I think the number of employees is down, but the number of private contractors is up, if I am not mistaken, which seems to be a trend throughout the Federal Government.

Thank you, Mr. Chairman, for holding the hearing.

Chairman STEVENS. Mr. Dodaro, let me again go over this, if you will. Dr. Stillman, I would like to turn to you at the next hearing with your team and get the people in from IRS who are supposed to respond to your recommendations and let's find out why they didn't. That would be late April.

In early May, Ms. Willis, I would like to get into a definition of what was the program supposed to accomplish and let's see what it has accomplished or whether it can accomplish that.

By that time, Mr. Holloway, I hope the audit is finished and you can tell us why the IRS can't have the same precision that they require of all of us.

Mr. HOLLOWAY. I am certain by that time it will be finished.

Chairman STEVENS. Mr. Dodaro, we will wind up with a hearing with you some time in early June to see where we are going from now on because by that time we will get to the appropriations and we will have to decide what we are going to do in next year's appropriations.

Mr. DODARO. We will be glad to assist in any way we can, Mr. Chairman.

Chairman STEVENS. Thank you.

Mr. DODARO. Thank you.

Chairman STEVENS. Now, we will turn to the commissioner, and I want to say, Commissioner, it is no disrespect that we did not call you first. It is just that it was my opinion that some of these things ought to be out in front of all of us before we discussed the problem with you.

Ms. Richardson, Senator Pryor said that you would have to be a miracle worker to take over this task, and I understand you volunteered to be a Joan of Arc all right. I do want to say at the outset that I appreciate your courtesy in the way you have dealt with this Committee in responding to our calls and understanding what we feel has to be our mission with regard to this problem that is like a virus that has entered into your agency. I understand that it is a very difficult thing to try and correct that from the position that you hold.

We would be very pleased to have your statement. I apologize that we are just a little bit late in the time that we told you we would be available for your testimony. It is a difficult problem. It is one you inherited. We don't want to cast any aspersions on what you have tried to do, but we would like to have your statement as to what is going on at the IRS with regard to these matters we have discussed so far.

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

Ms. RICHARDSON. Thank you, Mr. Chairman and Senator Pryor. I am pleased to be here this morning to be able to talk about two of our most critical responsibilities.

Chairman STEVENS. Would you first identify for us the people with you?

Ms. RICHARDSON. I am sorry. I was going to introduce these folks right now. I have with me Michael Dolan, who is the Deputy Commissioner, who is on my immediate left; Judy Van Alfen, who is the Associate Commissioner for Modernization. On my right is Jim Donelson, who is the Chief of Taxpayer Services and Acting Chief Compliance Officer, and Tony Musick who is our new Chief Financial Officer.

Chairman STEVENS. Thank you very much.

Ms. RICHARDSON. We are pleased to be able to talk about both modernizing tax administration and the implementation of the Chief Financial Officers Act of 1990.

Modernizing the tax administration system certainly requires an ongoing effort to upgrade technology, to improve our business processes, and to develop a flexible organization. These three items are the essence of modernization and we are trying to modernize on all these fronts. Today, I really do want to focus, though, on updating the technology.

We have undertaken a series of technology modernizations projects which we collectively refer to as the Tax Systems Modernization Program. This is intended to modernize our information systems. The program originally began in 1988 as merely an effort to replace the existing technology, which at that time dated back a number of years. Since that time, and in response to oversight from this Committee, others in Congress, as well as the GAO and other outside critics, we have redesigned that system. We have redesigned it to assist us in realizing our business vision in the year 2001, although many of the projects under our modernization program are either completed or scheduled for completion before then. That program, when completed, will enable us to move from paper and more labor-intensive processes to an electronic environment and to help us more effectively accomplish our mission, which is, after all, to collect the proper-and I always underscore "proper"-amount of revenue at the least cost and in a way that imposes the least burden on taxpayers. The TSM projects are designed to provide more accurate and timely taxpayer account information to enhance our customer service and compliance efforts, while reducing the number of contacts between taxpayers and the IRS.

Tax administration is dependent upon the receipt, analysis and utilization of information submitted by taxpayers and other sources; for example, employers and other payers. The TSM projects fall into three broad categories-those that will facilitate our ability to capture data more effectively and efficiently, those

that will improve our ability to store and analyze data, and those that will distribute and use the data to improve compliance and customer service. All the systems are being built to ensure that confidential taxpayer information will be protected from unauthorized access and use.

Although we recognize that a great deal of work remains to be done in updating our technology, progress has been made. As a result of technology, taxpayers have many more options today for filing their returns and paying their taxes. For example, this filing season over 20 million taxpayers were eligible to file their returns by telephone in a phone call that would take less than 10 minutes. To date, we have 2.5 million taxpayers who have already done so. Three years ago, that was merely a pilot and this year it has been expanded nationwide.

Today, we also accept payments electronically through our tax link or electronic funds transfer payment system that is used by employers to pay employment and other deposit taxes. In 1995, over $232 billion was deposited that way, which was a significant increase over the $6.2 billion deposited in the prior year.

Taxpayers are also able to get information from us in many different ways this year through services like our Internet home page and our fax on demand service. Technology is allowing us to answer more taxpayer questions and handle more account information on a first call. About 75 percent of the time, we can provide our employees with the information they need to resolve a taxpayer's account question.

Technology is also changing the way our compliance operations work. The integrated collections system, which provides online access to current account information to revenue officers, was used in two districts last year and it increased their productivity more than 30 percent. That productivity translates into dollars in the bank. In 1996, seven additional districts will be using the integrated collection system and we hope to have it fully installed nationwide by 1999.

Our investments are also designed to put a new infrastructure in place. A number of the initiatives are currently underway with substantial long-term benefits. During the past 4 years, we have awarded contracts that update computer center hardware, modernize operations, and allow us to use commercial expertise for software and hardware support, information engineering, telecommunications and security. As of today, $1.7 billion in new equipment and software has been installed across the country.

We have, as you have heard today, benefitted from the oversight of the GAO and the National Research Council. On balance, we agree with most of the assessments in their reports. We take them very seriously, but more importantly we are doing something about them. During the past year, the management of the Tax Systems Modernization Program has changed significantly. Modernization management has been centralized under the Associate Commissioner for Modernization, Judy Van Alfen, who has been given the responsibility and the authority to manage and control consistently all systems development and reengineering efforts within the Internal Revenue Service.

In September of 1995, the Associate Commissioner became responsible for formulation, allocation and management of all information system resources, and by that I mean the budget as well as all other resource expenditures. In response to criticisms about the lack of a clear plan for implementing the TSM program and an adequate analytical process for establishing investment priorities, we have put in place an investment review discipline to select, control and evaluate investment decisions that are based upon the GAO's best practices.

An integral part of this discipline is our Investment Review Board. It was established in October of 1995, it is chaired by the Associate Commissioner, and it is responsible for assessing and prioritizing information systems investments, monitoring progress of spending against plans, and evaluating the results of those investments. In addition, we recently reexamined our entire technology modernization program to ensure that information technology investments produce the maximum business value. Based on the results of this review, we are establishing achievable and manageable priorities for the next 5 years and we are trying to break them down into chunks that are manageable so that we can assess where we are and what we are doing at any given time.

We also have a new chief information officer, Arthur Gross, who will be working closely with the Associate Commissioner. He is most recently the Deputy Tax Commissioner responsible for systems and processing in New York and he will be joining us on April 15th.

We recognize that our software development capabilities, as well as those of our contractors, must be moved to the CMM Level 2 and we have taken steps in that direction. All our contractors are required to perform at a level that produces high-quality software. We are also improving our own systems development capabilities to ensure that the TSM program is developed consistent with modern processes and standards.

Specifically, we are enhancing our system architecture and test plans to provide the critical road maps for developing and implementing fully integrated systems. But I must also say to you, Mr. Chairman, that our information systems organization has consistently delivered program changes that accommodate each filing system's requirements, and that is no small feat.

A vital aspect of updating our technology is enhancing our capabilities to safeguard taxpayer information. We concur with the NRC's advice regarding the security of tax processing systems and the privacy of tax information. Information system security and integrity has been and will always continue to be one of the highest priorities for the Internal Revenue Service.

I have issued two policy statements, the Declaration of Privacy Principles and our Information Security Plan, and based on similar recommendations from the General Accounting Office, we recently completed a security concept of operations which provides an IRS user's view of the security capabilities in the TSM program systems which will protect taxpayer data from unauthorized access or disclosure. Security will also be an integral part of our information systems architecture.

We are also relying heavily on private sector expertise to assist in our technology modernization projects. We have developed a plan with the help of outside experts, from other government agencies and the private sector to aggressively expand the work of our current integration support contractor. Under this new approach, the integration support contractor will assume as much of the systems integration role as our current contract permits. This will include the architecture, systems engineering, integration and test activities that are essential to successfully integrate the systems. I mentioned our TeleFile system. We have developed a broad business strategy for expanding our electronic filing program, but we also have other options this year. I mentioned the TeleFile, but as of March 22 we had about 102,000 taxpayers who have filed using a third-party transmitter with their own software from home-a significant increase over the 1,000 that filed that way last year. We also have about 2 million who have filed using the socalled 1040 PC, which is a print-out of a paper document, but using software, and those 2 million people are clearly ready for electronic filing as well.

I might skip any discussion about the Chief Financial Officers Act because I see I have run out of time, but I did want to touch on, if I might, with your indulgence, Mr. Chairman, some comments that were responsive to the earlier witnesses from the State of Alaska.

As I mentioned to you, I did not have their testimony and wasn't aware exactly what they were concerned about until I saw it late last night. But I think both Mr. Street and Ms. Anderson pointed to something that is of grave concern to me and to others in the Service, and that is how we can have the most effective compliance programs.

We understand, and have for some years, that we cannot rely just on enforcement resources. We need to have education and we need to get out in the community and make sure people do understand what their obligations are. That is why we have spent so much time working with the State of Alaska to make sure that not just the fisherman, but all the citizens in Alaska, as well as other parts of the country, understand what their obligations are and how we can go about making sure that they meet them.

The efforts to reorganize the IRS are in no way intended to do anything other than enhance our ability to deliver better customer service to taxpayers, as well as better and more effective compliance. I am more than happy and will commit to you to go to Alaska some time over the course of the recess, if you would like, and sit down with you, and Mr. Donelson who will be happy to come with me, I am sure. We can sit down with our career people there and make certain that no one misunderstands that my moving the district management back to Seattle. We are combining 63 district offices into 33 across the country, but all we have ever done is intended to move the management layer-that is, the district director and the district director's immediate staff-consolidate those staffs in certain locations.

At no time have we had any plans to diminish our commitment to the kinds of programs that we have in Alaska, and if there is