[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF THE INTERNAL REVENUE SERVICE
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,
FINANCIAL MANAGEMENT AND
INTERGOVERNMENTAL RELATIONS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
APRIL 2, 2001
__________
Serial No. 107-33
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
_______
U.S. GOVERNMENT PRINTING OFFICE
77-055 WASHINGTON : 2001
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California PATSY T. MINK, Hawaii
JOHN L. MICA, Florida CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida DANNY K. DAVIS, Illinois
DOUG OSE, California JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky JIM TURNER, Texas
JO ANN DAVIS, Virginia THOMAS H. ALLEN, Maine
TODD RUSSELL PLATTS, Pennsylvania JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida WM. LACY CLAY, Missouri
CHRIS CANNON, Utah ------ ------
ADAM H. PUTNAM, Florida ------ ------
C.L. ``BUTCH'' OTTER, Idaho ------
EDWARD L. SCHROCK, Virginia BERNARD SANDERS, Vermont
------ ------ (Independent)
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
James C. Wilson, Chief Counsel
Robert A. Briggs, Chief Clerk
Phil Schiliro, Minority Staff Director
Subcommittee on Government Efficiency, Financial Management and
Intergovernmental Relations
STEPHEN HORN, California, Chairman
RON LEWIS, Kentucky JANICE D. SCHAKOWSKY, Illinois
DAN MILLER, Florida MAJOR R. OWENS, New York
DOUG OSE, California PAUL E. KANJORSKI, Pennsylvania
ADAM H. PUTNAM, Florida CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Robert Alloway, Professional Staff Member
Grant Newman, Clerk
Mark Stephenson, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on April 2, 2001.................................... 1
Statement of:
Rossotti, Charles O., Commissioner, Internal Revenue Service,
accompanied by Lawrence W. Rogers, Acting Chief Financial
Officer; Robert F. Dacey, Director, Information Security
Issues, U.S. General Accounting Office, accompanied by
Michael Brostek, Director, Tax Administration Issues;
Randolph C. Hite, Director, Information Technology; Steven
J. Sebastian, Acting Director, IRS Financial Management
Issues; and Larry R. Levitan, chairman, IRS Oversight Board 7
Letters, statements, etc., submitted for the record by:
Dacey, Robert F., Director, Information Security Issues, U.S.
General Accounting Office, prepared statement of........... 68
Horn, Hon. Stephen, a Representative in Congress from the
State of California, prepared statement of................. 4
Levitan, Larry R., chairman, IRS Oversight Board, prepared
statement of............................................... 50
Rossotti, Charles O., Commissioner, Internal Revenue Service,
prepared statement of...................................... 12
OVERSIGHT OF THE INTERNAL REVENUE SERVICE
----------
MONDAY, APRIL 2, 2001
House of Representatives,
Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations,
Committee on Government Reform,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:01 p.m., in
room 2154, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Present: Representatives Horn and Putnam.
Staff present: J. Russell George, staff director and chief
counsel; Dianne Guensberg, detailee; Bonnie Heald, director of
communications; Earl Pierce, professional staff member; Matthew
Ebert, policy advisor; Grant Newman, assistant to the
subcommittee; Brian Hom, intern; Michelle Ash, minority
counsel; Mark Stephenson, minority professional staff member;
and Jean Gosa and Earley Green, minority assistant clerks.
Mr. Horn. This hearing of the Subcommittee on Government
Efficiency, Financial Management and Intergovernmental
Relations will come to order.
We are here today to examine several management issues
involving the Internal Revenue Service, the Agency charged with
collecting nearly 95 percent of the Federal Government's annual
revenue and enforcing the Nation's tax laws. Every April 15th,
the Internal Revenue Service holds American taxpayers
accountable for the accurate reporting of their tax
liabilities. The Internal Revenue Service must be held equally
accountable.
Many improvements have been made under the capable and
distinguished leadership of Commissioner Charles Rossotti, who
has substantially turned this service around. However,
impressive challenges remain and must be resolved.
On Friday, the subcommittee reviewed the results of the
General Accounting Office's audit of the Federal Government's
fiscal year 2000 financial statements. Based on that report and
the findings of agency auditors, this subcommittee released its
report card, grading the 24 major Federal departments and
agencies on their progress in improving their financial
management.
The Internal Revenue Service, as part of the Department of
the Treasury, did not receive an individual grade. However, for
the first time, the Service, the Internal Revenue Service,
received a clean audit opinion on its financial statements.
That is certainly a step in the right direction. However, as
the Comptroller General of the United States, Mr. David Walker,
testified Friday, it is only the first step toward the
governmentwide goal of providing accurate, timely financial
information on a day-to-day basis.
Today we will examine the efforts of the IRS toward meeting
that goal and its efforts to protect the security of its
computer systems which contain personal information on every
taxpayer in this Nation. In addition, we will review the
agency's program to reorganize its management structure and to
modernize its business systems.
We are pleased that the IRS has made progress not only in
its financial statements, but also in its efforts to improve
services to the taxpayers. However, several serious concerns
remain in these and other areas, such as the Service's efforts
to protect and modernize its computer systems. It is essential
that taxpayers know that their tax files are private and
secured from unlawful invasion.
According to the General Accounting Office, the IRS
achieved a clean opinion on its financial statements through
extremely dedicated efforts that required IRS personnel to work
around serious deficiencies in order to develop reasonable
numbers for a single date, September 30, 2000. Yet, as Office
of Management and Budget Director Mitch Daniels testified
Friday, such efforts are meaningless until reliable financial
information can be generated on a daily, weekly, monthly, and
quarterly basis.
A tremendous amount of money is being invested in
modernizing the business systems of the IRS. However, the
General Accounting Office has expressed reservations about the
Service's ability to manage these acquisition projects on
schedule and within budget.
Computer security procedures remain a significant concern.
Last year, General Accounting Office investigators gained
unauthorized access to the IRS' electronic filing system, which
contained the tax records of more than 35 million people.
The Internal Revenue Service says it has now fixed that
problem. But it is troubling that it was the General Accounting
Office auditors, not the IRS, who discovered the problem. But
in fact, the GAO audit found that the Agency did not have
adequate procedures in place to detect these unauthorized
intrusions. The IRS tells taxpayers that their transactions are
safe and secure. What the agency failed to tell taxpayers who
are filing returns electronically is that an intermediary
company, or partner, such as a tax preparing company or
financial software manufacturer, may be involved in the
transaction.
At the moment, the Internal Revenue Service does not
require these partners to meet minimum computer security
standards such as encryption. Such minimal standards place
taxpayers who file their returns electronically at risk of
exposing their personal tax records to unauthorized viewers. In
addition, the IRS inspector general is investigating
allegations that employees are still illegally browsing and
misusing the personal tax records of others.
Given these risks, how can the Internal Revenue Service
expect to comply with the IRS Restructuring and Reform Act
requirement that by 2007, 80 percent of all taxpayers will file
their returns electronically?
We welcome our witnesses today who will discuss these
issues: The Honorable Charles O. Rossotti, Commissioner of
Internal Revenue; the Honorable Larry R. Levitan, chairman of
the Internal Revenue Service Oversight Board; and Mr. Robert F.
Dacey, Director of Information Security Issues for the U.S.
General Accounting Office. We look forward to your testimony.
[The prepared statement of Hon. Stephen Horn follows:]
[GRAPHIC] [TIFF OMITTED] T7055.001
[GRAPHIC] [TIFF OMITTED] T7055.002
Mr. Horn. I believe Mr. Putnam is here. And, Mr. Putnam, if
you have an opening statement, please feel free to make it.
Mr. Putnam. Thank you, Mr. Chairman. I thank the panelists,
particularly you, Mr. Commissioner. We appreciate you spending
some time with us this afternoon. I'm looking forward to
hearing the testimony of the panel and learning of the progress
that has been made by the IRS in reforming the agency.
This is a monumental task that the IRS has ahead of them,
and I feel it's important for Congress to not only monitor
their progress but, more importantly, to be involved in the
process so we are able to offer assistance where it may or may
not be needed, which is sometimes the case.
It appears that the IRS has made significant strides toward
making meaningful changes in how it operates since the passage
of the 1998 Internal Revenue Service Restructuring and Reform
Act.
Obviously, the greatest criticism of the IRS by the general
public has been its lack of customer service and its abusive
tactics in pursuing delinquent taxes. These are serious
concerns. But many other problems, such as improving internal
management and modernizing the IT structure in the agency are
also important issues.
I have reviewed the Strategic Plan developed by the IRS and
the Oversight Board and feel that they're on track in
addressing the many challenges facing the IRS. The Strategic
Plan demonstrates a clear understanding of the needs of the
agency and offers sensible solutions to meeting those needs. I
am particularly encouraged by the agency's commitment to
improving its customer relations and the progress that has
already been made in accomplishing that endeavor. I feel this
is an important first step in altering the image of the
Internal Revenue Service, assuming the plan is actually
implemented.
It's relatively easy to write a plan that will fix the
problems. Changing an agency's culture so that the plan will
work is quite a different matter.
Finally, we in Congress must recognize that one cause of
the problems between the IRS and the American people is the
complexity of the Tax Code. I certainly believe that Congress
should shoulder its share of the burden for that. The more
complicated the tax laws are, the more mistakes,
misunderstandings, and opportunities for the misapplication of
its provisions there will be.
I thank the panel for taking the time to be here and
testify. I look forward to hearing of your progress and
learning how this committee and this Congress can be of
assistance. I recognize that you have an unenviable task in
government, and often you're whipsawed between the different
whims of Congress and the needs of revenue collection for this
government. And, I certainly recognize that, and appreciate it,
and look forward to your comments.
Thank you. Thank you, Mr. Chairman.
Mr. Horn. I thank the gentleman. As most of you know, this
is an investigating committee and we do ask all witnesses to
take the oath. So if you will raise your right hands.
[Witnesses sworn.]
Mr. Horn. I note that nine--the clerk will get the names of
the supporting cast. The actors we know. So, thank you very
much. And, our first presenter is the Honorable Charles O.
Rossotti, Internal Revenue Service.
STATEMENTS OF CHARLES O. ROSSOTTI, COMMISSIONER, INTERNAL
REVENUE SERVICE, ACCOMPANIED BY LAWRENCE W. ROGERS, ACTING
CHIEF FINANCIAL OFFICER; ROBERT F. DACEY, DIRECTOR, INFORMATION
SECURITY ISSUES, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY
MICHAEL BROSTEK, DIRECTOR, TAX ADMINISTRATION ISSUES; RANDOLPH
C. HITE, DIRECTOR, INFORMATION TECHNOLOGY; STEVEN J. SEBASTIAN,
ACTING DIRECTOR, IRS FINANCIAL MANAGEMENT ISSUES; AND LARRY R.
LEVITAN, CHAIRMAN, IRS OVERSIGHT BOARD
Mr. Rossotti. Mr. Chairman and Mr. Putnam, last year when I
came before you I said we had a clear direction for the IRS and
had taken some important steps to improve the IRS. Now I think
for the first time I can tell you that we have a more
comprehensive, real plan, referred to by Mr. Putnam, that lays
out how we will build on the foundation that we have already
laid to make the IRS everything that we think the American
public has a right to expect it to be.
On January 30, 2001, the IRS Oversight Board approved the
IRS Strategic Plan. It follows closely the spirit and the
letter of the Restructuring Act and reflects what we intend for
the new and modernized IRS. This plan shows how the IRS can
dramatically improve services to taxpayers, ensure fairness and
compliance with our tax laws, and at the same time meet these
goals while continuing to shrink in size relative to our
economy. These are challenging objectives, but the most
challenging part of it is that we must continue to administer
the world's largest and most complex tax system while
simultaneously reengineering and improving how the agency works
at its most basic level.
In other words, we have to operate effectively and
modernize at the same time. Our plan is based on recognizing
the reality of this dual approach. So, we have strategies to
improve performance over the next 2 years while modernizing the
agency in the long run. In conjunction with our missions and
goals, we developed 10 strategies. For each of these for 2001
and 2002 we define specific priorities and projects and assign
responsibilities for carrying them out.
For example, the 2001 filing season demonstrates how we can
build on positive trends in meeting taxpayer needs and
broadening the use of electronic interactions, which are two of
our strategies. With respect to electronic filing, so far this
filing season our filing from individuals using their home
computers is up 37 percent compared to last year and is almost
equal to the 5 million done last year. Overall, including all
kinds of electronic returns, we expect to receive about 35
million returns electronically this year.
There are reasons why we continue to get more returns
electronically. In the 2001 filing season, for example, we
added 23 additional forms to the e-filing program and we expect
to roll out 38 more next year for the 2002 filing season. That
means that we will have e-file eligibility for about 99.1
percent of all taxpayers by the end of next year, which was an
important limitation previously.
On other electronic interactions, our Web site has received
about 1.3 billion hits this year, and through February there
has been about 103 million downloads, mostly of forms. And
that's almost double the 51 million last year. That's a lot of
people that don't have to make a trip to the Post Office.
We also just announced a couple of weeks ago that taxpayers
who need an extension to file their returns--and you're allowed
an automatic extension until August 15th--can now do that with
a simple phone call. You'll get a confirmation. No paper is
required.
For the small business taxpayer we have an exciting pilot
program ongoing right now to test an Internet based application
for businesses to file and pay Federal taxes online, especially
payroll taxes. This new feature, which is called EFTPS online,
allows businesses to enroll in the system and then to securely
make Federal tax payments as well as to check their payment
history over the Internet. Using this system they'll be also
able to schedule future payments through the Internet and even
cancel payments if necessary. For most small businesses this
type of transaction is the most frequent interaction they have
with the IRS.
Let me also stress that during the past year, with respect
to our electronic filing programs, responding in part to
weaknesses that were identified by GAO, as you noted in your
statement, Mr. Chairman, as well as to our own security
office's initiatives, we completed a comprehensive set of
exchanges and upgrades to strengthen our security for the
millions of electronically filed returns for this filing
season.
In another area of services to taxpayers, we made steady
progress this year in providing telephone services. A few years
ago busy signals were our biggest problem. One year there were
400 million busy signals, which was more than there were calls
obviously. That problem has been reduced to a minimal level of
busy signals, under 4 percent. On getting through to the IRS
for filing season through March 23rd we've answered 51\1/2\
million calls, which is 14 percent more than last year. For
those taxpayers who wanted to talk in person to a customer
services representative, they have gotten through 66 percent of
the time so far this filing season compared to 61.4 last year.
Now, that's still well below what we should be, which is
probably around 90 percent as in the commercial sector, but it
definitely represents progress.
Another one of our major strategies is to promote the
effectiveness of our asset and information stewardship. This
includes all aspects of financial management, as you noted in
your opening, Mr. Chairman. I'm very pleased to point out that
in fiscal 2000 the GAO provided for the first time a clean
opinion on all of our financial statements. Larry Rogers, until
recently our Chief Financial Officer, has accompanied me to
answer any questions on this topic because I have a recusal on
most of that. However, I will make a couple of comments on it
since it's so important.
Very shortly after he came here, Secretary O'Neill said
that ``good stewardship of taxpayer resources is a
responsibility I take very seriously.'' And I do, too. At the
IRS we want to make sure that every manager and employee takes
this responsibility very seriously.
During the last fiscal year, I think we demonstrated that
seriousness by the tremendous amount of hard work, acknowledged
by the GAO, of the IRS staff. They also identified where
significant improvements were made to our internal systems and
noted the management focus.
I also want to acknowledge, Mr. Chairman, that the work
that was done to achieve this clean opinion was not only by the
IRS, the GAO itself did a tremendous amount of work in a very
constructive way to work with us to get this clean opinion, and
we also note that your committee has made a continued emphasis
on this area, which I think has certainly provided us an
incentive and encouragement to come here. We prefer not to come
here explaining why we didn't get a clean opinion, very
honestly.
Mr. Horn. That's an honest witness who says he doesn't
prefer to come here.
Mr. Rossotti. I said we prefer not to come here when we
have to explain why we didn't get a clean opinion. I think
we're much more pleased to come under these circumstances. But
we also recognize that we have a lot more to do, and we're
already under way with our planning to talk about what we need
to do to improve future audits and especially to address the
material weaknesses that were still identified by GAO.
On the longer term, modernization, the other prong, if you
will, of our efforts to improve the agency; we've made, we
believe, steady progress in the three key modernization
programs. In response to RRA 1998, we have the new customer-
focused organization implemented for the most part and a total
top management team in place for each of our four operating
divisions, the functional units.
On another major effort we have also got now our balanced
measure system in place for much of our new organization, and
by the end of this fiscal year, we should have most of those
measures deployed throughout our field organization. These
changes, especially the organizational changes, are already
enabling us to do one of the key things we want to do, which is
to understand taxpayer needs better and to tailor our services
as well as our compliance programs where they will do the most
good.
Just to give two examples, we recently rolled out a
specialized sub-sight on our Web site for the small business
self-employed community. We have for large business two new
issue resolution programs which are attempting to resolve
issues more expeditiously and efficiently for large businesses.
The third and probably biggest, at least in terms of time
and cost the biggest part of our modernization program, which
is our business systems modernization program, officially
kicked off with the first funding release almost exactly 21
months ago. This is still the early stages of this long-term
program, but we believe we've made solid progress in a number
of areas, three in particular. One is developing an agency wide
vision and architecture; second, building a program management
capability; and third, delivering on some near term specific
business projects.
The enterprise architecture, which is essentially our road
map for modernizing the agency's business systems as well as
its supporting technology, was approved earlier this year. Our
management capability, which involves using a rigorous
methodology and governance process, is improving greatly,
although it still has a ways to go before it's fully mature.
Our first two projects, one to improve technology for our
telephone services and the other to provide better tools for
our employees who examine corporate income tax returns, will be
rolled out over the next few months, which is approximately 2
years after the initial start of the program.
Now, Mr. Chairman, I have to say in spite of the progress
we have made since the enactment of RRA 1998, I have to
acknowledge that it is very clear that we are still not
reaching the goals that we've set for ourselves. We are not
providing the level and quality of services that we think
taxpayers deserve, nor are we collecting all the taxes that are
officially due.
I could give examples. I cited the improvement in the level
of phone services. That's the glass is half full, the glass is
half empty because it's not at the level that it needs to be,
and it's certainly not comparable to the private sector. We're
not satisfied with the quality of our phone services yet, even
though it's improving.
Also, aside from the matter of whether taxpayers could get
through because of the antiquated computer systems that our
employees have to deal with, we often can't provide taxpayers
with up-to-date information on their accounts, which results in
considerable frustration both for our customers and our
employees who want to help the taxpayers. Another sign of the
problems we still have is that almost every business process
operates too slowly, and, sometimes inaccurately and
inefficiently.
In previous hearings, Mr. Chairman, you and I have
discussed how slow and inefficient our collection process is,
which depends--and I think you remember the chart. At one time
I think you took it back to your office. I will be glad in the
rest of this, if you want, to go into what we're doing about
that because I think we're moving on that.
In terms of our communication with taxpayers, we send out
over 100 million notices a year. Many of them are somewhat
confusing to the taxpayers. While electronic filing is
increasing significantly, it's going to be very difficult to
reach 80 percent by 2007, which is the goal that Congress set
for us.
As we noted, even though we got a clean opinion, we still
have material weaknesses in our financial systems. Some of
those we can address quickly through better management, but
frankly, the most serious ones cannot be effectively addressed
except through our business systems modernization program.
In addition, we're also deeply concerned about the
continued drop in our audit and collection activity. The risks
in these declines is not simply the dollar value of the taxes
that are left uncollected. We think the greatest risk is that
the average taxpayer who honestly pays his taxes loses
confidence if the IRS fails to deal with and act efficiently
and effectively to collect from those who do not pay what they
owe.
The effect of decline in our examination coverage is
especially important with respect to fairness since it's
relatively easy for the IRS to verify most of the income of
lower and middle income taxpayers, but, it's much harder and
often requires an examination to verify the income of higher
income and corporate taxpayers. This decline in activity up
through the last 3 years was caused by several factors,
including the long-term decline in staffing, the need to assign
some compliance staff to customer services duties during the
filing season, and the edit RRA responsibilities. With the help
of money that was appropriated by Congress in 2001 as well as,
very importantly, our new organization structure, which I think
is better at focusing on what we want to accomplish, we hope to
turn that around beginning this year.
With respect to the modernization program, business systems
modernization is at a critical juncture. It will require
continued financial support from the committees of Congress who
oversee us. I am pleased to say that, as was noted in the
President's blueprint announced a few weeks ago, the budget
will include close to $400 million in investments for the
information technology investment account.
So, Mr. Chairman, in conclusion, I hope I have given you a
brief but balanced assessment of where we are at the IRS. I
think we're on the right track. We, I think, have demonstrated
our ability to make some short-term improvements in services,
and to make essential organizational changes, and I think, very
importantly, to produce a viable plan that will guide our
efforts, which are aimed at making major changes in the entire
way we do business in providing services to the taxpayers. With
your continued support, and that of the American people, I am
very convinced that we can succeed in this effort.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Rossotti follows:]
[GRAPHIC] [TIFF OMITTED] T7055.003
[GRAPHIC] [TIFF OMITTED] T7055.004
[GRAPHIC] [TIFF OMITTED] T7055.005
[GRAPHIC] [TIFF OMITTED] T7055.006
[GRAPHIC] [TIFF OMITTED] T7055.007
[GRAPHIC] [TIFF OMITTED] T7055.008
[GRAPHIC] [TIFF OMITTED] T7055.009
[GRAPHIC] [TIFF OMITTED] T7055.010
[GRAPHIC] [TIFF OMITTED] T7055.011
[GRAPHIC] [TIFF OMITTED] T7055.012
[GRAPHIC] [TIFF OMITTED] T7055.013
[GRAPHIC] [TIFF OMITTED] T7055.014
[GRAPHIC] [TIFF OMITTED] T7055.015
[GRAPHIC] [TIFF OMITTED] T7055.016
[GRAPHIC] [TIFF OMITTED] T7055.017
[GRAPHIC] [TIFF OMITTED] T7055.018
[GRAPHIC] [TIFF OMITTED] T7055.019
[GRAPHIC] [TIFF OMITTED] T7055.020
[GRAPHIC] [TIFF OMITTED] T7055.021
[GRAPHIC] [TIFF OMITTED] T7055.022
[GRAPHIC] [TIFF OMITTED] T7055.023
[GRAPHIC] [TIFF OMITTED] T7055.024
[GRAPHIC] [TIFF OMITTED] T7055.025
[GRAPHIC] [TIFF OMITTED] T7055.026
[GRAPHIC] [TIFF OMITTED] T7055.027
[GRAPHIC] [TIFF OMITTED] T7055.028
[GRAPHIC] [TIFF OMITTED] T7055.029
[GRAPHIC] [TIFF OMITTED] T7055.030
[GRAPHIC] [TIFF OMITTED] T7055.031
[GRAPHIC] [TIFF OMITTED] T7055.032
[GRAPHIC] [TIFF OMITTED] T7055.033
[GRAPHIC] [TIFF OMITTED] T7055.034
[GRAPHIC] [TIFF OMITTED] T7055.035
[GRAPHIC] [TIFF OMITTED] T7055.036
[GRAPHIC] [TIFF OMITTED] T7055.037
Mr. Horn. Well, thank you very much. That was an excellent
statement, and we'll have more in a dialog on the questions.
But, I'd like to now recognize the Honorable Larry R. Levitan,
chairman of the IRS Oversight Board. Mr. Levitan, if you would,
you might tell us a little bit about the Board, are the
positions filled, and then whatever you would like to talk
about. Let's talk about it.
Mr. Levitan. Thank you, Chairman Horn, Mr. Putnam. It's my
pleasure, and I'm proud to represent the IRS Oversight Board
and discuss our role in improving the operations of the IRS. As
you know, the IRS Oversight Board was established by the IRS
Restructuring and Reform Act of 1998, and it had three primary
objectives: First, to strengthen governance of the IRS through
independent oversight; second, to provide continuity through 5-
year staggered terms of its members; and, third, to bring
business-oriented input to the agency's operations.
During the year 2000, the seven private citizen members of
the Board were nominated by the President and confirmed by the
Senate. We held our first meeting in September 2000 and now
meet for 2 days every 2 months. Since September, the focus of
our activities has first been on getting ourselves up to speed
on IRS operations which is not an insignificant task, reviewing
and approving the IRS Strategic Plan that you heard about from
Commissioner Rossotti, developing a recommended IRS budget for
fiscal year 2002, actively participating in the evaluation of
candidates for the Taxpayer Advocate position, advising the
Secretary of Treasury on this appointment, participating in the
selection of a new Chief Information Officer, and starting to
build a professional staff for the Board.
We've also established three committees that focus on the
important areas of modernization, personnel and organization,
and performance management. While we are still a new
organization and still have a lot to learn, we believe that
we've gained a good understanding of many of the issues and
challenges that the IRS faces.
Mr. Chairman, the problems faced by the IRS are almost too
numerous to list. With that said, we're quite sure that the
Board has not yet identified all of these problems, although
the Commissioner and other senior executives have been very
forthcoming in discussing these issues. One logical way to
summarize the problems of the IRS is to state that it is not
meeting, I repeat, not meeting any of the three strategic goals
and objectives defined in its Strategic Plan. The IRS does not
provide top quality services to each taxpayer in every
interaction. For example, phone calls frequently go unanswered
and notices to taxpayers are often difficult to understand.
The IRS does not provide top quality services to all
taxpayers through fair and uniform application of the law. For
example, the level of audits and other enforcement activities
have fallen to an unreasonable low level.
The IRS does not provide productivity through a quality
work environment. Because of outdated technology, the work
environment is completely inconsistent with efficient and
modern practices.
These problems are not a surprise and are well understood
by Congress, by the Treasury Department, and by the IRS itself.
They've been the subject of congressional hearings and led
directly to the IRS Restructuring Commission and the passage of
the IRS Restructuring and Reform Act of 1998. In addition, many
of the operational changes mandated by RRA 1998 have been
implemented and are starting to have a positive effect at the
IRS and, more importantly, on taxpayers. During 1999 and 2000,
the IRS was reorganized from a geographic structure to one
built upon specific taxpayer needs. In the future this should
provide the basis for building more specialized skills and
improving services. Steps have been taken to improve the rights
of taxpayers, the Office of the National Taxpayer Advocate has
been strengthened, new rules and regulations have been put into
place, and IRS employees have received extensive training.
Next, the IRS has brought in new managers from the business
world and other government agencies, and this has strengthened
our organizational capabilities. During 2000, the IRS prepared
its first Strategic Plan in many years. This plan, which was
approved by the Oversight Board in its January meeting,
establishes a blueprint to operate and improve the agency over
the next 5 years. The 2002 budget request that the Oversight
Board developed was developed specifically to support this
plan. An aggressive program to dramatically increase the level
of electronic filing has been put in place and is showing real
results. A well-designed Web site to support both taxpayers and
tax preparers is in place and is one of the most widely used
sites on the Internet.
The technology modernization program was started in 1997
and the Board is encouraged by what we see as real progress.
Key IRS leadership is fully engaged and has taken ownership of
this program. The program has been designed to include not just
new technology, but improve business processes and new skills
for IRS employees. A management governance program has been put
in place to help ensure that the right people make appropriate
decisions at the right time, and that funding is appropriately
managed.
A new business systems modernization blueprint, which
defines what work will be done, was approved this year and
provides a plan for the entire program. A systems development
life cycle methodology has been put in place to support and
link governance of the program and how the work is conducted.
Technology management has been consolidated under the
leadership of a strong CIO with extensive and relevant private
sector experience; and a technology consolidation program was
recently completed, reducing the number of data centers and the
number of mainframe computers. In addition, steps are underway
to standardize the technology infrastructure across the entire
agency and to improve data security.
Despite these accomplishments, there is still much to do.
Short-term improvements are necessary to quickly improve
customer services and stop the continued degradation of IRS
enforcement activities. This will require ending, and to some
limited extent reversing, the decade long reduction of IRS
headcount. In the past 10 years IRS headcount has gone down 17
percent while the workload has increased significantly. The
Board strongly recommends the full implementation of the STABLE
program that was begun this year and should be completed in
fiscal year 2002. This program will add approximately 3,800 new
employees to improve services and start to address the reduced
levels of enforcement.
Additional headcount, however, is not the way to address
IRS challenges in the longer term. Modernization of technology
and business processes provides the opportunity to create a
new, more efficient IRS that will provide the kind of services
that Congress and the American taxpayers demand.
As previously described, this modernization program is
underway but still in its early stages. The program is very
large, highly complex, and extremely high risk. The program
will require continued investment and support as well as
meaningful oversight by the Board and by Congress.
The Board urges Congress to give careful consideration to
the modernization and improvement investments included in our
recommended budget for 2002. I have submitted to the
subcommittee, as part of my testimony, a discussion paper on
the IRS Strategic Plan in our 2002 recommendation. This paper
provides additional background on this issue, and I ask that it
be included in the official record as part of our testimony.
Mr. Horn. Without objection, it will be put in the record
at this point.
[The prepared statement of Mr. Levitan follows:]
[GRAPHIC] [TIFF OMITTED] T7055.038
[GRAPHIC] [TIFF OMITTED] T7055.039
[GRAPHIC] [TIFF OMITTED] T7055.040
[GRAPHIC] [TIFF OMITTED] T7055.041
[GRAPHIC] [TIFF OMITTED] T7055.042
[GRAPHIC] [TIFF OMITTED] T7055.043
[GRAPHIC] [TIFF OMITTED] T7055.044
[GRAPHIC] [TIFF OMITTED] T7055.045
[GRAPHIC] [TIFF OMITTED] T7055.046
[GRAPHIC] [TIFF OMITTED] T7055.047
[GRAPHIC] [TIFF OMITTED] T7055.048
[GRAPHIC] [TIFF OMITTED] T7055.049
[GRAPHIC] [TIFF OMITTED] T7055.050
[GRAPHIC] [TIFF OMITTED] T7055.051
[GRAPHIC] [TIFF OMITTED] T7055.052
Mr. Levitan. In closing, one obvious problem faced by the
IRS and America's taxpayers is one I know the Congress
continues to struggle with. While this problem is clearly
outside the scope of the Board's responsibility, we believe the
complexity of the Tax Code continues to create burdens to sound
tax administration. As long as the Tax Code is as complex as it
is today, the operations of the IRS and the services it
provides to taxpayers will be negatively impacted.
Mr. Chairman, thank you for the opportunity to be here
today. The restructuring and creation of a new and better IRS
is very much a work in progress. The IRS Oversight Board is
proud of its important role in this process of providing
oversight and guidance as the IRS moves toward the goal of
meeting its strategic objectives and creating an IRS which
truly provides top quality services to American taxpayers. I
appreciate this opportunity to report on our activities and our
views on these critical matters and would be pleased to answer
any questions that you may have.
Thank you.
Mr. Horn. Well, thank you very much. And could you just
answer, before I go to Mr. Dacey--are the members all in place
for your oversight board?
Mr. Levitan. Yes. There are seven private citizens, the
Secretary of the Treasury and the Commissioner of the IRS. We
are all in place and have been in place since September of last
year.
Mr. Horn. And they show up.
Mr. Levitan. They show up, they work hard and are all
extremely active and dedicated.
Mr. Horn. Well, because it worried us all when the former
President didn't make any appointments in a timely manner. So,
you know, that bothered us.
Mr. Levitan. Right.
Mr. Horn. Now we have Mr. Robert Dacey, the Director,
Information Security Issues, U.S. General Accounting Office,
which is headed by the Comptroller General of the United
States, Mr. Walker. I believe you're accompanied by Michael
Brostek, Director, Tax Administration Issues; Randolph Hite,
Director, Information Technology Systems Issues; and Steven J.
Sebastian, Acting Director, IRS Financial Management Issues.
And I might add that with the Commissioner is Mr. Lawrence
Rogers, Acting Chief Financial Officer. That's where all those
hands were going up. Now we can hear from them. Do they talk as
well as hold oaths? OK. Good.
Mr. Dacey. Mr. Chairman and Mr. Putnam, we are pleased to
accept your invitation to be here this afternoon to discuss
management challenges that continue to face the IRS in its
efforts to improve its services to taxpayers and the efficiency
of its operations through modernization.
As you requested, I will briefly summarize our written
statement which covers four areas. In order of discussion, they
are: computer security, financial management, organizational
transformation and performance management, and business systems
modernization management. The IRS has made important progress
in each of these areas. Yet significant obstacles remain. The
challenges that face IRS are longstanding and systemic
challenges that require both short and long-term solutions.
In the area of computer security, IRS has corrected a
significant number of previously identified weaknesses and is
implementing a computer security management program which will,
when implemented, help it to manage risks in this area.
However, significant computer security weaknesses continue to
exist that increase the risk of unauthorized disclosure, and
the modification or destruction of taxpayer data. These
weaknesses could impair IRS's ability to perform critical
business operations.
For example, as illustrated by this chart, during last
year's tax filing season IRS did not implement adequate
computer controls to ensure the security, privacy, and
reliability of its electronic filing, or e-file, systems. We
demonstrated that individuals both internal and external to the
Internal Revenue Service could have gained unauthorized access
to IRS's e-file systems and could have viewed, modified,
copied, or deleted the taxpayer data they contained. Further,
they could have gained access to sensitive business, financial
and taxpayer information and other critical IRS systems that
were connected to the e-file systems through its service-wide
network.
While IRS has stated that it does not have any evidence
that intruders had accessed or modified taxpayer data, the
agency did not have adequate procedures to detect such
intrusions if they had occurred.
According to IRS officials, prior to the current tax filing
season, the agency has corrected all of the critical
vulnerabilities that we identified. We will assess the
effectiveness of IRS's corrective actions as part of our normal
followup review.
In financial management, IRS was able to prepare financial
statements that received an unqualified or clean opinion.
However, this achievement came through the use of substantial,
costly, and time-consuming processes to work around serious
systems and control deficiencies. Such deficiencies related to
the management of unpaid tax assessments, the identification
and collection of unpaid taxes, the disbursement of refunds,
the handling of taxpayer receipts and data, administrative
activities, and financial reporting.
Our written statement contains several examples that
illustrate the impact of these weaknesses on IRS's ability to
reduce taxpayer burden, collect all of the revenues due to the
Federal Government, and to routinely produce reliable, useful,
and timely information for day-to-day decisionmaking.
Looking at the IRS's structure, its progress in
reorganizing around four taxpayer-focused operating divisions
and developing a new performance management approach begins
laying the foundation for making substantive changes to
business practices. However, much work remains to complete the
foundation and to design and implement business practice
changes that noticeably improve services to the taxpayers and
IRS's efficient administration of the tax system. Further,
although IRS managers have a vital role in translating IRS's
goals and objectives into actions that make a difference, they
do not appear to have consistently revised their program
management approach to be consistent with performance
management principles.
Finally, in terms of business systems modernization, IRS's
multi-year, multi-billion-dollar program is critical to
achieving its new customer-focused vision and enabling it to
meet performance and accountability goals.
Although IRS has made important progress in developing and
implementing fundamental modernization management controls, we
are concerned that projects are entering critical stages
without a sufficiently defined enterprise architecture and a
rigorous disciplined configuration management process, which
considerably increases the risk that IRS's modernized systems
will not deliver promised value on time and within budget. IRS
officials have stated that they plan to have these controls in
place by the end of this June. Given that IRS is seeking
congressional approval of additional systems modernization
funding, this is an opportune time to ensure that IRS addresses
these risks.
In summary, IRS has clearly made important progress toward
its decade-long effort to transform itself into a more
reliable, accountable, and customer-focused organization. We
have made many recommendations over the years to assist the
agency in achieving this goal. Also, we have worked closely
with IRS officials and will continue to do so.
Mr. Chairman, that concludes our statement. We would be
pleased to answer any questions that you or Mr. Putnam would
have at this time.
Mr. Horn. Thank you very much for, as usual, a very good
presentation by the GAO.
[The prepared statement of Mr. Dacy follows:]
[GRAPHIC] [TIFF OMITTED] T7055.053
[GRAPHIC] [TIFF OMITTED] T7055.054
[GRAPHIC] [TIFF OMITTED] T7055.055
[GRAPHIC] [TIFF OMITTED] T7055.056
[GRAPHIC] [TIFF OMITTED] T7055.057
[GRAPHIC] [TIFF OMITTED] T7055.058
[GRAPHIC] [TIFF OMITTED] T7055.059
[GRAPHIC] [TIFF OMITTED] T7055.060
[GRAPHIC] [TIFF OMITTED] T7055.061
[GRAPHIC] [TIFF OMITTED] T7055.062
[GRAPHIC] [TIFF OMITTED] T7055.063
[GRAPHIC] [TIFF OMITTED] T7055.064
[GRAPHIC] [TIFF OMITTED] T7055.065
[GRAPHIC] [TIFF OMITTED] T7055.066
[GRAPHIC] [TIFF OMITTED] T7055.067
[GRAPHIC] [TIFF OMITTED] T7055.068
[GRAPHIC] [TIFF OMITTED] T7055.069
[GRAPHIC] [TIFF OMITTED] T7055.070
[GRAPHIC] [TIFF OMITTED] T7055.071
[GRAPHIC] [TIFF OMITTED] T7055.072
[GRAPHIC] [TIFF OMITTED] T7055.073
[GRAPHIC] [TIFF OMITTED] T7055.074
[GRAPHIC] [TIFF OMITTED] T7055.075
[GRAPHIC] [TIFF OMITTED] T7055.076
[GRAPHIC] [TIFF OMITTED] T7055.077
[GRAPHIC] [TIFF OMITTED] T7055.078
[GRAPHIC] [TIFF OMITTED] T7055.079
[GRAPHIC] [TIFF OMITTED] T7055.080
[GRAPHIC] [TIFF OMITTED] T7055.081
[GRAPHIC] [TIFF OMITTED] T7055.082
[GRAPHIC] [TIFF OMITTED] T7055.083
[GRAPHIC] [TIFF OMITTED] T7055.084
[GRAPHIC] [TIFF OMITTED] T7055.085
[GRAPHIC] [TIFF OMITTED] T7055.086
[GRAPHIC] [TIFF OMITTED] T7055.087
[GRAPHIC] [TIFF OMITTED] T7055.088
[GRAPHIC] [TIFF OMITTED] T7055.089
[GRAPHIC] [TIFF OMITTED] T7055.090
[GRAPHIC] [TIFF OMITTED] T7055.091
[GRAPHIC] [TIFF OMITTED] T7055.092
Mr. Horn. Before we go to questions, let me straighten out
something that happened earlier today. In the Washington Post
it said, ``debtor's Social Security checks to be garnished.''
The Federal Government is owed more than $50 billion of
delinquent nontax debts. The Federal Government has an
obligation to taxpayers to pursue individuals who are unwilling
to pay their debts to the Federal Government. For years, the
government has been attempting to collect this debt through a
variety of mechanisms.
The Debt Collection Improvement Act of 1996, which I
authored along with Ms. Carolyn Maloney of New York, and which
passed with overwhelming bipartisan support, gave the
government additional tools to collect those delinquent debts.
Among its various provisions the law allows the Department of
the Treasury to withhold a portion of a delinquent debtor's
Social Security benefits to satisfy their delinquent debt owed
to the executive branch of the Federal Government. The
authority to offset these payments can only be used as a last
resort.
The delinquent debts that are owed are more than 6 months
delinquent, oftentimes much more than 6 months delinquent. The
Federal agency that is owed these debts has made every effort
to work out a repayment agreement. Finally, the Treasury
Department's Financial Management Services has contacted the
debtor to attempt to work out a repayment agreement.
For this collection tool to be used, the debtor truly has
no intention of repaying their debts. That is unfair to
taxpayers as well as to those who are repaying their
obligations to the Federal Government.
Those with disabilities as well as others under the
Supplemental Security Income program are exempt from this
collection program. In addition, to prevent undue hardship, the
first $750 of the recipient's check is exempt. In other words,
recipients who receive $750 or less will not be targeted. Only
15 percent of the amount above the $750 threshold will be
collected. This percentage will be withheld until the debt is
paid. This is a responsible and fair mechanism for the
government to collect debt that has irresponsibly gone
delinquent.
So, I thought we ought to clarify that, because the
authority is in the agency involved.
I don't know if the Commissioner or Mr. Dacey wants to say
anything or not. I don't know if you have ever looked----
Mr. Rossotti. Just to say I think your summary was correct.
We are at the present time--that's called the Federal payment
levy program. We are currently levying on Federal vendor
payments and Office of Personnel Management retirement
payments, and there is a plan to extend that to some portions
of Social Security payments as authorized by law beginning next
fiscal year, October of this year.
Mr. Horn. Very good. I think people that have a problem,
there are waivers. But, basically, what started me on this
whole thing was, under your predecessor where the IRS had $110
billion that they hadn't collected anything on I was told,
``oh, well, we've got another one that's $60 billion,'' and
they weren't collecting on that. And they weren't organized.
Since we're now into question time, let me just ask the
Commissioner what kind of an apparatus does he have to get at
the pileup that's often coming out. And if you could just
outline, are you getting new people in that area, are you using
private debt collectors, or what in particular are we doing to
get some of this down?
Mr. Rossotti. As we've discussed at previous hearings,
collection is one of the main things that the IRS does.
Mr. Horn. Turn the----
Mr. Rossotti. Collection is certainly one of our main
missions. Unfortunately, it's also one that I think, as we've
also discussed, is quite far behind in the way this process
works. The key problem being that the speed of collection that
we currently pursue is very, very slow by comparison with the
private sector. Typically, you know, it might take us 2 years
not to collect all debts but in many cases it might be over a
year, 2 years. The majority of our efforts are at the back end
of the process.
Our long-term vision, which is now well documented in the
overall enterprise architecture, is to try to bring that down
to 6 months, which we think will not only increase the
probability of collection, we know it will, but also in a funny
way we'll reduce the burden on taxpayers. Because if you wait
that long to collect, the interest is built up; and it's harder
for people to pay. So that's our vision.
As with everything else, just as I said in my statement, we
have to do some things now. In fact, most of the things in this
area really depend on new technology. But there are some things
that we can do. And mainly what we're doing is we're trying to
do some modest reengineering of the collection process in the
short term to do better workload selection so we can assign the
right cases, or better yet, do a better job of assigning the
right cases that really have collection potential and less
emphasis on those that don't. Because, we simply don't have the
resources to collect everything. That's a sort of a primary
short-term issue.
We are going to be using some of the resources from our
2001 budget to provide more staff resources, and we're going to
do that in two ways. One way is by directly putting some more
staff onto the phone collections, especially. But, the other
way is by putting some more people into customer services and
customer education positions so that they--and they will be
generally not as expensive as our collection people, will be
able to handle the filing season duties and we will not have to
pull as many people as we have done in past years off the
collection cases to staff the filing season, which was a
necessary response to provide some services during the filing
season but is really inefficient and in fact debilitating to
the collection process because you're putting off case work,
and making it even slower than it would be.
So the two short-term things are providing additional
staffing in, we think, an intelligent way where we can do
better workload selection. Then the longer term is really the
major modernization program.
Let me just mention one--we've talked about this in the
past. In your hearings last year I remember the chart; and we
said, this is what we want to do, here is where we are. We kind
of knew at a high level where we wanted to go. The one really
big thing that has been done on that score since the last time
is that, through that visioning process, this enterprise
architecture, we now have a much more established, clear vision
of what the future state of IRS collections would be; and that
is the guideline that we're going to--we hope to, later this
year, assuming we get the funding release from Congress, to
really begin in a serious way the initial design work on that
program. It will still take several years before the first
implementation of it, but it lays out the vision in a fairly
clear way, and it also does what we've talked about at a more
general level, which is to try to quantify what we can do with
this.
We believe we can significantly improve our ability to
address all of the collection issues that we currently have,
which we can't do now because of resources. We will need a
little bit more resources, in terms of staff, which we can get
by redeploying from other functions mostly. But, mostly it will
be through the support of the additional technology.
Finally, not to go on too long on this, but one of the
other things that has been key in the Congress's view, I think
Mr. Putnam notices this in the collection area, is protection
of taxpayer rights. A lot of RRA was about taxpayer rights. We
have implemented all of the provisions of RRA with respect to
our current collection process. But, a lot of it relies on
training employees to remember to do this, to remember to do
that, to check off a sheet, to do things manually.
We intend in our future collection vision to have all these
taxpayer rights built in to make it--I will never say foolproof
because I have learned that there is no such thing as foolproof
when people are doing things, even with computers--but,
essentially build right into the process that the computer has
control so it will be very difficult, if not impossible, for
somebody to violate taxpayer rights, for example to try to
execute an enforcement action before the time has expired for
the person to get the notice of their appeals. Those are very
doable things that we can do.
We tried to jerry-rig them as best as we could with our
existing systems, but these systems are limited. So, I think we
have a really major opportunity to dramatically improve our
ability to collect money, reduce the burden on taxpayers,
protect taxpayer rights, and improve efficiency, all at the
same time. It will require some investment.
Mr. Horn. Well, to what degree are you going to use private
debt collectors? That would cut down your request for a budget
increase. The last I knew, a lot of bill collectors were pretty
effective and get the job done; and I don't see that really
being used very much. Just how many collectors do we have now
that are private?
Mr. Rossotti. That are private?
Mr. Horn. Yeah.
Mr. Rossotti. We're not using private debt collectors right
now. I think we have talked about this before. There are some
with the computer systems we have. In order to effectively use
private or public debt collectors, you have to provide the
people clear, accurate information about what you're
collecting, about what needs to be collected, and about the
history of the people that you have tried to collect on. That's
what we don't have.
I think we did an experiment once before, before I got
here, and I have looked at that. I know that the people who
worked on it on the private side thought they were given
garbage collections to do.
Mr. Horn. The problem under your predecessor was that when
they had this great pilot project, it was 5-year-old debt which
they hadn't done anything about to start with, and now they
wanted to dump that on a private debt collector. It just didn't
work. It was a phony operation. That sent me right through the
ceiling. I don't understand why we can't get private debt
collectors. If the Federal Government--they ought to be--you
ought to be training the people so they can have a higher level
job, I would think, in terms of working and interacting with
the taxpayer.
Then I had a lot of nonsense about, oh, it's a privacy
problem. There is no privacy problem. Give them the address,
tell them how much, and if they say I don't owe that, they say,
``fine, here's an appointment with a revenue officer, maybe you
can work it all out.'' But, I just think--I can't believe we're
still not moving ahead to get private debt collectors.
Mr. Rossotti. And I think that, again, that is something
that we have discussed, to try to--notwithstanding some of the
issues about how old the debt was that was given in the
previous pilot, if we were to attempt to do it today, with the
best intentions, we would still have two fundamental
constraints, which is most of the debt we're collecting on is
very old, just because of the nature of our inventory; and,
second, the systems--that we have to get accurate and current
information is a fundamental requirement to do accurate
collection. You have to know who you're collecting on, what
you're collecting on, and history, which is precisely what we
lack because of our computer systems.
So, if we were to do it again, even with trying to improve
it, we would run into some of the same issues, maybe not as bad
as last time.
I think that as we move forward with this vision that I
talked about there are some elements that it might be very
possible--assuming we can work out the systems issues and the
other contractual issues, it might be possible to provide a
portion of that inventory that could be part of the solution to
dealing with this inventory as we move forward.
Mr. Horn. Well, I would sure hope we can be a little more
efficient on that side, because I think it's an outrage when
all the rest of us pay our taxes and these people sit there and
get away with it.
We've recently had a thing related to pardons, for example.
I'm taking about big fat cats, the ones that do it repeatedly,
that go out of business and, say, ``oh, sorry, we're all
bankrupt.'' Then they're back in 2 days or they have the name
changed or something. Meanwhile, everybody else is paying their
taxes and these guys aren't. That bothers me. Does it bother
you?
Mr. Rossotti. It does. It's one of many things about the
IRS that bothers me right now.
Mr. Horn. How are we going to deal with it then?
Mr. Rossotti. I really think that the key thing that we
have to do--and the computer systems really are part of this,
because you can't collect debt effectively, no matter whether
it's private or public, without having accurate, up-to-date,
timely information about who is likely--who is delinquent, what
the probability is of their going further delinquent, and so
forth. Any private debt collector has to have that. That's what
we lack. That's one of the reasons why it's so slow. I think
the solution is----
Mr. Horn. Is OMB giving you the money this year.
Mr. Rossotti. There is $397 million in the President's
budget request for the ITIA account, which is very significant.
It's probably the most significant.
Mr. Horn. Million or billion.
Mr. Rossotti. It's $397 million for 2002. That was in the
blueprint that was published earlier by the administration, and
that's an important step.
Mr. Horn. I'm sure that you'll be provided that. So, you
think that will help bring this pile down.
Mr. Rossotti. We've just finished this whole exercise. One
of the key projects is this whole collection project. I wish I
could tell you that there was a quick way that we could just
deal with this and, if there were, you know, we would be doing
it, I can assure you. It wouldn't involve private debt
collectors or anything. I really don't think that there is a
quick solution to this. I think there's a solution. I don't
think there's a quick solution.
Mr. Horn. Well, I think you're right. When they didn't give
them any notices and pretty soon somebody says, ``oh, gee, I
remember getting a grant from the Federal Government,'' and
they don't think of it as a loan. Students are the same way,
and we expect bankers to collect the debt.
But, bankers don't because the law, which was written long
before my time, you know, states that if they default, they get
paid by the government anyhow. That's just a recipe for
absolute stupidity, and maybe we oughta tighten that one up,
too. The gentleman from Florida, Mr. Putnam, any questions?
Mr. Putnam. Mr. Chairman, I appreciate the opportunity to
be a part of this hearing. Let me just ask you a couple of
basic questions for the slow learner on the group. What percent
of returns are prepared by taxpayers themselves versus
professionals?
Mr. Rossotti. About 45 percent on individual returns.
Mr. Putnam. And how many employees do you have currently?
Mr. Rossotti. Employees, we have, well, about 100,000
equivalent employees, including averaging the seasonals in
there.
Mr. Putnam. Do you know what the estimated accounts
receivable are, or debts owed to the IRS?
Mr. Rossotti. Well, in the financial statements which GAO
prepared, there's what's called the net accounts receivable,
financial accounts receivable in here is about $22 billion.
That is net of----
Mr. Putnam. $22 billion?
Mr. Rossotti. $22 billion. That's net of, you know,
estimated allowances for bad debt losses. The gross receivables
are more than that. I think they're around $80 billion, if I
recall correctly. I've got this number here, but the--that's
really the total inventory that we can conceivably collect on.
Obviously, we're not going to collect it all, but the financial
statements really net it out down to about $22 billion. That is
estimated.
Mr. Putnam. And what is your average turnover rate among
your employees?
Mr. Rossotti. The turnover rate? Well, you have to really
break it down between full-time, or let's call them permanent
employees, and seasonal. We have a lot of seasonal employees
that work during the filing season, which is what we call the
period before April 15th. There are about 80,000 permanent
employees of the IRS, slightly more than 80,000, and the
turnover rate, I would have to get that for you. It varies by
job classification. I believe that it is around 4 percent right
now, 4, 4\1/2\ percent.
So, it would be about 3,500 employees leaving every year,
of the permanent work force. The seasonals, it's not quite the
same kind of a calculation because they're coming back to some
degree year after year, but they're also only working part
time.
Mr. Putnam. The observation that I make based on--I mean, I
take that as a very low turnover rate.
Mr. Rossotti. It is relatively low.
Mr. Putnam. They're obviously well compensated, fairly
satisfied with their job. Otherwise they would be fleeing in an
economy like this, I would observe. Is that not correct?
Mr. Rossotti. Well, I think that it is interesting. It is a
relatively low turnover rate compared to what I had in the
private sector, and I think what it reflects--and I have
studied this quite a bit--I don't think you would get agreement
from our employees that it's because they're all very happy and
feel they're well compensated. I think the reality is we have a
very aging work force. A substantial percentage of our work
force is getting to the point where in 5 years--I think--I
don't have the exact numbers, but many job categories, half the
people will be eligible to retire in 5-years, or 40 percent.
What happens in the Federal Government, partly because of
the way the retirement system works, is once people get in and
stay a certain number of years, they tend to stay in until they
can get to the retirement program, and I think that has been
very helpful actually in terms of keeping our work force
stable.
What it means, though, is that we're looking at a very
serious problem. I think GAO has made a lot of notes of this
across the whole Federal Government--as a key point, I know
that Mr. Walker, the Comptroller General, has been focused on
that we have this bubble coming up where a very substantial
percentage of our skilled employees, especially, are simply
going to be leaving, you know, in the next 5, 6, 7 years.
The reason that this situation exists is because in the
IRS, among the permanent work force--forget the seasonals for
the moment--there has been minimal hiring since 1995. I mean,
one of our key occupational classes in the IRS is what's called
the revenue agents. Those are the most skilled people--
actually, the accountants that go out and audit corporate
returns and more complex returns. Because of the budget
limitations, and essentially the near hiring freeze we've been
in, until this year, until 2001 when we got money, there was
virtually no hiring.
I mean there had been virtually no revenue agents except
for a handful hired since 1995. So, you know, even though the
people that are there are staying, every year they get 1 year
closer to retirement, and we are now in a position where we
have a substantial percentage of these folks that are getting
close to retirement.
So fortunately, in the 2001 budget, we did get some money
and we've begun to resume our hiring program, and in fact, you
will see some advertisements on the Internet and other places,
on college campuses, the IRS is going out and hiring for the
first time.
Mr. Putnam. Do your employees have the training and the
professional development that they need to deal with these
technologies that you are moving toward, and are they prepared
to make the most of our IT investment?
Mr. Rossotti. That's an excellent question. And I think
maybe the answer is not one that you would expect or that I
would have expected. You know, having come from the private
sector, one of the ironies of the IRS is it was one of the
first organizations of a large scale to make use of computer
technology on a pervasive basis. I mean, you know, the systems,
some of them we're using were built in the 1960's. So actually,
compared to many organizations, our front line employees are
very literate in terms of using computers, or they're very used
to using computers.
As a matter of fact, if you were to look at what some of
our employees who answer the phones in customer service do with
the 30-year old systems they have, which are much harder to use
than the systems that exist today, much harder because they
require entering little codes, they are really quite adept at
it. So, our employees are dying for this new technology.
They're not resisting it. That doesn't mean they don't need
training. They will need training, not so much in the use of
computers, because they're really quite used to doing this, but
rather in the new business practices that we are going to be
able to establish.
For example, in our collection area, we're going to be
changing, as I said to the chairman, the whole way we do
business. So, that part of the training is where the training
is going to come up. But, in terms of just basically enabling
people to use computer technology, we have a surprisingly adept
work force in using and being resourceful in using what are
really quite difficult systems to use.
Mr. Putnam. Is there an incentive in place, or is there a
disincentive in place to--for your agency to retain a portion
of old debt or collections that can be reinvested in your
agency, in IT or in professional development or whatever your
needs may be--let me be very careful in how I phrase it--
without an incentive for a quota system, but certainly an
incentive to retire these old debts, collect them?
Mr. Rossotti. Well, I think just to clarify, in terms of
the way the financial model works, we don't retain any revenues
that are collected. I mean, we are an agent of the Federal
Government, and all of the revenues, every penny that is
collected from the taxpayer, is turned over to the Treasury,
you know, directly, and we have to account for it.
There's one minor exception. There's about $70 million of
what are called user fees that we're allowed to impose for
certain kinds of services that we provide, but with the
exception of those user fees, you know, the entire $1.8
trillion that we collect net is turned over. So there's no
incentive or disincentive in a financial sense.
Now, on the other hand, with respect to what we do, I mean,
our mission and our goals are basically, as I related them, one
of them, is fair and efficient--fair application of the tax law
to every taxpayer. We've translated that down into a series of
measurement systems we call a balanced measurement system,
which in the debt area, has to do with respecting taxpayer
rights, you know, closing cases on a quality basis. It does not
involve dollar factors, though, because under section 1204 of
the Restructuring Act, the IRS is not allowed to use dollar
quotas or what are called ``records of enforcement results'' to
set goals or evaluate anybody.
As a matter of fact, as I sometimes point out, the
oversight board can't evaluate the commissioner based on how
many dollars we collect either, because I'm an employee of the
IRS.
But all joking aside, the way that we have to measure
performance in the IRS is very much not focused on dollars any
longer, but in terms of effective execution of our plans,
quality casework and the amount of cases that we process but
not based on any kinds of dollar figures.
Mr. Putnam. Mr. Levitan, in your testimony--and welcome as
a fellow Gator, glad to have you--there was--for the first two-
thirds of your testimony, I was ready to loan you a gun and
just go ahead and put the agency out of its misery. You
identified that they do not provide quality service to each
taxpayer in every interaction as they have identified in their
strategic plan; the agency does not provide top quality service
through fair and uniform applications of the law; nor does it
provide productivity through a quality work environment. How
much of an investment are we going to have to make in people or
computers, and if you would, please clarify for me, we've--
you've identified an additional staffing requirement and
additional technology requirements. Is there a way that we can
invest in one and save on the other?
Mr. Levitan. First, the investment will be long term and it
will be significant. And in the long term, you will save on
personnel and operating costs by making the investment in the
new technology and the new business processes. The
modernization program will probably last somewhere between 7
and 10 years. It will just take that long to get it completed.
It's entirely too long. Everyone would like it to move a lot
faster than that, but there is so much that needs to be done,
the systems are so large and complex and interrelated with each
other and with the existing systems, and just the management
ability of the IRS to manage all of that change will require it
to take that long a period of time.
The IRS has developed a very detailed plan on how that
investment should be made, what should be done, when it should
be done, how long it will take, and what the benefits are. The
Commissioner talked about--mentioned that the President's
budget includes a recommendation for $397 million to be put
into the information technology investment account. The
Oversight Board recommends that the budget for 2002 for ITIA
not be $397 million, but should be $1 billion, and we think
that there are very strong reasons for it to be that much.
First, the biggest part of it is that we're recommending
that the account be funded for a 2-year period of time. The $1
billion would cover planned expenditures for both 2002 and
2003. When ITIA was originally established, one of the major
reasons to set up the account that way was to provide
continuity of projects and funding for projects that will last
over fiscal year periods of time, and so you do not reach a
point in time that you know you run out of funding, that it
goes to zero. You have to artificially slow down or start
projects in the next fiscal year.
Initially the account was funded on that basis.
Unfortunately, by the end of this fiscal year 2001, and for the
first time that the account has been in place, it will be down
to zero. That's a dangerous situation. It can be a highly
inefficient situation. So, we are recommending that 2 years of
funding be put into it.
Second, our recommendation is that funding be set up for
$450 million in 2002 and $550 million in 2003. So, there is a
difference between our recommendation and the administration's
recommendation of something like $53 million for 2002. You
might say, well, $400 or $397 or $400 million is an awful lot
of money, and it certainly is, but the IRS has detailed plans
in place of what needs to be done, and the price tag on it, if
they do it all in that period, would be about $450 million. If
only $400 million is appropriated it will take a program that
is already taking too long and it just extends it out further
than that.
So, again, it's going to be a long-term investment. It will
be over the next 7 to 10 years, but by making that investment,
you have the capability to create a completely different IRS,
an IRS that is much more efficient, an IRS that serves the
taxpayers much better, an IRS that collects a much, much higher
percentage of the taxes that are due to the Federal Government.
Mr. Putnam. Where would the bulk of that modernization
money be spent? At the customer service level? At the
collections level? At the audit level?
Mr. Levitan. Really, on all of those things there are a
large group of new systems. First of all, what needs to be done
is we need a technology infrastructure put into place. That
technology infrastructure includes new communications, the kind
of improved security that you've heard talked about, and the
need for that described earlier. It includes new data bases
which would have current, up-to-date, consistent data about all
taxpayers, about all tax returns, so it could be made
available, both to the taxpayers that need that information
themselves, as well as the employees that are providing both
service to taxpayers, as well as following up on the
enforcement activities. So it's all of that.
One of the first things I did when I first started working
with the IRS is I visited a number of the centers. I had the
opportunity to sit down with someone who was answering the
telephone and trying to answer questions from taxpayers, and if
you would do that, it's amazing. You're almost embarrassed at
how poor the systems are, how poor the information is. The
individual trying to answer the questions couldn't get
accurate, up-to-date information in order to respond to the
fairly basic questions that the taxpayers were asking, and
because the systems are so antiquated they need to be replaced
and put in.
But again, to answer your question, you know, the new
technology would address all three of those primary objectives
that the IRS has established in their strategic plan.
Mr. Putnam. Thank you, Mr. Chairman.
Mr. Horn. I thank the gentleman, and let me ask on a follow
up on that. Commissioner, you're an expert in dealing with
computers. Are we already too far down the path or could you
use the money if Congress took the recommendation of the
chairman of the Oversight Board, or are there other things----
Mr. Rossotti. Oh, could we use the money, I feel certain we
could use the money. I think, you know, as with any agency
head, within reason, if we had more we could do more. So yes, I
believe that we could use the money. I will say that the way
the ITIA account works, and I'm cognizant of what the GAO
testimony was, which we take very seriously, is that we don't
want to get our projects ahead of our management capacity. So,
we're constantly working on both of those, but I think we feel
that within the bounds that we're talking about here we could
manage it and we would manage very carefully.
The way this ITIA account goes, the money goes in and it's
appropriated, but we don't actually get the money until we
present a specific plan to Congress. Right now we have a plan
for the second half of this year that is before the
appropriation committees and it's being reviewed by GAO. So,
even if the money is in the account, we're not going to be able
to spend it, nor would we ask to spend it, unless we were sure,
as we get closer to that period of time, that we would be
prepared for that.
Mr. Horn. How much did we spend last year for modernization
in your budget?
Mr. Rossotti. Well, this is an interesting point. In the
current fiscal year, there was only $71 million. I mean, I know
that's a lot of money, but relative to what we're talking
about----
Mr. Horn. $71 million?
Mr. Rossotti. $71 million. However, we had $300 million of
carryover funds from prior years, from the prior account. So
assuming that if Congress, and the appropriation committees
approved the release request that we currently have pending,
which we're waiting to hear, but if they do, then with that
money we will have essentially spent--you know, obligated about
$370 million, which is all that we had. So, in other words,
because of the carryover nature of this account, even though
there was $71 million of appropriations, there is actually $371
million of funds available, taking into account what was
carried over from prior years.
Mr. Horn. The carry over now is how much?
Mr. Rossotti. About--little over $300 million.
Mr. Horn. $300 million. Well, that isn't chicken feed.
Mr. Rossotti. None of this is chicken feed. It's serious
money. It's serious money.
Mr. Levitan. Mr. Chairman, if you don't mind, I wanted to
comment on talking about the size of the spend on the
modernization. When you do major technology programs, they tend
to start at a relatively small level and go up as they
progress. You start with the planning phases of the project,
you move into the design phases, and then you move into the
development phases where you know you're making major
acquisition of hardware and software and developing the new
systems, and the costs go higher. There is a plan in place and
what that--and we believe that the plan is reasonable. It needs
to be managed every step of the way and oversight provided by
our board, by Congress, by the GAO and others, but that plan
shows the expenditure levels going from, you know, about 300
and so, $370 million in this fiscal year to $450 next fiscal
year, to $550 in the following fiscal year and then peaking out
for a number of years at about a $700 million level. So the
numbers will continue to go up, and you should not be surprised
at that. It's just the nature of the beast that we are trying
to conquer here.
Mr. Horn. I was just checking my memory here. When I first
came to Congress in 1993, I went out and looked at the Federal
Aviation proposals and actions. They were doing all this
wonderful computer design and everything about 20 miles out of
town. There was absolutely no management, and then they went
through a series of people and passed it on, and then IRS was
also in modernization, but that was chaos, too, $4 billion down
the drain, I think I remember right.
I asked both of them when we had them in, I said ``how
about stopping at $4 million, maybe $40 million, how about $400
million? Why do we always get the taxpayers' money going down
the drain in some $4 billion thing where they haven't planned
it out, managed it or done anything?'' It was the stupidest
operation I have ever seen in both of them. So what did we ever
do with the $4 billion earlier, before you got there?
Mr. Rossotti. Well, it was before I got there. I mean,
that's my best answer. I think, you know, I don't really know
whether it was $4 billion. I don't know exactly what it was. We
have been looking for it. There were some deliverables that
were realized out of that. It wasn't a complete loss, but
clearly it did not solve the problem. I mean, that's an
accurate statement. I mean, most of our fundamental systems
were not replaced, and you know, we could go back and look at
that, and I think there are some very fundamental reasons.
Just to tick off some of the things that we have now, and I
don't mean by saying this to minimize the risk of this, because
I think Mr. Levitan said, and you know I agree with this, that
this is a high risk program. It's a very high risk program, and
it's not a program that frankly I wish that we had to have the
IRS do. You know, most organizations would never get this far
behind, and they would never have to do a program like this.
So, it's not something that you wished you had to do, but there
is no real alternative. So, we have to manage it as well as we
can. But just to tick off a couple of items.
First of all, from an organizational standpoint--this is
most fundamental--the IRS had at least--when I got there, at
least 15 different information systems organizations. There
were many different units, and they all had their own CIO. The
CIO had effective control only of the headquarters portion of
that, not the whole thing. There was virtually no
standardization of any technology. So, even if you had a
system--and frankly, this was one of the problems--even if you
had a new system that you successfully developed, it could take
10 years to deploy it because every place had a different
standard. So, organizational standardization just in basic
technology, that has largely been resolved.
Not all of the standardization has been fully implemented,
but the organization structure for information systems is a
centralized structure, all the resources are in one place,
management is under one place. We have a new CIO that has
recently just come in that I'd like to come up and introduce to
you, former CIO of Time Warner Corp., very qualified
individual, and we have some other people.
So, we have an organization in place. We have
standardization close to being where we need it to be. We've
set up a program management office to run the modernization
program. We have a prime contractor with the resources of the
private sector that has been brought in. We have a rigorous
methodology in place. We have an enterprise architecture.
Now, as GAO constantly notes for us, and we agree with
this, it's not a mature process. Not all of this is mature.
It's not functioning at a level--I'll call it maturity--that it
needs to be. For example, there is more work to be done to fill
in some of the details in the enterprise architecture. We don't
have all of our configuration management processes as well
developed as they should be. I think the enterprise life cycle
is approaching much more maturity, but I could go on and on
with these things.
We are working constantly to increase the maturity level of
our management processes at the same time we deliver. We can't
put a fully mature management process in place for something
this huge without actually doing some real projects. I mean, it
would be like going into a sports team and just doing spring
training all year around and never actually playing any games.
You would never really learn. So, we have a constant challenge
of maturing, increasing the maturing of our management
processes at the same time we actually work on delivering these
systems, and I think we're making some serious progress, but
you know, every day that goes by we learn.
I will say to you, Mr. Chairman, that we are not in chaos.
We are not just spending money without a plan, without
management discipline in place. I view it, and I think all of
my management team that's come in from the private sector, as
well as those that have signed on to this, view it as though it
were their own company. I mean, I don't want to spend a dollar
on this program if I wouldn't spend it exactly the same way if
it was my own company, and that's the way I feel about this
program. I don't want to have anybody working on it that
doesn't feel the same way.
Even under the best of circumstances, though, it is a high
risk program. There's going to be some delays. There's going to
be blind alleys. There are going to be things that are going to
go wrong.
I will finally just finish up--and I know I may be going on
too long with this--to say that even though it's high risk and
we will make some mistakes along the way, you know, it does not
follow from that this program is destined to fail. That is not
the conclusion I'm saying. In fact, I don't believe that it
will fail. I believe it can succeed and will succeed, and it
will pay off enormously as long as we manage it intensely and
we're not afraid to recognize when we have problems, back up
and try something different, slow down and speed up depending
on how much we learn, and just manage this on a sustained
basis. It can succeed and I think it will succeed, and I think
we know how to make it succeed as long as we stick with it and
are not afraid to recognize the reality of what we're dealing
with.
Mr. Horn. Well, I think that's good advice. Let's move to a
couple of other things. Tax advocates. How do you feel about
that program?
Mr. Rossotti. The taxpayer advocate?
Mr. Horn. Yeah.
Mr. Rossotti. Well, I think that is a program which has
made a great deal of progress. We have established the taxpayer
advocate service, as we now call it, as was required by RIA. So
this is a distinct entity within the IRS that has its own line
structure. Has about, a little over 2,000 employees. There's
taxpayer advocates in every State. We have a new taxpayer
advocate that has just come within the last month, and I'd like
to bring her over to meet you, Mr. Chairman. Her name is Nina
Olsen. I think she was with the Oversight Board, which was
actively involved with working with us to recruit her, and she
has a long background as not only a tax practitioner, but as a
person who took the lead in establishing a network of low
income tax clinics. She has got a lot of experience dealing
with taxpayers with hardship, and that's one of the aspects of
the taxpayer advocate service.
So, I think that we have really made some good progress
here and have really put them in place to be, in effect, the
safety valve that they need to be where you have a taxpayer who
has either one of two things. Either they're not getting the
service that they should, or they have a hardship that needs
some special consideration, and I think that's working. We
have, obviously, our challenges, there as in other places,
defining exactly how they relate to the rest of the service.
But, I really feel quite proud of what's been done there under
the previous taxpayer advocate, Mr. Oberson, and now Nina
Olsen, who I think is going to be an excellent leader for that
organization.
Mr. Horn. I happen to have visited some of the ones in the
West, and I was very impressed by them. My staff, I think I
have told you this before, from my District Office, have had
nothing but praise for your people at Laguna Niguel in terms of
working with the various congressional offices in the region.
We have hundreds of cases, all sorts of things, and they can't
be resolved unless we've got good people at the other end of
the bureaucratic line, and we've had no problems or anything.
So, I congratulate you on putting the right people in the right
place there.
Let me go back a minute on the business modification, and
the Commissioner made a point there on how much money they can
really absorb. What would be the General Accounting Office's
views?
Mr. Dacey. Let me defer to Randy Hite, who can address that
issue.
Mr. Hite. Mr. Chairman, our position on the funding of
large modernization programs has always been that it's very
difficult to estimate what it's going to cost to do many things
over many years. Therefore, we have advocated an incremental
approach to funding large modernization programs. The law has
been set up with the ITIA account because, regardless of the
amount that goes into the ITIA account each year, in order for
that money to be released, IRS must give an expenditure plan to
the Appropriations Committees, and that plan needs to be
reviewed and approved by Treasury, by OMB, and by GAO, and then
we advise the Appropriations Committees on their decisions for
release of that money.
So, having said that, the precise amount of money that they
would be asking for in 2002 and 2003 is not that much of a
concern to us. The expenditure plan is the means by which you
manage the prudent and deliberate release of that money in
relation to how it's going to be spent in the near term, but
you can estimate with some precision.
Mr. Horn. I have one more question and then Mr. Putnam will
wind it up. The question is how many of those browsers have
been caught and what's happened to them? Have they been fired
or what?
Mr. Rossotti. That's the so called unauthorized access
program, and we have, as a matter of fact, been very active
working with the Inspector General for tax administration,
expecially, on identifying those people, and our policy is, in
fact, to terminate people if it's established that they have
had a UNIX violation. We've been getting--and I've got the
statistics here, I can give them to you more precisely if I can
find them--approximately 200 cases that have been investigated.
Some of those have been found after further investigation to be
not----
Mr. Horn. In 1 year?
Mr. Rossotti. This was for fiscal 2000, for last year. It
was slightly less than--I'm just trying to find it. I've got so
many statistics in here.
Mr. Williams. Mr. Commissioner, I have some data. I
apologize for not telling you earlier.
Mr. Rossotti. Go ahead.
Mr. Williams. Since the program began, 373 employees have
been removed or resigned during the investigation for
unauthorized access.
Mr. Horn. Any other comment on that?
Mr. Rossotti. No. I was just trying to find the numbers.
Thank you very much.
Mr. Horn. I yield to the gentleman from Florida for
questions.
Mr. Putnam. Thank you, Mr. Chairman. I also am very
concerned about this unauthorized access issue, and I'm curious
to know if part of your modernization plan includes additional
tools to detect this type of unauthorized access, and in
addition to IRS employees viewing taxpayer records, I'm also
concerned about the GAO report of serious weaknesses in the e-
filing systems that allowed hackers to view, copy, and modify
taxpayer data during the last filing season. What steps have
you taken to prevent those occurrences from happening this
filing season, and what is the long term solution to this?
Mr. Rossotti. Well, as far as the issues identified by GAO
in the last filing season, I do want to make clear that while
those were important vulnerabilities, there was no evidence
that there was anybody that actually got in and looked at any
taxpayer--damaged any taxpayer data. I think GAO did an
outstanding job of identifying some vulnerabilities that could
have led to unauthorized access, but as far as we know--and of
course there's always the possibility that something happened
we didn't know--but we don't believe there was any unauthorized
access from outside the IRS.
As far as what we've done about it, GAO came up with, I
believe it was 59 specific recommendations or 56 that they gave
to us last summer, as soon as they found some of these
problems, and we acted very, very quickly to address those
issues, and we addressed most of the--all the critical issues,
that GAO indicated.
Now, GAO has not come back in to verify that yet, but we
have certified our e-filing systems before this filing season
with our own internal security office to make sure that we've
actually followed through on those, and we are looking forward
to getting GAO back in to verify that.
As far as the longer term is concerned, you asked the
question, will the new architecture help us to identify, you
know, unauthorized access of all kinds. The answer to that is
yes, it will, and in two ways: One way is that right now we
have a system that we work with Mr. Williams' staff on. We
provide information to them from some of our systems, which
allows them to run computer programs that identify possible
cases of unauthorized access. They have a staff that is
dedicated to doing that. It does an excellent job. When they
find one of these cases they refer them to us for discipline,
and that works reasonably well.
However, it has two limitations that we believe will be
addressed in the new architecture. One of them is that it--just
because we have 123 different systems right now that are not
integrated, the ability to identify these possible accesses,
you know, is not complete. It identifies them in the most
common system, the most likely places they would occur, but
it's not complete. So, there could be cases of unauthorized
access that we currently don't identify just because of the
limitations of our computing systems.
The other thing is that the tools we have to prevent the
access in the first place are somewhat limited. In other words,
the security controls that we have are there, but they're not
as effective as they would be in the new environment. So, on
both detection and prevention, we will have better capabilities
in the new environment, and that is one of the most expensive
pieces of the new architecture.
We have a whole project that is basically building a
security architecture, a foundational issue, a foundational
part of our architecture that is really aimed at providing
robust security, and part of that, a major part of that, will
be to prevent unauthorized access and to allow us to detect any
attempts at unauthorized access. Maybe Mr. Williams might have
some comments.
Mr. Putnam. In addition to the 383 that were engaged in the
unauthorized browsing, how many instances of inappropriate use
of information, illegal use of information, identity theft, how
many instances of those sort have occurred among employees of
the IRS?
Mr. Williams. If I may I'd like to provide you a more
detailed written response, but essentially----
Mr. Horn. Without objection, it will be put in the record
at this point.
Mr. Williams. Thank you, Mr. Chairman. We conduct about
4,000 investigations a year, and about half of those regard
employees and half of those regard external employees. With
regard to----
Mr. Putnam. External employees or external----
Mr. Williams. I'm sorry, external parties, and that's some
sense to the number of investigations we do with--of all sorts
of misconduct. The subset of unauthorized accesses and identity
theft and the other kinds of disclosure issues that you raised,
if I may, I'll provide.
Mr. Putnam. I will be very interested in that. People
certainly ought to feel safe and secure in providing important
information to the IRS and to any other government agency, and
we ought to vigorously pursue anybody who would betray that
trust.
Mr. Williams. Well, thank you. I appreciate your saying
that. Of the employees that were involved in the access, some
of those involved browsing. About 20 percent of those did
involve disclosure or financial crimes, and that led to 65
criminal indictments in addition to the figures that I provided
earlier to you.
Mr. Putnam. So, when we talk about browsing versus illegal
use, they're just curious to know what a particular movie star
or celebrity made? Is that the bulk of the browsing problems?
Mr. Williams. Those are the ones that are merely browsing.
Probably the largest subset are relatives of the employees.
Mr. Putnam. I see.
Mr. Williams. There's also revenge as a motive when this
very sensitive personal tax data is obtained. We've had
instances in which it's been obtained for financial gain. There
was one instance in which one of our seasonal employees
actually did access a citizen's record, find out their address
and other kinds of information regarding their lifestyle and
habits, so that they could kill them. They were a witness to a
crime that was committed.
Mr. Putnam. One final question, Mr. Chairman, if I may.
Commissioner, I believe you indicated that you have about
20,000 seasonal employees?
Mr. Rossotti. Actually, if you count everybody that works
at all, it's probably closer to 30,000.
Mr. Putnam. How do you prepare these seasonal employees?
How do you train them so that the answers that taxpayers
receive are consistent, clear, and on message when you're
dealing with a tax policy as complicated as we have?
Mr. Rossotti. Mr. Putnam, you just put your finger on one
of the hardest problems we have. I mean, we have a very
complex--with respect to answering taxpayer's tax law
questions. We have a very complex tax code. We have many
different kinds of people that ask many different questions,
and a high percentage of those kind of questions come in in a
very short period of time, 3 months prior to the filing season.
I'm not aware of anyplace else--I have looked around--I'm not
aware of anyplace else--there are lots of other private sector
companies that have, you know, lots of phone calls and some
have seasonal, but our calls tend to be about three times as an
indicator for an example of commercial calls. So, this is a
major problem.
How are we dealing with it? Well, first of all, many of our
seasonal employees actually return from year to year. This is
an interesting thing, but we are actually able to retain--and
this is one of our goals--seasonal employees. There are people
who actually, because of their own personal situation, actually
prefer not to work all year round, and we have been reasonably
successful, at least for the people that deal with things like
answering phone calls, we have a lot of seasonal employees that
do mechanical tests like just key entry, sorting mail, and
things like that, but for the more skilled ones they tend to
be, and as much as possible, we get them to come back year
after year, so they are not starting fresh the second time.
The second thing, of course, is that we do bring them in
ahead of schedule so that they go through training before they
go on to the filing system.
But, there is one thing that we are doing now, one very
major thing that we are doing now, that we think will enable us
even more--to do an even better job, especially on the quality,
which is to rethink the entire way that these set of assisters
are organized. We have about an average of 9,000 people
answering phones on our toll free lines, but it gets up to
almost twice that, or not quite twice, but well over that
during the filing season, and in the past they had been managed
through--they're in about 25 different locations. Each location
had somewhat managed its work force kind of separately.
What we're doing now--this is a major part of our
reorganization--is we are rethinking the entire network of all
these 25 sites and rethinking from the point of view of what is
the specialization of the particular kind of questions they can
answer from simple to hard, how we can specialize these so that
we will for any given question, people that are relatively less
experienced answering the simple questions, then going up to
people that know how to answer the more complex questions, so
that we can--and using the new technology we will be able to
route the calls all around the country to the person who has
ideally just the right level of experience and specialization
to answer these questions. This is a major part of the
combination of our reorganization and our technology which is
really a critical thing in terms of improving the quality.
Right today in the filing season, so far on tax law calls,
about 75 percent, we have very a extensive system for
monitoring these calls and about 74, well, 74\1/2\ percent of
the tax law calls have been answered correctly. That's the
other side of the 25 percent have not been answered correctly.
On the account calls, about 86 percent have been answered
correctly. We have made some improvements on that through
training, but the real strategy in the long term is to create
this network of specialized assisters so that we will be able
to get the right level of training, the right level of
experience answering each type of question, and then route the
calls to those people because that is really one of the hard
problems we have to deal with.
Mr. Putnam. Thank you, Mr. Chairman.
Mr. Horn. On the seasonal worker problem, is there a
problem in not giving them security checks, or do you treat
hiring them just as you would hiring permanent employees?
Mr. Rossotti. Well, that was a question--an issue that was
identified by GAO a couple of years ago as a critical issue,
fingerprinting and security checks, and in the past we did not,
but we began this program actually in response to the GAO's
recommendations about 2 years ago, and we have, I believe at
this point, very close to 100 percent where they go through,
even the people that work for a very short period of time.
I'd have to get you the numbers to know whether there were
any exceptions that we may not have gotten 100 percent this
filing season, but it is our goal to have 100 percent, and I
think we've come close to it this year. I don't know--do you
know whether we've gotten to 100 percent?
Mr. Horn. OK. What I'm going to do is the last question, I
expect an answer from each of you. What are the three most
important challenges facing the IRS in the next 3 to 5 years?
Let's start over there with the Inspector General for tax
administration.
Mr. Williams. Well, certainly the modernization, its
successful completion and managing the ramp up that Mr. Levitan
described to you. We also need to recover from the effects of
both restructuring and modernization efforts which have been a
tremendous drain. So, that brings me to the second, the drop in
enforcement activity and rates; and the third is the continued
efforts to raise customer service.
Mr. Horn. What's the gap that you see in the enforcement
aspect? Do they not have enough personnel or they are not
trained yet or what?
Mr. Williams. Enforcement levels have dropped seriously
since 1996. They have dropped about 25 percent in the
examination area, and about 39 percent in the collections area.
In addition, that reduced force is being used to help on
customer service problems when the IRS' normal work force
becomes overwhelmed during this season. Another problem is the
criminal enforcement group, the CI is migrating back into to
its classic role that the Webster Commission recommended to it,
and that it agreed to do. That migration has been a bit slow.
They need to complete it. Then the modernization will provide a
great deal of assistance in all areas, but enforcement is one
of them.
Mr. Horn. Mr. Dacey, what do you feel--what's your two best
shots in the next three--or the three most important
challenges, whatever, in the next 3 to 5 years?
Mr. Dacey. I think in line with our testimony today there
are really challenges in making sure the IRS gives the right
information to the right people, that it is reliable, useful,
and timely. I think that has a big effect on their ability to
do their work and provide a level of service to the taxpayers
that they demand. I think there are challenges in the short
term in making sure they continue to manage those projects to
ensure they deliver the promised value on time and in budget.
In relation to that, their organizational transformation, or
realignment, is highly dependent. Some of the long-term goals
are highly dependent upon having that type of information. So,
I think those are probably the biggest challenges. Those also
have an impact on financial management and computer security,
that have to be built into the processes that go forward.
Mr. Horn. How about you, Mr. Levitan, what do you and your
colleagues think ought to be the three most important
challenges?
Mr. Levitan. The three areas that must be addressed are
modernization, customer service, and enforcement. Now, those
really are in three separate areas. All of them are tied
together and integrated. Modernization will provide the tools
to completely reinvent how service is provided and how
information is done, and so in the long term the way to solve
the service and enforcement challenges is through effective
implementation of the modernization program, and managing that
program to success is by far the most important and the most
difficult.
In the short term, service and enforcement can be improved
with additional manpower, additional resources. Now, as I
indicated earlier, that's not the long-term way to do it.
That's kind of like sticking your finger in the dike, you know,
to stop the immediate leaking, and in the long term, we've got
to rebuild the dikes, and the bridges, and the roads, and all
of that, and that's what modernization is about, and the focus
on successfully managing modernization is absolutely critical.
Mr. Horn. Commissioner.
Mr. Rossotti. I think we're all saying the same thing.
Mr. Horn. You want the chief financial officer to comment
on this at all?
Mr. Rossotti. Well, I'd like to ask him.
Mr. Rogers. The issues that we're talking about here, and I
think the Commissioner is going down this road and I agree with
Mr. Levitan, is that it really is an integral piece, and from a
personal standpoint as a retiree, if I might say so, I think
the country really needs to make an investment in improving
this agency, and that's going to mean money, and a little time,
and a little faith in making this work.
From a financial management standpoint, I'd like to say
that this year I think we made great strides. I'm very proud
actually of the agency and what happened here, and I join Mr.
Rossotti in thanking the GAO team. I think it was a team effort
in bringing this about. We are planning the improvements for
the coming year, and we think that when we appear here next
year, we will have more good things to say about our
improvements.
Mr. Horn. OK. Commissioner.
Mr. Rossotti. Well, I think that we're all saying the same
thing in slightly different ways, but let me try to just
crystallize it in terms of how it looks when people are trying
to manage it. I mean, I said that we have two tracks at the
same time. We have to operate effectively and we have to
modernize. In terms of the operating effectively part, there
are significant opportunities over the next 2 years to improve
the way we operate. That has to do with the area of our
management team, our reorganization, and our performance
measurements. The reason that we've made progress this year as
compared with last year is really not due to modernization
because it's just starting, and modernization in the technology
sense of modernization. It has to do with our organizational
and performance measures, and essentially what that boils down
to, it's a whole new way of learning to run the organization.
You know, every manager from the ground up is learning how
to manage in a way that balances customer service, compliance,
you know, that looks at things on the basis of continuous
improvement, all of those things, and I think we can make
significant head way.
But, I believe we have an excellent management team in
place and we have got a good plan, this plan which I gave to
you, which says how to do that. That is one major challenge.
The other major challenge which everyone has noted is
modernizing, and modernizing is not a technology project. I
mean it is a technology project, but if it was only technology,
we would be back into the same failures, you know, that we had
previously. It really is a different way of doing business.
So, those two things together are the sort of the twin
challenges. If you wanted to add a third one, which is a
sleeper, I think one of the questions that--Mr. Putnam raised
this--is that we have to renew our whole work force. You know,
we have an aging work force. There's been nobody hired for
years in the professional capacities. GAO's Mr. Walker has
noted this as a problem across the whole Federal Government,
but in the IRS, we are frankly at a dangerous point. I mean,
there has been so little hiring for so many years that, you
know, the art of actually bringing people into the organization
and training them has virtually been lost. We're virtually
starting up from scratch this year, and no matter how much you
do with technology, you have to have skilled people in order to
deal with taxpayers. I mean, you don't send out, you know,
automatons to deal with taxpayers. You send people.
So, that's on top of everything else, and I think that
fortunately the Congress did, in 2001, give us some resources,
and we've begun to rebuild that, but it's not a 1-year project.
It is not just adding people. It's just replacing the ones that
we have. And so, when you add that to it, you've really got the
three key dimensions which is learning how to manage in this
new way effectively, modernizing, which means changing the way
just about everything is done as well as putting in new
technology, and rebuilding the work force. That's quite a bit
to do.
Mr. Horn. Well, we wish you well. Let me thank the staff
that prepared this hearing: J. Russell George, staff director,
chief counsel sitting behind me; Diane Guensberg is a
professional staff member on detail from the General Accounting
Office; Bonnie Heald, director of communications; Earl Pierce,
professional staff; Matthew Ebert, policy adviser; Grant
Newman, assistant to the committee chair; Brian Hom, intern.
And our minority staff is Michelle Ash, professional staff;
Jean Gosa, minority clerk; and our two able court reporters are
Julia Thomas and Melinda Walker. We thank you all for what you
did, and gentlemen, we appreciate your coming. Let's see if we
can't get a few private collectors to get that money. That's
all I'm interested in. Thank you. The hearing is adjourned.
[Whereupon, at 4:55 p.m., the subcommittee was adjourned.]
[Additional information submitted for the hearing record
follows:]
[GRAPHIC] [TIFF OMITTED] T7055.093
[GRAPHIC] [TIFF OMITTED] T7055.094
[GRAPHIC] [TIFF OMITTED] T7055.095