MEMORANDUM FOR SECRETARY O’NEILL
David C. Williams, Inspector General
Management and Performance Challenges
Facing the Internal Revenue Service
APRIL 15, 2002
STATEMENT FOR THE RECORD
DAVID C. WILLIAMS
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
Treasury Inspector General for Tax Administration’s (TIGTA) assessment of
the major IRS management challenge areas for Fiscal Year (FY) 2002 has
not changed substantially from the prior year.
While the IRS has acted to address each challenge area, TIGTA was
able to remove only the challenge that addressed the organizational
restructuring of the IRS. In
TIGTA believes that two other issues will challenge the IRS in the coming
years. Human Capital and
Complexity of the Tax Law are being added to the TIGTA’s list of
challenges facing the IRS.
We have also recategorized or
renamed some issue areas. Challenge
areas formerly titled Financial Management and Implementation of
the Government Performance and Results Act of 1993 have been combined
under one area titled Performance and Financial Management.
The customer service issues previously included in the
challenge area titled Customer Service and Tax Compliance Initiatives
have been moved to the Providing Quality Customer Service challenge,
leaving a challenge area titled Tax Compliance Initiatives.
Issues in the challenge area formerly titled Impact of the Global
Economy on Tax Administration have been incorporated in the Tax
Compliance Initiative challenge area.
The challenge previously titled Revenue Protection – Minimizing
Tax Filing Fraud has been renamed Erroneous Payments to emphasize
presidential and congressional concerns in this area.
The TIGTA believes the major
management challenges, in order of priority, facing the IRS in FY 2002 are:
of the Internal Revenue Service
Employees and Facilities
Systems Modernization of the Internal Revenue
Integrating Performance and Financial Management
Returns and Implementing Tax Law Changes During the Tax Filing Season
of the Tax Law
Quality Customer Service Operations
Protection and Rights
Discussion of the major IRS
management challenge areas, including examples of relevant
TIGTA audit work, follows.
Security of the Internal Revenue Service
terrorist attacks on September 11, 2001, and the subsequent anthrax scare
highlighted new vulnerabilities in many government agencies.
Although the IRS has been security conscious because of the very
nature of its work, security of IRS employees, facilities, and information
systems is now considered as the number one challenge facing the IRS
management for FY 2002.
Security of the Internal Revenue Service – The Employees and the Facilities
after the tragic events in New York City and Washington, DC, the IRS took
steps to safeguard IRS personnel and assets.
First, the IRS Security Standards were reviewed and upgraded as
necessary. Second, a
preliminary risk assessment survey was completed for all 785 IRS
offices. The survey results
will identify offices that need additional safety measures and help
Security of the Internal Revenue Service – The Information Systems
the amount and sensitivity of the data the IRS is charged with protecting
and the amount of revenue it collects, the IRS is a highly visible target
for hackers, disgruntled employees, etc.
Access to the Internet and the linking of internal computer systems
have greatly increased the risk of loss or theft.
Despite the IRS’ significant efforts and accomplishments over the
past few years, the overall level of security over the IRS’ information
systems is not yet adequate.
the Internet gateways, which control external access into the IRS network,
firewalls and routers were not upgraded to protect against commonly known
weaknesses, configurations were weak, changes to configurations were not
documented, activity logs were not generated or reviewed, and sufficient and
capable staffing was not assigned to administer the firewalls.
Furthermore, the IRS still does not have the capability to
detect intrusions at all entry points from the Internet.
weaknesses with network operating system controls, physical security, and
access privileges still exist. Due
to the interconnectivity of systems within the IRS, these weaknesses are
persons gaining access to a computer in even the smallest post-of-duty can
potentially access data in any of the computing centers.
The IRS, however, still does not routinely run or review activity
logs on network servers to detect potential internal security breaches.
Systems Modernization of the Internal Revenue Service
IRS Restructuring and Reform Act of
1998 (RRA 98)1
that the IRS reorganize around groups of taxpayers with similar needs
and place a greater emphasis on serving taxpayers and meeting their needs.
The success of the IRS’
reorganization is dependent upon revising its business processes and
implementing new computer systems to better serve the specialized needs of
these groups. Given the IRS’
past history in modernizing its computer systems, this is a major challenge.
of IRS’ key goals, such as 80 percent of tax returns being filed
electronically by Year 2007 and significantly improving levels of service in
answering taxpayer questions, are contingent on the development of new
technology. Furthermore, while
the development of new technology evolves, existing operations must continue
plus improvements must be made to meet the needs of tax administration and
to demonstrate to taxpayers the IRS’ commitment to improved services.
Integrating Performance and Financial Management
Improving performance is an overall goal of the federal
without accurate and timely financial information, it is not possible to
accomplish the President’s agenda to secure the best performance and
highest measure of accountability for the American people.
IRS management has taken several steps to address the issues concerning
implementing the Government
Performance and Results Act (GPRA)2,
the Customer Satisfaction Survey
process, and managing the Annual
Program Performance Report process.
The IRS Commissioner designated the Deputy Commissioner and the Chief
Financial Officer as responsible for the macro-level GPRA processes and the
operating unit executives as responsible for implementing the GPRA in their
respective areas. The IRS has
made changes to its performance management process to help better define and
report on measures and is planning to qualify some data. In addition, the IRS has issued procedures for reporting on
the IRS’ critical measures, requiring that data and supporting
documentation be verified and approved prior to being reported to the
to the General Accounting Office’s (GAO) report for the FY 2000 audit
of the IRS, the IRS continues to face most of the pervasive systems and
internal control weaknesses that have been reported each year since GAO
began auditing the IRS’ financial statements in FY 1992.
Despite these weaknesses, in FY 2000 the IRS was able to
produce, for the first time, combined financial statements covering its tax
custodial and administrative activities that are fairly stated in all
material respects. This
achievement was the culmination of two years of extraordinary effort on the
part of the IRS. The IRS developed compensating processes to work around its
serious systems and control weaknesses in order to derive year-end balances
for its financial statements. In
addition, the IRS addressed several of the management issues raised in
this unqualified opinion relied heavily on costly, time consuming processes,
statistical projections, external contractors, substantial adjustments, and
monumental human effort. These
costly efforts would not have been necessary if the IRS’ systems and
controls operated effectively. In
addition, the absence of effective systems and controls means that the IRS
lacks, on an ongoing basis, the timely, accurate, and useful information
needed to make informed management decisions.3
Processing Returns and Implementing Tax
Law Changes During the Tax Filing Season
filing season impacts every American taxpayer and is, therefore, a highly
critical program for the IRS. Programs,
activities, and resources have to be planned and managed effectively each
filing season. During the 2000
Filing Season, the IRS effectively processed paper individual tax returns.
Nevertheless, the IRS could have more effectively implemented tax law
changes during the 2000 Filing Season for certain program areas, such as the
Child Tax Credits, Credits for the Elderly or the Disabled, Child and
Dependent Care Credits, Mortgage Interest Credits, and Education Credits.
opportunities still exist for the IRS to more effectively implement tax law
changes and process tax returns for business taxpayers.
Some examples include ensuring only taxpayers liable for the
corporate Alternative Minimum Tax actually pay the tax; ensuring the payment
vouchers and tax returns accurately reflect the taxpayer name and
identification number, developing controls to increase the accuracy of
electronic partnership returns, identifying incorrectly filed Personal
Service Corporation Income Tax Returns, and simplifying the estimated tax
Complexity of the Tax Law
law complexity is the highest-ranking problem individual and business
taxpayers had with the IRS, according to the FY 2000 Taxpayer
Advocate’s Annual Report to the Congress.
The Advocate also identified tax law complexity as the root cause of
many of the other problems on the Top 20 list, including clarity and tone of
IRS communications, inability to access the toll-free number, compliance
burden on small businesses, administration of the Earned Income Credit (EIC),
lack of one-stop service, penalty administration, understanding federal tax
deposits, and divorced and separated taxpayers issues.
its FY 2001 Annual Report to Congress, the National Taxpayer Advocate
takes tax law simplification a step further, focusing on key legislative
proposals that create a more burdensome and confusing voluntary tax system
for even the most compliant taxpayers.
The report outlines proposals to simplify or clarify six areas of tax
law – family status issues, joint and several liability, alternative
minimum tax for individuals, penalty and interest issues, home-based service
workers, and IRS collection procedures.
It also lists additional legislative issues, as well as some
potential legislative issues, that merit further consideration.
Joint Committee staff identified some causes of complexity: 1) a lack of
clarity and readability of the law; 2) the use of the Federal tax system to
advance social and economic policies; 3) increased complexity in the
economy; and 4) the interaction of Federal tax laws with State laws, other
Federal laws and standards (such as Federal securities laws, Federal labor
laws and generally accepted accounting principles), the laws of foreign
countries, and tax treaties. In
addition, the lack of clarity and readability of the law results from 1)
statutory language that is, in some cases, overly technical and, in other
cases, overly vague; 2) too much or too little guidance with respect to
certain issues; 3) the use of temporary provisions; 4) frequent changes in
the law; 5) broad grants of regulatory authority; 6) judicial
interpretation of statutory and regulatory language; and 7) the effects of
the Congressional budget process.
Tax Compliance Initiatives
IRS’ goal of providing world-class service to taxpayers hinges on the
theory that, if the IRS provides the
right mix of education, support, and up-front problem solving to taxpayers,
the overall rate of voluntary compliance with the tax laws will increase.
The challenge to the IRS management is to establish a tax compliance
program (examining tax returns and collecting tax liabilities) that
identifies those citizens who do not meet their tax obligations, either by
not paying the correct amount of tax or not filing proper tax returns.
the last decade, the number of tax returns selected for examination by the
IRS has decreased, while the number of tax returns filed by taxpayers has
increased. Additionally, revenue
receipts processed by the IRS increased from $1.5 trillion in FY 1996
to $1.9 trillion in FY 2000.
However, revenue collected as a result of compliance activity
decreased by $5 billion and gross accounts receivable increased by $41 billion
during the same period. Decreases
in the examination rate can be partially attributed to fewer revenue agents
and tax auditors, a decline in direct examination time, and an increase in
time per return by revenue agents. Decreased enforcement has been attributed to reduced resources allocated
to compliance activities and IRS employees’ concerns over the mandatory
employment termination provision in Section 1203 of RRA 98.
Providing Quality Customer Service
Providing top quality service to every taxpayer in
every transaction is integral to the IRS’ modernization plans.
There are many ways in which the IRS provides customer service.
The most direct include toll-free telephone service, electronic
customer service, written communications to taxpayers, walk-in service, and
accurate and timely tax refunds. Each of these services affects a taxpayer’s ability and
desire to voluntarily comply with the tax laws.
Providing these services in a high-quality manner can also be a
challenge to the IRS.
Quality service at IRS Taxpayer Assistance Centers
(TAC) continues to be a major concern.
Both an IRS study conducted during the 2000 Filing Season and a TIGTA
audit conducted during the 2001 Filing Season reported low accuracy
rates on tax law questions answered by a sampling of IRS assistors.
In addition, TIGTA auditors, who posed as walk-in taxpayers, were not
provided correct or sufficient answers 73 percent of the time, and, in some
instances, were treated with discourtesy or had excessive wait time.
Audit test calls to the Spanish language option on the IRS’
toll-free telephone helpline identified a need for improvement in the
quality of responses being provided to Spanish-speaking taxpayers asking tax
Internet technology affords the IRS many opportunities to dramatically
improve customer service, and the IRS has made strides in using these
technologies. An IRS web site
that provides taxpayers with convenient access to tax forms and information
received over one billion accesses during this past filing season alone.
However, inadequate systems design and planning have hindered other
efforts. For example, to better serve customers and relieve some of the call
volumes from the toll-free system, the IRS has been planning, since 1996, to
implement an Internet-based refund status application.
This application is now scheduled to be available
to taxpayers by the beginning
of the 2002 filing
Both the President and the Congress have expressed
concerns with the large amount of erroneous payments made by Federal
agencies. Improper payments
include inadvertent errors; payments for unsupported or inadequately
supported claims; payments for services not rendered; payments to ineligible
beneficiaries; and payments resulting from outright fraud and abuse by
program participants and/or federal employees.
Stewardship responsibility over public funds is a major challenge
facing IRS management.
The EIC Program continues to be a highly visible area of potential fraud. To combat potential EIC fraud, the IRS launched promising new compliance initiatives. For example, partnerships with the Department of Health and Human Services and the Social Security Administration will permit the IRS to crosscheck information on the child and the taxpayer. However, despite extensive IRS programs and efforts to address certain refund schemes, relatively little effort has been made to systematically identify those schemes involving business returns and associated credits. While a few business schemes have been identified, it has generally been through labor-intensive manual procedures. The IRS is concerned that fraudulent refund claims may be expanding to include business returns, and that scheme perpetrators may be using the Internet or other means to promote and advertise their schemes.
Taxpayer Protection and Rights
The RRA 98, which was signed into law on July 22, 1998,
contains 71 provisions that increase or help protect taxpayers’ rights.
The IRS is now fully compliant with three provisions, i.e., Mitigation of the Failure to Deposit Penalty
(RRA § 3304(a)), Seizure
of Property (RRA §§ 3401(b) and
3421), and Notice of Levy (RRA 98
§ 3401(b)). For another
seven provisions, the IRS is taking additional corrective actions to
increase compliance. However,
the IRS did not fully comply with two of the RRA 98 provisions because
of delays and other implementation problems.
Additional actions are needed to implement these provisions: Dual
Notices for Joint Filers (RRA 98 § 3201) and
Collection Statute Extensions (RRA 98 §§ 3461(a) and (c)).
An extension of the implementation deadline had been
requested or the compliance could not be fully evaluated on another six
Additionally, the IRS Commissioner has expressed,
before the Congress, concerns about treating taxpayers fairly.
The IRS has indicated to the Congress its commitment to treat all
taxpayers equitably, and strategic plans indicate equitable treatment of
taxpayers is included in efforts to promote compliance among business
taxpayers. However, the TIGTA
is concerned about possible inequities between the different taxpayer
groups. For example: the Wage and Investment
Income (W&I) Division characterizes its taxpayers as highly
compliant, which it attributes to its document-matching program.
Conversely, the Small Business/Self-Employed (SB/SE) Division
acknowledges that the largest part of the tax gap is attributed to the
taxpayers it serves. Business
income, however, is not subject to similar matching programs.
Like many other government agencies, the IRS faces a range of serious
personnel management issues, ranging from recruiting, training, and
retaining employees to problems associated with the IRS’ recent
reorganization and modernization efforts.
During FY 2001, the
IRS struggled with a continuing need to properly staff, train, and provide
adequate tools for employees. In
some cases, such as the lack of resources for visually impaired telephone
assistors, the IRS was at risk of civil suits.
Retention of a qualified work force continues to be a challenge for the
IRS, particularly the Large and Mid-size Business (LMSB) and SB/SE
Divisions. During the recent
reorganization, much of the experienced staff were assigned to these
divisions, and many of these employees will be eligible for retirement
within the next five or six years. Both
the LMSB and SB/SE Divisions have taken various steps to establish a human
capital plan. The LMSB Division developed an accelerated skill attainment program, a
coaching/mentoring implementation plan, and an innovative recognition
program. The SB/SE Division
developed a learning and education organization blueprint and conducted
career path reviews.
of the issue removed from the major IRS management challenge areas follows.
Modernization of the Internal Revenue
Service – Organizational Restructuring
On October 1, 2000, IRS achieved the first
milestone toward modernization by implementing its new organizational
structure. The four major
components of the new IRS – the W&I,
the SB/SE, the LMSB, and the Tax Exempt
and Government Entities (TE/GE) Division – substantially completed the
critical elements needed for standing up.
Specifically, most key management positions were filled, most
employees had been realigned, finance offices and budgets were established,
many delegations of authority were revised, and detailed plans of
developed. In addition to the
four major business units, other key IRS offices, such as the Criminal
Investigation function, the Taxpayer Advocate Service, and the Appeals
function, also successfully implemented a new structure.
Therefore, the TIGTA believes that the organizational restructuring
is complete but, to be effective, new business processes and computer
systems need to be implemented. The
new processes and systems implementation will be examined under the other
The complete document reflecting the TIGTA’s comprehensive analysis of the major management challenges facing the IRS in Fiscal Year 2002 can be viewed at the following Internet address:
1 Pub. L. No. 105-206, 112 Stat. 685 (codified as amended in scattered sections of 2 U.S.C., 5 U.S.C., 5 U.S.C. app., 16 U.S.C., 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C., 31 U.S.C., 38 U.S.C., and 49 U.S.C.).
2 Pub. L. No. 103-62, 107 Stat. 285 (codified as amended in scattered sections of 5 U.S.C., 31 U.S.C., and 39 U.S.C.).
3 United States General Accounting Office Report to the Secretary of the Treasury – IRS’ Fiscal Year 2000 Financial Statements, March 2001.
4 Temporary solution to a problem that allows a new organization to be operational until a final solution can be developed and implemented.
Posted on 04/12/2002