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plaints that we are hearing from you and from other people. But I need a time line on that. He is saying the same thing.

Senator GLENN. That is the key.

Chairman STEVENS. Where is the point of no return on that time line? Just think about it; all right?

Ms. WILLIS. I will have to think about it.

Chairman STEVENS. All right. Thank you very much.

Ms. WILLIS. And I would be very interested in IRS' response to that question as well.

Chairman STEVENS. Well, stick around. You do not need to change the station, but you do not have to. Thank you.

Senator GLENN. Mr. Chairman, just one other comment, if I might.

Chairman STEVENS. OK.

Senator GLENN. This thing on the compliance initiative I referred to earlier I have been sort of leafing through this thing here a little bit-this was set up with the recommendations of GAO as to how this productivity of the additional people was to be measured. And so they followed GAO's concerns on this and set it up so that we were not just financing a base, we were financing the addedon and the add-ons, and the effectiveness of them, and it makes a case for them here, and I would recommend it. I had not read the whole thing either, but it looks pretty good. And we just got this just a few days ago.

Ms. WILLIS. Senator Glenn, we have historically done a great deal of work for you looking at the compliance initiatives and would be happy to look at that report and the stuff leading up to that report.

Senator GLENN. I would appreciate your comments on it.

Ms. WILLIS. We will get back to you.

Senator GLENN. Brian, you can make sure they get that; right? He can be in touch with you and make sure you get it.

Ms. WILLIS. No problem. We will get it from him.

Senator GLENN. Thank you.

Chairman STEVENS. Thank you very much.

Ms. WILLIS. Thank you.

Chairman STEVENS. We appreciate it and we will probably see you again, not too soon.

Senator GLENN. With better news.

Chairman STEVENS. Our next panel is Michael P. Dolan, Deputy Commissioner of Revenue for the Internal Revenue Service; Judy Van Alfen, the Associate Commissioner for Modernization; and Jim Donelson, the Chief of Taxpayer Service and Acting Chief Compliance Officer of the Internal Revenue Service. I would appreciate it if we can put your statement in the record and have you summarize it. I assume that is acceptable. I have just been summoned to another meeting at 11:45, which I have to go to, so I will ask a few questions and turn the meeting over to Senator Glenn. I think he has some longer questions than I probably have.

Senator GLENN. Well, we will see.

Chairman STEVENS. We will see. I appreciate your courtesy and would like to have your statement, please.

TESTIMONY OF MICHAEL P. DOLAN, DEPUTY COMMISSIONER OF REVENUE, INTERNAL REVENUE SERVICE; ACCOMPANIED BY JUDY VAN ALFEN, ASSOCIATE COMMISSIONER FOR MODERNIZATION, INTERNAL REVENUE SERVICE; AND JIM DONELSON, CHIEF, TAXPAYER SERVICE AND ACTING CHIEF COMPLIANCE OFFICER, INTERNAL REVENUE SERVICE

Mr. DOLAN. Thank you, Mr. Chairman, and Senator Glenn. Good morning. You gentlemen do this from up there regularly. For those of us who are not in that position as regularly, sitting there through the last hour and a half is a little bit like being in the dentist chair, no novocaine, and wondering whether the right tooth is being worked on. I do want to not be defensive about what I have heard, but I have got to tell you that I am going to complicate your life because some of what I am going to present to you this morning is a perspective that diverges from some of what you have heard, and I do that with hopefully the professionalism of differences of opinion and also respect that complicates your life, but I will try to do that in as straightforward a way as I know how, and I will, Senator, with your permission put the longer statement in the record.

Chairman STEVENS. We appreciate your courtesy, and I understand what you are saying. You have just watched someone else analyze your root canal.

Mr. DOLAN. Well, one of the things that I think, without even declaring myself defensive, I think I would have to listen to the last hour and a half and read the GAO comments as essentially a reflection that they have got a lot of doubt whether the IRS has got any plan of where it needs to go or wants to go, and I guess I would like to spend a couple minutes with you trying to at least satisfy you or encourage you to believe that not only do we have an idea of where we need to go, we have got a pretty decent idea of what it is going to take to get there, and beyond that, that some of the kind of discussion that we have had thus far this morning misses our appreciable achievements already in the bank, things that are not speculative. And Senator Glenn, I respect and remember your questions about when is this ever going to materialize, and I think there is always a question about whether enough has materialized. What I would like to do is share my observations. I think a fair amount has materialized to the benefit of the taxpayer. When we think about ourselves, senators, as you probably know, we think as complicated as our business is, we basically go about it thinking we have three basic objectives. One is to improve customer service. Another is to increase voluntary compliance, and the third is to constantly try to increase our own productivity, and when we do that, we do it much like, I guess, a private company thinking we have three basic lines of business and, Senator Stevens, you sort of referenced them in your opening. We think of processing tax returns and payments and documents; we think of providing customer service; we think of compliance as essentially our three lines of business, and against those three lines of business, our strategic plans, our annual plans, our operating plans, our measure systems attempt to drive the three objectives through those three lines of business.

We try to be more productive. We try to improve the compliance, and we try to enhance the customer service. And I think the first of those processing, as Senator Glenn said, is clearly that part of our business line that touches at virtually everybody. Now to a large extent, the typical taxpayer in this country has the kind of transaction with that business line that consists in filing an appropriate tax return, having it go through posting, and never hears from us.

But the volumes of things that go through that business line, the $1.3 trillion worth of receipts, the 200 million tax returns, a couple billion pieces of information that go through, clearly makes it one of our most critical and customer sensitive of our business lines, and what I think from time immemorial, the people who have dealt with us have seen that as very much a paper process. Their information came to us, their returns, their money, their check, came to us, strictly paperbound. We believe we can deliver a tax processing system that reduces paper dramatically and provides taxpayers with an array of alternatives toward getting us the returns, the money, and the information either electronically or to the extent that it will still come in paper, it will come more efficiently both from the taxpayer's point of view and from ours.

And while the GAO would make a recommendation that we should have a more cogent, strategic plan in the area of electronic filing, and I would stipulate that our plan could, should and will be better, I would also suggest to you the plan we have is one that has produced benefit. The plan we have is one that put 14.9 million electronic filed returns in the system this year. The plan we have is the one that allowed 2.8 million people to conduct a total transaction with its government of 8 to 10 minutes, find itself paperlessly having met its tax obligation, which is a radical departure from where we have been with our customers, the taxpayer constituents, in the past.

That is a plan that also this year found us with 150,000 people who are using software packages at home, who belong to some form of an on-line service, and used that on-line service to get those tax returns to us this year. It is also the plan that allowed us in 3.1 million instances this year to say to American taxpayers, you only have to file one return, and when you file that return, one will come to the Federal Government and one will come to the State. Our goals are to do a lot better than that. We are not satisfied with 14.9 million electronic filed returns, but I would suggest to you that that is more than just whether you have a static plan in place, because since we began planning this notion of getting the electronic receipts and what we do with the paper, an awful lot has changed with our world. If you think back 3 or 4 years ago, at least as I think back 3 or 4 years ago, about the extent to which computers are present in homes today, the extent to which the tax practice is automated, the extent to which people are very much more accustomed to doing financial and commercial interactions over the telephones, the electronic payment habits of corporate America, and so, I think, followed by individual payment habits have moved abundantly more electronically than when we first started this.

We think we have a number of places where our plan over the next couple of years will allow us to capitalize on these kinds of de

velopments. I think the TeleFile is a good example. We talked some this morning about a return free environment. In effect, the 2.8 million people who filed this year had a return-free transaction. It was not the one we were talking about before, but no paper of any sort accompanied their filing obligation. Last year we only did 680,000 of those. This year, as I said, we went to 2.8 million. We also learned some things from the outside. We learned from people who are in the marketing business how to take a product of certain attributes to a marketplace in which that product can be most attractive. We learned that students are very much more interested in having their transaction with our government this way, and consequently we marketed heavily to students. The other part of our logic was if we can get a student as a first-time filer to think that the way he or she wants to deal with the IRS over the course of his or her filing life is not by paper but by telephone and potentially subsequently by some other electronic method that we have done the right thing. This year, 23 million people were eligible to do that. Some would say 2.8 million is not a very good return on that. When we talk to people who are in the business of marketing other kinds of products, they would tell you that 10 percent, more than 10 percent, in the first year available nationwide is not necessarily a thing that we ought to hang our head about.

Next year we think we might be able to expose more people to that option. One of the things, Senator Stevens, that the Commissioner and Jim Donelson came back from Alaska with was some very good learning about the permanent dividend, and we learned that the way that the 1040EZ is today composed and the way that we were creating the parameters for the TeleFile would have precluded a population that would otherwise be ideal candidates for TeleFile. Next year, we will take and make that accommodation again as a way of making that product meet what we think are the needs of the marketplace.

I talked a minute about practitioners. Again, the GAO recommended or observed that we had backed away from a one time plan that suggested we might come to the Congress and ask you to help mandate the filing of electronic returns for practitioners who file perhaps more than 100 returns. We do not think at all that the fact that we have not come forward with that jeopardizes those plans because between the time that we first launched our plan and today, an increasing amount of that industry is automated. They have not automated for the IRS' purposes, but they have automated because it makes sense to them. It takes their paper out. They use the commercial softwares. They do all the things that makes business sense for a tax practitioner to be in an electronic environment.

We are reasonably confident that we are going to be able to create both the incentives and the catchers that will have almost 50 million returns that are today prepared by practitioners make for the kind of logical exchange with us electronically that will not require us to go about it with congressional mandates.

Another area that we have talked some, and Senator Stevens, you had expressed some earlier interest in how we were going to deal with what we call the at-home filer market. This year, as I mentioned, 150,000 of those people came to us through the on-line

services. Another 6 million people used software packages to basically prepare an answer sheet, something we call a 1040PC. We see that as an incipient market for the kind of direct at-home access to us, that we believe within the next year or two, will make for those taxpayers the transaction of sending it to us electronically as logical as it is for people who today lick a stamp and put it on a legal envelope.

We believe that our customer service product line is a place where we have got equally ambitious goals and equally achievable ones. One of the things that we know a number of things about is our customers. Our customers have said to us we would like to deal with you as infrequently as possible. When we deal with you, we like to deal with you by phone rather than paper. When we deal with you, we would like to make one contact. We do not want you shoving us all over your organization. We want to call one place and know that you can do our business. And we want certitude. We want to know that when we have had the transaction with you, it took, it is over, I am complete, my obligations are satisfied. Those are the underpinnings of the vision that we are trying to implement on our customer service side.

And in that, I have given you a lot more detail in the formal statement, but when we talked with you last, Senator Stevens, we told you that we frankly up until recently had not been doing very good against those expectations for reasons like we had our data divided geographically. If you happened to call somebody who was not associated with a return once you filed a return, we had a heck of a time trying to get that person serviced. We also told you that our systems did not talk to each other. Our automated collections and our toll-frees, and our underreporters, none of those systems talked to each other, and in the last year we have made significant strides bringing those systems together, not in the total final elegant solution design, but in ways that today allow us to deal with taxpayers as customers of the IRS, not of the "x" district or the "y" part of the country. We have installed modern telephone systems in each of our call sites, such that we can put on the front end of those, voice response units that help people find themselves both to the right IRS person or the right source of information that may not require human intervention.

We have done a number of other things. Our TeleTax system is a system that allows somebody to call in virtually any time of the day or night, get answers to 148 different questions. Senator Stevens, I think we talked in an earlier hearing about our home page this year. Our home page was set up as another way for people to come to us, not constrained by getting a live IRS assistant, come to us any time of the day or night, 50 million times this filing season people came to us over the home page. On the last day of the filing season, 1.8 million people got to us over that device with last minute instruction needs or forms or other kinds of things.

We go on and on with things that I believe are legitimate steps towards the vision I talked to you about at the outset. Cumulatively, we think these initiatives represent some huge improvements, not measured in IRS terms, measured in terms of what the customer has benefitted from our ability to react to them differently. At the same time, we sit here very candidly and say to

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