In early 1998, the Internal Revenue Service (IRS) Commissioner outlined a program to modernize the IRS, offering more efficient work processes and better service to American taxpayers. The Congress subsequently passed the IRS Restructuring and Reform Act of 1998 (RRA 98), mandating that the IRS modernize itself to improve operations and to better serve its customers. As a result, a comprehensive strategy was developed to reorganize the IRS into four operating divisions. The four operating divisions are: Wage and Investment, Small Business/Self-Employed, Large and Mid-Size Business, and Tax Exempt and Government Entities. The Small Business/Self-Employed (SB/SE) Division will service small corporations and partnerships (less than $5 million in assets) and fully and partially self-employed taxpayers.

Part of the modernization process in establishing the four operating divisions is called "standing up." This process is defined as the establishment of a new IRS organization with at least the minimum requirements of operating. These requirements include filling key management positions, completing actions to realign positions, ensuring workarounds are developed and in place, establishing a finance office and separate budgets, and ensuring necessary business authorities are in place.

The Treasury Inspector General for Tax Administration identified the modernization of the IRS as one of the major challenges facing the IRS and, as a result, initiated audit coverage of this area. The overall objective of this review was to determine if the SB/SE Division will substantially achieve stand-up by October 1, 2000.

Important aspects of the overall implementation of the SB/SE Division are already complete, and the implementation team has positioned the Division to substantially achieve stand-up on October 1, 2000. Specifically, most key managers are in place, employees have been realigned, the finance office is in place, many delegation orders are in place, and a detailed plan of workarounds has been developed. However, there are four areas which management needs to address or monitor implementation activities: timely obtaining space for the headquarters office, updating Delegation Orders, establishing Memoranda of Understanding with other IRS functions, and implementing the Taxpayer Education and Communication (TEC) function.

Most of the executives for the Headquarters, Customer Account Services (CAS), and Compliance functions have been selected and will be in place on October 1, 2000. As of late August, 7 (70 percent) of 10 Headquarters executives, 7 (88 percent) of 8 CAS function executives, and 20 (80 percent) of 25 Compliance executives had been selected.

Employees scheduled to work in the new unit have been identified, and letters have been issued notifying them where they will be placed. However, sufficient space will not be available for all headquarters activities to be together until April 2001. While this condition is temporary and the SB/SE Division apparently has no other options, the ability to start a new headquarters organization will be somewhat hindered when employees are located in different offices.

The SB/SE Division has its own budget for Fiscal Year (FY) 2001 and will be responsible for tracking and meeting budget requirements. The Division has also developed its own financial resource structure for FY 2001 and has begun drafting comprehensive financial operating policies and guidelines.

The creation of the SB/SE Division required the updating of 164 Delegation Orders to realign the authority for collecting tax revenue and operating the IRS with the new positions created by the reorganization. While 154 of the Delegation Orders have been properly updated, 4 were not properly transferred to positions within the new Division, and 6 were transferred based on the authority of an outdated Treasury Order or Treasury Directive. Additionally, although the IRS plans to update the Delegation Orders, which are located in part one of the Internal Revenue Manual (IRM), it does not plan to update the remainder of the IRM to reflect the new organizational titles.

The SB/SE Division has developed a detailed plan of workarounds to allow it to function after stand-up. As part of this effort, the Division developed, or is developing, Memoranda of Understanding (MOU) covering 33 shared services. However, an effective means of monitoring these agreements still needs to be developed. In addition, the SB/SE Division does not have an agreement with the Agency Wide Shared Services function.

Management faces several major challenges in attempting to develop a TEC function that will be able to provide specialized programs to small business taxpayers in the near future. The IRS:

• Has not yet identified all of the various business taxpayer education programs offered under its previous structure, nor has it developed a comprehensive plan regarding whether and/or how these services will be continued in the near future.
• Is still in the process of developing an overall strategic plan for implementing the new TEC function.
• Plans to use the newly formed TEC function to provide critically needed customer service support during the filing season (January through April). As a result, the IRS will have a ready pool of staff able to provide vital assistance to all taxpayers during the filing season; however, implementation of small business-oriented TEC programs will not begin until May 2001. Furthermore, providing this assistance during the filing season will potentially delay TEC employees from receiving the specific technical training necessary to assist business taxpayers.
• Has not yet developed a training plan to provide the skills that will be needed in the new TEC function.