I think every year, we have given you more money for more agents, but I haven't seen the increased percentage of return that is related to that money we have invested in new agents, and I think that is what Speaker Gingrich is talking about. Many of us are very skeptical about the fact that if we give you more money, we automatically get more money into the treasury, particularly when we are falling down in terms of the consumer-related services that people have become accustomed to. Senator Pryor mentions just the lack of the phone line anymore and identification of who to call if you have a problem you want to have resolved. I do believe that we have sort of assumed everything is going right.

As a matter of fact, most people are afraid of you. Most people are afraid of the IRS. Right here in the Senate, I was told don't do this because it is just going to excite those people. I am serious with you.

Ms. RICHARDSON. Well, I hope that it was said in jest because it is certainly not true. We welcome your oversight.

Chairman STEVENS. How many oversight hearings have you had this year?

Ms. RICHARDSON. This is the third one. I have another one this week. I have had two in the last 2 weeks, this one and one on Thursday.

Chairman STEVENS. Well, the Department of Defense has one every week, twice a week, in my other committee.

Ms. RICHARDSON. That is true.

Chairman STEVENS. What I am saying is I think we have been paying a lot of attention to people in other areas, but we haven't really been paying a lot of attention to the IRS. We are going to go ahead. I hope your people will cooperate with the GAO and see if we can complete those audits so we can understand what that subject means. I hope the Committee will stay with it and we will give you some information as we proceed, as I indicated, going through with the GAO recommendations to try to find out if you agreed to them-why haven't they been implemented. Again, I agree with Senator Glenn and Senator Pryor. That may be a problem about the ability of a new director to sweep clean, if he or she has to.

Ms. RICHARDSON. Well, we will be submitting reports to Congress within the next 30 days to our appropriators, but we will most certainly send you and your Committee those reports. The reports respond to all of the GAO's concerns, what we have done about them, what we are doing about them, and with a timetable for implementing them.

Chairman STEVENS. We look forward to that. Thank you very much.

Ms. RICHARDSON. Thank you, sir.

[The prepared statement of Ms. Richardson follows:]

PREPARED STATEMENT OF MARGARET MILNER RICHARDSON

Mr. Chairman and Distinguished Members of the Committee: Good morning. I am pleased to be here today to discuss two of the IRS' critical responsibilities-modernizing tax administration and the implementation of the Chief Financial Officers' Act (CFO) of 1990. With me are Michael Dolan, Deputy Commissioner, Judy Van Alfen, Associate Commissioner for Modernization, Jim Donelson, Chief, Taxpayer

in 1995. Based on a similar recommendation from GAO, we recently completed a Security Concepts of Operation which provides an IRS users' 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 the information systems architecture.

We are also relying heavily on private sector expertise to assist in our technology modernization projects. To meet the significant challenges of such a large-scale effort, we have the ability to access private sector skills and experience through contracts with the IRS' Federally Funded Research and Development Center (FFRDC), the Integration Support Contract (ISC) and the Treasury Information Processing Support Services (TIPSS) procurement.

We have developed a plan with the help of outside experts from other governmental agencies and the private sector to aggressively expand the work of the current Integration Support Contractor. Under this new approach, the Integration Support Contractor will assume as much of the systems integration role as the existing contract permits. This will include the architecture, systems engineering, integration and test activities that are essential to successfully integrate the systems. IRS will continue to make the decision on final design and development. Production software development work is and will be contracted out.

In addition, the newly-instituted Presidential Technology Team will bring experienced technical professionals from across government to work on technology modernization. The IRS, in fact, worked with OMB to create this concept and will be the first beneficiary of its effort.

We are also working to increase electronic filing options, like TeleFile. For instance, beginning in fiscal year 1994, taxpayers could file their tax returns from their home computers using commercial tax preparation software through a third party transmitter for a small fee. As of March 22, 1996, about 102,000 taxpayers had used this filing method, a significant increase from the 1,000 that filed through this service last year. We are in the process of developing a program that will allow taxpayers to file directly with the IRS from their home computers free of charge. And we are looking for options that will allow preparers who use software to prepare returns to file those returns electronically.

Improving Business Processes

Along with updating our technology, we are also improving our business processes to make them more efficient and effective. For instance, in 1994, the IRS volunteered to serve as a pilot agency for the Government Performance and Results Act (GPRA). GPRA requires agencies to set goals, establish measures, and report on their accomplishments, as well as integrate performance measures into the budget and strategic planning process. Our participation as a GPRA pilot agency has helped us improve our budget, strategic planning and evaluation processes. This year as part of our GPRA responsibilities, we are integrating our planning, budgeting and assessment processes and will complete the first draft of an Integrated Strategic Plan and Budget next month.

We have also reengineered many of our administrative processes to be less labor intensive and to take advantage of available technology. Through an innovation we call "Employee Express," our employees can now manage their own employment accounts, directly changing their tax withholding, savings bond allotments, Thrift Savings Plan contributions and other personnel actions through the use of a touch tone telephone or centrally located kiosks. In the past, these employees filled out forms and sent them to their personnel offices where other employees made the changes to the payroll system.

We have fully automated our travel accounting system, and this system was showcased as an example of a government agency implementing the best practices of the private sector at a March 8 hearing on Government-wide Travel Management before the Senate Committee on Governmental Affairs, Subcommittee on Oversight of Government Management and the District of Columbia. In reengineering this process, we were able to eliminate all but two steps: a certification of the claim by the traveler and the approval by the supervisor. Employees are reimbursed in about 5 to 7 days. In fiscal year 1995, we processed 83 percent of our travel vouchers or about 325,000 vouchers electronically.

We have also changed our business processes so that we can serve taxpayers better. For example, we are eliminating notices that are now sent out about 46 million times a year. This is good for both the IRS (we save $20 million in printing and postage and eliminate subsequent questions) and taxpayers who are relieved of the stress that can surface when an official looking letter from the IRS arrives in the mail. The notices we will continue to send are being rewritten in clearer language so that fewer recipients will require further explanation.

cations. During the past 4 years, we have awarded contracts that upgrade computer center hardware, modernize operations and allow us to utilize 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.

Over the past several years, our technology modernization efforts have benefitted from oversight from the General Accounting Office (GAO), the National Research Council (NRC), and the Congress. On balance, we agree with the assessments in the GAO and NRC reports. We take them very seriously, but more importantly, we are doing something about them. The criticisms of our technology modernization efforts can be categorized as follows:

(1) Accountability and Management-the need to centralize management of technology modernization in one office;

(2) Managing Information Technology Investments-the need to better prioritize technology investments;

(3) Software Development-the need to develop procedures that ensure the development of high quality software;

(4) Technical Infrastructure-the need to develop a comprehensive blue print of the infrastructure;

(5) Electronic Filing-the need to develop a comprehensive strategy for electronic filing.

During the past year, management of the TSM Program has changed significantly. Modernization management has been centralized under the Associate Commissioner for Modernization, who has been given the responsibility and authority to manage and control consistently all systems development and reengineering efforts within the IRS. In September 1995, the Associate Commissioner for Modernization became responsible for the formulation, allocation, and management of all information systems resources. This was an important step in the process of ensuring that all information systems resources are used in accordance with the IRS' strategic objectives.

The Modernization Management Partnership (MMP), a management structure which includes me and the Assistant Secretary for Management/Chief Financial Officer as well as other senior IRS and Treasury Department officials, was established last year to identify and address important technology modernization issues at the Departmental level. The Deputy Secretary has indicated plans to strengthen the MMP so that it will function more like a board of directors, with day-to-day responsibility for the TSM Program remaining with the IRS.

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 put in place an investment review discipline to select, control, and evaluate investment decisions based on GAO best practices. An integral part of this discipline is the Investment Review Board, established in October 1995, chaired by the Associate Commissioner for Modernization, which 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 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. We also have a new Chief Information Officer (ČIO), Mr. Arthur Gross, who will work with the Associate Commissioner for Modernization. He plans to begin work on April 15th. Mr. Gross was previously the Deputy Tax Commissioner responsible for systems and processing for New York. In that position, he led a broad tax modernization effort for the State during the past several years.

We recognize that our software development capabilities as well as those of our contractors must be improved, and we have taken positive steps in that direction. 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 sys

tems.

A vital aspect of updating our technology is enhancing our capabilities for safeguarding taxpayer information. IRS concurs with NRC's advice regarding the security of tax processing systems and the privacy of tax information. Information systems security and integrity has been and will continue to be one of the highest priorities for the Internal Revenue Service. I have issued two policy statements-the Declaration of Privacy Principles in 1994 and the IRS Information Security Policy

audit." And, we are quite concerned as well. But it is important that we all understand what is not meant and what is meant by that remark. It does not mean that the money the IRS is supposed to be collecting or spending has simply disappeared or somehow been misappropriated. This has not occurred.

The Service has two separate financial processes to track funds: the administrauve system that handles our appropriated funds and our revenue accounting system that tracks tax collections. It is important to understand these two different systems order to understand the GAO's audit findings and what we are doing to improve beth systems to comply with the CFO Act.

Results of Fiscal Year 1994 Audit

The IRS' first financial statement audit by the GAO was for fiscal year 1992. In the 1994 financial statement audit, GAO recognized the progress we had made since 1992 in implementing a new administrative accounting system, in transferring our payroll processing to the Department of Agriculture's National Finance Center, and in improving the accounting for federal revenues. But GAO also listed five primary reasons why they were unable to express an opinion on the financial statements: (1) They could not reconcile the amount of total revenue of $1.3 trillion reported in the financial statements to accounting records maintained for individual taxpayers.

(2) They could not substantiate amounts reported for various types of taxes collected, for example, social security, income and excise taxes.

(3) They could not determine the reliability of our estimates of accounts receivable.

(4) They could not substantiate a significant portion of our $2.1 billion in nonpayroll expenses, primarily due to lack of documentation, and

(5) IRS could not reconcile its fund balances with Treasury accounts.

While our goal is a clean financial statement audit opinion at the earliest possible time, and I reaffirm that commitment today, I would also like to highlight some of the progress we have made since fiscal year 1994 in addressing some of the GAO's concerns. The fiscal year 1995 financial statement audit is currently underway but GAO has not given us any indication when it will be completed.

Accounting for the Appropriated Funds that the IRS Spends

We are very proud of the significant improvements we have made in our Administrative Accounting System. Just 5 years ago, we had eight separate systems. Now we have a single corporate data base for our over $7 billion in appropriated_funds. In addition, in the last 2 years we have made measurable improvements. For instance,

• We implemented our integrated financial system, transferred payroll to the National Finance Center, and integrated other administrative systems to capture data at the source and transmit this data electronically to our corporate financial database.

• Our travel vouchers and payments to contractors have been automated nationwide. The traveler keys the travel information into the system, certifies the electronic voucher, and sends it to the supervisor. Once the supervisor approves, the traveler will receive payment in 5 to 7 days. Over 80 percent of our travel vouchers were processed this way in fiscal year 1995.

. We implemented commitment accounting procedures, so that we will have timely information about how money is being spent and so that we can manage our expenditures more carefully.

We linked the procurement system with the administrative accounting system to enable obligations to be transferred electronically.

To show the progress we have made in improving our administrative finance operations, the GAO was unable to audit our administrative accounting systems for fiscal year 1992. In fiscal year 1993, our system was auditable, but we were unable to provide supporting information for among other things the reconciliation of budgeted amounts to actual expenditures. For fiscal year 1994, the GAO audit report focused on just two administrative accounting issues in this area-failure to reconcile our accounts with Treasury and the lack of receipt and acceptance documentation for non-payroll payments, such as rent payments to GSA and printing payments to GPO.

Regarding these two issues, we are reconciling our cash balances to Treasury's records through fiscal year 1995 and will ensure these balances are reconciled on a monthly basis. On the non-payroll payments, the concern of GAO was that we were not adequately verifying the payments being made for us by GSA and GPO.

We are reviewing the processes involved and working to improve them, but the solution requires the assistance of GSA and GPO.

Improving Financial Information Systems

A significant example of the effectiveness of our improved administrative financial systems was our ability to track one of our major programs. In fiscal year 1995, we received funding for a Compliance Initiative, a 5-year plan with the monies raised going directly to deficit reduction. (Ironically, because of budget cuts, it was not funded for fiscal year 1996.)

In order to meet our commitment to Congress to account for the Initiative so that we could verify the money raised by the FTEs hired under the Initiative, we developed comprehensive tracking procedures that enabled us to provide a clear and verifiable picture of the results. Using our Enforcement Revenue Information System (ERIS), we were able to produce reports showing resource and revenue plans and results in far greater detail than ever before.

The results have been impressive. Because of the information produced by our tracking system, I can tell you that our Compliance Initiative yielded over $800 million in revenue in fiscal year 1995, far exceeding the $331 million we promised. Regrettably, much of the progress we have made in improving our collection efforts that I will be discussing with you today, is because of the Compliance Initiative and may be jeopardized by its abandonment.

Accounting for the Revenue that the IRS Collects

The Revenue Accounting and Control System (RACS), which was implemented during 1984, was not designed to provide the detailed information required by the CFO Act for financial statement presentations. Most of the problems with the revenue accounting procedures that have been raised by GAO concern summary data produced by RACS that is difficult to reconcile on a transaction by transaction basis with our Masterfile.

While we can and do reconcile gross amounts collected, we have been unable to give GAO auditors the information that they would like to have to tie individual transactions to their sources. Because the revenue systems were not designed to meet the CFO Act audit requirements, our real challenge is to alter our revenue accounting system to provide the necessary data to meet the new standards, so that our revenue accounting systems can also get a clean audit opinion.

To immediately address this issue, for the fiscal year 1995 audit, the Service is providing detailed revenue receipt information from the individual taxpayer accounts contained in the Masterfile. Also, we are installing a short-term system solution, the Interim Revenue Accounting Control System or IRACS. By July, IRACS should be implemented nationwide so that the network will connect the database located at our Detroit Computing Center with our 10 service centers. The system will:

• improve balancing routines and validity checks,

• provide additional information on-line,

• retain 3 years worth of data instead of the 1 month that we currently retain, and

• interact electronically with and extract data from other tax processing systems. With these efforts our ability to account for the revenue we collect will continue to improve.

CONCLUSION

I have tried to demonstrate to you and the Members of the Subcommittee [sic] the priority and significance that we attach to both our efforts to modernize the tax administration system and to satisfy our financial management responsibilities under the Chief Financial Officers' Act. We have worked hard to improve in both areas and I am pleased to report progress. But despite that progress, we recognize that we still have much more to do.

Chairman STEVENS. We have one last series of witnesses, Mr. Clagett and Mr. Irvine-Robert P. Clagett and C.A. Irvine, of the Computer Science and Telecommunications Board of the National Research Council. I am sorry to keep you waiting, gentlemen. We appreciate your courtesy in being willing to appear today and comment upon the review you have made of this problem. Who is going to go first?