TAX LAW COMPLEXITY
The scope and complexity of the United States Tax Code make it
virtually certain that taxpayers will face procedural, technical, and
bureaucratic obstacles before meeting their tax obligations. The IRS
has consistently sought to ease the process for all taxpayers, but each
tax season brings new challenges, and old problems sometimes resist
solution.
According to the Taxpayer Advocate's 2004 Annual Report to
Congress, the most serious problem facing taxpayers and the IRS is the
complexity of the Internal Revenue Code.\19\ The Joint Committee on
Taxation conducted a study in 2001 that demonstrates the vastness of
the tax code. The study found that, in 2001, the tax code consisted of
nearly 1.4 million words. There were 693 sections of the code
applicable to individuals, 1,501 sections applicable to businesses, and
445 sections applicable to tax exempt organizations, employee plans,
and governments.\20\
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\19\ National Taxpayer Advocate 2004 Annual Report to Congress
(Dec. 31, 2004).
\20\ Study of the Overall State of the Federal Tax System and
Recommendations for Simplification, Pursuant to Section 8022(3)(B) of
the Internal Revenue Code of 1986, Staff of the Joint Committee on
Taxation, JCS-3-01 (Apr. 2001).
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The complexity of the code hampers the ability of the IRS to
administer the Nation's tax system and confuses most taxpayers. The IRS
has attempted to provide assistance to taxpayers with questions about
the tax code through toll-free telephone lines, Taxpayer Assistance
Centers (TACs), kiosks, and the IRS internet web site. TIGTA has
performed numerous audits of the accuracy of IRS responses to taxpayer
questions submitted via these methods and found that even some IRS
employees cannot apply the tax code correctly.
Our most recent audit of the accuracy of responses provided to tax
law questions received via the toll-free telephone lines during the
2004 Filing Season found that 62 percent of the answers given were
correct.\21\ The IRS conducted its own tests and found an accuracy rate
of 79 percent. Both of these figures were well below the IRS's accuracy
goal of 85 percent for this service. Tax law complexity contributes to
the IRS's challenges in reaching these accuracy goals, as well as to
taxpayer frustration with attempting to decipher the tax code.
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\21\ Additional Effort Answering Tax Law Questions Would Improve
Customer Service (Reference Number 2004-40-150, dated August 2004).
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Besides adding to the burden on the taxpayer and the IRS, tax law
complexity also may inadvertently contribute to the tax gap. Complexity
has given rise to the latest generation of abusive tax avoidance
transactions, with taxpayers attempting to take advantage of the tax
code's length and complexity by devising intricate schemes to illegally
shelter income from taxation. Administering such a complex tax code
makes the job of pursuing these abusive tax avoidance schemes
challenging and costly to the IRS. For example, in 2004, the hours
revenue agents spent per return on examinations increased by 23 percent
for individual tax returns and 19 percent for corporate tax returns
compared to 2003 figures.\22\
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\22\ TIGTA analysis of IRS Data Book information.
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As part of its goal to improve service to taxpayers, the IRS
includes simplifying the tax process as an objective in its new
Strategic Plan. Simplification could incorporate a range of actions
from developing legislative recommendations to clarifying tax
instructions or forms. Changing tax laws, however, can be a lengthy
process since the IRS only administers the tax code that is passed by
the Congress. Thus, the IRS must work extensively with these
stakeholders, as well as the Department of the Treasury, to identify
and develop legislative recommendations that would reduce tax law
complexity and taxpayer burden.
PREVENTING ERRONEOUS AND IMPROPER PAYMENTS
One of the goals of The President's Management Agenda is to reduce
erroneous payments.\23\ Further, the Improper Payments Information Act
of 2002 \24\ greatly expanded the administration's efforts to identify
and reduce erroneous and improper payments in government programs and
activities. While the administration has pushed to prevent erroneous
and improper payments, stewardship over public funds remains a major
challenge for IRS management.
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\23\ The President's Management Agenda, announced in the summer of
2001, is the President's aggressive strategy for improving the
management of the Federal Government. It focuses on five areas of
management weakness across the Government where improvements should be
made.
\24\ Public Law No. 107-300, 116 Stat. 2350.
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Improper and erroneous payments include inadvertent errors,
payments for unsupported or inadequately supported claims, payments for
services not rendered, payments to ineligible beneficiaries, and
payments resulting from outright fraud and abuse by program
participants or Federal employees. For the IRS, improper and erroneous
payments generally involve improperly paid refunds, tax return filing
fraud, or overpayments to vendors or contractors.
Some tax credits, such as the Earned Income Tax Credit (EITC),
provide opportunities for taxpayer abuse. The EITC is a refundable
credit available to taxpayers who do not exceed a certain amount of
income per year. The EITC was intended to provide significant benefits
to the working poor, but some taxpayers have abused the credit, which
has resulted in a significant loss of revenue to the Federal
Government. An IRS compliance study of tax year 1999 returns estimated
between $8.5 billion and $9.9 billion (27 to 32 percent) of the $31
billion in EITC claimed for tax year 1999 should not have been
paid.\25\ A TIGTA review of EITC claimed for tax year 2002 estimated
that the IRS allowed over $16 million in potentially erroneous credits
because the claimed qualifying ``child'' was significantly older than
the primary taxpayer.
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\25\ IRS report, Compliance Estimates for Earned Income Tax Credit
on 1999 Returns (dated February 2002).
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In addition to erroneous payments of credits, contract expenditures
represent a significant outlay of IRS funds and are also susceptible to
mistakes or abuse. The IRS approved payment of nearly a billion dollars
for the Business Systems Modernization contract. Initially, neither the
IRS nor the contractor could provide proper supporting documentation
for approximately $9.5 million (approximately 54 percent of the $17.6
million sampled) in direct charges.\26\ The contractor subsequently
provided additional documentation, and TIGTA was able to verify all but
approximately $52,200. Nevertheless, to assure that its billings are
adequately justified and to facilitate timely independent reviews, the
IRS should strengthen its invoice review process by routinely
requesting and reviewing a sample of supporting documents.
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\26\ Improvements Are Needed in the Invoice Review Process for the
Business Systems Modernization Contract (Reference Number 2004-10-117,
dated June 2004).
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PROVIDING QUALITY CUSTOMER SERVICE
Providing quality customer service to the taxpayer is not only a
primary goal of the IRS, but it is also one of its major management
challenges. The Commissioner has frequently stated that service
combined with enforcement will result in compliance. Quality taxpayer
service includes helping the taxpaying public understand their tax
obligations while making it easier to participate in the tax system.
Since the passage of the IRS Restructuring and Reform Act of 1998
(RRA 98),\27\ the IRS's focus on customer service has led to many
improvements. Taxpayer satisfaction rates with the IRS have increased
since the Act's passage, growing almost 2 percent in 2004 alone.\28\
Every year, the IRS helps millions of taxpayers understand their tax
obligations by answering questions on its toll-free telephone lines or
in person at local offices, making information available on its Web
site, and responding to correspondence.
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\27\ Public Law No. 105-206, 112 Stat. 683 (codified as amended in
scattered sections of 2 U.S.C., 5 U.S.C. app., 16 U.S.C., 19 U.S.C., 22
U.S.C., 23 U.S.C., 26 U.S.C., 31 U.S.C., 38 U.S.C., and 49 U.S.C.).
\28\ Special Report on IRS Fiscal 2006 Budget, IRS Oversight Board,
March 15, 2005.
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The IRS internet site, www.IRS.gov, is an excellent source for
forms, publications, and other guidance. Taxpayers visited the site
over 139 million times last year.\29\ The site also received an award
for being the Nation's most reliable government internet site.\30\
Electronic filing of tax returns continues to grow, and the ability to
check the status of tax refunds online has been a successful IRS
project that is helpful to taxpayers.\31\
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\29\ IRS.gov Cited As Most Reliable Government Web Site, IR-2004-
131, October 25, 2004.
\30\ Id.
\31\ Free File Tops Last Year's Total, IR-2005-36, March 23, 2005.
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As for the toll-free telephone system, access by taxpayers to the
IRS via telephone has improved. Callers were able to connect with the
IRS more easily and received better, quicker service. Surveys of
callers during the 2004 filing season showed that the vast majority of
taxpayers were satisfied with the services they received.\32\ While the
IRS exceeded its goals in professionalism and timeliness, the accuracy
of answers provided to taxpayers on tax law questions slipped in 1 year
from 73 percent to 62 percent. TIGTA attributed this decrease to IRS
employees not always using the required Probe and Response Guide to
obtain sufficient information from taxpayers or the employees were not
correctly interpreting the tax law.
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\32\ Taxpayers Experienced Improved Access to Toll-Free Telephone
Services During the 2004 Filing Season (Reference Number 2004-30-144,
dated August 2004).
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The IRS has obviously made strides in customer service over the
past 7 years. TIGTA is concerned, however, that the IRS may disrupt the
balance between customer service and enforcement by closing many of its
Taxpayer Assistance Centers. The TACs are walk-in sites where taxpayers
can receive answers to both account and tax law questions, as well as
receive assistance preparing their returns. Over the past few years,
customer service at Taxpayer Assistance Centers has shown
improvement.\33\ Yet, the IRS is considering closing nearly a quarter
of its approximately 400 TACs nationwide. TIGTA is skeptical that the
IRS has adequate data to assess the impact that closing TACs will have
on customer service.
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\33\ Customer Service at the Taxpayer Assistance Centers Is
Improving but Is Still Not Meeting Expectations (Reference Number 2005-
40-021, dated December 2004).
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From the information provided by the IRS to TIGTA, the IRS is using
the following criteria to select TACs to close: location, labor cost,
facility cost, workload, and demographics. The last criterion,
demographics, falls short of capturing the information needed to make a
well-informed decision. To compile information on the demographics of a
particular TAC location, the IRS is collecting data, by zip code, on
population size, income level, age, unemployment, and percent of
population who e-file. TIGTA believes this information is insufficient
to draw conclusions on the capability and likelihood that taxpayers who
have used these centers in the past will be willing to use alternative
methods of seeking help, such as the internet or telephone. I strongly
recommend that the IRS further research these issues before closing
TACs.
PROTECTING TAXPAYERS AND TAXPAYER RIGHTS
Congress realized the importance of protecting taxpayers and
taxpayer rights when it passed RRA 98. This legislation required the
IRS to devote significant attention and resources to protecting
taxpayer rights. The RRA 98 and other legislation require TIGTA to
review IRS compliance with taxpayer rights provisions. Our most recent
audit results on some of these taxpayer rights provisions are:
--Notice of Levy.--TIGTA reports have recognized that the IRS has
implemented tighter controls over the issuance of systemically
generated levies, and TIGTA testing of these controls indicated
that they continue to function effectively. However, revenue
officers who issue levies manually still are not always
properly notifying taxpayers of their appeal rights.\34\
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\34\ Additional Efforts Are Needed to Ensure Taxpayer Rights Are
Protected When Manual Levies Are Issued (Reference Number 2004-30-094,
dated April 2004).
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--Restrictions on the Use of Enforcement Statistics to Evaluate
Employees.--The IRS is complying with the law. A sample review
of employee performance and related supervisory documentation
revealed no instances of tax enforcement results, production
quotas, or goals being used to evaluate employee
performance.\35\
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\35\ Fiscal year 2004 Statutory Audit of Compliance With Legal
Guidelines Restricting the Use of Records of Tax Enforcement Results
(Reference Number 2004-40-066, dated March 2004).
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--Notice of Lien.--The IRS did not completely comply with the law.
For example, the IRS did not always timely mail lien notices.
In other cases, the IRS could not provide proof of mailing. In
addition, the IRS did not always follow its guidelines for
notifying taxpayer representatives and for maintaining
certified mail listings.\36\
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\36\ Fiscal year 2004 Statutory Review of Compliance With Lien Due
Process Procedures (Reference Number 2004-30-086, dated April 2004).
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--Seizures.--The IRS did not always comply with legal provisions and
internal procedures when conducting seizures. The TIGTA review
did not identify any instances where taxpayers were adversely
affected, but not following legal and internal guidelines could
result in abuses of taxpayer rights.\37\
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\37\ Legal and Internal Guidelines Were Not Always Followed When
Conducting Seizures of Taxpayers' Property (Reference Number 2004-30-
149, dated August 2004).
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--Illegal Tax Protestor Designations.--The IRS is prohibited by law
from designating taxpayers as ``illegal tax protestors'' but
may refer to taxpayers as ``nonfilers.'' TIGTA has reviewed the
Master File for illegal tax protestor designations. We found
that the IRS has not reintroduced such designations on the
Master File, taxpayer accounts that were formerly coded as
illegal tax protestor accounts have not been assigned similar
designations, and current IRS publications do not refer to
illegal tax protestors. However, a few illegal tax protestor
references still exist in manuals, job aids, computer systems,
and isolated case files.\38\
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\38\ Fiscal year 2004 Statutory Audit of Compliance With Legal
Guidelines Prohibiting the Use of Illegal Tax Protester and Similar
Designations (Reference Number 2004-40-109, dated June 2004).
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--Denials of Requests for Information.--The IRS improperly withheld
information from requesters in 4.4 percent of the Freedom of
Information Act \39\ and Privacy Act of 1974 \40\ requests, and
14.6 percent of the 26 U.S.C. 6103 requests reviewed.\41\
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\39\ 5 U.S.C. 552.
\40\ 5 U.S.C. 552a.
\41\ Improvements Are Needed to Ensure Compliance With the Freedom
of Information Act (Reference Number 2004-40-064, dated March 2004).
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--Collection Due Process.--IRS Appeals Officers and Settlement
Officers substantially complied with the requirements of the
law when conducting collection due process hearings. However,
the Settlement Officers did not always address all the issues
raised by the taxpayers.\42\
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\42\ Appeals Complied With the Provisions of the Law for the
Collection Due Process (Reference Number 2004-40-067, dated March
2004).
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Neither TIGTA nor the IRS could evaluate the IRS's compliance with
three RRA 98 provisions since IRS information systems do not track
specific cases. These three provisions relate to: restrictions on
directly contacting taxpayers instead of authorized representatives,
taxpayer complaints, and separated or divorced joint filer requests.
SECURING IRS EMPLOYEES, FACILITIES, AND INFORMATION SYSTEMS
As the Nation's primary revenue collector and an integral part of
the Nation's critical infrastructure, the IRS is a prime target for
anti-government protestors, international terrorists, and other
extremists. Millions of taxpayers entrust the IRS with sensitive
financial and personal data, which are stored and processed by IRS
computer systems. The risks that sensitive data or computer systems
could be compromised and that computer operations could be disrupted
have increased over the last few years due to the external threats
noted above and the increased connectivity of computer systems. In
addition, IRS systems and data are vulnerable to unhappy taxpayers and
disgruntled employees, as well as natural disasters. Although many
steps have been taken to limit risks, IRS systems and taxpayer
information remain susceptible to threats that could impact the
confidentiality, integrity, and availability of data and information
systems.
For the past 4 years, TIGTA assessments have concluded that the
security infrastructure and the applications that guard sensitive data
are weak because of inadequate accountability and security awareness,
as well as insufficient training for key security employees. The IRS
has focused on technical solutions to this issue, but the primary
causes are managerial and operational factors. For example, in 2004,
TIGTA found that while security roles and responsibilities have been
defined, we continue to identify significant security weaknesses
throughout the IRS that can be attributed to employees not fulfilling
their responsibilities.\43\ This results in the IRS failing to
establish an organizational culture that strongly emphasizes the
security and privacy of taxpayer data. In addition, some disaster
recovery plans require additional development, testing, or personnel
training to ensure that the IRS can quickly recover in the event of a
disaster.
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\43\ Computer Security Roles and Responsibilities and Training
Should Remain Part of the Computer Security Material Weakness
(Reference Number 2004-20-155, dated September 2004).
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TIGTA has also identified security weaknesses in a number of IRS
systems. For example, the IRS envisions the Security Audit and Analysis
System (SAAS) as the audit trail collection and reporting system for
the IRS's modernized applications. To date, no modernization
applications are employing the SAAS for this purpose. This failure to
employ the SAAS for audit trail collection and reporting results in at
least two weaknesses. First, the IRS could deploy modernization
applications without proper audit trail controls in place. Second, the
IRS may spend additional resources to employ an application-specific
audit trail that is not consistent with the IRS's architecture and
would, in essence, represent a double investment in audit trail
controls. Furthermore, the SAAS was accepted by the IRS despite the
fact that it did not meet performance requirements.\44\
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\44\ For example, the SAAS users cannot query the audit trail
information to generate reports. In addition, the functionality and
software performance problems of the SAAS prevent the IRS business
units from using it to identify questionable activities on modernized
applications. See The Audit Trail System for Detecting Improper
Activities on Modernized Systems Is Not Functioning, (Reference Number
2004-20-135, dated August 2004).
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The IRS has taken several positive steps toward improving security
in the IRS. In October 2003, the IRS combined key security activities
into a single organization to promote better performance and consistent
customer focus. Adequate security policies and procedures have been
established and, in most cases, the IRS has the necessary hardware and
software to provide adequate system security. While the IRS has become
a leader in government under this management structure, it must
emphasize the importance of security to its employees.
For the IRS to make the largest strides in improving computer
security at a relatively low cost, managers and employees must be aware
of the security risks inherent in their positions and consider security
implications in their day-to-day activities. Thus, IRS business unit
managers should be held accountable for the security of their systems
and key security employees should be adequately trained to carry out
their responsibilities. It is also vital that the IRS continues to
refine its plans and capabilities to manage emergency situations in a
manner that protects employees and allows restoration of business
operations in a timely manner. In addition, aggressive network control,
monitoring, and incident response capabilities are necessary to prevent
incursions into IRS systems from external and internal sources.
INTEGRATING PERFORMANCE AND FINANCIAL MANAGEMENT
The President's Management Agenda aims to place a greater focus on
performance by formally integrating it with budget decisions. In
addition, without accurate and timely financial information, it is not
possible to accomplish the President's agenda to secure the best
performance and highest measure of accountability for the American
people. The IRS has made some progress; however, integrating
performance and financial management remains a major challenge.
The IRS has achieved mixed success in establishing long-term goals
to integrate performance and financial management. During the fiscal
year 2005 budget formulation process, the IRS took the important step
of aligning performance and resources requested. The IRS also modified
its budget and performance plans to include more customer-focused and
``end result'' measures. However, TIGTA believes the IRS must continue
to integrate performance into its decision-making and resource
allocation processes to completely achieve an integrated performance
budget.
The IRS also continues to analyze the critical data needed to
develop long-term enforcement outcome measures. For example, the IRS
released the first results from its National Research Program and they
provide fresh data on taxpayer voluntary compliance levels--the first
in more than a decade. Such data is essential to establishing
enforcement measures and effectively allocating resources to related
activities. The IRS, however, needs to develop a more strategic
approach to the entire tax administration system. Such an effort would
better identify the characteristics of an effective and efficient tax
administration system, help pinpoint desired outcomes, and create a
road map for the next decade that would complement the IRS's strategic,
budget, and annual performance plans.
The IRS's financial statements and related activities also continue
to be of concern to IRS stakeholders. The GAO audits the IRS's
financial statements annually. The audit determines whether the IRS:
(1) prepared reliable financial statements; (2) maintained effective
internal controls; and, (3) complied with selected provisions of
significant laws and regulations, including compliance of its financial
systems with the Federal Financial Management Improvement Act of 1996
(FFMIA).\45\
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\45\ Public Law No. 104-208, 110 Stat. 3009.
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In audits of the IRS's financial statements, the GAO has concluded
that the records were fairly presented in all material respects.\46\
The GAO, however, identified some continuing serious deficiencies in
the IRS's financial systems, including control weaknesses and system
deficiencies affecting financial reporting, unpaid tax assessments, tax
revenue and refunds, and computer security. However, the IRS again had
to rely extensively on resource-intensive compensating processes to
prepare its financial statements. Without a financial management system
that can produce timely, accurate, and useful information needed for
day-to-day decisions, the IRS's financial stewardship responsibilities
continue to be one of the largest challenges facing IRS management.
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\46\ Financial Audit: IRS's fiscal years 2003 and 2002 Financial
Statement (GAO-04-126, dated November 2003).
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MANAGING HUMAN CAPITAL
Like much of the Federal Government, managing the extensive human
capital resources at the IRS remains a serious concern. Workforce
issues, ranging from recruiting to training and retaining employees,
have challenged Federal agencies for years. The GAO, the Office of
Management and Budget, and the Office of Personnel Management have all
made the strategic management of human capital a top priority.
Specifically for the IRS, recent reorganization and modernization
efforts, such as the focus on e-filing, have made many jobs dealing
with processing paper tax returns redundant.
The Large and Mid-Size Business Division reported in its fiscal
year 2006 strategic assessment that it will continue to lose
substantial experience in the Revenue Agent position through attrition.
Similarly, in the Small Business/Self-Employed Division, the human
capital crisis continues to intensify as employees in key occupations
increasingly become eligible for retirement, are lost through
attrition, or migrate to other areas. Stagnant funding allocations have
impacted the ability to attract new hires and retain existing
employees. Thus, potential losses in critical occupational groups
(e.g., Revenue Agents, Revenue Officers, Tax Compliance Officers),
coupled with concerns regarding grade and competency gaps, further
emphasize the need to strategically manage human capital.
The Tax-Exempt/Government Entities Division is already understaffed
to handle the current volume of customer calls. The Division's toll-
free service is still maturing and acquiring new customers; however,
without additional staffing or system enhancements, the level of
service will deteriorate. This issue requires immediate attention
because the Division relies on quality toll-free customer service to
help ensure voluntary compliance among its customers, since it has very
limited resources for more traditional compliance activities like
examinations.
In contrast, the Wage and Investment Division has reported that it
has made significant progress in the human capital area. Examples
include increased employee use of electronic learning and training by
demand, and improved technical assessments for identifying skill levels
and training needs of employees. In addition, the Division effectively
planned and realigned its workforce as the result of reduced workload
demands and technological improvements. Even so, more work needs to be
completed to attract and retain high-quality employees, to increase
productivity and quality, and to provide equal employment opportunities
for all.
The Criminal Investigation function has also moved forward in this
area. The function is implementing a computer-based knowledge
management program, which can immediately identify current subject
matter experts. Skill transfer programs will be implemented to provide
continuity of technical subject matter expertise, and continuing
education programs will provide updated training on emerging issues,
strategies, and operational priority subjects.
The President's fiscal year 2006 budget may offer some relief in
staffing shortages; however, the overall training and acclimation
process will take some time. The IRS must devote significant attention
to managing human capital to overcome the challenges noted above.
PROCESSING RETURNS AND IMPLEMENTING TAX LAW CHANGES DURING THE TAX
FILING SEASON
Each filing season tests the ability of the IRS to implement tax
law changes made by the Congress during the year. It is during the
filing season that most individuals file their income tax returns and
call the IRS if they have questions about specific tax laws or filing
procedures. Correctly implementing tax law changes is a continuing
challenge because the IRS must identify the tax law changes; revise the
various tax forms, instructions, and publications; and reprogram the
computer system used in processing returns.
This year's filing season includes significant tax law changes
created by the American Jobs Creation Act of 2004.\47\ One significant
tax law change for the 2005 filing season that many taxpayers are
familiar with is the ability to deduct sales tax instead of State and
local income tax. Changes to the tax law can have a major effect on how
the IRS conducts its activities, how many resources are required, and
how much progress can be made on strategic goals. Generally, the
Congress makes changes to the tax law each year, so some level of
change is a normal part of the IRS environment. However, certain kinds
of changes can significantly impact the IRS in terms of the quality and
effectiveness of service and in how taxpayers perceive the IRS.
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\47\ Public Law No. 108-357, 118 Stat. 1418 (2004).
---------------------------------------------------------------------------
To date, we have seen no significant problems during the 2005
filing season. During the 2004 filing season, most of the 123.1 million
individual income tax returns received through May 28, 2004 (including
over 60 million received electronically, an increase of nearly 16
percent from 2003) were timely and accurately processed. TIGTA
determined that the IRS correctly implemented the key tax law changes
that affected 2003 returns. However, TIGTA has previously identified
tax law changes that have not yet been effectively implemented and
could result in loss of taxpayer entitlements and erroneous tax
reductions. For example, TIGTA identified taxpayers that are continuing
to receive erroneous deductions for student loan interest, taxpayers
with potentially unclaimed Additional Child Tax Credits, and taxpayers
that were allowed questionable ``dual benefits'' for the tuition and
fees deduction and the education credit.\48\ These tax law changes must
be effectively implemented to fairly apply the law to all taxpayers.
---------------------------------------------------------------------------
\48\ The 2004 Filing Season Was Completed Timely and Accurately,
but Some Tax Law Changes Have Not Been Effectively Implemented
(Reference Number 2005-40-016, dated Dec. 2004).
---------------------------------------------------------------------------
I hope this discussion of the major challenges facing the IRS aids
you in your consideration of the IRS's appropriation for fiscal year
2006. Mr. Chairman and members of the committee, thank you for allowing
me to share my views. I would be pleased to answer any questions you
might have at this time.
Senator Bond. Thank you very much, Mr. George. We will try
to go 5 minutes each for questioning so all of us have an
opportunity to go. Now, we will go as long as we can stand up
to it. So let me begin.
Mr. Everson. As long as you can stand up to it.
Senator Bond. I haven't lost too many witnesses at the
witness table but there have been one or two occasions. I doubt
if this will be the case today, but looking at BSM and the
customer account data engine, CADE, which is essential for the
BSM, we are concerned that IRS has re-baselined the program and
has a moving set of requirements which obscures oversight and
allows success to be measured in terms of garbage in rather
than revenue coming out.
But let me ask two questions to begin. BSM, the biggest
challenge you have, is fast approaching $2 billion, with CADE
as a key feature. I would like to know, No. 1, how much will it
cost to include all 120 million individual taxpayers? Moreover,
since CADE currently only allows for the processing of the
easiest returns of taxpayers using the EZ form, how many filers
will be processed during the 2004 tax season by CADE?
BUSINESS SYSTEMS MODERNIZATION
Mr. Everson. Let me back up and talk about the whole
program for a moment, if I may? I agree with your
characterization. As I stated, the whole program has been too
costly and delayed, and didn't get us the functionality we
needed. When I came in 2 years ago I immediately commissioned a
set of reviews. The set of reviews were consistent, the four
different reviews, and the conclusions that were reached were
that No. 1, we were too ambitious. We had been encouraged by
the oversight board and others to move very quickly. And we
spent hundreds or millions of dollars; the funding stream on
this was $400 or $500 million a year at one point. We felt we
needed to resize the portfolio. We had inadequate business unit
involvement, meaning customers, people that were going to use
these things in the process. We changed that as well. We had
uneven performance by the contractor. Now, it would be easy to
blame everything on the contractor, but I don't think that was
appropriate. The final thing is we had very little in the way
of outside experts coming in and helping us, in terms of our
staff. We've addressed each of those issues and I think that we
have, as I said, turned a corner. We've reset dates and we met
those dates last year in both CADE and in the financial system
that we put on line.
So we brought down the funding level from about $400
million to this $200 million and we straight-lined it in fiscal
year 2006, even though I think we could have made a case to
increase it further this year. We want to proceed carefully and
what we're doing now, Mr. Chairman, is limiting our ongoing
work to just three areas so that we can stay on it. We're going
to continue to work on this master file, the processing that
includes the EZ's, and right now I think we're going to get 1.3
million or 1.5 million out of the total filing season for 2004.
I can't tell you because we're not looking at how quickly this
will ramp up over the years, what the remainder of the CADE
program will be. We will get that number to you as soon we've
done some additional work on it. The second piece we're working
on right now, as I indicated, is the collections. There's
several hundred billion dollars of monies that haven't come in
to the government. We need to update our systems so that we can
work better, including the pieces done by the private
collection agencies. That is the thrust of our modernization
effort.
And the last is electronic filing. We have mandated
electronic filing for corporations. This change will speed up
our audits. It cuts 1\1/2\ years out of the audit process,
which now goes 5 years. It's way too long for us to detect
what's going on in these corporations. We're working on those
three areas, very limited, and I think we will meet our
deadlines and our cost targets as we go forward because our
record in the last year has been good.
Senator Bond. Thank you, Commissioner. I would like to turn
to Mr. George. How can the BSM be successful, within what time
frame and at what cost? What is the TIGTA assessment?
Mr. George. That's a very difficult question to answer, Mr.
Chairman. When you look at CADE and then look at the fact that
it's over $130 billion, $130 million over budget, and 30 months
behind schedule already, and then of course when you look at
the TSM, the Tax Systems Modernization effort that occurred 10
years ago, it really doesn't give one a lot of encouragement
that something as massive as BSM will be any much more
successful unless a complete understanding as to what went
wrong with TSM is had. I don't question that the current
commissioner is examining the problems and has examined the
problems of tax system modernization, but it involves not only
the major prime contractor, Computer Science Corp, but many
subcontractors. And we are in the process, Senator, of
conducting audits on some of those sub-contractors and we'll
share that information with this committee once those ordered
audits are complete.
Senator Bond. We appreciate your continuing to share this
information with us. This hearing is just the beginning of our
inquiries and we look forward to having that information.
Let me ask one quick question to the Commissioner. Since
the IRS is only getting 11 of the 15 items promised with the
next CADE delivery in July, can you tell me how much the
government will be refunded for the four dropped items?
CUSTOMER ACCOUNT DATA ENGINE
Mr. Everson. I'm not sure to which items you are
specifically referring. I will certainly take a look at that
and provide the information for the record. We've had ongoing
discussions and negotiations with the contractors and reached
some pretty tough deals over the last year, where we've changed
the way we're dealing with them and the relationship is subject
to renegotiation. I want you to know my commitment here. I meet
monthly with the President and chief operating officer of CSC
and I've done that for a year and a half now, and their
performance has improved significantly. We are continuing to
hold their feet to the fire to make sure we get everything,
every nickel's worth that the government pays.
Senator Bond. Thank you very much, Mr. Commissioner.
Senator Murray.
Senator Murray. Thank you, Mr. Everson. I appreciate your
testimony and as I talked about in my opening statement the IRS
is talking about significant cuts to taxpayer services in order
to pay for enforcement. You're proposing closing taxpayer
assistance centers, reducing telephone service, eliminating
phone-routing sites, discontinuing TeleFile, and reducing
communications with practitioners. Last year, you published a
comprehensive reorganization plan but those reductions are
nowhere to be found in that plan. Why are you now suddenly
proposing cuts when they were never a part of your recent
reorganization plan?
IRS STRATEGIC PLAN AND TAXPAYER SERVICE
Mr. Everson. Do you mean you're citing a strategic plan?
I'm not sure what you mean by the reorganization plan.
Senator Murray. The strategic plan that was published last
year.
Mr. Everson. We have set out a strategic plan and it has
three objectives, which are to continue to maintain and improve
taxpayer services, to significantly enhance enforcement, and to
modernize the IRS. And I think that plan has guided all of our
internal work and our budget discussions. Now, the IRS is not
protected from overall fiscal realities so we have been asked
to do our share and we are going to do our share to tighten our
belt where we can. What we've done is gone through a very
detailed process, and my two deputies are leading a lot of
discussions to tighten up where we can. We're making a lot of
increases in productivity and efficiency. You mentioned
reducing phone services as an example. We've taken a look at
the phones. Right now we provide 15 hours of access. We're
going to bring that down to 12 hours. That is comparable to
what Social Security and Blue Cross/Blue Shield do. Ninety-
three percent of the calls that come in fall within those 12
hours. We believe that we can save money through less overtime
pay, but not reduce services there.
TAXPAYER SERVICE CENTERS
Closing the tax centers, I understand that that will cause
some disruption of services. It is relatively higher cost
services and our decisions here are based upon just as GAO
said, an increase in things like the VITA volunteer centers.
There are 14,000 VITA sites around the country. There will
necessarily be a shifting of work to these sites. We see other
changes. For instance, the calls coming into our telephone
system now are down 6 or 7 percent this year. That reflects
movement activity over to the Internet, where contacts have
doubled.
Senator Murray. But there are always people who don't have
access to the Internet.
Mr. Everson. Absolutely, Senator. You look at tele-file as
an example where in terms of individuals, that usage has been
going down 10 or 15 percent a year. I've asked our people to
come up with what were the tough choices, instead of bleeding
away and cutting everything over a period of years by 5 percent
or something. To take a look at what we do and then make the
hard choices to not do 110 different things, to strip off some
of those so that we can do well what we ought to do. There are
some tough choices here. I agree with you.
Senator Murray. But your budget says you want to improve
taxpayer service by, ``make it easier for people to participate
in the tax system'', and when you close centers that puts undue
hardship on a number of people who are already living in more
remote locations to travel further. So that is at odds with
your statement, but let me ask you, how do you plan to measure
the adverse impacts of these proposals on taxpayers?
TAXPAYER SERVICE CHANGES
Mr. Everson. What we have done is gone through a process
that looks at five different considerations. We ended up
developing two models and we've taken input from a variety of
people, including an advisory committee, an IRS advisory
committee, and I----
Senator Murray. It's a little hard to read.
Mr. Everson. I think you have copies of this. It's my
understanding, anyway. If you don't, I'll give you mine.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
We've looked across our system. We have 408 of these
taxpayer assistance centers and have compared them using some
three dozen factors that we have loaded into the models we've
run. There are over 13,000 different data points, is my
understanding. We're looking at geography. As you say, how far
is it to the next TAC? How far is it to the next volunteer
center? We'd look at the cost. Obviously, a part of this is
trying to drive down cost and hold the funding to a reasonable
cost. It includes employee cost, it includes a facilities cost.
We've looked at workload, obviously. Some TACs that are in more
rural states have one or two people as opposed to in larger
cities. And we've looked at demographics, changes in the
country. We had a team of 12 people that's been doing this work
for the last several months and we've ended up developing two
models. This was after an initial conversation we had with the
taxpayer advocate who has said, make sure you're looking at
things that affect taxpayer access and that gets more to this
question of workload. And initially a model that we had had
something like 37 TACs being closed. They were all in big
locations, big cities, and high cost operations, but what we've
now done is refine this to two different models. One of them
ends up with 67 TACs closed in 27 States across the country.
And that gives a slightly greater weight to employee facilities
costs. The other ends up with 105 closed and that gives more
weight to issues like workload and demographics. And the
difference is, in some States you obviously end up with a
deeper impact like in Washington or North Dakota or any place
in going to the second model. Our inclinations are to go to
option No. 1. We've been reviewing these options with others
and we haven't reached any final decisions. We're still
refining this.
Senator Murray. Well, let me ask Mr. George, because in
your formal testimony you expressed concern to us that the IRS
may disrupt a balance between customer service and enforcement
by closing some of these centers. Then you question whether the
IRS has sufficient data to conclude the taxpayers that use
these centers would be willing and able to use alternative
methods to gain tax preparation assistance from the IRS. So
given all of these uncertainties you've just seen do you
believe the cost savings closing these centers will yield is
worth the sacrifice that will be endured by taxpayers?
Mr. George. Senator, we have no evidence that it will or
won't just because the data is not there. But the one thing
that I would note that is striking in terms of what is missing
from the components of the criteria that the commissioner noted
is the behavior of those who use the taxpayer assistance
centers. As was noted we truly do not know what options they
will or will not pursue of this and I do not believe that the
Internal Revenue Service has considered that as a factor when
it's considered.
Senator Murray. Are you concerned that it's not a fair way
to evaluate the system?
Mr. George. I think it is not a complete way in which to do
it.
Senator Murray. Can you tell me exactly what you think
needs to be added to it?
Mr. George. I think a very comprehensive survey of the
users of the taxpayer assistance centers using a methodology
which is reasonable given the large numbers that are affected
by this, something of that sort, Senator.
LEGISLATIVE LANGUAGE
Mr. Everson. If I could prolong this for just a second. I
want the committee to understand what the stakes really are
here. I mentioned in the opening statement the impact if we're
constrained from taking this action. We've gone through a very
deliberate, careful process to try to squeeze down into the
President's service mark. If you tell us not to do this and you
use the President's mark for service as the ceiling, you will
be doing things like forcing us into further cuts on services
for telephones, stopping basic transcription of information
like K1 data which we use for high income audits. We will be
reducing support to our VITA programs because we have already
gone through a whole series of belt tightening exercises over
recent years. So I do caution you. Obviously, we will do
whatever is said here but unless you----
EFFECT OF SERVICE REDUCTIONS
Senator Murray. Are you telling us costs savings for option
No. 1 or option No. 2?
Mr. Everson. They both cost about $52 or $54 million, I
can't remember which is which, but they're comparable for the
two options.
Senator Murray. For what time period?
Mr. Everson. That is what comes out next year.
Senator Murray. But we don't know whether that will mean
reduced number of taxes paid because people don't get the
correct assistance.
Mr. Everson. I think that if we were to attempt to quantify
that, it would be an excruciatingly long and detailed process
because I've not seen any research that ties that kind of
service changes directly to taxes paid give that answer. You
would have to wait years to get that answer.
Senator Murray. That may well be but if people do their
taxes accurately the first time around it does save us money in
not having to go back and forth with them.
Mr. Everson. I agree with that. I agree with what the
chairman said that if we simplify all this we would get a lot
better answers. Now we're working in other areas, like the VITA
sites, where TIGTA and others have said the quality of their
return preparation isn't what it ought to be. We're trying to
increase that service so those are the kinds of considerations
we have getting at just what you're talking about.
Senator Murray. I'm out of time.
Senator Bond. Thank you very much, Senator Murray. Senator
Dorgan.
Senator Dorgan. Mr. Chairman, thank you very much. I thank
you and the ranking member. At one point, I was a chairman and
then ranking member of the subcommittee that funded the IRS.
I've always been very supportive of the IRS. I'm a former Tax
Administrator but I'll tell you over the years you almost run
out of patience on this. This year we're told modernization, a
program for which we have literally shoveled money out of this
Congress, is behind schedule, over budget, and probably will
produce a product less valuable than anticipated. You know at
some point this is not the type of science that requires
sending a person to the moon. Modernizing the computer system
of the Internal Revenue Service ought to be able to be done. It
is really disappointing to hear these reports and we do it
every year. It's not just on your watch. Behind schedule, over
budget, less valuable than we expect.
With respect to the tax gap I just wanted to make a couple
of comments and ask you, Mr. Commissioner, to respond. The tax
gap continues to grow. I think we need to increase enforcement
in order to respond to that but we can't increase enforcement
at the cost of closing taxpayer assistance centers in my
judgment. For 2 years I put money in your budget for the
Inspector General to go have people anonymously visit taxpayer
assistance centers every 2 months and tell us about the quality
of the taxpayer assistance. One of the reasons I did that is
because a large percent of the time the IRS employees
themselves were giving inaccurate information and couldn't
complete the tax returns properly. The results were still
pretty miserable, frankly. The Inspector General now has
reported about 44 anonymous visits to IRS Volunteer Income Tax
Assistance centers and here's what they found. These are the
centers that you would increase I think if you close some
taxpayer assisted centers. From February to April last year
Inspector General employees conducted 44 anonymous visits to
VITA sites. Thirty-five tax returns were prepared. None of them
were prepared correctly. Of the 35, if 28 of those returns had
been filed the IRS would have incorrectly refunded $26,000. If
the remaining 7 returns had been filed, the taxpayers would
have failed to receive $4,500 in refunds. For 9 of the 44
visits, tax returns were not prepared at all because the VITA
sites weren't open, had been relocated or too many people were
in line. But the fact is that of the 35 people who actually got
help, none of them got correct help. All of them, 100 percent,
incorrect. And so I mean to close taxpayer assisted centers
themselves--that themselves have a pretty miserable record.
Relying on VITA sites, I think is the wrong thing.
Let me just say one other thing. I think big multinational
corporations are having a field day with the Internal Revenue
Service on the issue of transfer pricing. They're now doing
business all across the world so you have related companies in
this country and abroad. They are buying and selling to each
other in order to move profits out of this country so that they
can't be taxed. They inflate prices, or deflated prices as it
were, and let me give you some examples. Tweezers, $4,800 each
purchased from your own subsidiary. That is an inflated price.
Safety pins, $29 each. Deflated prices, tractor tires for $7.
Pianos for $50. Missile launchers for $52. There are two
professors, Doctors Simon Pak and John Zdanowicz at Penn State
and Florida International University, respectively, who are
doing some research, that I helped fund through an earmark to
determine about how much tax revenue we may be losing due to
abnormal pricing. The IRS is using the arms-length method to
deal with their pricing abuses. It's like trying to take two
plates of spaghetti and fuse the ends together. It is
impossible and the corporations are having a field day. In my
judgment, there's massive tax avoidance and nobody seems to do
much about it. And there are some obvious answers to it. I
don't have time to deal with it here but I wanted to make this
final point.
We need more enforcement, better enforcement, smarter
enforcement, and we need more taxpayer assistance and taxpayer
assistance that is accurate. And if that requires additional
funding we need to do that. You can't have a tax system you
impose on the shoulders of the American people and say to them
you comply even though paid IRS employees can't figure it out
when a citizen walks up to get help. So you've got a tough job
Mr. Everson. I want to be supportive of you but I'm telling you
I'm really discouraged year after year to see modernization
apparently failing and to see all of these other things pile up
and the tax cap grow much larger. Now, is that a mouthful, and
you deserve an opportunity to respond.
COMPLIANCE
Mr. Everson. You covered a lot of ground there. Maybe I'll
be somewhat selective in what I respond to. Let's go to this
chart.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
No one has spoken more aggressively or acted more
aggressively to go after corporations and high income
individuals than I have since coming onto this job 2 years ago.
We asked for more money last year. We didn't get it all, and
the President's request again gives a great deal of focus, as
you can see, to corporations. We're asking for $63 million in
new funding, and for high-income individuals compliance we're
asking for $46 million. I agree with your assessment. The
corporations, it's a relatively small portion of the tax gap.
We did not update the corporate tax gap in our work, but I
suspect that the gap is understated. We are working
aggressively on this. We're doing something like establishing a
joint international tax shelter information center here in town
with counterparts from Britain, Australia, and Canada. We're
sharing information and we're seeing many of the things you're
talking about. Corporations, in too many instances, are not
just interested in going through a low tax jurisdiction, they
want to set up transactions that have two different treatments
in two different taxing jurisdictions, and then no taxes paid.
So we're working on this very aggressively. We do need that
funding to keep giving that problem prominence, and we do that
even though, in terms of a tax gap, the larger portion of the
tax gap is in individuals and an understatement of income,
largely associated with schedule C, their own sort of business
activities. We give that prominence because of the sense of
fairness that is so important to average Americans. They can't
feel that just because you're rich or you're a company you get
away with it. So I'm with you a 100 percent on that and so is
the President in terms of the allocation of resources.
BUSINESS SYSTEMS MODERNIZATION
BSM. I think there's a risk here that the committee is
drawing the wrong impression. I do not disagree at all that
this has been a troubled program, and it's tempting to say
let's cut that program down to a $100 million or put further
controls on it. That would, in my view, be exactly the wrong
thing to do. We are just now getting a handle on this. We're
just now delivering the systems. I think that the problems that
Inspector General stated are absolutely correct, but that was a
view from 2 years ago. We've acted and we are turning a corner
here and if we act as if nothing has happened then you will
choke it off and then we really will be at risk of this system
cratering because we won't move forward. These fiscal pressures
as you know, Senator, are not going to get any easier. If we
don't invest in this technology, you won't get the services.
Right now we're at over 50 percent of the returns being filed
electronically. That is good news. It helps everybody. If we
don't keep going on this--hold me accountable to do it right
for sure--but if we don't continue to have a baseline of
funding--and this $200 million is a very modest amount compared
to where we were at $400 million or $500 million just 2 or 3
years ago--I fear we will really not make it.
Senator Dorgan. Mr. Chairman, could I just observe that if
you are always turning a corner you may be going in a circle.
The reason I say that and Mr. Everson I want you to succeed and
I want to work with you and be helpful to you but for 8 years
working on this subcommittee or some derivation of it, I've
been told by Commissioners we're turning the corner. At some
point it is apparently a track that we're on. So I guess in the
final analysis, Mr. George, your work is very important. You
tell us exactly what's happening down there. Mr. Everson, we
want you to succeed. This is not criticism. It is frustration.
So, Mr. Chairman, thank you for allowing me that therapy.
Senator Bond. Senator Dorgan, I hope you feel better.
Senator Dorgan. Much better. Thank you.
Senator Bond. We look forward to hearing your suggestions
how we can make sure we're turning the corner in the right
direction based on your experience. Senator Murray.
Senator Murray. Thank you very much. Mr. Chairman, I have a
Veteran's Committee hearing that I want to get to so let me
just ask you a quick question on the tax gap. Are there any
findings in your report that are going to cause you to change
your area of emphasis on enforcement?
COMPLIANCE BUDGET
Mr. Everson. I would say that we've looked at this and the
results are preliminary, Senator. We're going to be refining
them over the course of the year. That is why we've established
this range. The statisticians are continuing to go through all
of these areas. I have been struck by the fact that our
allocation of resources is generally consistent with what we're
seeing in the gap. You can see that we're asking for more
money. Last year we didn't really touch individuals and small
businesses very much compared to the high income and the
corporation. This year in the request we're starting to move
past those two areas to cover that area more--that is where the
big preponderance of the gap is. And so I think what we're
doing here is generally consistent. The final point I would
make for you to consider is that we've got two buckets of
money: criminal activity and the tax-exempt area. They're not
as directly tied to the gap. It's very tempting for the
committee to just fund the things that get you the very best
return, but we have other responsibilities, like maintaining
the integrity of tax exemption, that are very important too. So
while I think our resource allocation is consistent with the
findings, we have to make sure we go beyond just the tax cap.
Senator Murray. Okay. Thank you very much. Thank you, Mr.
Chairman. I appreciate it.
Senator Bond. Thank you very much, Senator Murray. I
believe that we do need to support via some funding but we need
clear benchmarks and requirements. We need a plan to lay out a
straight path forward, so we know we're getting there. Mr.
George, I'm sure, will be all over it to help us to determine
that we're on that right path. TIGTA reported that the Security
Audit and Analysis System that was developed to audit online
activity of IRS employees was accepted by IRS even though its
required functions IRS paid for were not operating. How much
did it cost? What weaknesses still exist? And what are you
doing to make the system work as advertised?
IT SECURITY
Mr. Everson. IT security is an issue of paramount concern
for us. It is something that we've recognized. After I arrived
at the agency, we stripped out our security functions from a
variety of pockets in the agency and put together one mission
assurance organization. One of my two deputies gives it the
appropriate providence. I think that is bearing results. We've
never had any penetrations from the outside of the IRS into our
systems. TIGTA has correctly pointed out, as have others, that
when you're inside the system there's maybe too much latitude,
and we do have some problems where things can get compromised
from time to time. We're working on that. We need to address it
further. I think we're making progress. All I can tell you is
that it is the subject of regular conversations at the most
senior levels. So we're not going to move off this. We're going
to continue to give it the prominence it needs because we don't
want the security compromised. We recognize the terrible
ramifications of that.
Senator Bond. So you're telling me that we saw this theft
of personal information from ChoicePoint by criminals accessing
data, posing as legitimate users, but you're telling me that
nobody has been able, from the outside, to access the IRS
system? It is not vulnerable to similar attack?
Mr. Everson. That is correct. Now I don't want to sound
overconfident about that. But we have really good people who
continue to work on that. People try to penetrate the system,
Senator, from around the world everyday, but we've got good
firewalls there. And we're going to continue to be vigilant to
make sure we're doing absolutely everything we can to prevent
that. I think TIGTA would certainly say within the firewalls
we've got some more work to do as well.
Senator Bond. I was kind of concerned when TIGTA called 100
IRS managers and employees pretending to be help desk
employees, and they were able to convince 35 managers and
employees to reveal their account name and change their
passwords to one suggested by TIGTA. Doesn't that show the
likelihood of defeating security measures? What can be done to
make sure that that problem does not recur?
Mr. Everson. That's exactly the kind of thing I'm saying
internally, within the firewalls, and we're obviously moving
forward on a lot of what's in that report, and other measures.
I think it is an area of continuing discussion and there's a
lot of focus from TIGTA as we move forward on their stuff.
Senator Bond. Mr. George, what's your comments on that?
Mr. George. Well, Senator first of all to quote former
Commissioner Sheldon Cohen, he thinks he is an honest man who
has never been given the opportunity to cheat. And in effect
that there are opportunities, that additional firewalls were
maintained. Yes that would enhance the strength, in terms of
outside attempts. But there's no question that internal access
by disgruntled employees, it's a great risk to the IRS. And now
that the Commissioner has restated his commitment to address
that, I am more optimistic that something will and can be done.
But it is something that TIGTA certainly will be monitoring,
and we'll report back to you on.
Senator Bond. Thank you, Mr. George. Well, the Taxpayer
Service Budget, Commissioner, assumes a reduction of $134
million through taxpayer service reengineering. Until this
week, however, we had not received details on how the IRS plans
to achieve these savings. The Taxpayers Advocate's testimony,
as you know, said increasing enforcement and reducing service
is based on more of an instinct than solid research. Can you
lay out for us, and give us further detail, for the record, if
that's appropriate, on how you arrive at these proposed cuts.
We've had some discussions----
TAXPAYER SERVICE REENGINEERING
Mr. Everson. I'm absolutely happy to do that. We've had a
long process of 2 or 3 months of detailed planning and weighing
of options. And I think it is a sound proposal and we will
provide you those details.
[The information follows:]
Taxpayer Service Fiscal Year 2006 Budget Reduction Initiatives
assistance
Closing selected Taxpayer Assistance Centers realigns service with
changing trends.--TACs are one of the most expensive methods of
customer service. The number of people accessing TACs continues to
decline as more taxpayers use the IRS toll-free telephone system to get
answers to their questions. Web-site use and e-filing continues to
rise. Volunteer tax preparation and other outreach assistance is also
increasing. The IRS created a business model based on five neutral
criteria to identify the most appropriate TACs to close. Based on
internal and external input on the model, taxpayer-centric needs, such
as workload, geography, and demographics were given greater weight than
labor and facilities costs. The estimated savings are $45 million-$55
million.
Changing the Toll-Free Telephone Hours of Operation.--The hours of
toll-free telephone operations will change beginning October 2005 from
15 to 12 hours 8:00 a.m. to 8:00 p.m., Monday though Friday, in local
time zones. Current call volume is low during the late evening and
early morning. Ninety-three percent of the calls come in from 8 a.m. to
8 p.m. The change in level of service is minimal. The estimated savings
are $10 million-$16 million.
IRS will reduce Electronic Tax Law Assistance (ETLA) service.--The
will reduce the level of service in fiscal year 2006. Less than 150,000
tax law inquiries were received in fiscal year 2004. This compares with
over 8.6 million tax law inquiries handled via our toll-free lines. The
IRS will discontinue providing ETLA in early fiscal year 2006 for
customers living in the United States. ETLA will continue for customers
located overseas (Taxpayers living abroad and Military Personnel)
because this is their only toll-free communication tool. The estimated
is still being evaluated but is less than $1 million.
The IRS is closing non-continuing call-sites.--The IRS will
consolidate work in its Boston, Chicago, Des Moines, Houston, Omaha,
and Wichita telephone call-sites into its larger phone centers for
greater efficiency and lower costs. The change will be invisible to
customers. Taxpayers won't notice a change; their calls are currently
routed and answered nationwide. The IRS has 26 call-sites nationwide--
these six non-continuing sites are satellites of the 26 sites.
Nationwide the IRS has approximately 15,000 employees providing
customer service. Savings from staff realignment have not yet been
finalized. Rent savings of up to $1.2 million will be achieved
primarily in fiscal year 2007.
Updates in processing of applications for Employer ID numbers
submitted through the Internet.--The IRS will complete upgrades to its
system for accepting applications through the Internet for employer
identification numbers (EINs). The current system for accepting the EIN
applications at the front-end of the process is automated. This will
improve back-end processing of the applications. By September 2006, 100
percent of the forms submitted through the Internet should be fully
automated. The estimated savings are $2 million-$5 million.
Efficiencies in managing customer accounts will result in
savings.--The process improvements and productivity gains achieved over
the past few years, along with the decline in correspondence from
taxpayers who have account or tax law inquiries, have changed the need
for the same staff levels. The estimated savings are $15 million-$17
million.
OUTREACH
Greater efficiencies in distributing tax products, increases in e-
filing and use of Internet to download tax products will decrease
printing and postage costs.--For example: The IRS's forms distribution
site will be more efficient and save staff, printing and postage
resources as a result of consolidating operations from three sites to
one site. Other savings include mailing out fewer tax packages because
more taxpayers are filing electronically. The IRS will reduce excess
quantities of tax products based on increases in e-filing and internet
downloads of tax forms and publications, and by streamlining some tax
products. The estimated savings are $5 million-$10 million.
Discontinuing lower value products in outreach programs and
reducing some program travel will have little affect on customers.--IRS
will discontinue developing some lower value publications and outreach
material used to support volunteer tax assistors and outreach partners.
For example, the IRS will discontinue some small quantities of end-of-
season flyers, brochures and pamphlets used by its field staff, and
reduce some operational travel. The estimated savings are up to $1
million.
Realigning and refocusing communications, outreach, and liaison
efforts within the Small Business/Self-Employed (SB/SE) Division.--The
merger will improve service to small business taxpayers and tax
professionals, clarify the individual missions, coordinate programs,
and minimize any overlapping responsibilities. Efficiencies gained
through the realignment will allow the IRS to redirect staff resources
to front line enforcement efforts. The estimated savings are $15
million-$20 million.
PROCESSING
IRS will discontinue TeleFile.--The IRS will end its TeleFile
program after August 16, 2005. TeleFile allows taxpayers to file
certain forms by telephone: Form 1040EZ, Income Tax Return for Single
Filers and Joint Filers with No Dependents; Certain State individual
tax returns, Form 4868, Application for Automatic Extension of Time to
File U.S. Individual Income Tax Return, and Form 941, Employer's
Quarterly Federal Tax Return. Decline in use for most forms (e.g., less
than 4 million of the 16 million eligible EZ filers used TeleFile),
coupled with increasing costs to maintain the system, and the growth of
other electronic filing options led to the decision to end the program.
The expected printing and postage savings is $4 million-$5 million.
Improved efficiencies in processing tax returns.--The IRS will have
additional savings due to improved efficiencies in its Service Center
campus processing operations, through re-engineering of its processes,
and because more taxpayers are e-filing or using computer software to
prepare their tax returns. For example: The IRS is evaluating its
current processing procedures so that it can reduce unnecessary labor
costs, especially when the returns are prepared by taxpayers and
practitioners using computer software. The IRS will improve its
productivity rates in data transcription of data from the forms. The
expected savings are $9 million-$12 million.
Enhancements to processing of paper Forms 941 will improve
productivity.--The IRS will modify its existing Service Center
Recognition/Image Processing System (SCRIPS) to add a new application
for processing paper Employer's Quarterly Federal Tax Return, Forms
941. This will result in improved productivity rates and increased
accuracy in data capture. Fewer additional seasonal employees will be
needed. The estimated savings are $4 million-$6 million.
Senator Bond.--We would also like to have Mr. George's
review of it so we can take a look at it.
You've already discussed the criteria that you're
considering to close Taxpayer Assistance Centers. And you have
not, as I understand it, made a determination which of the, on
the blue chart, which methodology you're going to use.
Mr. Everson. That's correct. I think we're leaning towards
the option No. 1, which has the impact of the smaller number of
sites being closed. But we're still assessing that over the
next coming weeks.
Senator Bond. All right. The tax gap you mentioned--how did
you calculate the $4 received for every dollar of enforcement
spending?
RETURN ON INVESTMENT
Mr. Everson. The chart that you saw there of enforcement
revenues, that's a pretty simple thing. We track the
collections, which is the bulk of this money. We've got a small
strip, a couple of billion dollars of monies that come in from
document matching activities. And then the rest is from our
audits. And we follow how much money comes in from each of
those actions. And now that is turning back up, that is a
comparison. That $43 billion, that's cash in hand. And that
compares, as I said, to the total budget that you've given us
of $10.2 billion. It's a gross simplification. The $10.2
includes the $6 plus billion for enforcement, but also all the
other money for processing returns or answering phones, or the
outreach that we do. And I'm simply pointing out to everybody
that you get $4:$1 on average. Now you get better than that,
obviously, if you look only at enforcement programs.
Senator Bond. If you took the audit function and the
enforcement function alone, you might get a higher number?
Mr. Everson. You would get a higher number, and what we try
to do, Senator is run a balanced program here. We could invest
in certain strips of activity that would get you $10:$1 or
$20:$1, but then you would be ignoring other areas. And you'd
be, maybe, going after more middle class people just on under
reporting as opposed to trying to run a balanced system, where
you go across that whole tax gap map. If you look at the tax
gap map there are a lot of activities in there that you have to
get after. And you have to show some enforcement presence
across everything.
Senator Bond. Mr. George, do you have any input on those
figures?
Mr. George. We're in the process now, Senator, of
evaluating the methodology and the conclusions that you heard
the Commissioner state. And so we will issue that report as
soon as we can. And we'll give that to you.
Mr. Everson. That $43 billion in the methodology has been
audited by GAO years ago when that system was set up. So I
think the integrity of that number is pretty well established.
Senator Bond. Mr. George, as related by Senator Dorgan,
your oversight of the VITA program had some pretty stunning
results. Out of 35 VITA returns, they were zero for 35 in
accuracy, which doesn't get you into a higher league certainly
if you're batting zero. Did you present particularly difficult
returns? How did you structure this?
Mr. George. Senator, there's no question that the
complexity of tax law is a factor. And so that then leads to
the degree to which VITA volunteers are trained. So we do have
some question as to whether or not that is being effectively
done. Lastly, volunteers did not in effect follow normal
procedures in many instances. Some of the mistakes that were
made could have been avoided had they, for example used intake
sheets properly and were supervised properly. The problems we
found are something that we don't believe are insurmountable.
Again, through proper training and through appropriate
oversight. We think many of the problems could be avoided in
the future.
Senator Bond. Commissioner, what do you propose to do to
fix that problem?
VITA PROGRAM
Mr. Everson. Let me make a couple comments on this. I think
that in response to your question, were these overly complex
returns, the answer is yes. And in fact TIGTA is looking at
this year, I believe both parties agree--and the Inspector
General wouldn't notice because he wasn't here last year--a
more representative sampling of the returns. It does not yield,
based upon the work that is being done now, a good return or a
good rate, but it doesn't yield a zero either. So I think that
the change in the methodology of how the returns have been
selected shows an improvement. Now we have taken their
recommendations and are working on them with one exception.
We've done more training; we're working on the software, and
the whole series of things. We're making sure people are using
the guide. There was some contention around one suggestion, and
we backed away from the proposal, that we have IRS observers
doing more onsite monitoring. We probably will end up doing
this in the next filing season when we satisfy ourselves that
it can be handled with the appropriate disclosure discussion
with taxpayers before we do it. They had recommended that step.
The Taxpayer Advocate felt that it was not an appropriate step.
The volunteer organizations themselves, who do the bulk of this
work, have told me that they think it is good idea. AARP, which
does about half of this work, they told me they were fine with
having IRS people there to watch what was going on. So I think
we want to do that down the road, having organized it
correctly. So we have a lot more to do here. To strengthen this
area, I think what they're doing is helpful to us. And they're
refining what they do and we're refining what we do. And we've
got to do better.
Senator Bond. IRS estimates that 740,000 people have set up
offshore financial accounts, concealing taxable income at a
loss of $20 to $40 billion a year. When you had a voluntary
compliance initiative, only 1,300 of them came forward. How can
you shut down this abusive practice? And what realistically can
you do about it to go after the other 738,000-some-odd
taxpayers who are non-taxpayers?
OFFSHORE VOLUNTARY COMPLIANCE INITIATIVE
Mr. Everson. I think that this offshore area is
particularly troublesome and difficult. Basically augmenting
those resources going back in to the offshore compliance and
audit rate, that helps sweep in more of these taxpayers. We do
look at returns. We have access to other information; we see
how people are spending their money. If we see things that are
out of line maybe we can get after this in other ways. But the
other thing is we're getting better cooperation from other
countries. We've had some issues with getting all of the
information we need from credit card providers and others. But
we're working through those. It is a big, big continuing
challenge, internationalization and sending money offshore. It
goes beyond what Senator Dorgan was saying on corporations. It
really does go into individuals too. And what we have is a very
aggressive program with the Justice Department to get
injunctions against promoters if we see schemes that are being
sold to people. We attack them and try to leverage our findings
from the promoters as well.
Senator Bond. Many of the questions we raised really deal
with the complexity of the IRS code. With 54,000 pages of tax
law regulation and related advisory material, I think we all
agree it is too complex, confusing, and costly. What can be
done administratively to simplify it? And does the
administration have specific legislative changes to reduce the
complexity, to assist taxpayers and assist in enforcement?
TAX COMPLEXITY
Mr. Everson. I've testified before the Tax Panel that has
been formed, as you know, with your former colleagues Senators
Mack and Breaux. And I've said that the simplification is
terribly important. Our view is that complexity obscures
understanding. People either make inadvertent errors or they
throw up their hands and say ``Why bother?'' at a certain
point. On the other hand the complexity provides an opportunity
for those who would skirt the tax laws to hide and to avoid
detection by the IRS. So I agree with your sentiment 100
percent. I've said to the tax panel that compliance is
something that they need to watch for when they come forward
with proposals that you will ultimately see. We need to look at
compliance. A couple of quick points: no system is immune to
compliance issues. So you've got to consider its
administerability. Look at a VAT as an example. We were in
Britain a few months ago and they've got an 11 or 12 percent
compliance problem with the VAT system, so you have to be
cognizant of these problems, no matter what system you chose.
And the administration is, I think, well aware of that, as is
the tax panel as they go through these discussions.
Senator Bond. A final question. Some small business tax
preparers are concerned and I wonder whether the IRS has any
plans to charge fees for those who can afford them for some of
IRS's services, especially where there are competing services
provided by the private sector. Is it feasible to consider
charging fees where it is obvious that the taxpayers, if not
for getting IRS service, would be using private sector tax
preparers?
FEES FOR SERVICE
Mr. Everson. We have something like 1.2 million tax
practitioners out there that we're highly relying on. The IRS
doesn't do all the work and it doesn't do all the contacts with
the individuals. We rely on professionals, good professionals
in lots of small firms to help us guide people through the
process. I'm unaware at this time of any new fee proposals
along the lines of what you've suggested. And I'll check to see
what the status is and let you know. But we think the vitality
of small practitioners is very central to what we're doing.
Senator Bond. Mr. George, any closing comments?
Mr. George. Senator, again thank you for the opportunity.
This being my first hearing in my new capacity as IG. There is
no question of the vital role that the Internal Revenue Service
plays to our Nation's security. And I have known of Mark
Everson and have worked with him in his capacity as managing
official at OMB.
Mr. Everson. That's why he's skeptical.
Mr. George. Not at all, not at all. So I believe that he is
committed to helping ensure that this important organization
fulfills its mandate. And I can assure you that I'm committed
to assisting in terms of tax administration and ensuring that
that organization does what it's supposed to do. And if it
engages in activity that's inappropriate, that we bring that to
both your attention and to the attention of the Secretary of
the Treasury.
Senator Bond. Thank you, Mr. George. Commissioner, any
closing comments?
Mr. Everson. No. I appreciate your interest. We're in tough
territory here; you've got some other needy clients. I ask you
to bear in mind that we feel we've constructed a balanced
proposal. But that getting this enforcement funding does help
the government's top line. And that's obviously of some very
real importance in this time of deficits.
ADDITIONAL SUBMITTED STATEMENTS
Senator Bond. Additional prepared statements have been
submitted, and they will also be included in the record.
[The statements follow:]
Prepared Statement of James R. White, Director, Strategic Issues, and
David A. Powner, Director, Information Technology Management Issues,
Government Accountability Office
INTERNAL REVENUE SERVICE--ASSESSMENT OF THE FISCAL YEAR 2006 BUDGET
REQUEST
GAO HIGHLIGHTS
Highlights of GAO-05-566, a statement for the record for the
Subcommittee on Transportation, Treasury, the Judiciary, Housing and
Urban Development, and Related Agencies, Committee on Appropriations.
WHY GAO DID THIS STUDY
The Internal Revenue Service (IRS) has been shifting its priorities
from taxpayer service to enforcement and its management of Business
Systems Modernization (BSM) from contractors to IRS staff. Although
there are sound reasons for these adjustments, they also involve risks.
With respect to the fiscal year 2006 budget request, GAO assessed
(1) how IRS proposes to balance its resources between taxpayer service
and enforcement programs and the potential impact on taxpayers, (2)
status of IRS's efforts to develop and implement the BSM program, and
(3) the progress IRS has made in implementing best practices in
developing its Information Technology (IT) operations and maintenance
budget.
WHAT GAO RECOMMENDS
In a related statement (GAO-05-416T), GAO recommended that the
Commissioner of Internal Revenue supplement the 2006 budget request
with more detailed information on how proposed service reductions would
impact taxpayers. GAO has recommendations still outstanding related to
BSM management controls and IT budget justification.
WHAT GAO FOUND
IRS's fiscal year 2006 budget request of $10.9 billion is an
increase of 3.7 percent over last year's enacted levels. This includes
an 8 percent increase for enforcement, and a 1 percent and 2 percent
decrease for taxpayer service and BSM. However, the potential impact of
these changes on taxpayers in either the short- or long-term is
unclear, because IRS has not provided details of proposed taxpayer
service reductions, and although it is developing long-term goals, they
are not yet finalized. Because of the proposed reductions and new and
improved taxpayer services in recent years, this is an opportune time
to examine the menu of services IRS provides. It may be possible to
maintain the overall level of service to taxpayers by offsetting
reductions in some areas with new and improved service in other areas
such as on IRS's Web site.
Taxpayers and IRS are seeing some payoff from the BSM program, with
the deployment of initial phases of several modernized systems in 2004.
Nevertheless, the BSM program continues to be high-risk, in part,
because projects have incurred significant cost increases and schedule
delays and the program faces major challenges in areas such as human
capital and requirements management. As a result of budget reductions
and other factors, IRS has made major adjustments. It is too early to
tell what effect these adjustments will have on the program, but they
are not without risk and could potentially impact future budgets.
Further, the BSM program is based on strategies developed years ago,
which, coupled with the delays and changes brought on by budget
reductions, indicates that it is time for IRS to revisit its long-term
goals, strategy, and plans for BSM. Because of these challenges, IRS is
redefining and refocusing the BSM program.
Likewise, IRS has made progress in implementing best practices that
would improve its budget development and support for its IT operations
and maintenance request. In particular, the recent release of a
modernized financial management system included a cost module. However,
at this time, historical data is not yet available for IRS to use this
module in formulating its IT operations and maintenance request.
IRS BUDGET SUMMARY FOR KEY ACTIVITIES, FISCAL YEARS 2004-2006
[Dollars in millions]
----------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal
Year 2004 Year 2005 Year 2006 Percent Percent Percent
Change Change Change
(Enacted) (Enacted) (Request) (2004-2005) (2005-2006) (2004-2006)
----------------------------------------------------------------------------------------------------------------
Taxpayer service........................ $3,710 $3,606 $3,567 -2.8 -1.1 -3.8
Enforcement............................. 6,052 6,392 6,893 5.6 7.8 13.9
BSM..................................... 388 203 199 -47.6 -2.0 -48.7
----------------------------------------------------------------------------------------------------------------
Source.--GAO analysis of IRS data.
Note.--Numbers may not add due to rounding.
Mr. Chairman and members of the subcommittee, we are pleased to
present this statement for the record regarding the Internal Revenue
Service's (IRS) fiscal year 2006 budget request and in support of your
April 7, 2005 hearing on IRS's appropriations.
IRS is in the midst of making significant adjustments to its
modernization strategy to better serve taxpayers and ensure their
compliance with the Nation's tax laws. It is now 7 years since the
passage of the Internal Revenue Service Restructuring and Reform Act of
1998 (RRA 98) \1\ and IRS is shifting its priorities from improving
taxpayer service to strengthening tax law enforcement efforts. IRS is
also adjusting its strategy for managing its Business Systems
Modernization (BSM) effort by shifting significant program management
responsibilities from contractor to IRS staff. Although there are sound
reasons for these adjustments, they also involve risk.
---------------------------------------------------------------------------
\1\ Public Law No. 105-206 (1998).
---------------------------------------------------------------------------
We have reported that IRS has made progress improving taxpayer
service since the passage of RRA 98.\2\ For example, IRS's telephone
assistance is now more accessible and accurate. Further, IRS is more
efficient at processing tax returns, in part, because of the growth of
electronic filing, and has cut processing staff. IRS has also
implemented some modernized information systems and increased its
capacity to manage large systems acquisition and development programs.
However, progress has not been uniform. We have reported on large and
pervasive declines in IRS's tax law enforcement programs after 1998. We
have also reported that a number of systems modernization projects were
over budget and behind schedule.\3\
---------------------------------------------------------------------------
\2\ See for example, GAO-05-67, Tax Administration: IRS Improved
Performance in the 2004 Filing Season, But Better Data on the Quality
of Some Services Are Needed (Washington, DC: Nov. 15, 2004).
\3\ GAO, Internal Revenue Service: Assessment of Fiscal Year 2005
Budget Request and 2004 Filing Season Performance, GAO-04-560T
(Washington, DC: Mar. 30, 2004).
---------------------------------------------------------------------------
As noted, IRS is shifting its priorities to better address these
problems. The risk, as IRS shifts its priorities towards enforcement,
is that some of the gains in the quality of taxpayer service could be
surrendered. There are analogous risks associated with moving more of
the management of BSM in-house.
With these risks in mind, our statement for the record discusses
IRS's fiscal year 2006 budget request. To address your request to
provide this statement, we assessed (1) how IRS proposes to balance its
resources between taxpayer service and enforcement programs and the
potential impact on taxpayers, (2) the status of IRS's efforts to
develop and implement the BSM program, and (3) the progress IRS has
made in implementing best practices for developing its information
technology (IT) operations and maintenance budget.
Our assessment of the budget request and BSM is based on a
comparative analysis of IRS's fiscal year 2002 through 2006 budget
requests, funding, expenditures, other documentation, and interviews
with IRS officials. For this assessment, we used historical budget and
performance data from reports and budget requests used by IRS,
Department of Treasury, and Office of Management and Budget (OMB). In
past work, we assessed IRS's budget and performance data.\4\ Since the
data sources and procedures for producing this year's budget data have
not significantly changed from prior years, we determined that the data
were sufficiently reliable for the purposes of this report although for
fiscal years 2005 and 2006 subject to change. Regarding our analysis of
IRS's BSM program, we primarily used the agency's BSM expenditure plans
to determine the status of the program. To assess the reliability of
the cost and schedule information contained in these plans, we
interviewed applicable IRS officials to gain an understanding of the
data and discuss our use of that data. In addition, we checked that
information in the plans was consistent with information contained in
IRS internal briefings. Accordingly, we determined that the data in the
plans were sufficiently reliable for purposes of this statement. We
performed our work in Washington, DC and Atlanta, Georgia from December
2004 through March 2005, in accordance with generally accepted
government auditing standards.
---------------------------------------------------------------------------
\4\ GAO, Tax Administration: IRS Needs to Further Refine Its Tax
Filing Season Performance Measures, GAO-03-143 (Washington, DC: Nov.
22, 2002) and GAO, Financial Audit: IRS's Fiscal Years 2004 and 2003
Financial Statements, GAO-05-103 (Washington, DC: Nov. 10, 2004).
---------------------------------------------------------------------------
In summary, our assessment shows that:
--IRS's 2006 fiscal year budget request reflects a continuing shift
in priorities from improving taxpayer service to strengthening
enforcement efforts, but the potential impact of these changes
on taxpayers in both the short- and long-term is unclear. IRS
is requesting $10.9 billion, an increase of 3.7 percent over
fiscal year 2005 enacted levels. This includes an 8 percent
increase for enforcement, and a 1 percent and 2 percent
decrease for taxpayer service and BSM, respectively. IRS has
not finalized the details on where reductions in taxpayer
service would occur. In addition, IRS is developing, but
currently lacks, long-term goals that can help IRS inform
stakeholders, including the Congress, and aid them in assessing
performance and making budget decisions. In light of the
current budget environment and IRS's improvements in taxpayer
service over the last several years, this is an opportune time
to reconsider the menu of services it provides. It may be
possible to maintain the overall level of assistance to
taxpayers by changing the menu of services offered, offsetting
reductions in some areas with new and improved service in other
areas such as on IRS's Web site.
--IRS has taken important steps forward towards implementing the BSM
program by delivering the initial phases of several modernized
systems in 2004 and early 2005. Nevertheless, BSM continues to
be high risk because, in part, its projects have incurred
significant cost increases and schedule delays, and the program
continues to face major challenges. As a result of funding
reductions and other factors, IRS has made major adjustments to
the BSM program, including reducing the management reserve and
changing the mix and roles of contractor versus Federal staff
used to manage the program. It is too early to tell what effect
these adjustments will ultimately have on the BSM program, but
they are not without risk, could potentially impact future
budget requests, and will delay the implementation of certain
functionality that was intended to provide benefit to IRS
operations and taxpayers. Finally, the BSM program is based on
visions and strategies developed years ago, which, coupled with
the already significant delays the program has experienced and
the changes brought on by the budget reductions, indicates that
it is time for IRS to revisit its long-term goals, strategy,
and plans for BSM, including an assessment of when significant
future BSM functionality would be delivered. According to the
Associate Chief Information Officer (CIO) for BSM, IRS is
redefining and refocusing this program.
--IRS has made progress toward implementing investment management
best practices that would improve its budget development and
support for its IT operations and maintenance funding requests.
For example, the recent release of a new accounting system
included an activity-based cost module, which IRS considered to
be a necessary action to implement these best practices.
However, Office of the Chief Financial Officer officials stated
that IRS needs 3 years of actual costs to have the historical
data necessary to provide a basis for future budget estimates.
Accordingly, they expect that IRS will begin using the
activity-based cost module in formulating the fiscal year 2008
budget and will have the requisite 3 years of historical data
in time to develop the fiscal year 2010 budget.
IRS'S BUDGET REQUEST CONTINUES TO SHIFT PRIORITY FROM TAXPAYER SERVICE
TO ENFORCEMENT, BUT THE SHORT- AND LONG-TERM IMPACTS ON TAXPAYERS ARE
UNCLEAR
IRS's fiscal year 2006 budget request reflects a continuing shift
in priorities by proposing reductions in taxpayer service and increases
in enforcement activities. The request does not provide details about
how the reductions will impact taxpayers in the short-term. Nor does
IRS have long-term goals; thus the contribution of the fiscal year 2006
budget request to achieving IRS's mission in the long-term is unclear.
Because of budget constraints and the progress IRS has made improving
the quality of taxpayer services, this is an opportune time to
reconsider the menu of services IRS offers.
IRS Is Proposing Reductions in Taxpayer Service and BSM and Increases
in Enforcement
IRS is requesting $10.9 billion, which includes just over a 1
percent decrease for taxpayer service, a 2 percent decrease for BSM,
and nearly an 8 percent increase for enforcement, as shown in table
1.\5\ As table 1 further shows, the changes proposed in the 2006 budget
request continue a trend from 2004. In comparison to the fiscal year
2004 enacted budget, the 2006 budget request proposes almost 4 percent
less for service, almost 49 percent less for BSM, and nearly 14 percent
more for enforcement.\6\
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\5\ IRS is proposing a new budget structure beginning in fiscal
year 2006. The proposal would integrate support costs and the IT
appropriation into taxpayer assistance and operations appropriation
with eight program areas involving both taxpayer service and
enforcement. See appendix I for information on the new budget
structure.
\6\ The administration proposes to fully fund enforcement efforts
and costs as contingent appropriations. This would be achieved by using
one of two budgetary mechanisms that would allow for an adjustment to
total discretionary spending for fiscal year 2006 of not more than $446
million for IRS tax enforcement.
TABLE 1.--IRS BUDGET SUMMARY FOR KEY ACTIVITIES, FISCAL YEARS 2004-2006
[Dollars in millions]
----------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal
Year 2004 Year 2005 Year 2006 Percent Percent Percent
Change Change Change
(Enacted) (Enacted) (Request) (2004-2005) (2005-2006) (2004-2006)
----------------------------------------------------------------------------------------------------------------
Taxpayer service........................ $3,710 $3,606 $3,567 -2.8 -1.1 -3.8
Enforcement............................. 6,052 6,392 6,893 5.6 7.8 13.9
BSM..................................... 388 203 199 -47.6 -2.0 -48.7
----------------------------------------------------------------------------------------------------------------
Source.--GAO analysis of IRS data.
Note.--Numbers may not add due to rounding.
As table 1 also shows, taxpayer service sustained a reduction of
$104 million or 2.8 percent between fiscal years 2004 and 2005.
According to IRS officials, the majority of this reduction was the
result of consolidating paper-processing operations, shifting resources
from service to enforcement, and reducing some services. IRS officials
said that this reduction is not expected to adversely impact the
services they provide to taxpayers but added that the agency cannot
continue to absorb reductions in taxpayer service without beginning to
compromise some services.
For fiscal years 2005 and 2006, table 2 shows some details of
changes in both dollars and full-time equivalents (FTE).\7\ Both are
shown because funding changes do not translate into proportional
changes in FTEs due to cost increases for salaries, rent, and other
items. For example, the $39 million or 1.1 percent reduction in
taxpayer service translates into a reduction of 1,385 FTEs or 3.6
percent. Similarly, the over $500 million or 7.8 percent increase in
enforcement spending translates into an increase of 1,961 FTEs or 3.4
percent.
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\7\ According to IRS, an FTE is the equivalent of one person
working full time for 1 year without overtime.
TABLE 2.--IRS REQUESTED CHANGES IN FUNDING FOR TAXPAYER SERVICE AND ENFORCEMENT, FISCAL YEARS 2005 AND 2006
(REQUESTED)
[Dollars in millions]
----------------------------------------------------------------------------------------------------------------
Fiscal Year 2005 Fiscal Year 2006 Change Fiscal Year
(Estimated) (Requested) 2005-Fiscal Year 2006
Program Activities -----------------------------------------------------------------------
Full-time Full-time Full-time
Dollars Equivalents Dollars Equivalents Dollars Equivalents
----------------------------------------------------------------------------------------------------------------
Assistance.............................. $1,829 20,798 $1,806 20,160 -$23 -638
Outreach................................ $500 2,473 $466 1,905 -$34 -568
Processing.............................. $1,276 15,695 $1,295 15,516 $19 -179
-----------------------------------------------------------------------
Taxpayer service subtotal......... $3,606 38,966 $3,567 37,581 -$39 -1,385
=======================================================================
Research................................ $154 1,119 $158 1,119 $4 0
Examination............................. $3,478 31,498 $3,712 32,284 $234 786
Collection.............................. $1,826 18,023 $1,991 18,815 $165 792
Investigation........................... $682 4,899 $767 5,250 $85 351
Regulatory.............................. $253 1,912 $265 1,944 $12 32
-----------------------------------------------------------------------
Enforcement subtotal.............. $6,392 57,451 $6,893 59,412 $500 1,961
=======================================================================
Taxpayer service and enforcement $9,998 96,417 $10,460 96,993 $462 576
total............................
----------------------------------------------------------------------------------------------------------------
Source.--GAO analysis of IRS data.
Note.--Numbers may not add due to rounding.
The difference between changes in dollars and FTEs could be even
larger because of unbudgeted expenses. Unbudgeted expenses have
consumed some of IRS's budget increases and internal savings increases
over the last few years. Unbudgeted expenses include unfunded portions
of annual salary increases, which can be substantial given IRS's large
workforce, and other costs such as higher-than-budgeted rent increases.
According to IRS officials, these unbudgeted expenses accounted for
over $150 million in each of the last 4 years.
An IRS official also told us they anticipate having to cover
unbudgeted expenses in 2006. As of March 2005, IRS officials were
projecting unbudgeted salary increases of at least $40 million. This
projection could change since potential Federal salary increases for
2006 have not been determined.
IRS Is Proposing $39 Million Less for Taxpayer Service, but the Impact
on Taxpayers Is Unclear
The budget request provides some detail on how IRS plans to absorb
cost increases in the taxpayer service budget. IRS is proposing a gross
reduction of over $134 million in taxpayer service from reexamining the
budget's base and plans to use more than $95 million of it to cover
annual increases such as salaries. This leaves a net reduction of
nearly $39 million or 1.1 percent in the taxpayer service budget. The
extent to which IRS is able to achieve the gross reductions will impact
its ability to use the funds as anticipated.
Decisions on how the $134 million gross reduction would be absorbed
were not finalized prior to releasing the budget. According to IRS
officials, some of the reductions would result from efficiency gains
such as reducing printing and postage costs; however, others would
result from reductions in the services provided to taxpayers such as
shortening the hours of toll-free telephone service operations. The
officials also said most decisions have now been made about general
areas for reduction and most changes will not be readily apparent to
taxpayers.
Although IRS has made general decisions about the reductions, many
of the details have yet to be determined. Therefore, the extent of the
impact on taxpayers in the short term is unclear. For example, IRS
plans to reduce dependence on field assistance, including walk-in
sites, but has not reached a final decision on how to reduce services.
Table 3 provides further detail on how IRS is proposing to reduce
funding and resources for taxpayer service.
TABLE 3.--IRS REQUESTED CHANGES IN FUNDING AND FULL-TIME EQUIVALENTS FOR TAXPAYER SERVICE, FISCAL YEARS 2005 AND
2006
[Dollars in millions]
----------------------------------------------------------------------------------------------------------------
Fiscal Year 2005 Fiscal Year 2006 Change Fiscal Year
(Actual) (Requested) 2005-2006
Program Activities -----------------------------------------------------------------------
Full-time Full-time Full-time
Dollars Equivalents Dollars Equivalents Dollars Equivalents
----------------------------------------------------------------------------------------------------------------
Assistance:
Electronic.......................... $1,536 17,745 $1,557 17,721 $21 -24
Field............................... $274 2,796 $230 2,181 -$44 -615
EITC assistance..................... $19 258 $19 258 <$1 ...........
-----------------------------------------------------------------------
Assistance total.................. $1,829 20,798 $1,806 20,160 -$23 -638
=======================================================================
Outreach:
Publication & Media................. $291 821 $276 520 -$15 -301
Taxpayer Education & Communication.. $203 1,592 $184 1,326 -$19 -266
EITC Outreach....................... $7 60 $7 60 <$1 ...........
-----------------------------------------------------------------------
Outreach total.................... $500 2,473 $466 1,905 -$34 -568
=======================================================================
Processing.............................. $1,276 15,695 $1,295 15,516 $19 -179
=======================================================================
Taxpayer service total............ $3,606 38,966 $3,568 37,581 -$39 -1,385
----------------------------------------------------------------------------------------------------------------
Source.--GAO analysis of IRS data.
Note.--Numbers may not add due to rounding.
IRS Continues to Request Significant Increases for Enforcement to Build
on Recent Hiring Gains
IRS's fiscal year 2006 budget request is the sixth consecutive year
the agency has requested additional staffing for enforcement. However,
up until last year, IRS was unable to increase enforcement staffing;
unbudgeted costs and other priorities consumed the budget increase.
IRS's proposal for fiscal year 2006, if implemented as planned,
would return enforcement staffing in these occupations to their highest
levels since 1999. Of the more than $500 million increase requested for
2006, about $265 million would fund enforcement initiatives, over $182
million would be used in part for salary increases, and over $55
million is a proposal to transfer funding authority from the Department
of Justice's Interagency Crime and Drug Enforcement. The $500 million
increase would be supplemented by internal enforcement savings of $88
million. As is the case with taxpayer service savings, the extent to
which IRS achieves enforcement savings will affect its ability to fund
the new enforcement initiatives.
The $265 million for new enforcement initiatives consist of:
--$149.7 million and 920 FTEs to attack corrosive non-compliance
activity driving the tax gap such as abusive trusts and
shelters, including offshore credit cards and organized tax
resistance;
--$51.8 million and 236 FTEs to detect and deter corrosive corporate
non-compliance to attack complex abusive tax avoidance
transactions on a global basis and challenge those who promote
their use;
--$37.9 million and 417 FTEs to increase individual taxpayer
compliance by identifying and implementing actions to address
non-compliance with filing requirements; increasing Automated
Underreporter resources to address the reporting compliance tax
gap; increasing audit coverage; and expanding collection work
in walk-in sites;
--$14.5 million and 77 FTEs to combat abusive transactions by
entities with special tax status by initiating examinations
more promptly, safeguarding compliant customers from
unscrupulous promoters, and increasing vigilance to ensure that
the assets of tax-exempt organizations are put to their
intended tax-preferred purpose and not misdirected to fund
terrorism or for private gain; and
--$10.8 million and 22 FTEs to curtail fraudulent refund crimes.
The $88 million in internal savings would be reinvested to perform
the following activities:
--$66.7 million and 585 FTEs to devote resources to front-line
enforcement activities;
--$14.9 million and 156 FTEs to, in part, address bankruptcy-related
taxpayer questions; and
--$6.7 million and 52 FTEs to address complex, high-risk issues such
as compliance among tax professionals.
In the past, IRS has had trouble achieving enforcement staffing
increases because other priorities, including unbudgeted expenses, have
absorbed additional funds. IRS achieved some gains in 2004 and expects
modest gains in 2005. Figure 1 shows that the number of revenue agents
(those who audit complex returns), revenue officers (those who do field
collection work), and special agents (those who perform criminal
investigations) decreased over 21 percent between 1998 and 2003, but
increased almost 6 percent from 2003 to 2004.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
IRS's recent gains in enforcement staffing are encouraging, as tax
law enforcement continues to remain an area of high risk for the
Federal Government because the resources IRS has dedicated to enforcing
the tax laws have declined, while IRS's enforcement workload--measured
by the number of taxpayer returns filed--has continually increased.\8\
Figure 2 shows the trend in field, correspondence, and total audit
rates since 1995. Field audits involve face-to-face audits and
correspondence audits are typically less complex involving
communication through notices. IRS experienced steep declines in audit
rates from 1995 to 1999, but the audit rate--the proportion of tax
returns that IRS audits each year--has slowly increased since 2000. The
figure shows that the increase in total audit rates of individual
filers has been driven mostly by correspondence audits, while more
complex field audits, continue to decline.
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\8\ GAO, High Risk Series: An Update, GAO-05-207 (Washington, DC:
January 2005).
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
The link between the decline in enforcement staff and the decline
in enforcement actions, such as audits, is complicated, and the real
impact on taxpayers' rate of voluntary compliance is not known. This
leaves open the question of whether the declines in IRS's enforcement
programs are eroding taxpayers' incentives to voluntarily comply. IRS's
National Research Program (NRP) recently completed a study on
compliance by individual tax filers based on tax data provided on 2001
tax returns. The study estimated that the tax gap--the difference
between what taxpayers owe and what they pay--is at least $312 billion
per year as of 2001 and could be as large as $353 billion. This study
is important for several reasons beyond measuring compliance. It is
intended to help IRS better target its enforcement actions, such as
audits, on non-compliant taxpayers, and minimize audits of compliant
taxpayers. It should also help IRS better understand the impact of
taxpayer service on compliance.
IRS Is Developing Long-term Goals That Can Be Used to Assess
Performance and Make Budget Decisions
IRS is developing but currently lacks long-term goals that can be
used to assess performance and make budget decisions.\9\ Long-term
goals and results measurement are a component of the statutory
strategic planning and management framework that the Congress adopted
in the Government Performance and Results Act of 1993.\10\ As a part of
this comprehensive framework, long-term goals that are linked to annual
performance measures can help guide agencies when considering
organizational changes and making resource decisions.
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\9\ IRS has one long-term goal set by the Congress in RRA 98 for
IRS to have 80 percent of all individual income tax returns filed
electronically.
\10\ Public Law No. 103-62 (1993). The Government Performance and
Results Act of 1993 seeks to improve the management of Federal
programs, as well as their effectiveness and efficiency, by requiring
executive agencies to prepare multiyear strategic plans, annual
performance plans, and annual performance reports. Under the Act,
strategic plans are the starting point for setting goals and measuring
progress towards them. The Act requires executive agencies to develop
strategic plans that include an agency's mission statement, long-term
general goals, and the strategies that the agency will use to achieve
these goals. The plans should also explain the key external factors
that could significantly affect achievement of these goals, and
describe how long-term goals will be related to annual performance
goals.
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A recent Program Assessment Rating Tool (PART) review conducted by
OMB reported that IRS lacks long-term goals.\11\ As a result, IRS has
been working to identify and establish long-term goals for all aspects
of its operations for over a year. IRS officials said these goals will
be finalized and provided publicly as an update to the agency's
strategic plan before May 2005.
---------------------------------------------------------------------------
\11\ The PART was applied during the fiscal year 2004 budget cycle
to ``programs'' selected by OMB. The PART includes general questions in
each of four broad topics to which all programs are subjected: (1)
program purpose and design; (2) strategic planning; (3) program
management; and (4) program results (i.e., whether a program is meeting
its long-term and annual goals). OMB also makes an overall assessment
on program effectiveness.
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For IRS and its stakeholders, such as the Congress, long-term goals
can be used to assess performance and progress towards these goals, and
determine whether budget decisions contribute to achieving those goals.
Without long-term goals, the Congress and other stakeholders are
hampered in evaluating whether IRS is making satisfactory long-term
progress. Further, without such goals, the extent to which IRS's 2006
budget request would help IRS achieve its mission over the long-term is
unclear.
This Is an Opportune Time to Review IRS's Menu of Taxpayer Services
For at least two reasons, this is an opportune time to review the
menu of taxpayer services that IRS provides. First, IRS's budget for
taxpayer services was reduced in 2005 and an additional reduction is
proposed for 2006. As already discussed, these reductions have forced
IRS to propose scaling back some services. Second, as we have reported,
IRS has made significant progress in improving the quality of its
taxpayer services. For example, IRS now provides many Internet services
that did not exist a few years ago and has noticeably improved the
quality of telephone services. This opens up the possibility of
maintaining the overall level of taxpayer service but with a different
menu of service choices. Cuts in selected services could be offset by
the new and improved services.
Generally, as indicated in the budget, the menu of taxpayer
services that IRS provides covers assistance, outreach, and processing.
Assistance includes answering taxpayer questions via telephone,
correspondence, and face-to-face at its walk-in sites. Outreach
includes educational programs and the development of partnerships.
Processing includes issuing millions of tax refunds.
When considering program reductions, we support a targeted approach
rather than across-the-board cuts.\12\ A targeted approach helps reduce
the risk that effective programs are reduced or eliminated while
ineffective or lower priority programs are maintained.
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\12\ GAO, 21st Century Challenges: Reexamining the Base of the
Federal Government, GAO-05-325SP (Washington, DC: February 2005).
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With the above reasons in mind for reconsidering IRS's menu of
services, we have compiled a list of options for targeted reductions in
taxpayer service. The options on this list are not recommendations but
are intended to contribute to a dialogue about the tradeoffs faced when
setting IRS's budget. The options presented meet at least one of the
following criteria that we generally use to evaluate programs or budget
requests.\13\ These criteria include that the activity:
---------------------------------------------------------------------------
\13\ We selected these criteria from a variety of sources based on
generally accepted government auditing standards.
---------------------------------------------------------------------------
--duplicates other efforts that may be more effective and/or
efficient;
--historically does not meet performance goals or provide intended
results as reported by GAO, the Treasury Inspector General for
Tax Administration (TIGTA), IRS, or others;
--experiences a continued decrease in demand;
--lacks adequate oversight, implementation and management plans, or
structures and systems to be implemented effectively;
--has been the subject of actual or requested funding increases that
cannot be adequately justified; or
--has the potential to make an agency more self-sustaining by
charging user fees for services provided.
We recognize that the options listed below involve tradeoffs. In
each case, some taxpayers would lose a service they use. However, the
savings could be used to help maintain the quality of other services.
We also want to give IRS credit for identifying savings, including some
on this list. The options include:
--closing walk-in sites. Taxpayer demand for walk-in services has
continued to decrease and staff answer a more limited number of
tax law questions in person than staff answer via telephone.
--limiting the type of telephone questions answered by IRS assistors.
IRS assistors still answer some refund status questions even
though IRS provides automated answers via telephone and its Web
site.
--mandating electronic filing for some filers such as paid preparers
or businesses. As noted, efficiency gains from electronic
filing have enabled IRS to consolidate paper processing
operations.
--charging for services. For example, IRS provides paid preparers
with information on Federal debts owed by taxpayers seeking
refund anticipation loans.
progress in bsm implementation, but the program remains high risk and
budget reductions have resulted in significant adjustments
Although IRS has implemented important elements of the BSM program,
much work remains. In particular, the BSM program remains at high risk
and has a long history of significant cost overruns and schedule
delays. Furthermore, budget reductions have resulted in significant
adjustments to the BSM program, although it is too early to determine
their ultimate effect.
IRS Has Made Progress in Implementing BSM, but Much Work Remains
IRS has long relied on obsolete automated systems for key
operational and financial management functions, and its attempts to
modernize these aging computer systems span several decades. IRS's
current modernization program, BSM, is a highly complex, multibillion-
dollar program that is the agency's latest attempt to modernize its
systems. BSM is critical to supporting IRS's taxpayer service and
enforcement goals. For example, BSM includes projects to allow
taxpayers to file and retrieve information electronically and to
provide technology solutions to help reduce the backlog of collections
cases. BSM is important for another reason. It allows IRS to provide
the reliable and timely financial management information needed to
account for the Nation's largest revenue stream and better enable the
agency to justify its resource allocation decisions and congressional
budgetary requests.
Since our testimony before this subcommittee on last year's budget
request, IRS has deployed initial phases of several modernized systems
under its BSM program. The following provides examples of the systems
and functionality that IRS implemented in 2004 and the beginning of
2005.
--Modernized e-File (MeF).--This project is intended to provide
electronic filing for large corporations, small businesses, and
tax-exempt organizations. The initial releases of this project
were implemented in June and December 2004, and allowed for the
electronic filing of forms and schedules for the form 1120
(corporate tax return) and form 990 (tax-exempt organizations'
tax return). IRS reported that, during the 2004 filing season,
it accepted over 53,000 of these forms and schedules using MeF.
--e-Services.--This project created a Web portal and provided other
electronic services to promote the goal of conducting most IRS
transactions with taxpayers and tax practitioners
electronically. IRS implemented e-Services in May 2004.
According to IRS, as of late March 2005, over 84,000 users have
registered with this Web portal.
--Customer Account Data Engine (CADE).--CADE is intended to replace
IRS's antiquated system that contains the agency's repository
of taxpayer information and, therefore, is the BSM program's
linchpin and highest priority project. In July 2004 and January
2005, IRS implemented the initial releases of CADE, which have
been used to process filing year 2004 and 2005 1040EZ returns,
respectively, for single taxpayers with refund or even-balance
returns. According to IRS, as of March 16, 2005, CADE had
processed over 842,000 tax returns so far this filing season.
--Integrated Financial System (IFS).--This system replaces aspects of
IRS's core financial systems and is ultimately intended to
operate as its new accounting system of record. The first
release of this system became fully operational in January
2005.
Although IRS is to be applauded for delivering such important
functionality, the BSM program is far from complete. Future deliveries
of additional functionality of deployed systems and the implementation
of other BSM projects are expected to have a significant impact on
IRS's taxpayer services and enforcement capability. For example, IRS
has projected that CADE will process about 2 million returns in the
2005 filing season. However, the returns being processed in CADE are
the most basic and constitute less than 1 percent of the total tax
returns expected to be processed during the current filing season. IRS
expects the full implementation of CADE to take several more years.
Another BSM project--the Filing and Payment Compliance (F&PC) project--
is expected to increase (1) IRS's capacity to treat and resolve the
backlog of delinquent taxpayer cases, (2) the closure of collection
cases by 10 million annually by 2014, and (3) voluntary taxpayer
compliance. As part of this project, IRS plans to implement an initial
limited private debt collection capability in January 2006, with full
implementation of this aspect of the F&PC project to be delivered by
January 2008 and additional functionality to follow in later years.
BSM Program Has History of Cost Increases and Schedule Delays and Is
High Risk
The BSM program has a long history of significant cost increases
and schedule delays, which, in part, has led us to report this program
as high-risk since 1995.\14\ Appendix II provides the history of the
BSM life-cycle cost and schedule variances. In January 2005 letters to
congressional appropriation committees, IRS stated that it had showed a
marked improvement in significantly reducing its cost variances. In
particular, IRS claimed that it reduced the variance between estimated
and actual costs from 33 percent in fiscal year 2002 to 4 percent in
fiscal year 2004. However, we do not agree with the methodology used in
the analysis supporting this claim. Specifically, (1) the analysis did
not reflect actual costs, instead it reflected changes in cost
estimates (i.e., budget allocations) for various BSM projects; (2) IRS
aggregated all of the changes in the estimates associated with the
major activities for some projects, such as CADE, which masked that
monies were shifted from future activities to cover increased costs of
current activities; and (3) the calculations were based on a percentage
of specific fiscal year appropriations, which does not reflect that
these are multiyear projects.
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\14\ For our latest high-risk report, please see GAO, High-Risk
Series: An Update, GAO-05-207 (Washington, DC, January 2005).
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In February 2002 we expressed concern over IRS's cost and schedule
estimating and made a recommendation for improvement.\15\ IRS and its
prime systems integration support (PRIME) contractor have taken action
to improve their estimating practices, such as developing a cost and
schedule estimation guidebook and developing a risk-adjustment model to
include an analysis of uncertainty. These actions may ultimately result
in more realistic cost and schedule estimates, but our analysis of
IRS's expenditure plans \16\ over the last few years shows continued
increases in estimated project life-cycle costs (see fig. 3).
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\15\ GAO, Business Systems Modernization: IRS Needs to Better
Balance Management Capacity with Systems Acquisition Workload, GAO-02-
356 (Washington, DC: Feb. 28, 2002).
\16\ BSM funds are unavailable until the IRS submits to
congressional appropriations committees for approval a modernization
expenditure plan that (1) meets the OMB capital planning and investment
control review requirements; (2) complies with IRS's enterprise
architecture; (3) conforms with IRS's enterprise life-cycle
methodology; (4) is approved by IRS, the Department of the Treasury,
and OMB; (5) is reviewed by GAO; and (6) complies with acquisition
rules, requirements, guidelines, and systems acquisition management
practices.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
The Associate CIO for BSM stated that he believes that IRS's cost
and schedule estimating has improved in the past year. In particular,
he pointed out that IRS met its cost and schedule goals for the
implementation of the latest release of CADE, which allowed the agency
to use this system to process certain 1040EZ forms in the 2005 filing
season. It is too early to tell whether this signals a fundamental
improvement in IRS's ability to accurately forecast project costs and
schedules.
The reasons for IRS's cost increases and schedule delays vary.
However, we have previously reported that they are due, in part, to
weaknesses in management controls and capabilities. We have previously
made recommendations to improve BSM management controls, and IRS has
implemented or begun to implement these recommendations. For example,
in February 2002, we reported that IRS had not yet defined or
implemented an IT human capital strategy, and recommended that IRS
develop plans for obtaining, developing, and retaining requisite human
capital resources.\17\ In September 2003, TIGTA reported that IRS had
made significant progress in developing a human capital strategy but
that it needed further development. In August 2004, the current
Associate CIO for BSM identified the completion of a human capital
strategy as a high priority. Among the activities that IRS is
implementing are prioritizing its BSM staffing needs and developing a
recruiting plan. IRS has also identified, and is addressing, other
major management challenges in areas such as requirements, contract,
and program management. For example, poorly defined requirements have
been among the significant weaknesses that have been identified as
contributing to project cost overruns and schedule delays. As part of
addressing this problem, in March 2005, the IRS BSM office established
a requirements management office, although a leader has not yet been
hired.
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\17\ GAO-02-356.
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IRS Is Adjusting the BSM Program in Response to Budget Reductions
The BSM program is undergoing significant changes as it adjusts to
reductions in its budget. Figure 4 illustrates the BSM program's
requested and enacted budgets for fiscal years 2004 through 2006.\18\
For fiscal year 2005, IRS received about 29 percent less funding than
it requested (from $285 million to $203.4 million). According to the
Senate report for the fiscal year 2005 Transportation, Treasury, and
General Government appropriations bill, in making its recommendation to
reduce BSM funding, the Senate Appropriations Committee was concerned
about the program's cost overruns and schedule delays. In addition, the
committee emphasized that in providing fewer funds, it wanted IRS to
focus on its highest priority projects, particularly CADE.\19\ In
addition, IRS's fiscal year 2006 budget request reflects an additional
reduction of about 2 percent, or about $4.4 million, from the fiscal
year 2005 appropriation.
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\18\ IRS uses the appropriated funds to cover contractor costs
related to the BSM program. IRS funds internal costs for managing BSM
with another appropriation. These costs are not tracked separately for
BSM-related activities.
\19\ U.S. Senate, Senate Report 108-342 (2004).
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
It is too early to tell what effect the budget reductions will
ultimately have on the BSM program. However, the significant
adjustments that IRS is making to the program to address these
reductions are not without risk, could potentially impact future budget
requests, and will delay the implementation of certain functionality
that was intended to provide benefit to IRS operations and the
taxpayer. For example:
--Reductions in Management reserve/project risk adjustments.--In
response to the fiscal year 2005 budget reduction, IRS reduced
the amount that it had allotted to program management reserve
and project risk adjustments by about 62 percent (from about
$49.1 million to about $18.6 million).\20\ If BSM projects have
future cost overruns that cannot be covered by the depleted
reserve, this reduction could result in (1) increased budget
requests in future years or (2) delays in planned future
activities (e.g., delays in delivering promised functionality)
to use those allocated funds to cover the overruns.
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\20\ We did not include in our calculations, reductions to specific
project risk adjustment amounts that were made for reasons other than
the fiscal year 2005 budget reduction.
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--Shifts of BSM management responsibility from the PRIME contractor
to IRS.--Due to budget reductions and IRS's assessment of the
PRIME contractor's performance, IRS decided to shift
significant BSM responsibilities for program management,
systems engineering, and business integration from the PRIME
contractor to IRS staff. For example, IRS staff are assuming
responsibility for cost and schedule estimation and
measurement, risk management, integration test and deployment,
and transition management. There are risks associated with this
decision. To successfully accomplish this transfer, IRS must
have the management capability to perform this role. Although
the BSM program office has been attempting to improve this
capability through, for example, implementation of a new
governance structure and hiring staff with specific technical
and management expertise, IRS has had significant problems in
the past managing this and other large development projects,
and acknowledges that it has major challenges to overcome in
this area.
--Suspension of the Custodial Accounting Project (CAP).--Although the
initial release of CAP went into production in September 2004,
IRS has decided not to use this system and to stop work on
planned improvements due to budget constraints. According to
IRS, it made this decision after it evaluated the business
benefits and costs to develop and maintain CAP versus the
benefits expected to be provided by other projects, such as
CADE. Among the functionality that the initial releases of CAP
were expected to provide were (1) critical control and
reporting capabilities mandated by federal financial management
laws; (2) a traceable audit trail to support financial
reporting; and (3) a subsidiary ledger to accurately and
promptly identify, classify, track, and report custodial
revenue transactions and unpaid assessments. With the
suspension of CAP, it is now unclear how IRS plans to replace
the functionality this system was expected to provide, which
was intended to allow the agency to make meaningful progress
toward addressing long-standing financial management
weaknesses. IRS is currently evaluating alternative approaches
to addressing these weaknesses.
--Reductions in planned functionality.--According to IRS, the fiscal
year 2006 funding reduction will result in delays in planned
functionality for some of its BSM projects. For example, IRS no
longer plans to include Form 1041 (the income tax return for
estates and trusts) in the fourth release of Modernized e-File,
which is expected to be implemented in fiscal year 2007.
The BSM program is based on visions and strategies developed in
2000 and 2001. The age of these plans, in conjunction with the
significant delays already experienced by the program and the
substantive changes brought on by budget reductions, indicate that it
is time for IRS to revisit its long-term goals, strategy, and plans for
BSM. Such an assessment would include an evaluation of when significant
future BSM functionality would be delivered. IRS's Associate CIO for
BSM has recognized that it is time to recast the agency's BSM strategy
because of changes that have occurred subsequent to the development of
the program's initial plans. According to this official, IRS is
redefining and refocusing the BSM program, and he expects this effort
to be completed by the end of this fiscal year.
ADDITIONAL ACTIONS NEEDED TO IMPROVE BUDGETING FOR IT OPERATIONS AND
MAINTENANCE
IRS has requested about $1.62 billion for IT operations and
maintenance in fiscal year 2006, within its proposed new Tax
Administration and Operations account. Under the prior years' budget
structure, these funds were included in a separate account, for which
IRS received an appropriation of about $1.59 billion in fiscal year
2005. The $1.62 billion requested in fiscal year 2006 is intended to
fund the personnel costs for IT staff (including staff supporting the
BSM program) and activities such as IT security, enterprise networks,
and the operations and maintenance costs of its current systems. We
have previously expressed concern that IRS does not employ best
practices in the development of its IT operations and maintenance
budget request.\21\ Although IRS has made progress in addressing our
concern, more work remains.
---------------------------------------------------------------------------
\21\ GAO, Internal Revenue Service: Improving Adequacy of
Information Systems Budget Justification, GAO-02-704 (Washington, DC,
June 28, 2002).
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The Paperwork Reduction Act (PRA) of 1995 \22\ requires Federal
agencies to be accountable for their IT investments and responsible for
maximizing the value and managing the risks of their major information
systems initiatives. The Clinger-Cohen Act of 1996 \23\ establishes a
more definitive framework for implementing the PRA's requirements for
IT investment management. It requires Federal agencies to focus more on
the results they have achieved and introduces more rigor and structure
into how agencies are to select and manage IT projects. In addition,
leading private- and public-sector organizations have taken a project-
or system-centric approach to managing not only new investments but
also operations and maintenance of existing systems. As such, these
organizations:
---------------------------------------------------------------------------
\22\ Public Law No. 104-13 (1995).
\23\ Public Law No. 104-106 section 5001 et. seq. (1996).
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--identify operations and maintenance projects and systems for
inclusion in budget requests;
--assess these projects or systems on the basis of expected costs,
benefits, and risks to the organization;
--analyze these projects as a portfolio of competing funding options;
and
--use this information to develop and support budget requests.
This focus on projects, their outcomes, and risks as the basic
elements of analysis and decision making is incorporated in the IT
investment management approach that is recommended by OMB and GAO. By
using these proven investment management approaches for budget
formulation, agencies have a systematic method, on the basis of risk
and return on investment, to justify what are typically substantial
information systems operations and maintenance budget requests.
In our assessment of IRS's fiscal year 2003 budget request, we
reported that the agency did not develop its information systems
operations and maintenance request in accordance with the investment
management approach used by leading organizations. We recommended that
IRS prepare its future budget requests in accordance with these best
practices.\24\ To address our recommendation, IRS agreed to take a
variety of actions, which it has made progress in implementing. For
example, IRS stated that it planned to develop an activity-based cost
model to plan, project, and report costs for business tasks/activities
funded by the information systems budget. The recent release of IFS
included an activity-based cost module, but IRS does not currently have
historical cost data to populate this module. According to officials in
the Office of the Chief Financial Officer, IRS is in the process of
accumulating these data. These officials stated that IRS needs 3 years
of actual costs to have the historical data that would provide a basis
for future budget estimates. Accordingly, these officials expected that
IRS would begin using the IFS activity-based cost module in formulating
the fiscal year 2008 budget request and would have the requisite 3
years' of historical data in time to develop the fiscal year 2010
budget request. In addition, IRS planned to develop a capital planning
guide to implement processes for capital planning and investment
control, budget formulation and execution, business case development,
and project prioritization. IRS has developed a draft guide, which is
currently under review by IRS executives, and IRS expects it to become
policy on October 1, 2005. Although progress has been made in
implementing best practices in the development of the IT operations and
maintenance budget, until these actions are completely implemented IRS
will not be able to ensure that its request is adequately supported.
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\24\ GAO-02-704.
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CONCLUSIONS
As IRS shifts its priorities to enforcement and faces tight budgets
for service, the agency will be challenged to maintain the gains it has
made in taxpayer service. In order to avoid a ``swinging pendulum,''
where enforcement gains are achieved at the cost of taxpayer service
and vice versa, IRS and the Congress would benefit from a set of
agreed-upon long-term goals. Long-term goals would provide a framework
for assessing budgetary tradeoffs between taxpayer service and
enforcement and whether IRS is making satisfactory progress towards
achieving those goals. Similarly, long-term goals could help identify
priorities within the taxpayer service and enforcement functions. For
example, if the budget for taxpayer service were to be cut and
efficiency gains did not offset the cut, long-term goals could help
guide decisions about whether to make service cuts across the board or
target selected services. To its credit, IRS has been developing a set
of long-term goals, so we are not making a recommendation on goals.
However, we want to underscore the importance of making the goals
public in a timely fashion, as IRS has planned. The Congress would then
have an opportunity to review the goals and start using them as a tool
for holding IRS accountable for performance.
In addition, the Congress would benefit from more information about
the short-term impacts of the 2006 budget request on taxpayers. The
2006 budget request cites a need for reducing the hours of telephone
service and scaling back walk-in assistance but provides little
additional detail. Without more detail about how taxpayers will be
affected, it is difficult to assess whether the 2006 proposed budget
would allow IRS to achieve its stated intent of both maintaining a high
level of taxpayer service and increasing enforcement.
BSM and related initiatives such as electronic filing hold the
promise of delivering further efficiency gains that could offset the
need for larger budget increases to fund taxpayer service and
enforcement. Today, taxpayers have seen payoffs from BSM; however, the
program is still high risk and budget reductions have caused
substantive program changes. IRS has recognized it is time to revisit
its long-term BSM strategy and is currently refocusing the program. As
we did with long-term goals above, we want to underscore the importance
of timely completion of the revision of the BSM strategy.
RECOMMENDATION
In a related statement (GAO-05-416T), GAO recommended that the
Commissioner of Internal Revenue supplement the 2006 budget request
with more detailed information on how proposed service reductions would
impact taxpayers.
Appendix I.--Description of IRS's Proposed Budget Structure
IRS's proposed new budget structure as depicted in figure 5
combines the three major appropriations that the agency has had in the
past--Processing, Assistance, and Management; Tax Law Enforcement; and
Information Systems into one appropriation called Tax Administration
and Operations. The Business Systems Modernization and Health Insurance
Tax Credit Administration appropriations accounts remain unchanged. The
Tax Administration and Operations appropriation is divided among eight
critical program areas. These budget activities focus on Assistance,
Outreach, Processing, Examination, Collection, Investigations,
Regulatory Compliance, and Research. According to IRS, as it continues
to move forward with developing and implementing this new structure,
these program areas and the associated resource distributions will be
refined to provide more accurate costing.
IRS reported that the new budget structure has a more direct
relationship to its major program areas and strategic plan. We did not
evaluate IRS's proposed budget structure as part of this engagement
because it was not within the scope of our review. However, we have
recently completed a study on the administration's broader budget
restructuring effort. In that study we say that, going forward,
infusing a performance perspective into budget decisions may only be
achieved when the underlying information becomes more credible and used
by all major decision makers. Thus, the Congress must be considered a
partner. In due course, once the goals and underlying data become more
compelling and used by the Congress, budget restructuring may become a
better tool to advance budget and performance integration.\25\
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\25\ For a more detailed discussion, see GAO, Performance
Budgeting: Efforts to Restructure Budgets to Better Align Resources
with Performance, GAO-05-117SP (Washington, DC: February 2005).
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Appendix II.--BSM Project Life Cycle Cost/Schedule Variance and
Benefits Summary
The table below shows the life-cycle variance in cost and schedule
estimates for completed and ongoing Business Systems Modernization
(BSM) projects, based on data contained in IRS's expenditure plans.
These variances are based on a comparison of IRS's initial and revised
(as of July 2004) cost and schedule estimates to complete initial
operation \26\ or full deployment \27\ of the projects.
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\26\ Initial operation refers to the point at which a project is
authorized to begin enterprise-wide deployment.
\27\ Full deployment refers to the point at which enterprise-wide
deployment has been completed and a project is transitioned to
operations and support.
TABLE 4.--BSM PROJECT LIFE CYCLE COST/SCHEDULE VARIANCE AND BENEFITS SUMMARY
[Dollars in thousands]
----------------------------------------------------------------------------------------------------------------
Schedule
Reported/ Variance Reported/Revised Reported IRS/
Project Cost Variance Revised (In Estimated Taxpayer Benefits
Estimated Cost Months) Completion Date
----------------------------------------------------------------------------------------------------------------
Completed projects:
Security and Technology +$8,450 $45,401 +5 1/31/02 (initial Provides
Infrastructure Release 1. operation) \1\. infrastructure for
secure telephony
and electronic
interaction among
IRS employees, tax
practitioners, and
taxpayers.
Customer Communications +$14,562 $60,762 +9 2/26/02 (full Improves
2001. deployment). telecommunications
infrastructure,
including telephone
call management,
call routing, and
customer self-
service
applications.
Customer Relationship -$721 $9,245 +3 9/30/02 (full Provides commercial,
Management Exam. deployment). off-the-shelf
software to IRS
revenue agents to
allow them to
accurately compute
complex corporate
transactions.
Human Resources Connect +$200 $10,200 ......... 12/31/02 Allows IRS employees
Release 1. (initial to access and
operation) \1\. manage their human
resources
information online.
Internet Refund/Fact of +$12,923 $26,432 +14 9/26/03 (full Provides instant
Filing. deployment). refund status
information and
instructions for
resolving refund
problems to
taxpayers with
Internet access.
Modernized e-File Release +$21,057 $50,303 +6.5 5/31/04 (initial Provides initial
1. operation) \1\. electronic filing
capability for
large corporations,
small business, and
tax-exempt
organizations.
Ongoing projects:
Modernized e-File Release .............. $16,325 ......... 9/30/04 (initial Provides additional
2. operation). functionality to
support corporate
electronic filing
and other
capabilities,
including required
public access to
filed returns for
tax-exempt
organizations.
Modernized e-File Release +$5,300 $27,175 ......... 3/31/05 (initial Provides additional
3. operation). functionality to
support electronic
filing for tax-
exempt
organizations and
other capabilities,
including the
interface with
state retrieval
systems.
e-Services............... +$102,271 $148,820 +18 4/30/05 (full Provides a Web
deployment). portal and other e-
Services to promote
the goal of
conducting most IRS
transactions with
taxpayers and tax
practitioners
electronically.
Customer Account Data +$118,129 $182,774 +30 6/30/05 (full Provides the
Engine--Individual deployment). modernized database
Master File Release 1. foundation to
replace the
existing individual
master file
processing systems.
Facilitates faster
refund processing
and more timely
response to
taxpayer inquiries
for Form 1040EZ
filers.
Integrated Financial +$73,710 $173,580 +15 6/30/05 (full Provides a single
System Release 1. deployment). general ledger for
custodial and
financial data and
a platform to
integrate core
financial data with
budget,
performance, and
cost-accounting
data.
Custodial Accounting +$91,789 $138,950 +33 11/01/05 (full Provides integrated
Project Release 1. deployment). tax operations and
internal management
information to
support evolving
decision analytics,
performance
measurement, and
management
information needs.
----------------------------------------------------------------------------------------------------------------
\1\ Information on the costs and schedule for the full-deployment stage of these projects was not available in
the BSM expenditure plans.
Source.--GAO analysis of IRS data.
Appendix III.--How IRS Allocated Expenditures FTEs in Fiscal Year 2004
Figures 6 and 7 illustrate how the Internal Revenue Service (IRS)
allocated expenditures and full-time equivalents (FTEs) in fiscal year
2004. Figure 8 shows total expenditures. The percentage of expenditures
devoted to contracts decreased from 9 percent in 2002 to 5 percent in
2004, because of fewer private contracts. The percentage of
expenditures devoted to other non-labor costs increased from 8 percent
in 2002 to 12 percent in 2004, according to IRS officials, due to of
increases in miscellaneous costs.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Figure 7 shows IRS's total FTEs. Since 2002, FTEs have decreased
slightly from 99,180 in 2002 to 99,055 in 2004. We previously reported
that processing FTEs declined 1 percentage point between 2002 and 2003.
Between 2003 and 2004, IRS's allocation of FTEs remained similar but
with a 1 percent increase in enforcement activities in conducting
examinations, and in management and other services.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
______
Prepared Statement of Nina E. Olson, National Taxpayer Advocate
Mr. Chairman and distinguished members of the subcommittee, thank
you for inviting me to submit a statement in connection with your
hearing on the proposed budget of the Internal Revenue Service for
fiscal year 2006.
The IRS is at a critical juncture in its history. In the 6+ years
since the enactment of the Internal Revenue Service Restructuring and
Reform Act of 1998, the IRS has successfully incorporated valuable
customer service practices into its daily activities at all levels of
the organization. It is now trying to increase its enforcement activity
without eroding these taxpayer service gains. I strongly support a
robust and research-driven IRS that undertakes well-designed
examination and collection activities and criminal investigations. I
believe that the IRS is capable of conducting these activities in an
environment of superior taxpayer service. Given the size of the tax
gap, I believe that the IRS needs additional resources to apply to both
of these areas.
I also support increased funding for IRS Business Systems
Modernization, providing the funds are spent wisely. Systems
modernization is a critical component not only for the examination and
collection aspects of IRS work but also for the taxpayer service
component. Without sufficient funding, we are left continually
apologizing to taxpayers because our systems aren't functioning; we
create work for ourselves, fixing errors manually because systems
create taxpayer problems rather than avoid them.
The role of taxpayer service in an environment of increasing
enforcement activity is of great import to taxpayers, tax
administrators, and Congress alike. I identified several areas of
concern for taxpayer service in my 2004 Annual Report to Congress.
Before I discuss some of these issues, I will comment generally about
the balance between taxpayer service and enforcement.
THE COMPLIANCE EQUATION
In the IRS Strategic Plan for 2005-2009 and elsewhere, the IRS has
emphasized that its guiding principle is
``Service+Enforcement=Compliance.'' The proposed IRS budget for fiscal
year 2006 would revamp existing budget categories to fit this guiding
principle, placing 33 percent of the IRS budget into a ``taxpayer
service'' account and 65 percent of the IRS budget into an
``enforcement'' account. (The remaining 2 percent of the proposed
budget is allocated to Business Systems Modernization and Health
Insurance Tax Credit Administration.)
At a conceptual level, the ``Service+Enforcement=Compliance''
principle is indisputably correct. Compliance represents the sum total
of IRS's success in helping taxpayers file tax returns and pay tax, and
IRS's success at enforcing the law when taxpayers fail to do what is
required. What is less clear is the appropriate balance between service
and enforcement, particularly in a resource-constrained budget
environment. ``Service+Enforcement=Compliance'' does not in and of
itself define a specific level of compliance. That is, each of the
equation's elements is a variable. Thus, if we reduce service, there is
no guarantee--no matter how much we increase our enforcement efforts--
that compliance will increase overall. It is entirely possible that an
increase in enforcement initiatives, offset by a decrease in taxpayer
service, would result in less compliance.
How can that be? The answer is that our estimated 84 percent
voluntary compliance rate is driven primarily by the fact that most
income is subject to income and payroll tax withholding or to third-
party income reporting. If we do not provide adequate taxpayer service
to these taxpayers and their employers or payors--who are either
compliant or trying to be compliant--then compliance by these taxpayers
will decline. The IRS would then be forced to divert its enforcement
resources, in part, to address this new source of noncompliance.
Last week, the IRS released a preliminary estimate of the tax gap
based on the recent National Research Program study. This study
estimates the net tax gap (i.e., the gross gap reduced by late payments
and enforced payments) in the range of $257-$298 billion annually and a
voluntary compliance rate of approximately 84 percent. That rate is
generally consistent with the results of prior studies.
Today, there are approximately 130 million individual taxpayers.
Each individual taxpayer is paying, on average, a ``surtax'' of at
least $2,000 a year to subsidize noncompliance. That's the bad news.
The ``good'' news, if you can call it that, is that notwithstanding
claims that the decline in IRS enforcement activity in the aftermath of
the IRS Restructuring and Reform Act of 1998 led to rampant cheating,
the estimate of the compliance rate in the recent tax gap study is
approximately the same as the compliance rate when the prior study was
conducted in the late 1980's.
Even so, a principal function of the IRS is to collect all tax due,
so the big question is what do we do now to increase the compliance
rate? The proposed IRS budget reflects the view that enforcement
activity should be increased while taxpayer service is reduced. Is that
the right answer?
If I were developing a budget from scratch, I would argue that both
enforcement and taxpayer service funding should be increased. The IRS
is the accounts receivable department of the Federal Government, and it
is clear to me that additional funding for both enforcement and
taxpayer service--if spent wisely--would bring in significantly more
dollars.
Given the budget realities, however, I am concerned that the IRS
does not have better research to show where its dollars could be most
effectively spent. Indeed, the one function I am certain requires more
resources is the IRS research function. The IRS is able to track
revenue collected as a direct result of its enforcement activities.
While that is useful information, it is the indirect effects of IRS
activities--on both the taxpayer service side and the enforcement
side--that generate a far greater amount of revenue. Even if the IRS
only audits about 1 percent of tax returns, for example, much larger
numbers of taxpayers will choose to comply because of the possibility
that they could be audited. Thus, a single audit has a ``ripple''
effect or, in economic terms, a ``multiplier'' effect.
Not all audits are created equal, however: $1 spent on auditing
industries with historically high rates of noncompliance, such as the
construction industry, may have a very different multiplier than an
audit of a corporate tax shelter. Similarly, $1 spent on making it
easier for taxpayers to comply with their tax obligations--e.g.,
publishing forms, advertising e-file, answering tax law questions--
almost certainly has a multiplier effect as well. We simply don't have
adequate research to show where the next dollar is best spent.
Moreover, in terms of improving overall tax compliance, we don't
have data that show whether the ``multiplier effect'' is generally
greater at this time for enforcement or for taxpayer service. Thus, a
decision to increase enforcement and reduce taxpayer service is, to a
large degree, based more on instinct than solid research. To be sure,
this is not easy research to do, and in any event, it is a long-term
project that will not assist in fiscal year 2006 budget decisions. But
in the absence of better research, it is important to emphasize that
the decision about how much to increase or decrease certain activities
represents merely a policy call based on educated guessing.
If the proposed budget categories are enacted, we still face the
challenge of allocating IRS costs among them. Many, if not most, IRS
expenses cannot be unambiguously placed under either the
``enforcement'' or the ``taxpayer service'' umbrella. For example, the
proposed budget lists the $1.3 billion cost of submission processing as
a ``taxpayer service.'' In reality, I view this cost more as a core
business function. Processing tax returns provides service to the
extent that it is necessary to enable the IRS to issue tax refunds. On
the other hand, return processing is central to the IRS's ability to
classify returns for audits and determine balances due on returns.
The proposed division of the budget into two categories has also
triggered internal budget competition. Since the overall budget
proposes to increase the enforcement category by 8 percent and reduce
the taxpayer service category by 1 percent, operating divisions and
functions clearly benefit from placing as much of their programming as
possible into the enforcement category. Although final decisions have
not been made, this budget approach seems to be leading to some
questionable results.
For example, we have been told that more than 90 percent of the
funding for the Office of Appeals and the Office of Chief Counsel will
be allocated to enforcement. By contrast, we have been told that none
of the funding for the Taxpayer Advocate Service (TAS) will be
allocated to enforcement--indeed, that TAS will be the only function in
the IRS allocated entirely to taxpayer service. Considering that 85
percent of TAS's funding is currently allocated to the Tax Law
Enforcement (TLE) account and that fully two-thirds of TAS's cases are
enforcement-related (i.e., cases where taxpayers seek help from TAS due
to actual or perceived mistakes made by IRS examination or collection
personnel), there is little principled basis for this difference in
treatment. The practical effect of allocating TAS entirely to taxpayer
service is that it increases the likelihood that the TAS budget will
sustain significant cuts.
Among the many measures the IRS is considering to reduce taxpayer
service costs, I discuss my concerns about two below.
ELECTRONIC TAX LAW ASSISTANCE (ETLA)
Electronic Tax Law Assistance (ETLA) is a service provided through
a link on the official IRS website that allows taxpayers or
practitioners to send tax law questions electronically to the IRS. The
system is designed to allow employees to pull responses from the
database of pre-written answers and thus save time researching and
responding to frequently asked questions. As originally conceived, ETLA
was the first stage in a multi-level approach to tax law assistance,
using artificial intelligence technology to recognize and answer the
easiest questions and reserving valuable IRS employees for the more
complex questions. In a recent customer survey, over 90 percent of
taxpayers using ETLA stated that they would use the service again.
We understand that the IRS is considering a proposal to discontinue
providing tax law assistance over the Internet. I think this would be a
mistake. The benefits of providing answers to taxpayer questions by
Internet are significant. Most taxpayers now have Internet access, and
many taxpayers prefer to write up their questions precisely and submit
them electronically to avoid waiting on hold to speak with telephone
assisters. In fact, in other areas of tax administration, the IRS is
justifying the reduction of face-to-face service due to the
availability of Internet applications. Although Internet-based
assistance should not be the sole or even primary means of providing
tax law assistance, ETLA is still very useful, and I understand the
savings from eliminating it would be only about $1.5 million.
TAXPAYER ASSISTANCE CENTERS (TACS)
The IRS is planning to close a significant number of its
approximately 400 walk-in sites (also called ``Taxpayer Assistance
Centers'' or ``TACs''). Here, the estimated savings are larger--
approximately $50 million. To date, the IRS has not identified
alternative means to assist taxpayers who require face-to-face
assistance. This is unfortunate since taxpayers will continue to seek
the assistance they require. The Taxpayer Advocate Service and other
IRS offices co-located with TACs subject to closure are particularly
likely to see an upsurge in taxpayer requests for assistance.
In a tax system with 130 million individual taxpayers, there is no
one-size-fits-all solution to any problem. Some taxpayers strongly
prefer--or, depending on personal limitations, may even require--face-
to-face contacts, some need telephone contacts, and some prefer to
interact with the IRS electronically. A significant study released last
year by the Pew Internet and American Life Project examined how
Americans communicate with the government. Generally, the study found
that most Americans prefer to communicate with the government orally
(either by phone or in person), rather than by letter or over the
Internet. Notably, fully 20 percent of Americans reported that their
most recent contact with the government was in person. In a few States,
the IRS has experimented with using mobile vans to cover a greater
number of areas. For example, the van might move weekly among five
locations in a State. It could show up at a local library in a town
every Monday, for example, and visit other cities on other days of the
week. A mobile van would not be as convenient as having a fully staffed
office that is open daily, but if the IRS is planning to close a
significant number of offices, it should at a minimum consider whether
an approach like this might allow the IRS to remain accessible at a
much lower cost.
The IRS has developed a model incorporating many factors to help it
determine which TACs to close. I applaud the serious effort that went
into creating this model over a very short period of time--a matter of
months. Built using demographic and other taxpayer data, the model
provides an excellent first stage for an analysis of TAC closures. In
my view, however, the IRS should supplement this model with a
comprehensive survey of taxpayers' need for face-to-face service. The
model's reliance on TAC usage over the last few years, as a proxy for
taxpayer need, is inadequate since the IRS has reduced the services
provided in TACs over that period due to resource concerns.
The speed with which the IRS is making decisions of such momentous
import to taxpayer service, and the lack of stakeholder engagement, is
of great concern to me. I was briefed on this model on March 22 of this
year, too late to have any but the most trivial influence on its
development. It is my understanding that the IRS consulted the Internal
Revenue Service Advisory Committee (IRSAC) with respect to the
weighting of factors used to determine closings. However, the IRS did
not consult the Taxpayer Advocacy Panel (TAP), a Treasury panel of
volunteer taxpayers specifically chartered under the Federal Advisory
Committee Act to advise the IRS on matters pertaining to customer
service. Nor did the IRS seek comments or suggestions from the Low
Income Taxpayer Clinics funded by the IRS under IRC 7526, which
presumably represent the interests of a portion of the taxpayer
population affected by these closings.
In light of the lack of any taxpayer-centric assessment of the need
for face-to-face service, or any accurate measure of the impact of TAC
closings on compliance, or any significant engagement with
stakeholders, or any identification of alternative methods for
providing face-to-face service, I believe that closing Taxpayer
Assistance Centers at this time will irrevocably harm taxpayers.
CONCLUSION
The IRS faces significant challenges in the next few years as it
attempts to increase taxpayer compliance. To achieve this goal, the IRS
needs to do a better job of identifying and balancing both taxpayer
needs and enforcement efforts. Rather than making resource-driven
decisions that are based on inadequate research and that fail to
identify equivalent alternatives, the IRS must develop a world-class
research function that is the foundation for all of its customer
service and enforcement activities. Research--and truly strategic
planning--should inform the IRS's allocation of resources so that we
achieve the maximum compliance possible by obtaining the optimal
balance between service and enforcement.
ADDITIONAL COMMITTEE QUESTIONS
Senator Bond. As I've indicated earlier in my statement, it
would help us a lot if we could get some funding credit in the
badly out-of-date scoring systems for the money that comes in
for the IRS activities that we fund. This would help Congress
and the IRS to assist more taxpayers and, more importantly,
bring in more revenue.
We will leave the record open until next week for my
colleagues to submit questions. And we would appreciate your
prompt attention to and response to these. And I thank our
witnesses and those who've come to hear us.
[The following questions were not asked at the hearing, but
were submitted to the Department for response subsequent to the
hearing:]
Questions Submitted by Senator Pete V. Domenici
CAPITAL GAINS TAX RATE FOR ART AND COLLECTIBLES AND FUEL TAX FRAUD
Question. Commissioner Everson, I am a long-time advocate of
equitable treatment for all capital gains, and I plan to introduce a
bill to correct the tax code's disparate treatment of various capital
gains to ensure fairness for all types of investors.
My legislation would reduce the capital gains tax rate for sales of
art and collectibles to 15 percent--the same rate of taxation for most
capital gains relating to stock and bond sales. In addition to being
fair to individuals who choose to invest in art or other collectibles,
I believe that this legislation would raise revenue for the U.S.
Treasury because lowering the capital gains rate would encourage people
to buy and sell art and collectibles, which would increase the number
of people paying tax on art and collectibles.
Would you anticipate an increase in art and collectibles sales if
the capital gains tax rate were lowered for such sales?
Answer. Generally, a reduction in tax may result in an increase in
affected sales. However, the Department of the Treasury has not
prepared a revenue estimate that would chart the effects of this
particular proposal.
Question. Will you provide me with the amount of revenue generated
last year by the capital gains tax on the sale of stocks and bonds and
the amount of revenue generated last year by the capital gains tax on
the sale of art and collectibles?
Answer. For 2002, the most recent year for which tax data are
available, total tax revenue on capital gains from stocks, bonds, and
other assets subject to preferential capital gains rates was $49
billion. Separate data are not available for capital gains on sales of
artworks and collectibles. This category is likely well below 1 percent
of capital gains realizations and revenues, and too small to be
measured meaningfully with existing sales of capital assets tax data
samples.
Question. What was the administration's reasoning for lowering the
capital gains tax rate for some investments, but keeping a higher tax
rate for art and collectibles?
Answer. The Taxpayer Relief Act of 1997 generally reduced the
maximum rate on adjusted net capital gain of an individual from 28 to
20 percent. Although both the House and Senate versions of the Act
generally reduced the maximum capital gains tax rate for individuals,
both versions maintained the then-current law maximum 28 percent rate
for collectibles such as artwork, rugs, antiques, metals, gems, stamps
or coins, and the conference report retained this rule for
collectibles. The legislative history of the Act does not give a
specific reason for this treatment. The Jobs and Growth Tax Relief
Reconciliation Act of 2003 generally reduced the maximum rates on
adjusted net capital gain of an individual from 10 and 20 percent to 5
and 15 percent. It did not modify the category of 28 percent rate gain
including collectibles.
Question. Has the administration considered expanding the new,
lower capital gains tax rate to apply to art and collectibles?
Answer. The administration's Budget does not include any proposed
modifications to the taxation of sales or exchanges of collectibles.
The President has appointed an Advisory Panel on Federal Tax Reform to
consider fundamental changes throughout the tax Code. The Panel's
report is due by July 31, 2005.
CAPITAL GAINS TAX RATE FOR ART AND COLLECTIBLES
Question. The legislation I mentioned would also correct the
inequity afforded to artists who donate their work to charity. Under
current law, if a collector donates a painting to a museum, he or she
is entitled to a tax deduction equal to the fair market value of the
artwork. However, if the artist who created the work were to donate the
same painting, he or she is only entitled to a deduction for the paint,
the canvas, and any other art supplies involved in creating the work.
This provision of the Tax Code creates a tremendous disincentive
for artists to donate their work and negatively impacts museums,
libraries, and schools, which depend on such donations to grow their
collections. My legislation would remedy this unfairness by allowing
artists to deduct the full market value of artwork they donate.
Would you expect more artists to donate their works to charity if
they were subject to the same charitable contribution rules as art
collectors?
Answer. Yes. We would anticipate a significant increase. The IRS
anticipates a significant increase because the proposal would allow
artists to claim a deduction for amounts that are not included in
income. Current law does not allow a deduction for the value of donated
services. This current-law rule generally produces the same tax results
for individuals who assist charities by providing volunteer services as
for individuals who make charitable contributions of cash.
Question. Can you tell me how many artists sought deductions for
charitable contributions of their art work in 2004?
Answer. This information is not available.
FUEL TAX FRAUD
Question. Commissioner Everson, over the last several months we
have been working very hard to identify ways of shoring up the highway
trust fund without raising taxes. Recently a lot of attention has
focused on the revenue lost to fuel tax fraud, and in this case, the
ability of criminals to remove red dye from untaxed diesel fuel using
straightforward techniques. I have heard from your office that the IRS
is looking at various technologies to address this issue, but it is
being held up because there is no field test. It certainly seems we
could be simultaneously implementing more effective technology while
exploring options for a more effective field test.
Why is a field test critical to the success of this program?
Answer. Each year U.S. consumers buy more then 61 billion gallons
of diesel fuel and over 26 billion gallons of aviation grade kerosene.
Both of these products can be and are used in highway vehicles.
Currently, the IRS uses the red dye field test to monitor compliance
with the payment of fuel excise taxes. When the IRS takes a sample of
fuel from a motor vehicle, the results are immediate. If the sample
does not show any traces of red dye, the IRS releases the vehicle and
discards the sample. If the field sample shows traces of red dye, the
IRS forwards the sample to its laboratory for a complete analysis, and
the Fuel Compliance Officers (FCOs) gather information from the owner
of the truck, which the IRS uses to assess a penalty for improper use
of dyed fuel. Without such a field detection device, the IRS would have
to randomly select fuel from millions of highway vehicles and tens of
thousands of retail stations, and gather identifying information from
them as well, in order to monitor compliance with the payment of fuel
excise taxes. The IRS would have to analyze each sample at a laboratory
and then would have to follow up with those individuals or businesses
that failed the test.
The principal drawback to the current testing is the inability to
determine immediately if the red dye has been removed from red dye
diesel fuel. If this removal has been done effectively, there is no
visible trace left to detect, and the fuel looks just the same as taxed
fuel that has never been dyed. While the IRS agrees some type of
invisible marker (such as the recently promoted molecular marker) would
enable the IRS to detect dye removal, it would have to send all fuel
samples to a lab for analysis to determine the presence of the marker
in the fuel. Such an approach is not operationally or economically
feasible. Hence, the IRS needs some type of field device by which IRS
FCOs can readily detect the existence of a marker. To date, the IRS has
not been shown a practical field device.
Question. It certainly appears that the Red Dye has failed as a
field test, so why are we allowing perfect to be the enemy of the good
and losing hundreds of millions of dollars by not implementing another
method to detect fraudulent fuel?
Answer. The IRS does not believe that the red dye field test regime
has been a failure. In the vast majority of cases, the red dye
provisions have been successful in keeping non-taxable fuel off the
highways. Upon its initial implementation, the red dye regime yielded
significant tax increases and continues to be an effective deterrent
today. It is only recently that the IRS has begun to see products that
appear to have had the red dye removed. The extent of the removals is
unknown, but the IRS does not believe that it is widespread. The IRS is
not aware, nor has it stated, that it is losing hundreds of millions of
dollars due to the removal of the red dye. As requested in the
Appropriations bill, the IRS is continuing to look at the possibility
of using the molecular marking regime and has discussed the potential
usage with the American Petroleum Institute (API). They have raised
significant issues regarding the blending, product quality, company
indemnification and reliability of the sampling. The IRS is continuing
to work with the promoter of the field screening device to reach an
acceptable field performance level.
______
Questions Submitted by Senator Patty Murray
PRIVATE COLLECTION AGENCIES
Question. In January of 2005, the IRS briefed my staff on the
schedule for implementing private debt collection over the next few
years, including the number of agencies involved, and how much the IRS
plans to spend in fiscal year 2005 and successive years. Please provide
a detailed update of this information.
Answer. The IRS has made significant progress toward the initial
implementation of the private debt collection initiative. Since the
briefing in January 2005, the IRS has developed a release schedule that
will provide for limited implementation in January 2006. The IRS will
develop additional systemic functionality for January 2007. Full
implementation of the private debt collection program is scheduled for
January 2008 with enhanced reporting, monitoring and control
capabilities. This schedule will allow for a controlled ramp-up of
additional volumes of delinquent account placements with private
collection agencies.
In March 2005, the IRS selected a software vendor to provide
inventory management support of the private debt collection accounts.
The vendor is a proven leader in collection inventory management
applications with over 19 State deployments of their software. The
inventory management vendor is on board and has been working with IRS
staff to ensure successful deployment of the supporting software
applications in time for placement of delinquent accounts with private
collection agencies.
The IRS has prepared the statement of work to secure the services
of private collection agencies, and the contracting officer provided it
to potential vendors on April 27, 2005. The IRS expects to award
contracts in July 2005 with initial account placements in late January
2006. The IRS has identified the initial workload for placement with
private collection agencies and anticipates placing approximately
40,000 accounts within the first 9 months of operation.
The IRS has developed support structures and roles and
responsibilities. The IRS has identified operational sites and is
making progress on securing facilities. The IRS has identified a number
of key policy concerns and successfully worked them to resolution. The
IRS is drafting internal and external policies and procedures, with
anticipated completion scheduled for late summer.
The IRS has developed and approved a project schedule for the
limited implementation. The IRS has also developed a project budget and
secured funding for the current fiscal year. Additional funding is
included in the BSM spend plan requests for fiscal year 2006. The IRS
has established a project governance structure and its members meet
regularly with the project leadership to review progress against
scheduled activities and to provide guidance to the team. With the
current strong leadership in place, the IRS anticipates a successful
implementation of the private debt collection efforts.
The current information technology projected costs and budget for
fiscal year 2005 totals $15.5 million. This funding amount reflects the
full costs of the ``limited implementation'' for January 2006 of $9.5
million and an additional $6 million to begin the activities that
support the January 2007 implementation.
BUSINESS SYSTEMS MODERNIZATION
Question. Once finalized, the Custodial Accounting Project is
supposed to be a single, integrated data repository of taxpayer account
information and accessible for management analysis and reporting.
However, costs for the Custodial Accounting Project have continued to
increase, with the cost for the first phase in the neighborhood of $98
million. But this project is now on hold and may never go forward. What
is the latest on this project's cost and do you expect it to ever come
to fruition?
Answer. The BSM office designed CAP to provide integrated, reliable
tax operations and internal management information to support decision
analytics, performance measurement, and management information needs.
CAP also provided a data warehouse loaded with detailed taxpayer
account and collections information to be used for analysis and
financial reporting to oversight organizations. The IRS conceived CAP
as a multi-release solution, and BSM delivered the first two releases
into production in September 2004 and November 2004. However, for CAP
to have sustainable value to the IRS, it required two additional
releases--for business master file taxpayers and for collections data.
Collectively, these releases would take at least 3 years to complete
and cost more than $100 million. In addition, maintenance and support
for fielded CAP releases will cost more than $10 million annually.
Within the current budget context, the IRS evaluated benefits and costs
of continued CAP investment against the value to taxpayers and IRS
employees, competing priorities such as CADE, MeF, F&PC, and
maintaining core infrastructure. The IRS determined in January 2005
continued CAP investment is no longer a viable or sound business
decision; however, the IRS will leverage CAP work products and
knowledge gained in other BSM initiatives (e.g., BSM will use CAP data
models on CADE; the IRS now performs data segmentation and analysis in
a more modernized way, etc.). The CFO's office is pursuing a current
production environment (CPE) upgrade alternative that meets their
needs. There are no plans to revive CAP at this time.
Question. The contractor for Business Systems Modernization
developed a system for the IRS known as the Security Audit and Analysis
System to gather information for use in audits. Specifically, the
system would enable users to detect unauthorized activities and
facilitate the reconstruction of events if unauthorized activities
occurred. However, problems have prevented users from accessing the
data once it has been collected. When the contractor delivered the
system to the IRS in 2002, the IRS was aware that the system did not
meet IRS requirements but accepted the system with the understanding
that it would be fixed. Have these problems with the system been
resolved?
Answer. Since the initial delivery of the system in 2002, the IRS
has successfully resolved several requirements issues and is pleased
the Security Audit and Analysis System (SAAS) is effectively managing
audit trail data for modernization systems. Security Managers and
Modernization System Managers can generate Modernization Managers
Security Reports (MMSR) of employee access to taxpayer data from the
SAAS system. The Treasury Inspector General for Tax Administration
(TIGTA) should be able to begin their pilot use of SAAS in the summer
2005. The use of the SAAS reports by TIGTA is delayed until they
complete the testing of the current system audit trails. Final data
updates for this capability are underway and the TIGTA should complete
testing in the summer 2005. Activities continue to plan the transition
of current production systems audit trail analysis capabilities to the
SAAS system for TIGTA use. Mission Assurance and Security Services,
TIGTA, Modernization, Information Technology Services (ITS) and the
PRIME Contractor are working together to define and prioritize the
implementation of additional requirements and enhancements to the SAAS
system, which will be implemented in 2005 and 2006.
When IRS fully deploys SAAS, it will process two sources of ``audit
trail'' data. One source is audit trails for modernized systems (e.g.
IFS, Modernized E-file, E-services, IRFOF, etc.) and another is audit
trail historic data from the legacy Integrated Data Retrieval System
(IDRS) and Corporate Files on Line (CFOL) production systems. A current
production system called ATLAS, which continues to function while the
IRS transitions its capabilities to SAAS, currently captures this
legacy system audit trail data and processes it. The TIGTA will
continue to utilize ATLAS to review potential Unauthorized Access
(UNAX) violations until the IRS fully tests the SAAS system in a
production environment using production data. The IRS moved the ATLAS
data to SAAS to provide more modern technology support to the TIGTA
users, provide a single system for TIGTA to access their data instead
of their accessing both ATLAS and SAAS, and to allow the retirement of
the ATLAS system. The IRS previously processed and loaded the ATLAS
data into a data mart containing 60 months of historic data, but the
IRS is currently updating it to contain data from the last 4 months of
2004 audit trail information into SAAS, and then it will load the IDRS/
CFOL data from 2005.
Once the IRS loads the remaining 2004 historic IDRS data into SAAS,
the IRS needs to complete testing of multi-year report functionality.
At that point, TIGTA will begin to conduct a formal customer acceptance
test in the SAAS Production system. After the TIGTA completes the
customer acceptance test results, the IRS will make any necessary
systems changes and TIGTA will begin a 3-month parallel test of both
ATLAS and SAAS in Production prior to making any decisions about
retiring the current CPE system. TIGTA may determine that a second 3-
month parallel test of both ATLAS and SAAS is required based on the
results of the CAT testing and the initial parallel test. The current
completion dates are in the SAAS Production schedule (05/31/2005
schedule) as follows:
--Final Data Checkout on the loading of the 60 months of historic
data into the SAAS DataMart.--7/19/05;
--Complete initial TIGTA CAT in Production.--8/22/05.
The IRS is still working with TIGTA to reach agreement on a plan
and schedule for conducting the parallel test between SAAS and ATLAS in
Production. The IRS based the current schedule, which calls for this
test to begin in November 2006, upon the current estimates for loading
all historical audit trail data for 2005 into the SAAS data mart.
Delays in loading the most current 60 months of historic audit trail
data into the SAAS Production system have caused schedule delays, and
the IRS is looking at options (e.g., performance enhancements, capacity
upgrades) that may accelerate the current schedule estimates. The
current projected completion dates in the SAAS Production schedule as
of 05/31/2005 are:
--Final Datamart load of the 2005 data.--9/12/06;
--Execute 3 month parallel ATLAS/SAAS Production testing.--12/08/06;
--Execute 2nd 3 month parallel testing.--3/31/07--dependent on
TIGTA's satisfaction following the first 3 months parallel
testing;
--Retire ATLAS.--3/31/07 following 6-month ATLAS/SAAS parallel
testing.
TELEFILE--FILING TAX RETURNS BY TELEPHONE
Question. The IRS is reducing submissions processing activities
because taxpayers are filing fewer paper returns. In 2004, almost 4
million taxpayers filed by telephone--57 percent of whom had income of
$20,000 or less and 97 percent had income of $50,000 or less.
Additionally, nearly 1 million businesses used the TeleFile technology
to file their employment tax forms. The IRS's own survey reveals that
nearly 40 percent of the individual TeleFilers will go back to paper
filing. Further, there is currently no electronic alternative for the
businesses that use TeleFile. Nonetheless, the IRS is proposing to
eliminate TeleFile because the IRS says use has declined somewhat and
it is a bit more expensive to maintain than paper or electronic filing.
Why was the decision made to eliminate TeleFile without first providing
a viable, easy-to-access means of filing for these individuals and
businesses that ensured an electronic filing rather than forcing them
back to paper filing? Did the IRS look at ways to achieve efficiencies
in the operation of the current TeleFile system? If so, what were they?
Were these pursued?
Answer. The TeleFile program has certain requirements, such as
telecom, printing and postage cost that cannot be restructured or
reduced; therefore, the IRS could not develop efficiencies within the
current TeleFile program.
In making the decision to sunset TeleFile, the IRS considered the
declining use of TeleFile, the discontinuation of several State
TeleFile programs, including California's decision to cease TeleFile in
2005, and the growth of other electronic filing alternatives, such as
Free File. In fact, Free File volumes grew from 3.5 million returns in
2004 to 5.0 million returns in 2005, a 46.6 percent increase. At least
60 percent of individual filers qualify for Free File services and all
TeleFile-eligible filers with access to the Internet can use Free File.
Additionally, in their decision, the IRS considered the June 2004
Electronic Tax Administration Advisory Commission (ETAAC) report
recommendation to discontinue TeleFile. By sunsetting TeleFile, the IRS
will eliminate growing information systems operational costs of $3
million-$5 million annually and printing and postage costs of $4
million-$5 million annually.
The IRS has not developed a similar alternative for employment tax
returns. The same cost and infrastructure issues that the IRS faced
with Forms 1040 still persist. However, there are low cost alternatives
currently available to electronically file the Form 941.
TeleFilers may initially revert to paper filing (37 percent
according to a customer satisfaction survey), but research shows they
rebound to electronic filing at a higher rate than the general
population. Sixty-two percent of TeleFilers said they would try another
e-file option if TeleFile was no longer available.
TAXPAYER SERVICES
Question. The IRS is reducing its face-to-face service providing
taxpayers with information and filing assistance. Instead, the IRS
wants to direct taxpayers to the IRS website and to volunteer tax
return preparers. In particular, the IRS plans to decrease the level of
pre-filing services offered by Taxpayer Assistance Centers. The problem
with this is that some taxpayers rely on the face-to-face service. The
IRS notes, in its Strategic Plan, that it must ``continue to use a
comprehensive range of products and services to reach [their]
customers, including those who do not use electronic services.'' Mr.
Everson, how does the IRS's plan to reduce face-to-face services
adequately provide for these taxpayers who won't use electronic
services?
Answer. In recent years, the IRS has seen a significant shift in
the ways Americans interact with the Service. Compared to the past,
fewer taxpayers are choosing to write or call the IRS; even fewer
taxpayers are using walk-in TACs. Instead, more and more Americans are
turning to volunteers for return preparation and they are obtaining
forms and tax information from the IRS's Internet site. In addition,
most TAC services are available through the IRS's Toll-Free telephone
system at a greatly reduced cost and with higher quality. In a report
issued last year, the Government Accountability Office (GAO) stated,
``improvement in phone service, increased web site use and the
availability of volunteer sites raises a question about whether the IRS
should continue to operate as many walk-in sites.''
In making the business decision regarding the TACs, the IRS
considered the long-standing concept of operations for Field Assistance
that emphasizes accounts and collection work, with customers who need
assistance increasingly served through self-service mechanisms, and
reliance on community-based volunteer partners for return preparation
assistance. The IRS anticipated that as these partnerships grew and
increasingly met the needs of community members, the customer traffic
in IRS TACs would be reduced. In making this decision, the IRS also
considered changing taxpayer behavior, the availability of new and
improved alternative services, and the cost benefits of these
alternatives compared to walk-in service.
When taxpayers have tax law questions or questions about their
accounts, the IRS's Toll-Free service will route them to the assistor
who has the expertise to answer their particular question. If a
taxpayer needs a form, the IRS website has every form available for
download, and paper forms are available at 32,000 local libraries,
banks, post offices and other outlets. When taxpayers need help
preparing their returns, they can visit one of the 14,000 VITA and TCE
sites available throughout the country. If a taxpayer still needs face-
to-face service with an IRS representative, more than 300 TACs will
still be available across the country to provide that service as well.
ACCURACY OF TAX INFORMATION
Question. Mr. Everson, if you succeed in reducing the number of
Taxpayer Assistance Centers, it will become even more important that
the remaining avenues available to taxpayers seeking information be
accurate. Recently, the Treasury Inspector General for Tax
Administration (TIGTA) found that taxpayers have alerted the IRS of
possible errors on the IRS.gov website but these concerns were not
always addressed. TIGTA also found that the IRS could not verify
whether correct changes had been made to the website. Mr. Everson, if
compliance is an utmost priority to the IRS, how can you expect
taxpayers to comply if the information they receive from the IRS isn't
accurate or reliable?
Answer. After the Treasury Inspector General for Tax Administration
(TIGTA) review on the accuracy of IRS.gov, the IRS implemented several
controls to ensure taxpayer concerns regarding the web site are
directed to the appropriate IRS.gov Point of Contact (POC). The IRS
also issued more specific procedures to the IRS.gov Helpdesk vendor
regarding the handling of IRS.gov inquiries (comments, questions and
problems) from web users, to ensure the vendor is forwarding those
inquiries for resolution. Inquiries from web users regarding the
accuracy of the web site or inquiries that indicate that information on
the web site is different from other web documents are immediately
forwarded to the IRS.gov POCs for resolution.
The IRS has also added a staff member dedicated to monitoring the
resolution of inquiries forwarded to the IRS.gov POCs to ensure that
these inquiries are addressed. The IRS has also implemented the use of
Unresolved Escalation Reports to follow-up on unresolved inquires with
the Content Area Administrators and, when necessary, management. If
IRS.gov POCs do not respond to inquiries within designated timeframes,
a follow-up is scheduled to ensure issues are resolved.
In addition, the IRS has updated its procedural document
``Guidelines for Responding to IRS.gov Escalations'' to provide
specific responsibilities for IRS.gov POCs. On January 11, 2005, the
IRS held a meeting with the IRS Content Area Administrators and
explained the changes in procedures. Since January 2005, the new
procedures have been effectively implemented.
PROPOSED CUTS TO TAXPAYER OUTREACH
Question. Funding for taxpayer outreach has steadily decreased in
the past few years. Outreach activities include proactive programs for
taxpayers, businesses, tax practitioners, and others to understand
their tax obligations and have the information and materials necessary
to do so. For fiscal year 2006, a 7 percent cut is proposed, which is
almost the same as the increase proposed for enforcement. Doesn't
cutting outreach directly conflict with your Strategic Plan to improve
taxpayer service by making it easier for people to participate in the
tax system? Have you been able to identify a decline in the need for
outreach? Do you have data--has a study been completed to demonstrate
this? If yes, please provide a copy. If there has been no decline in
the need for outreach, how are you going to meet this need, if you are
cutting outreach?
Answer. The change in the level of resources requested for the
Outreach activity in fiscal year 2006 reflects the IRS's commitment to
providing high-quality services to taxpayers in the most efficient and
effective manner possible. However, the reduction in Outreach is not
comparable to the increase in Enforcement resources. Outreach is a
single budget activity with a relatively small budget, while the term
``Enforcement'' encompasses five budget activities with a substantially
larger budget. A more appropriate comparison would be between the
reduction in ``Taxpayer Service'' resources--encompassing several
budget activities--and the increase in ``Enforcement'' resources. As
proposed for fiscal year 2006, ``Taxpayer Service'' resources decline
by 1 percent, while ``Enforcement'' resources reflect a 7.8 percent
increase.
The IRS must provide strong customer service to taxpayers, but the
way taxpayers pay their taxes and access IRS information is changing.
In recent years, the use of IRS.gov and e-filing has increased rapidly
while paper filing and visits to walk-in Taxpayer Assistance Centers
(TACs) have declined. In fact, this filing season individuals filed
more returns electronically than on paper, marking the first time in
history that e-filing has outpaced paper returns. The closure of TAC
sites and corresponding reduction in Outreach resources has been
carefully evaluated to minimize the impact on taxpayers while
simultaneously making additional resources available for other
essential functions.
The number of taxpayers walking into a Taxpayer Assistance Center
(TAC) for assistance has decreased from a high of nearly 10 million
contacts in fiscal year 2000 to about 7.7 million contacts in fiscal
year 2004. To date this filing season, traffic is down again by over 9
percent. This trend reflects the increased availability and quality of
services that do not require travel or waiting in line. Examples
include improved access to IRS telephone service, the increasing
availability of volunteer assistance, and the many services now
available through IRS.gov, such as access to all forms and
publications, ``Free File,'' and ``Where's My Refund?''
These shifts present an opportunity to adjust the way the IRS
serves taxpayers and to focus on the most efficient services. Changing
the way the IRS provides customer service to meet the new ways people
are dealing with their taxes in the 21st century allows the IRS to meet
the needs of taxpayers while spending their tax dollars more
efficiently and responsibly.
With respect to quality, Toll-Free telephone service is the best
option for most customers to get a correct and complete answer to their
tax law or account questions. Unlike the walk-in environment, the
sophisticated capabilities of our Joint Operations Center allow Toll-
Free customers to be routed to an IRS employee specifically trained to
address their particular issues. This filing season, Toll-Free tax law
and account accuracy are at 88 percent and 91.5 percent respectively.
Treasury Inspector General for Tax Administration (TIGTA) audits
assessed the walk-in level of tax law accuracy at 75 percent for the
same time period; however, the IRS notes the TIGTA does not base its
results on a statistically valid sample. The IRS is developing a new
Field Assistance Embedded Quality Review System (EQRS) to determine the
true accuracy rate, but it is still too early in development to yield
measures of which the IRS is confident.
The Wage and Investment Division Stakeholder Partnerships,
Education and Communication (SPEC) business model focuses upon the
delivery of education and tax preparation services solely through
community-based partners such as non-profit, social services,
educational, financial, governmental, faith-based, and corporate
organizations. Since inception in 2001, this collaborative partnership
has increased the volume of volunteer tax return preparation from 1.1
million returns to over 2 million returns in 2005.
The IRS also believes it can streamline certain other outreach
programs while meeting or exceeding the service expectations. In
particular, the ongoing effort to realign and refocus communications,
outreach, and liaison efforts within the Small Business/Self-Employed
(SB/SE) Division will enable the IRS to enhance the level of service
and the quality of its interactions with small business taxpayers in
support of its strategic plan. The core mission of this merged
organization will focus efforts in three areas--practitioner liaison;
stakeholder engagement; and, support of strategic compliance
initiatives--and will result in the following benefits for small
businesses and practitioners:
--Centralized organization and delivery of key messages to ensure
national stakeholders and partners in tax administration at the
local level receive consistent, accurate and up-to-date
information.
--Targeted communications with practitioner groups to provide
consistent information on changes to the IRS's policies and
procedures and keep our stakeholders apprised of the many
services we offer--such as E-services for those who file
electronically on behalf of their clients.
--An enhanced Issue Resolution program to encourage and address the
feedback received from small business and practitioner
stakeholders and enable the IRS to continually make
improvements in examination, collection, and campus operations
that benefit small businesses and practitioners.
--Continued educational outreach to meet the needs of small
businesses through comprehensive curriculum, which the IRS
updates for all tax code changes. The website, which is
dedicated to small businesses, contains about 10,000 pages of
content arranged by major industry groups and by major tax
areas, such as employment taxes and depreciation. Response to
this site has been overwhelming. For example, in January 2005,
the site had 1.7 million visitors--more than double the number
from January 2004.
Finally, the IRS believes it can achieve greater efficiencies in
distributing tax products by leveraging on the continuing growth in e-
filing and taxpayers' increased use of Internet. For example,
consolidating the IRS's forms distribution operations from three sites
to one site not only will be more efficient, but also will save staff,
printing and postage resources. Other savings will accrue as increased
e-filing results in the need to mail fewer tax packages, and Internet
downloads allow the IRS to reduce excess quantities of tax forms,
publications and other tax products.
Question. Congress created the Taxpayer Advocate so that taxpayers
could receive assistance in solving their problems with the IRS.
However, taxpayers aren't able to take advantage of this service if
they don't know about it. Research indicates that only a small
percentage of taxpayers eligible for Taxpayer Advocate Services have
ever even heard of the Taxpayer Advocate. To what degree will the cuts
you are proposing affect the Taxpayer Advocate? Won't these cuts
further erode the public's awareness of the Taxpayer Advocate?
Answer. The IRS will continue to make taxpayers aware the Taxpayer
Advocate Service is available to help them solve their problems with
the IRS. The proposed changes to taxpayer service--reduced outreach
spending and fewer Taxpayer Assistance Centers--may minimally reduce
taxpayer awareness of the availability of the Taxpayer Advocate Service
(TAS). However, outreach activities that publicize TAS should continue.
The reduced outreach spending will be possible due to savings in
printing and postage caused by shifts to electronic filing and by
providing publications on-line, rather than through the mail. Reduced
IRS face-to-face assistance may increase the TAS workload as taxpayers
seek such service from TAS, especially in cases where TAS is collocated
with a TAC that's been closed. However, the IRS expects these impacts
to be minimal because of the overall trend toward alternate forms of
assistance via the Internet and the telephone. Further, VITA assistance
and SPEC and TEC outreach programs will supplement IRS reductions to
face-to-face service and will maintain significant support for the
awareness of TAS's services.
______
Question Submitted by Senator Harry Reid
Question. The National Research Program (NRP) estimates that
underreporting of tax attributable to individual income tax filers is
the largest component of the tax gap. The shortfall of taxes paid to
taxes owed has been estimated by the IRS at being in the range of $200
billion-$235 billion annually. Of this amount, the Service estimates
that as much as $9 billion of this underpayment relates to errors in
calculating taxable gains on the sale of equity assets. I understand
that the NRP program used, on a limited basis, a computer program to
help derive this underpayment estimate. Would an expansion of the use
of this program assist the Service in reducing the underpayment of tax
in this area?
Answer. The National Research Program (NRP) analyzed about 46,000
individual income tax returns for Tax Year 2001 and the Office of
Research used the data collected in its update of the Tax Gap figures
released in late March. NRP examiners and classifiers tested computer-
based tools to determine if the calculated amount of capital gains
reported by the taxpayer could easily be checked. The test was
inconclusive, with some examiners and classifiers saying the tool was
somewhat useful and others saying it was not helpful. In large part
these results reflect the fact that taxpayers do not always list the
exact purchase date for assets (such as shares of stock) they sell in a
particular tax year. Often, the acquisition date is given as
``various,'' reflecting purchases of more than one block of shares or
the ongoing acquisition of shares through dividend reinvestment.
Moreover, even where there is a specific acquisition date, the share
price may fluctuate on that day by 10 percent or more, and it is
unclear whether the taxpayer purchased the shares at the top of the
range, at the bottom, or somewhere in between. Given the current level
of information reporting for capital gains transactions (e.g., only
gross sales proceeds are reported by brokerage firms, not the basis of
the publicly-traded assets that were sold), it is not clear that the
benefits generated by using a computer-based tool to help calculate
basis of capital assets would exceed the costs.
Senator Bond. The hearing is recessed.
[Whereupon, at 10:50 a.m., Thursday, April 7, the
subcommittee was recessed, to reconvene subject to the call of
the Chair.]