MODERNIZATION AND THE IRS BUSINESS

VISION

THURSDAY, MAY 9, 1996

U.S. SENATE,

COMMITTEE ON GOVERNMENTAL AFFAIRS,

Washington, DC.

The Committee met, pursuant to notice, at 10:05 a.m., in room SD-342, Dirksen Senate Office Building, Hon. Ted Stevens, Chairman of the Committee, presiding.

Present: Senators Stevens and Glenn.

OPENING STATEMENT OF CHAIRMAN STEVENS

Chairman STEVENS. Today we are going to continue the Committee's review of the Internal Revenue Service modernization efforts. At our first hearing on this subject, which was held on March 26, we heard testimony on the status of the technological component of the Tax Systems Modernization program. We also heard how problems in the technical area and plans for their resolution can affect the Internal Revenue system business area. Now today's hearing expands our review to three main IRS program areas: Submissions processing, customer service, and compliance. In 1992, the IRS adopted a business vision to guide modernization efforts. This Committee is interested in how this business vision has redefined traditional elements of each program area, and we would like to try to understand if this TSM, this Tax Systems Modernization program, is delayed until these technical problems are fixed, will the IRS be able to meet the needs of taxpayers in the 21st Century as envisioned by the program?

Now, today we are going to start off with Lynda Willis, Director of Tax Policy and Administration Issues in the General Government Division of the GAO. Good morning, Ms. Willis.

Ms. WILLIS. Good morning.

Chairman STEVENS. And Dr. Rona Stillman, Chief Scientist, of the Office of Computers and Telecommunications in the Accounting and Information Management Division of the GAO.

Do you have an opening statement, Senator?

OPENING STATEMENT OF SENATOR JOHN GLENN Senator GLENN. Just very short, Mr. Chairman. Thank you. Today's hearing focuses on a fundamental problem that GAO has reported on again and again. IRS quite properly and rightfully wants to modernize and move to a less costly and more efficient paperless system as much as possible. And to do that need to decide a lot of things along the way, a lot of steps and many procedures on how

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to reach that goal. And without some of those basic business and strategic planning items, IRS modernization may be delayed unnecessarily or may even be impossible to implement unless some of those decisions are made at the right time.

Now I know IRS is now finishing up its TSM Rescoping Reportand the GAO review, I understand you are to review that report today and to give your views on that-and I hope today's hearings can help us shed some light on the specific program planning that needs to be done for TSM to really be something workable and not something that we just talk about into the future. It has been delayed. We have been aware of that. I have been a backer of TSM through many, many years on this Committee, too many years, because I had hoped it would be in place and working by now.

But there have been problems with it. We know that, and I continue to back it, but we sure want to work these problems out. We used to have almost a yearly ritual we went through on the Committee where I would say, well, how long do you think it is going to be before we can put TSM in and make it work, and the estimate always was 5 to 6 years. And the next year we would come back and ask the same question, and the next year it was 5 to 6 years. The next year after that, 5 to 6 years. It was sort of a rolling target. I think we are beyond that point now, and I think we are making progress in it, I hope, and I want to see the steps that are really going to be necessary or the steps that are ready to be taken now out of this rescoping effort that have been done to see how we really can move this thing forward. I think it is really needed.

This Committee deals with efficiencies of government. That is not an oxymoron phrase. I think we really can have better efficiencies in government. And I think of all the places in government where it would be effective it is in this area of IRS. This is the one place where every single person in this country has a very vital personal interest in their contact with their government every single year. I do not think anything would revive confidence in the Federal Government any more than having a very good efficient IRS over there, very efficient, and everybody knows what they are dealing with without any doubt. So I attach a lot of importance to this, not only in how we collect our dollars, how we collect our revenue, but I think it is a key element in installing some confidence back in government that is much needed. Thank you, Mr. Chair

man.

Chairman STEVENS. Thank you.

Ms. Willis, I assume you are going to proceed first. We have been at this now for 10 years. This program started in 1986, and while I have not sat through as many of the hearings as Senator Glenn, we have both been very concerned about the progress so tell us what you think about the situation now.

TESTIMONY OF LYNDA WILLIS, DIRECTOR, TAX POLICY AND ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY RONA B. STILLMAN, CHIEF SCIENTIST, OFFICE OF COMPUTERS AND TELECOMMUNICATIONS, ACCOUNTING AND INFORMATION MANAGEMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE

Ms. WILLIS. Well, Mr. Chairman, Senator Glenn, we are very pleased to be here again today to have this opportunity to assist the Committee in your continuing review of IRS Tax Systems Modernization. With me today is Dr. Rona Stillman. Dr. Stillman is GAO's Chief Scientist and the GAO executive responsible for our work on IRS information systems.

Mr. Chairman, as you noted in March, we appeared before you to discuss the managerial and technical weaknesses of TSM. Today, our testimony which is based in part on past work and on ongoing work, focuses on IRS' progress in achieving important programmatic aspects of its business vision and how IRS' TSM supports that vision. As you noted, in 1986, IRS initiated TSM. This was done primarily to replace the computers that it was using to process and store the information from tax returns on more efficient computers. The modernization effort was technology driven, not business driven, and as a result important business requirements were not clearly defined when TSM projects were designed. Originally, IRS planned to introduce the technology without changing its existing organizational and operating structure. In June 1991, we testified before this Committee on important management challenges facing IRS as it moved to resolve long-standing problems with its programs. At that time, we said that computers are only tools to help achieve management's vision of a future IRS. They are not a substitute for that vision. We also said that TSM offered IRS the opportunity to rethink the way it does business and the way it is structured to do that business.

In 1992, in response to our and other's recommendations, IRS developed a new business vision that was designed to address critical long-standing problems with its programs. These problems included the lack of accurate and readily accessible information on taxpayers, their accounts, and IRS operations. This is due in part to an antiquated tax return processing system that relies on labor intensive, error prone methods to process over 200 million, primarily paper, tax returns annually. Taxpayers are frustrated dealing with IRS. These frustrations revolve around very low levels of telephone accessibility, confusing and hard to understand notices, and the need to repeatedly call or correspond with IRS to resolve tax issues. IRS also has to deal with a stagnant level of taxpayer compliance and a sizable inventory of accounts receivable.

IRS' business vision calls for addressing these problems through a series of organizational, business process, and technology changes including TSM. Specifically, IRS' vision calls for (1) moving from a paper laden, labor intensive tax return processing environment to a modern electronic environment; (2) providing better service to taxpayers through wider use of the telephone, better access to data, and new information systems; and (3) improving compliance through access to accurate and up-to-date data, earlier identifica

tion of noncompliant taxpayers, and increased efficiencies in its field-enforcement functions.

During the past 4 years, IRS has made some progress in modernizing its operations to reflect its business vision, but the differences between IRS' current operations and those proposed in its vision are great. Specifically, Mr. Chairman, little progress has been made in either reducing the number of paper returns IRS processes or in delivering the new systems to better process paper returns. As we told this Committee in March, IRS lacks a comprehensive business strategy for achieving its goal of 80 million electronically filed returns annually.

TeleFile, a system that allows filers of very simple returns to do so over the telephone, went nationwide this year, and about 2.8 million people participated. Yet the total number of people filing their returns electronically remains below 1994 levels and far below what is needed to accomplish IRS' electronic filing goals. In addition, after spending about $270 million of a projected $1.3 billion on a Document Processing System (DPS) for scanning and imaging paper returns, IRS recently began to reevaluate the performance, costs and risks of DPS and has put the project on hold for 120 days. At the same time, IRS has begun a new project to reengineer its tax returns processing system including looking at outsourcing. It is too early to tell what impact this new reengineering effort will have on IRS' ability to reduce the volume of paper returns it processes or the need for DPS.

In customer service, IRS also faces significant challenge in implementing its vision for improving service to taxpayers. Telephone accessibility was up during the 1996 filing season. IRS assistors answered over a million more calls this year than last year due in part to better data availability. Yet IRS was still able to answer only about 20 percent of the calls it received. IRS' strategy for improving customer service offers promise as it is designed to improve taxpayers' ability to get assistance from IRS and provide IRS employees access to the information they need to help taxpayers. However, IRS faces important managerial, technical and human resource challenges to fully achieve its customer service vision.

Specifically, it has to manage the transition to the customer service vision while continuing to meet the current workload for providing answers to taxpayer inquiries, managing taxpayer accounts, and collecting unpaid taxes. IRS also has to determine the scope of responsibilities for the staff employed at customer service centers and provide the requisite training for that staff. IRS also has to develop the information systems necessary to accomplish its vision.

In compliance, IRS' goal is to increase compliance from 87 percent to 90 percent by 2001. However, IRS established that goal on a set of assumptions that have changed significantly. For example, IRS no longer plans to reinvest some of the staff savings from TSM into compliance activities; thus, compliance activities are likely to have fewer staff than IRS envisioned when it established the 90 percent goal. Also, as a result of cost and taxpayer burden concerns, IRS postponed the Taxpayer Compliance Measurement Program, the results of which were to provide more up-to-date infor