Chairman Shelby, Ranking Member Murray, and distinguished Members of the subcommittee, I appreciate the opportunity to appear before you today to discuss the Internal Revenue Service’s (IRS) budget, and the challenges the IRS continues to face in using its funds to improve the economy, efficiency, and effectiveness of tax administration.
The mission of the IRS is critical to the functioning of our Government. Each year, the IRS processes over 200 million tax returns and collects over $2 trillion. The IRS also issues nearly 100 million tax refunds, provides service to millions of taxpayers in person and via telephone calls and the internet, and applies complex tax laws to help ensure taxpayers meet their tax obligations.
E-filing provides significant benefits to both taxpayers and the IRS including quick acknowledgement to taxpayers that the IRS received their tax returns, more accurately processed tax returns, and faster refunds. In addition, the IRS estimates that the processing of an e-filed tax return compared to that of a paper tax return results in cost savings of approximately $2.30 per tax return. Since the enactment of the IRS Restructuring and Reform Act of 1998 (RRA 98), the IRS has made significant progress in attracting taxpayers to e-file and continues to identify opportunities and create incentives for taxpayers to e-file. These efforts have resulted in individual taxpayers being able to electronically sign their tax returns, e-file their state tax returns with their Federal tax returns, pay their taxes using a credit card, e-file 99 percent of all tax forms, and e-file at no cost. Furthermore, in an attempt to encourage paid preparers to submit tax returns electronically, the IRS offers specific support services and is in the process of providing incentives exclusive to e-file providers. These incentives include the ability to apply to become an e-file provider online, interact with the IRS by email, and obtain client transcripts online. This filing season, the IRS indicated it had received 43 million e-filed returns as of March 19 -- an increase of over 11 percent.
The IRS has also made progress in providing information to taxpayers via its internet website IRS.gov. Taxpayers have visited this website billions of times to obtain information. Just this tax season, the IRS stated taxpayers had made nearly 10 million visits by the end of February to obtain refund information from the “Where’s My Refund?” application which is featured on this site. This is almost double the number received last year at this time. Even with much progress, the IRS still faces significant challenges to meeting its mission. TIGTA has identified major management challenges in the following areas that could affect the IRS’ ability to help taxpayers address their tax responsibilities:
• Systems Modernization.
• Tax Compliance Initiatives.
• Security of Employees, Facilities, and Information Systems.
• Integrating Performance and Financial Management.
• Complexity of the Tax Law.
• Providing Quality Customer Service Operations.
• Erroneous and Improper Payments.
• Processing Returns and Implementing Tax Law Changes During the Tax Filing Season.
• Taxpayer Protection and Rights.
• Human Capital.
Although each of these areas presents its own unique challenges, I have chosen to focus the remainder of my remarks on two of these key areas, Systems Modernization and Providing Quality Customer Service Operations.
Systems Modernization
The IRS’ systems modernization program is in the sixth year of its effort to upgrade and modernize IRS information technology and business systems. It is expected that this program will take up to 15 years and cost at least $7 billion to complete. The modernization program is an extremely complex effort, since many of the IRS’ current business systems are a mixture of technologies that date back to the 1960s. While difficult, the program must nevertheless be successful if the IRS is to meet its goals and commitments of improving its customer service and tax compliance activities. To facilitate the success of its modernization efforts, the IRS hired the Computer Sciences Corporation as the PRIME contractor and integrator for the modernization program, and created the Business Systems Modernization Office to guide and oversee the work of the PRIME contractor. Through March 2004, the IRS has received approximately $1.59 billion to support the systems modernization program, and the IRS plans to request an additional $142 million for Fiscal Year (FY) 2004. Approximately $285 million has been included in the FY 2005 budget to further fund systems modernization efforts.
The Treasury Inspector General for Tax Administration (TIGTA) agrees with the IRS’ recent moves to resize and scale back its systems modernization efforts to place additional focus on ensuring the most critical systems are implemented. In fact, TIGTA has been recommending such a reduction in the modernization projects based on the concerns we have raised with cost and schedule overruns in the modernization program. The IRS Commissioner recently launched a comprehensive review of the modernization program resulting in 21 recommendations for improvement. Many of those recommendations were similar to those made in TIGTA reports issued during the past 4 years. Over the last 2 fiscal years, TIGTA cited four challenges that the IRS and the PRIME contractor must overcome to be successful:
1) Implement planned improvements in key management processes and commit necessary resources to enable success.
2) Manage the increasing complexity and risks of the modernization program.
3) Maintain the continuity of strategic direction with experienced leadership.
4) Ensure PRIME contractor performance and accountability are effectively managed.
The fourth challenge has recently become critical as oversight groups are starting to lose confidence in the PRIME contractor’s ability to meet its commitments in modernizing the IRS’ business systems and have raised concerns about future funding. In light of this concern, effective contract management, always difficult on a project of this magnitude, is becoming an increasingly important challenge that needs to be overcome.
The IRS has made progress in defining the management processes and capabilities needed to effectively acquire and implement information technology systems. For example, it has deployed the infrastructure system on which future modernized applications will run. Establishing this infrastructure is a necessary prerequisite to introducing the business applications that are intended to provide benefits to taxpayers and the IRS. The IRS also deployed several applications that have immediately produced taxpayer benefits. The “Where’s My Refund” application, as described earlier, has assisted taxpayers with millions of online inquiries to obtain refund information. Other applications that have been implemented allow businesses and taxpayers to obtain employer identification numbers online, tax preparers to apply to become an electronic filer and obtain an identification number for use in filing clients’ returns, and businesses to electronically file certain tax returns.
In response to concerns of TIGTA and others, the revised FY 2003 modernization spending plan submitted in March 2003 focused the program on a smaller portfolio of existing key projects. Although the IRS expressed high confidence in the practicality of the revised plan and assured the Congress that it could timely deliver the revised FY 2003 project portfolio, all of the projects experienced schedule delays and most incurred significant cost increases from FY 2002 estimates. Also, management decisions were made to delay some of the functionality that was originally planned for these systems until sometime in the future.
These schedule delays, cost increases, and delayed functionality occurred, in part, because modernization project teams did not always follow defined management and project development processes. The IRS and the PRIME contractor have particularly struggled to develop adequate cost and schedule estimation techniques. As a result, delivery schedules and cost estimates were very aggressive and overly optimistic.
Additionally, the IRS and the PRIME contractor had not fully implemented disciplined project testing processes and procedures. Testing processes have been substantially revised and refined based on lessons learned during the early testing efforts for modernization projects. However, TIGTA analyzed several key projects and found the project teams were not consistently following the established testing processes. We believe the inadequate implementation of the testing processes was the result of the modernization project teams attempting to meet overly optimistic project schedules.
While progress has been made in the IRS’ modernization efforts, it did not achieve its goals for FY 2003. This underachievement is disappointing considering that the expectations for the year were scaled back in hopes of being able to successfully deliver several key modernization projects.
The delays in implementing projects can clearly be seen in the most critical modernization project, the Customer Account Data Engine (CADE). CADE will eventually replace the existing Master File of taxpayer accounts, and will enable the implementation of other modernized systems that will improve customer service and compliance and allow the on-line posting and updating of taxpayer account and return data. Therefore, CADE will be the foundation for managing taxpayer accounts in the modernized IRS. The portion of CADE related to individual tax accounts will be incrementally deployed in five releases, each related to a specific taxpayer segment, over several years, as shown in the revised CADE release schedule below.
Customer Service
One of the Congress’ principal objectives in enacting the RRA 98 was to mandate that the IRS do a better job of meeting the needs of its customers. In the RRA 98, the Congress directed the IRS to achieve a better balance between its post-filing enforcement efforts and pre-filing taxpayer assistance through education and service. To comply with this Congressional mandate, the IRS revised its mission statement to refocus its emphasis on helping taxpayers understand and meet their tax responsibilities. Additionally, the IRS has enhanced its focus on increasing the levels of electronic filing.
Taxpayers have several options from which to choose when they need assistance from the IRS. These options include toll-free telephone assistance, walk-in service at the Taxpayer Assistance Centers (TAC), and the IRS internet website IRS.gov. The effectiveness of each of these services potentially affects a taxpayer’s ability and desire to voluntarily comply with the tax laws.
Toll-Free Telephone Assistance
The IRS’ toll-free telephone system is the contact method most taxpayers choose when seeking answers to tax law questions or trying to resolve tax account-related issues. Taxpayers called the IRS toll-free telephone system over 50 million times during the 2003 Filing Season. The IRS’ strategy for handling this significant customer demand is to direct those taxpayers with less complicated issues to its automated services (i.e., recorded information and interactive applications) and allow its Customer Service Representatives (CSR) to assist taxpayers with more difficult issues. However, during FY 2003, over 26 million of the calls were from taxpayers who had questions about their accounts and who chose to speak with a CSR.
The TIGTA and others have raised continuing concerns about the IRS’ ability to effectively meet the significant annual taxpayer demand for access to its toll-free telephone system. Over the past several years, the IRS has made many technological changes, as well as organizational and process changes, to its toll-free telephone system in an effort to provide taxpayers with better access and improve the quality of its service.
Many aspects of the taxpayer experience in accessing the IRS toll-free telephone system were significantly improved during the 2003 Filing Season. This improvement was reflected in the measures the IRS uses to gauge the performance of its toll-free telephone system. In comparison to the prior filing season, for example, the level of service increased, more calls were answered, and fewer taxpayers abandoned (i.e., hung up) their calls before receiving assistance. Further, taxpayers that called with account- or refund-related questions had shorter wait times to receive service, and taxpayers that called with account-related questions were more likely to receive assistance when they reached a CSR assigned to an account application. Although taxpayer access to its toll-free telephone services improved, the IRS has opportunities to further enhance the taxpayer experience and reduce the costs of providing toll-free telephone services. A major improvement opportunity involves implementing enhancements to automated call routing solutions so that much of the need for call screeners can be reduced or eliminated. For the 2003 Filing Season, using screeners to manually route calls cost the IRS almost $3.6 million in salaries and benefits that would not have been needed if the previously developed call routing solution had worked as planned. Another improvement opportunity involves reducing the high Assistor Availability levels that have existed for at least the past two filing seasons. The IRS had planned for a level of 5.5 percent in FY 2003, but during the 2003 Filing Season, the rate was 11.2 percent, and had further increased to 12.15 percent through the end of June. We estimate that this cost the IRS nearly $6.4 million in CSR salaries and benefits. Finally, the IRS needs a financial system that will accurately track its cost-per-call for various toll-free telephone services to provide management and key stakeholders sufficient information to make critical decisions.
The IRS receives calls from taxpayers with account issues and questions about various aspects of the tax law. During the 2003 Filing Season, we reviewed both account assistance and tax law assistance calls for professionalism, accuracy, and timeliness.
Account Assistance. TIGTA evaluated the professionalism, accuracy, and timeliness of account assistance obtained through the Toll-Free program. From a judgmental sample of 191 calls monitored between April 21 and May 16, 2003, we determined that CSRs treated taxpayers professionally for 99 percent of the calls and provided timely service for 83 percent of the calls. In addition, 78 percent of taxpayers received accurate answers to their account questions. Using a statistical sample during the same period we reviewed, the IRS reported rates of 100 and 97 percent, respectively, for professionalism and timeliness, and 88 percent for customer accuracy. Tax Law Assistance. TIGTA monitored a judgmental sample of 294 toll-free tax law calls between January 27 and March 13, 2003, and compared the results to records from an IRS statistically valid sample of 6,011 calls monitored during the same period. The 2 samples showed that CSR performance was professional and timely in 98 percent or more of the total number of calls monitored. Although our sample showed a customer accuracy rate of 73 percent as compared to the IRS’ measured rate of 81 percent, the need for CSRs to fully probe the taxpayer for information was clearly evident as an ongoing issue requiring improvement in both of the samples taken. The primary reason incorrect responses were given was because CSRs were not effectively using the appropriate guidance. Without effective use of this guidance, CSRs are unable to fully understand the taxpayer’s situation and may provide information that is incorrect or incomplete.
Taxpayer Assistance Centers
The primary emphasis of the TACs is to provide face-to-face assistance to taxpayers in meeting their filing and payment responsibilities, including educating taxpayers, providing self-help, interpreting tax laws and regulations, securing forms, resolving notices, and providing needs-based complimentary tax return preparation. The IRS has over 400 TACs that served over 8.5 million taxpayers in FY 2003. Significant improvements have occurred in the percentage of accurate answers to tax law questions TIGTA auditors asked when anonymously conducting site visits to TACs during the past 2 years. IRS employees correctly answered 69 percent of the questions asked and incorrectly referred only 2 percent to publications from July through December 2003, compared to correctly answering only 57 percent of the questions asked and incorrectly referring 12 percent to publications from July through December 2002. TIGTA commends the IRS for the improvements it has made in this level of accuracy.
Auditors also had positive experiences when they visited the TACs. IRS employees were professional and courteous in 97 percent of the 194 TIGTA site visits to 105 TACs. Wait time for service was 1 hour or less for 99 percent of the visits. In addition, 85 (81 percent) of the TACs visited by our auditors had office hours listed on the IRS internet website IRS.gov, which matched the hours posted at the TACs. Although improvements have occurred in accuracy of responses to taxpayer questions, the accuracy of tax return preparation at the TACs needs improvement. Complimentary tax return preparation and electronic filing is provided to those taxpayers whose returns meet certain requirements and limitations. For Tax Year 2002, IRS employees at the TACs prepared 293,242 tax returns that involved refunds and tax liabilities totaling approximately $330 million and $6 million, respectively.
Returns prepared at the TAC sites, however, are often inaccurate. From February through April 2003, TIGTA auditors made 34 anonymous visits to 26 TACs nationwide in an attempt to have a tax return prepared. IRS employees incorrectly prepared 19 of the 23 tax returns prepared during our visits. If these returns had been filed, the IRS would have inappropriately refunded $32,000 and inappropriately withheld $2,400 in tax refunds. IRS management has taken action to improve the accuracy of the tax returns prepared, and TIGTA has recommended additional actions to ensure taxpayers receive proper and accurate customer service when requesting assistance with tax return preparation.
Service to Taxpayers via the Internet
The use of the internet has increased dramatically. The latest statistics indicate that nearly 70 percent of the United States population are internet users. Since 1995, the IRS has administered a program to answer taxpayer questions submitted through its internet website IRS.gov. This program offers individual and business taxpayers an accessible and convenient alternative to using the telephone or visiting an IRS office to obtain answers to tax law questions. Taxpayers have the ability to submit tax law questions 24 hours a day, 7 days a week. The IRS provides responses to taxpayer questions via an e-mail message.
Past TIGTA testing indicated that the accuracy rate for the answers to the submitted questions was over 80 percent, which is higher than that received in TACs or via the toll-free assistance telephone program. However, the IRS did not respond to several of the questions TIGTA submitted anonymously to the program.
Additionally, the number of questions submitted dropped from over 200,000 questions in the 2000 Filing Season to about 120,000 in the 2002 Filing Season. TIGTA encouraged management to provide clear instructions to taxpayers to help them locate the area to input tax questions on the internet website.
Statistics obtained from the IRS indicated that for the 2003 Filing Season, 146,369 questions were received from taxpayers (a 23 percent increase over the prior year). However, the average response time for each question increased from 2.4 days to 4.2 days. Thus far, for the 2004 Filing Season (through March 15, 2004), statistics indicate a reduction in the number of questions received -- 76,156 questions have been received (76 percent of the number received in the prior year during the same period) with an average response time of 3.6 days.
In closing, I would like to reiterate that the improvements in the levels of service the IRS has provided to taxpayers are impressive. The IRS has made great strides in enhancing the level of electronic filing, providing information via its internet website, and improving the accuracy and availability of toll-free telephone service. The early IRS filing season statistics indicate a rise in electronic filing and an increase in the use of some of the services available via the internet. However, significant challenges remain to be addressed as the IRS strives to modernize its systems and provide world-class customer service to America’s taxpayers.
Footnotes
1. Cost savings relate to the costs saved to process a tax return and do not include Information Technology and Customer Service costs as the IRS is still in the process of computing these costs.
2. This no cost e-filing option is the result of the IRS entering into an agreement with tax preparation software companies and is available for taxpayers that meet certain requirements.
3. E-file providers may be electronic return originators, transmitters, software developers, tax practitioners, and states.
4. Annual Assessment of the Business Systems Modernization Program (Reference Number 2003-20-208, dated September 2003). Annual Assessment of the Internal Revenue Service’s Business Systems Modernization Program (Reference Number 2002-20-189, dated September 2002).
5. The Master File is the IRS’ database that stores various types of taxpayer account information and includes individual, business, and employee plans and exempt organizations data.
6. Estimated tax returns (electronic and paper) are based on 1999 statistics.
7. Release 1 has been divided up into three separate releases—1.1, 1.2, and 1.3.
8. Assistor Availability is the measure the IRS uses to calculate how long its CSRs are available to take calls when none are coming in for their specific applications. Achieving the optimum Assistor Availability level is critical for effective and efficient call site operations.
