[House Hearing, 107 Congress] [From the U.S. Government Publishing Office] OVERSIGHT OF THE INTERNAL REVENUE SERVICE ======================================================================= HEARING before the SUBCOMMITTEE ON GOVERNMENT EFFICIENCY, FINANCIAL MANAGEMENT AND INTERGOVERNMENTAL RELATIONS of the COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED SEVENTH CONGRESS FIRST SESSION __________ APRIL 2, 2001 __________ Serial No. 107-33 __________ Printed for the use of the Committee on Government Reform Available via the World Wide Web: http://www.gpo.gov/congress/house http://www.house.gov/reform _______ U.S. GOVERNMENT PRINTING OFFICE 77-055 WASHINGTON : 2001 ____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800 Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001 COMMITTEE ON GOVERNMENT REFORM DAN BURTON, Indiana, Chairman BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California CONSTANCE A. MORELLA, Maryland TOM LANTOS, California CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania STEPHEN HORN, California PATSY T. MINK, Hawaii JOHN L. MICA, Florida CAROLYN B. MALONEY, New York THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington, MARK E. SOUDER, Indiana DC JOE SCARBOROUGH, Florida ELIJAH E. CUMMINGS, Maryland STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio BOB BARR, Georgia ROD R. BLAGOJEVICH, Illinois DAN MILLER, Florida DANNY K. DAVIS, Illinois DOUG OSE, California JOHN F. TIERNEY, Massachusetts RON LEWIS, Kentucky JIM TURNER, Texas JO ANN DAVIS, Virginia THOMAS H. ALLEN, Maine TODD RUSSELL PLATTS, Pennsylvania JANICE D. SCHAKOWSKY, Illinois DAVE WELDON, Florida WM. LACY CLAY, Missouri CHRIS CANNON, Utah ------ ------ ADAM H. PUTNAM, Florida ------ ------ C.L. ``BUTCH'' OTTER, Idaho ------ EDWARD L. SCHROCK, Virginia BERNARD SANDERS, Vermont ------ ------ (Independent) Kevin Binger, Staff Director Daniel R. Moll, Deputy Staff Director James C. Wilson, Chief Counsel Robert A. Briggs, Chief Clerk Phil Schiliro, Minority Staff Director Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations STEPHEN HORN, California, Chairman RON LEWIS, Kentucky JANICE D. SCHAKOWSKY, Illinois DAN MILLER, Florida MAJOR R. OWENS, New York DOUG OSE, California PAUL E. KANJORSKI, Pennsylvania ADAM H. PUTNAM, Florida CAROLYN B. MALONEY, New York Ex Officio DAN BURTON, Indiana HENRY A. WAXMAN, California J. Russell George, Staff Director and Chief Counsel Robert Alloway, Professional Staff Member Grant Newman, Clerk Mark Stephenson, Minority Professional Staff Member C O N T E N T S ---------- Page Hearing held on April 2, 2001.................................... 1 Statement of: Rossotti, Charles O., Commissioner, Internal Revenue Service, accompanied by Lawrence W. Rogers, Acting Chief Financial Officer; Robert F. Dacey, Director, Information Security Issues, U.S. General Accounting Office, accompanied by Michael Brostek, Director, Tax Administration Issues; Randolph C. Hite, Director, Information Technology; Steven J. Sebastian, Acting Director, IRS Financial Management Issues; and Larry R. Levitan, chairman, IRS Oversight Board 7 Letters, statements, etc., submitted for the record by: Dacey, Robert F., Director, Information Security Issues, U.S. General Accounting Office, prepared statement of........... 68 Horn, Hon. Stephen, a Representative in Congress from the State of California, prepared statement of................. 4 Levitan, Larry R., chairman, IRS Oversight Board, prepared statement of............................................... 50 Rossotti, Charles O., Commissioner, Internal Revenue Service, prepared statement of...................................... 12 OVERSIGHT OF THE INTERNAL REVENUE SERVICE ---------- MONDAY, APRIL 2, 2001 House of Representatives, Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations, Committee on Government Reform, Washington, D.C. The subcommittee met, pursuant to notice, at 2:01 p.m., in room 2154, Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding. Present: Representatives Horn and Putnam. Staff present: J. Russell George, staff director and chief counsel; Dianne Guensberg, detailee; Bonnie Heald, director of communications; Earl Pierce, professional staff member; Matthew Ebert, policy advisor; Grant Newman, assistant to the subcommittee; Brian Hom, intern; Michelle Ash, minority counsel; Mark Stephenson, minority professional staff member; and Jean Gosa and Earley Green, minority assistant clerks. Mr. Horn. This hearing of the Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations will come to order. We are here today to examine several management issues involving the Internal Revenue Service, the Agency charged with collecting nearly 95 percent of the Federal Government's annual revenue and enforcing the Nation's tax laws. Every April 15th, the Internal Revenue Service holds American taxpayers accountable for the accurate reporting of their tax liabilities. The Internal Revenue Service must be held equally accountable. Many improvements have been made under the capable and distinguished leadership of Commissioner Charles Rossotti, who has substantially turned this service around. However, impressive challenges remain and must be resolved. On Friday, the subcommittee reviewed the results of the General Accounting Office's audit of the Federal Government's fiscal year 2000 financial statements. Based on that report and the findings of agency auditors, this subcommittee released its report card, grading the 24 major Federal departments and agencies on their progress in improving their financial management. The Internal Revenue Service, as part of the Department of the Treasury, did not receive an individual grade. However, for the first time, the Service, the Internal Revenue Service, received a clean audit opinion on its financial statements. That is certainly a step in the right direction. However, as the Comptroller General of the United States, Mr. David Walker, testified Friday, it is only the first step toward the governmentwide goal of providing accurate, timely financial information on a day-to-day basis. Today we will examine the efforts of the IRS toward meeting that goal and its efforts to protect the security of its computer systems which contain personal information on every taxpayer in this Nation. In addition, we will review the agency's program to reorganize its management structure and to modernize its business systems. We are pleased that the IRS has made progress not only in its financial statements, but also in its efforts to improve services to the taxpayers. However, several serious concerns remain in these and other areas, such as the Service's efforts to protect and modernize its computer systems. It is essential that taxpayers know that their tax files are private and secured from unlawful invasion. According to the General Accounting Office, the IRS achieved a clean opinion on its financial statements through extremely dedicated efforts that required IRS personnel to work around serious deficiencies in order to develop reasonable numbers for a single date, September 30, 2000. Yet, as Office of Management and Budget Director Mitch Daniels testified Friday, such efforts are meaningless until reliable financial information can be generated on a daily, weekly, monthly, and quarterly basis. A tremendous amount of money is being invested in modernizing the business systems of the IRS. However, the General Accounting Office has expressed reservations about the Service's ability to manage these acquisition projects on schedule and within budget. Computer security procedures remain a significant concern. Last year, General Accounting Office investigators gained unauthorized access to the IRS' electronic filing system, which contained the tax records of more than 35 million people. The Internal Revenue Service says it has now fixed that problem. But it is troubling that it was the General Accounting Office auditors, not the IRS, who discovered the problem. But in fact, the GAO audit found that the Agency did not have adequate procedures in place to detect these unauthorized intrusions. The IRS tells taxpayers that their transactions are safe and secure. What the agency failed to tell taxpayers who are filing returns electronically is that an intermediary company, or partner, such as a tax preparing company or financial software manufacturer, may be involved in the transaction. At the moment, the Internal Revenue Service does not require these partners to meet minimum computer security standards such as encryption. Such minimal standards place taxpayers who file their returns electronically at risk of exposing their personal tax records to unauthorized viewers. In addition, the IRS inspector general is investigating allegations that employees are still illegally browsing and misusing the personal tax records of others. Given these risks, how can the Internal Revenue Service expect to comply with the IRS Restructuring and Reform Act requirement that by 2007, 80 percent of all taxpayers will file their returns electronically? We welcome our witnesses today who will discuss these issues: The Honorable Charles O. Rossotti, Commissioner of Internal Revenue; the Honorable Larry R. Levitan, chairman of the Internal Revenue Service Oversight Board; and Mr. Robert F. Dacey, Director of Information Security Issues for the U.S. General Accounting Office. We look forward to your testimony. [The prepared statement of Hon. Stephen Horn follows:] [GRAPHIC] [TIFF OMITTED] T7055.001 [GRAPHIC] [TIFF OMITTED] T7055.002 Mr. Horn. I believe Mr. Putnam is here. And, Mr. Putnam, if you have an opening statement, please feel free to make it. Mr. Putnam. Thank you, Mr. Chairman. I thank the panelists, particularly you, Mr. Commissioner. We appreciate you spending some time with us this afternoon. I'm looking forward to hearing the testimony of the panel and learning of the progress that has been made by the IRS in reforming the agency. This is a monumental task that the IRS has ahead of them, and I feel it's important for Congress to not only monitor their progress but, more importantly, to be involved in the process so we are able to offer assistance where it may or may not be needed, which is sometimes the case. It appears that the IRS has made significant strides toward making meaningful changes in how it operates since the passage of the 1998 Internal Revenue Service Restructuring and Reform Act. Obviously, the greatest criticism of the IRS by the general public has been its lack of customer service and its abusive tactics in pursuing delinquent taxes. These are serious concerns. But many other problems, such as improving internal management and modernizing the IT structure in the agency are also important issues. I have reviewed the Strategic Plan developed by the IRS and the Oversight Board and feel that they're on track in addressing the many challenges facing the IRS. The Strategic Plan demonstrates a clear understanding of the needs of the agency and offers sensible solutions to meeting those needs. I am particularly encouraged by the agency's commitment to improving its customer relations and the progress that has already been made in accomplishing that endeavor. I feel this is an important first step in altering the image of the Internal Revenue Service, assuming the plan is actually implemented. It's relatively easy to write a plan that will fix the problems. Changing an agency's culture so that the plan will work is quite a different matter. Finally, we in Congress must recognize that one cause of the problems between the IRS and the American people is the complexity of the Tax Code. I certainly believe that Congress should shoulder its share of the burden for that. The more complicated the tax laws are, the more mistakes, misunderstandings, and opportunities for the misapplication of its provisions there will be. I thank the panel for taking the time to be here and testify. I look forward to hearing of your progress and learning how this committee and this Congress can be of assistance. I recognize that you have an unenviable task in government, and often you're whipsawed between the different whims of Congress and the needs of revenue collection for this government. And, I certainly recognize that, and appreciate it, and look forward to your comments. Thank you. Thank you, Mr. Chairman. Mr. Horn. I thank the gentleman. As most of you know, this is an investigating committee and we do ask all witnesses to take the oath. So if you will raise your right hands. [Witnesses sworn.] Mr. Horn. I note that nine--the clerk will get the names of the supporting cast. The actors we know. So, thank you very much. And, our first presenter is the Honorable Charles O. Rossotti, Internal Revenue Service. STATEMENTS OF CHARLES O. ROSSOTTI, COMMISSIONER, INTERNAL REVENUE SERVICE, ACCOMPANIED BY LAWRENCE W. ROGERS, ACTING CHIEF FINANCIAL OFFICER; ROBERT F. DACEY, DIRECTOR, INFORMATION SECURITY ISSUES, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY MICHAEL BROSTEK, DIRECTOR, TAX ADMINISTRATION ISSUES; RANDOLPH C. HITE, DIRECTOR, INFORMATION TECHNOLOGY; STEVEN J. SEBASTIAN, ACTING DIRECTOR, IRS FINANCIAL MANAGEMENT ISSUES; AND LARRY R. LEVITAN, CHAIRMAN, IRS OVERSIGHT BOARD Mr. Rossotti. Mr. Chairman and Mr. Putnam, last year when I came before you I said we had a clear direction for the IRS and had taken some important steps to improve the IRS. Now I think for the first time I can tell you that we have a more comprehensive, real plan, referred to by Mr. Putnam, that lays out how we will build on the foundation that we have already laid to make the IRS everything that we think the American public has a right to expect it to be. On January 30, 2001, the IRS Oversight Board approved the IRS Strategic Plan. It follows closely the spirit and the letter of the Restructuring Act and reflects what we intend for the new and modernized IRS. This plan shows how the IRS can dramatically improve services to taxpayers, ensure fairness and compliance with our tax laws, and at the same time meet these goals while continuing to shrink in size relative to our economy. These are challenging objectives, but the most challenging part of it is that we must continue to administer the world's largest and most complex tax system while simultaneously reengineering and improving how the agency works at its most basic level. In other words, we have to operate effectively and modernize at the same time. Our plan is based on recognizing the reality of this dual approach. So, we have strategies to improve performance over the next 2 years while modernizing the agency in the long run. In conjunction with our missions and goals, we developed 10 strategies. For each of these for 2001 and 2002 we define specific priorities and projects and assign responsibilities for carrying them out. For example, the 2001 filing season demonstrates how we can build on positive trends in meeting taxpayer needs and broadening the use of electronic interactions, which are two of our strategies. With respect to electronic filing, so far this filing season our filing from individuals using their home computers is up 37 percent compared to last year and is almost equal to the 5 million done last year. Overall, including all kinds of electronic returns, we expect to receive about 35 million returns electronically this year. There are reasons why we continue to get more returns electronically. In the 2001 filing season, for example, we added 23 additional forms to the e-filing program and we expect to roll out 38 more next year for the 2002 filing season. That means that we will have e-file eligibility for about 99.1 percent of all taxpayers by the end of next year, which was an important limitation previously. On other electronic interactions, our Web site has received about 1.3 billion hits this year, and through February there has been about 103 million downloads, mostly of forms. And that's almost double the 51 million last year. That's a lot of people that don't have to make a trip to the Post Office. We also just announced a couple of weeks ago that taxpayers who need an extension to file their returns--and you're allowed an automatic extension until August 15th--can now do that with a simple phone call. You'll get a confirmation. No paper is required. For the small business taxpayer we have an exciting pilot program ongoing right now to test an Internet based application for businesses to file and pay Federal taxes online, especially payroll taxes. This new feature, which is called EFTPS online, allows businesses to enroll in the system and then to securely make Federal tax payments as well as to check their payment history over the Internet. Using this system they'll be also able to schedule future payments through the Internet and even cancel payments if necessary. For most small businesses this type of transaction is the most frequent interaction they have with the IRS. Let me also stress that during the past year, with respect to our electronic filing programs, responding in part to weaknesses that were identified by GAO, as you noted in your statement, Mr. Chairman, as well as to our own security office's initiatives, we completed a comprehensive set of exchanges and upgrades to strengthen our security for the millions of electronically filed returns for this filing season. In another area of services to taxpayers, we made steady progress this year in providing telephone services. A few years ago busy signals were our biggest problem. One year there were 400 million busy signals, which was more than there were calls obviously. That problem has been reduced to a minimal level of busy signals, under 4 percent. On getting through to the IRS for filing season through March 23rd we've answered 51\1/2\ million calls, which is 14 percent more than last year. For those taxpayers who wanted to talk in person to a customer services representative, they have gotten through 66 percent of the time so far this filing season compared to 61.4 last year. Now, that's still well below what we should be, which is probably around 90 percent as in the commercial sector, but it definitely represents progress. Another one of our major strategies is to promote the effectiveness of our asset and information stewardship. This includes all aspects of financial management, as you noted in your opening, Mr. Chairman. I'm very pleased to point out that in fiscal 2000 the GAO provided for the first time a clean opinion on all of our financial statements. Larry Rogers, until recently our Chief Financial Officer, has accompanied me to answer any questions on this topic because I have a recusal on most of that. However, I will make a couple of comments on it since it's so important. Very shortly after he came here, Secretary O'Neill said that ``good stewardship of taxpayer resources is a responsibility I take very seriously.'' And I do, too. At the IRS we want to make sure that every manager and employee takes this responsibility very seriously. During the last fiscal year, I think we demonstrated that seriousness by the tremendous amount of hard work, acknowledged by the GAO, of the IRS staff. They also identified where significant improvements were made to our internal systems and noted the management focus. I also want to acknowledge, Mr. Chairman, that the work that was done to achieve this clean opinion was not only by the IRS, the GAO itself did a tremendous amount of work in a very constructive way to work with us to get this clean opinion, and we also note that your committee has made a continued emphasis on this area, which I think has certainly provided us an incentive and encouragement to come here. We prefer not to come here explaining why we didn't get a clean opinion, very honestly. Mr. Horn. That's an honest witness who says he doesn't prefer to come here. Mr. Rossotti. I said we prefer not to come here when we have to explain why we didn't get a clean opinion. I think we're much more pleased to come under these circumstances. But we also recognize that we have a lot more to do, and we're already under way with our planning to talk about what we need to do to improve future audits and especially to address the material weaknesses that were still identified by GAO. On the longer term, modernization, the other prong, if you will, of our efforts to improve the agency; we've made, we believe, steady progress in the three key modernization programs. In response to RRA 1998, we have the new customer- focused organization implemented for the most part and a total top management team in place for each of our four operating divisions, the functional units. On another major effort we have also got now our balanced measure system in place for much of our new organization, and by the end of this fiscal year, we should have most of those measures deployed throughout our field organization. These changes, especially the organizational changes, are already enabling us to do one of the key things we want to do, which is to understand taxpayer needs better and to tailor our services as well as our compliance programs where they will do the most good. Just to give two examples, we recently rolled out a specialized sub-sight on our Web site for the small business self-employed community. We have for large business two new issue resolution programs which are attempting to resolve issues more expeditiously and efficiently for large businesses. The third and probably biggest, at least in terms of time and cost the biggest part of our modernization program, which is our business systems modernization program, officially kicked off with the first funding release almost exactly 21 months ago. This is still the early stages of this long-term program, but we believe we've made solid progress in a number of areas, three in particular. One is developing an agency wide vision and architecture; second, building a program management capability; and third, delivering on some near term specific business projects. The enterprise architecture, which is essentially our road map for modernizing the agency's business systems as well as its supporting technology, was approved earlier this year. Our management capability, which involves using a rigorous methodology and governance process, is improving greatly, although it still has a ways to go before it's fully mature. Our first two projects, one to improve technology for our telephone services and the other to provide better tools for our employees who examine corporate income tax returns, will be rolled out over the next few months, which is approximately 2 years after the initial start of the program. Now, Mr. Chairman, I have to say in spite of the progress we have made since the enactment of RRA 1998, I have to acknowledge that it is very clear that we are still not reaching the goals that we've set for ourselves. We are not providing the level and quality of services that we think taxpayers deserve, nor are we collecting all the taxes that are officially due. I could give examples. I cited the improvement in the level of phone services. That's the glass is half full, the glass is half empty because it's not at the level that it needs to be, and it's certainly not comparable to the private sector. We're not satisfied with the quality of our phone services yet, even though it's improving. Also, aside from the matter of whether taxpayers could get through because of the antiquated computer systems that our employees have to deal with, we often can't provide taxpayers with up-to-date information on their accounts, which results in considerable frustration both for our customers and our employees who want to help the taxpayers. Another sign of the problems we still have is that almost every business process operates too slowly, and, sometimes inaccurately and inefficiently. In previous hearings, Mr. Chairman, you and I have discussed how slow and inefficient our collection process is, which depends--and I think you remember the chart. At one time I think you took it back to your office. I will be glad in the rest of this, if you want, to go into what we're doing about that because I think we're moving on that. In terms of our communication with taxpayers, we send out over 100 million notices a year. Many of them are somewhat confusing to the taxpayers. While electronic filing is increasing significantly, it's going to be very difficult to reach 80 percent by 2007, which is the goal that Congress set for us. As we noted, even though we got a clean opinion, we still have material weaknesses in our financial systems. Some of those we can address quickly through better management, but frankly, the most serious ones cannot be effectively addressed except through our business systems modernization program. In addition, we're also deeply concerned about the continued drop in our audit and collection activity. The risks in these declines is not simply the dollar value of the taxes that are left uncollected. We think the greatest risk is that the average taxpayer who honestly pays his taxes loses confidence if the IRS fails to deal with and act efficiently and effectively to collect from those who do not pay what they owe. The effect of decline in our examination coverage is especially important with respect to fairness since it's relatively easy for the IRS to verify most of the income of lower and middle income taxpayers, but, it's much harder and often requires an examination to verify the income of higher income and corporate taxpayers. This decline in activity up through the last 3 years was caused by several factors, including the long-term decline in staffing, the need to assign some compliance staff to customer services duties during the filing season, and the edit RRA responsibilities. With the help of money that was appropriated by Congress in 2001 as well as, very importantly, our new organization structure, which I think is better at focusing on what we want to accomplish, we hope to turn that around beginning this year. With respect to the modernization program, business systems modernization is at a critical juncture. It will require continued financial support from the committees of Congress who oversee us. I am pleased to say that, as was noted in the President's blueprint announced a few weeks ago, the budget will include close to $400 million in investments for the information technology investment account. So, Mr. Chairman, in conclusion, I hope I have given you a brief but balanced assessment of where we are at the IRS. I think we're on the right track. We, I think, have demonstrated our ability to make some short-term improvements in services, and to make essential organizational changes, and I think, very importantly, to produce a viable plan that will guide our efforts, which are aimed at making major changes in the entire way we do business in providing services to the taxpayers. With your continued support, and that of the American people, I am very convinced that we can succeed in this effort. Thank you, Mr. Chairman. [The prepared statement of Mr. Rossotti follows:] [GRAPHIC] [TIFF OMITTED] T7055.003 [GRAPHIC] [TIFF OMITTED] T7055.004 [GRAPHIC] [TIFF OMITTED] T7055.005 [GRAPHIC] [TIFF OMITTED] T7055.006 [GRAPHIC] [TIFF OMITTED] T7055.007 [GRAPHIC] [TIFF OMITTED] T7055.008 [GRAPHIC] [TIFF OMITTED] T7055.009 [GRAPHIC] [TIFF OMITTED] T7055.010 [GRAPHIC] [TIFF OMITTED] T7055.011 [GRAPHIC] [TIFF OMITTED] T7055.012 [GRAPHIC] [TIFF OMITTED] T7055.013 [GRAPHIC] [TIFF OMITTED] T7055.014 [GRAPHIC] [TIFF OMITTED] T7055.015 [GRAPHIC] [TIFF OMITTED] T7055.016 [GRAPHIC] [TIFF OMITTED] T7055.017 [GRAPHIC] [TIFF OMITTED] T7055.018 [GRAPHIC] [TIFF OMITTED] T7055.019 [GRAPHIC] [TIFF OMITTED] T7055.020 [GRAPHIC] [TIFF OMITTED] T7055.021 [GRAPHIC] [TIFF OMITTED] T7055.022 [GRAPHIC] [TIFF OMITTED] T7055.023 [GRAPHIC] [TIFF OMITTED] T7055.024 [GRAPHIC] [TIFF OMITTED] T7055.025 [GRAPHIC] [TIFF OMITTED] T7055.026 [GRAPHIC] [TIFF OMITTED] T7055.027 [GRAPHIC] [TIFF OMITTED] T7055.028 [GRAPHIC] [TIFF OMITTED] T7055.029 [GRAPHIC] [TIFF OMITTED] T7055.030 [GRAPHIC] [TIFF OMITTED] T7055.031 [GRAPHIC] [TIFF OMITTED] T7055.032 [GRAPHIC] [TIFF OMITTED] T7055.033 [GRAPHIC] [TIFF OMITTED] T7055.034 [GRAPHIC] [TIFF OMITTED] T7055.035 [GRAPHIC] [TIFF OMITTED] T7055.036 [GRAPHIC] [TIFF OMITTED] T7055.037 Mr. Horn. Well, thank you very much. That was an excellent statement, and we'll have more in a dialog on the questions. But, I'd like to now recognize the Honorable Larry R. Levitan, chairman of the IRS Oversight Board. Mr. Levitan, if you would, you might tell us a little bit about the Board, are the positions filled, and then whatever you would like to talk about. Let's talk about it. Mr. Levitan. Thank you, Chairman Horn, Mr. Putnam. It's my pleasure, and I'm proud to represent the IRS Oversight Board and discuss our role in improving the operations of the IRS. As you know, the IRS Oversight Board was established by the IRS Restructuring and Reform Act of 1998, and it had three primary objectives: First, to strengthen governance of the IRS through independent oversight; second, to provide continuity through 5- year staggered terms of its members; and, third, to bring business-oriented input to the agency's operations. During the year 2000, the seven private citizen members of the Board were nominated by the President and confirmed by the Senate. We held our first meeting in September 2000 and now meet for 2 days every 2 months. Since September, the focus of our activities has first been on getting ourselves up to speed on IRS operations which is not an insignificant task, reviewing and approving the IRS Strategic Plan that you heard about from Commissioner Rossotti, developing a recommended IRS budget for fiscal year 2002, actively participating in the evaluation of candidates for the Taxpayer Advocate position, advising the Secretary of Treasury on this appointment, participating in the selection of a new Chief Information Officer, and starting to build a professional staff for the Board. We've also established three committees that focus on the important areas of modernization, personnel and organization, and performance management. While we are still a new organization and still have a lot to learn, we believe that we've gained a good understanding of many of the issues and challenges that the IRS faces. Mr. Chairman, the problems faced by the IRS are almost too numerous to list. With that said, we're quite sure that the Board has not yet identified all of these problems, although the Commissioner and other senior executives have been very forthcoming in discussing these issues. One logical way to summarize the problems of the IRS is to state that it is not meeting, I repeat, not meeting any of the three strategic goals and objectives defined in its Strategic Plan. The IRS does not provide top quality services to each taxpayer in every interaction. For example, phone calls frequently go unanswered and notices to taxpayers are often difficult to understand. The IRS does not provide top quality services to all taxpayers through fair and uniform application of the law. For example, the level of audits and other enforcement activities have fallen to an unreasonable low level. The IRS does not provide productivity through a quality work environment. Because of outdated technology, the work environment is completely inconsistent with efficient and modern practices. These problems are not a surprise and are well understood by Congress, by the Treasury Department, and by the IRS itself. They've been the subject of congressional hearings and led directly to the IRS Restructuring Commission and the passage of the IRS Restructuring and Reform Act of 1998. In addition, many of the operational changes mandated by RRA 1998 have been implemented and are starting to have a positive effect at the IRS and, more importantly, on taxpayers. During 1999 and 2000, the IRS was reorganized from a geographic structure to one built upon specific taxpayer needs. In the future this should provide the basis for building more specialized skills and improving services. Steps have been taken to improve the rights of taxpayers, the Office of the National Taxpayer Advocate has been strengthened, new rules and regulations have been put into place, and IRS employees have received extensive training. Next, the IRS has brought in new managers from the business world and other government agencies, and this has strengthened our organizational capabilities. During 2000, the IRS prepared its first Strategic Plan in many years. This plan, which was approved by the Oversight Board in its January meeting, establishes a blueprint to operate and improve the agency over the next 5 years. The 2002 budget request that the Oversight Board developed was developed specifically to support this plan. An aggressive program to dramatically increase the level of electronic filing has been put in place and is showing real results. A well-designed Web site to support both taxpayers and tax preparers is in place and is one of the most widely used sites on the Internet. The technology modernization program was started in 1997 and the Board is encouraged by what we see as real progress. Key IRS leadership is fully engaged and has taken ownership of this program. The program has been designed to include not just new technology, but improve business processes and new skills for IRS employees. A management governance program has been put in place to help ensure that the right people make appropriate decisions at the right time, and that funding is appropriately managed. A new business systems modernization blueprint, which defines what work will be done, was approved this year and provides a plan for the entire program. A systems development life cycle methodology has been put in place to support and link governance of the program and how the work is conducted. Technology management has been consolidated under the leadership of a strong CIO with extensive and relevant private sector experience; and a technology consolidation program was recently completed, reducing the number of data centers and the number of mainframe computers. In addition, steps are underway to standardize the technology infrastructure across the entire agency and to improve data security. Despite these accomplishments, there is still much to do. Short-term improvements are necessary to quickly improve customer services and stop the continued degradation of IRS enforcement activities. This will require ending, and to some limited extent reversing, the decade long reduction of IRS headcount. In the past 10 years IRS headcount has gone down 17 percent while the workload has increased significantly. The Board strongly recommends the full implementation of the STABLE program that was begun this year and should be completed in fiscal year 2002. This program will add approximately 3,800 new employees to improve services and start to address the reduced levels of enforcement. Additional headcount, however, is not the way to address IRS challenges in the longer term. Modernization of technology and business processes provides the opportunity to create a new, more efficient IRS that will provide the kind of services that Congress and the American taxpayers demand. As previously described, this modernization program is underway but still in its early stages. The program is very large, highly complex, and extremely high risk. The program will require continued investment and support as well as meaningful oversight by the Board and by Congress. The Board urges Congress to give careful consideration to the modernization and improvement investments included in our recommended budget for 2002. I have submitted to the subcommittee, as part of my testimony, a discussion paper on the IRS Strategic Plan in our 2002 recommendation. This paper provides additional background on this issue, and I ask that it be included in the official record as part of our testimony. Mr. Horn. Without objection, it will be put in the record at this point. [The prepared statement of Mr. Levitan follows:] [GRAPHIC] [TIFF OMITTED] T7055.038 [GRAPHIC] [TIFF OMITTED] T7055.039 [GRAPHIC] [TIFF OMITTED] T7055.040 [GRAPHIC] [TIFF OMITTED] T7055.041 [GRAPHIC] [TIFF OMITTED] T7055.042 [GRAPHIC] [TIFF OMITTED] T7055.043 [GRAPHIC] [TIFF OMITTED] T7055.044 [GRAPHIC] [TIFF OMITTED] T7055.045 [GRAPHIC] [TIFF OMITTED] T7055.046 [GRAPHIC] [TIFF OMITTED] T7055.047 [GRAPHIC] [TIFF OMITTED] T7055.048 [GRAPHIC] [TIFF OMITTED] T7055.049 [GRAPHIC] [TIFF OMITTED] T7055.050 [GRAPHIC] [TIFF OMITTED] T7055.051 [GRAPHIC] [TIFF OMITTED] T7055.052 Mr. Levitan. In closing, one obvious problem faced by the IRS and America's taxpayers is one I know the Congress continues to struggle with. While this problem is clearly outside the scope of the Board's responsibility, we believe the complexity of the Tax Code continues to create burdens to sound tax administration. As long as the Tax Code is as complex as it is today, the operations of the IRS and the services it provides to taxpayers will be negatively impacted. Mr. Chairman, thank you for the opportunity to be here today. The restructuring and creation of a new and better IRS is very much a work in progress. The IRS Oversight Board is proud of its important role in this process of providing oversight and guidance as the IRS moves toward the goal of meeting its strategic objectives and creating an IRS which truly provides top quality services to American taxpayers. I appreciate this opportunity to report on our activities and our views on these critical matters and would be pleased to answer any questions that you may have. Thank you. Mr. Horn. Well, thank you very much. And could you just answer, before I go to Mr. Dacey--are the members all in place for your oversight board? Mr. Levitan. Yes. There are seven private citizens, the Secretary of the Treasury and the Commissioner of the IRS. We are all in place and have been in place since September of last year. Mr. Horn. And they show up. Mr. Levitan. They show up, they work hard and are all extremely active and dedicated. Mr. Horn. Well, because it worried us all when the former President didn't make any appointments in a timely manner. So, you know, that bothered us. Mr. Levitan. Right. Mr. Horn. Now we have Mr. Robert Dacey, the Director, Information Security Issues, U.S. General Accounting Office, which is headed by the Comptroller General of the United States, Mr. Walker. I believe you're accompanied by Michael Brostek, Director, Tax Administration Issues; Randolph Hite, Director, Information Technology Systems Issues; and Steven J. Sebastian, Acting Director, IRS Financial Management Issues. And I might add that with the Commissioner is Mr. Lawrence Rogers, Acting Chief Financial Officer. That's where all those hands were going up. Now we can hear from them. Do they talk as well as hold oaths? OK. Good. Mr. Dacey. Mr. Chairman and Mr. Putnam, we are pleased to accept your invitation to be here this afternoon to discuss management challenges that continue to face the IRS in its efforts to improve its services to taxpayers and the efficiency of its operations through modernization. As you requested, I will briefly summarize our written statement which covers four areas. In order of discussion, they are: computer security, financial management, organizational transformation and performance management, and business systems modernization management. The IRS has made important progress in each of these areas. Yet significant obstacles remain. The challenges that face IRS are longstanding and systemic challenges that require both short and long-term solutions. In the area of computer security, IRS has corrected a significant number of previously identified weaknesses and is implementing a computer security management program which will, when implemented, help it to manage risks in this area. However, significant computer security weaknesses continue to exist that increase the risk of unauthorized disclosure, and the modification or destruction of taxpayer data. These weaknesses could impair IRS's ability to perform critical business operations. For example, as illustrated by this chart, during last year's tax filing season IRS did not implement adequate computer controls to ensure the security, privacy, and reliability of its electronic filing, or e-file, systems. We demonstrated that individuals both internal and external to the Internal Revenue Service could have gained unauthorized access to IRS's e-file systems and could have viewed, modified, copied, or deleted the taxpayer data they contained. Further, they could have gained access to sensitive business, financial and taxpayer information and other critical IRS systems that were connected to the e-file systems through its service-wide network. While IRS has stated that it does not have any evidence that intruders had accessed or modified taxpayer data, the agency did not have adequate procedures to detect such intrusions if they had occurred. According to IRS officials, prior to the current tax filing season, the agency has corrected all of the critical vulnerabilities that we identified. We will assess the effectiveness of IRS's corrective actions as part of our normal followup review. In financial management, IRS was able to prepare financial statements that received an unqualified or clean opinion. However, this achievement came through the use of substantial, costly, and time-consuming processes to work around serious systems and control deficiencies. Such deficiencies related to the management of unpaid tax assessments, the identification and collection of unpaid taxes, the disbursement of refunds, the handling of taxpayer receipts and data, administrative activities, and financial reporting. Our written statement contains several examples that illustrate the impact of these weaknesses on IRS's ability to reduce taxpayer burden, collect all of the revenues due to the Federal Government, and to routinely produce reliable, useful, and timely information for day-to-day decisionmaking. Looking at the IRS's structure, its progress in reorganizing around four taxpayer-focused operating divisions and developing a new performance management approach begins laying the foundation for making substantive changes to business practices. However, much work remains to complete the foundation and to design and implement business practice changes that noticeably improve services to the taxpayers and IRS's efficient administration of the tax system. Further, although IRS managers have a vital role in translating IRS's goals and objectives into actions that make a difference, they do not appear to have consistently revised their program management approach to be consistent with performance management principles. Finally, in terms of business systems modernization, IRS's multi-year, multi-billion-dollar program is critical to achieving its new customer-focused vision and enabling it to meet performance and accountability goals. Although IRS has made important progress in developing and implementing fundamental modernization management controls, we are concerned that projects are entering critical stages without a sufficiently defined enterprise architecture and a rigorous disciplined configuration management process, which considerably increases the risk that IRS's modernized systems will not deliver promised value on time and within budget. IRS officials have stated that they plan to have these controls in place by the end of this June. Given that IRS is seeking congressional approval of additional systems modernization funding, this is an opportune time to ensure that IRS addresses these risks. In summary, IRS has clearly made important progress toward its decade-long effort to transform itself into a more reliable, accountable, and customer-focused organization. We have made many recommendations over the years to assist the agency in achieving this goal. Also, we have worked closely with IRS officials and will continue to do so. Mr. Chairman, that concludes our statement. We would be pleased to answer any questions that you or Mr. Putnam would have at this time. Mr. Horn. Thank you very much for, as usual, a very good presentation by the GAO. 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Before we go to questions, let me straighten out something that happened earlier today. In the Washington Post it said, ``debtor's Social Security checks to be garnished.'' The Federal Government is owed more than $50 billion of delinquent nontax debts. The Federal Government has an obligation to taxpayers to pursue individuals who are unwilling to pay their debts to the Federal Government. For years, the government has been attempting to collect this debt through a variety of mechanisms. The Debt Collection Improvement Act of 1996, which I authored along with Ms. Carolyn Maloney of New York, and which passed with overwhelming bipartisan support, gave the government additional tools to collect those delinquent debts. Among its various provisions the law allows the Department of the Treasury to withhold a portion of a delinquent debtor's Social Security benefits to satisfy their delinquent debt owed to the executive branch of the Federal Government. The authority to offset these payments can only be used as a last resort. The delinquent debts that are owed are more than 6 months delinquent, oftentimes much more than 6 months delinquent. The Federal agency that is owed these debts has made every effort to work out a repayment agreement. Finally, the Treasury Department's Financial Management Services has contacted the debtor to attempt to work out a repayment agreement. For this collection tool to be used, the debtor truly has no intention of repaying their debts. That is unfair to taxpayers as well as to those who are repaying their obligations to the Federal Government. Those with disabilities as well as others under the Supplemental Security Income program are exempt from this collection program. In addition, to prevent undue hardship, the first $750 of the recipient's check is exempt. In other words, recipients who receive $750 or less will not be targeted. Only 15 percent of the amount above the $750 threshold will be collected. This percentage will be withheld until the debt is paid. This is a responsible and fair mechanism for the government to collect debt that has irresponsibly gone delinquent. So, I thought we ought to clarify that, because the authority is in the agency involved. I don't know if the Commissioner or Mr. Dacey wants to say anything or not. I don't know if you have ever looked---- Mr. Rossotti. Just to say I think your summary was correct. We are at the present time--that's called the Federal payment levy program. We are currently levying on Federal vendor payments and Office of Personnel Management retirement payments, and there is a plan to extend that to some portions of Social Security payments as authorized by law beginning next fiscal year, October of this year. Mr. Horn. Very good. I think people that have a problem, there are waivers. But, basically, what started me on this whole thing was, under your predecessor where the IRS had $110 billion that they hadn't collected anything on I was told, ``oh, well, we've got another one that's $60 billion,'' and they weren't collecting on that. And they weren't organized. Since we're now into question time, let me just ask the Commissioner what kind of an apparatus does he have to get at the pileup that's often coming out. And if you could just outline, are you getting new people in that area, are you using private debt collectors, or what in particular are we doing to get some of this down? Mr. Rossotti. As we've discussed at previous hearings, collection is one of the main things that the IRS does. Mr. Horn. Turn the---- Mr. Rossotti. Collection is certainly one of our main missions. Unfortunately, it's also one that I think, as we've also discussed, is quite far behind in the way this process works. The key problem being that the speed of collection that we currently pursue is very, very slow by comparison with the private sector. Typically, you know, it might take us 2 years not to collect all debts but in many cases it might be over a year, 2 years. The majority of our efforts are at the back end of the process. Our long-term vision, which is now well documented in the overall enterprise architecture, is to try to bring that down to 6 months, which we think will not only increase the probability of collection, we know it will, but also in a funny way we'll reduce the burden on taxpayers. Because if you wait that long to collect, the interest is built up; and it's harder for people to pay. So that's our vision. As with everything else, just as I said in my statement, we have to do some things now. In fact, most of the things in this area really depend on new technology. But there are some things that we can do. And mainly what we're doing is we're trying to do some modest reengineering of the collection process in the short term to do better workload selection so we can assign the right cases, or better yet, do a better job of assigning the right cases that really have collection potential and less emphasis on those that don't. Because, we simply don't have the resources to collect everything. That's a sort of a primary short-term issue. We are going to be using some of the resources from our 2001 budget to provide more staff resources, and we're going to do that in two ways. One way is by directly putting some more staff onto the phone collections, especially. But, the other way is by putting some more people into customer services and customer education positions so that they--and they will be generally not as expensive as our collection people, will be able to handle the filing season duties and we will not have to pull as many people as we have done in past years off the collection cases to staff the filing season, which was a necessary response to provide some services during the filing season but is really inefficient and in fact debilitating to the collection process because you're putting off case work, and making it even slower than it would be. So the two short-term things are providing additional staffing in, we think, an intelligent way where we can do better workload selection. Then the longer term is really the major modernization program. Let me just mention one--we've talked about this in the past. In your hearings last year I remember the chart; and we said, this is what we want to do, here is where we are. We kind of knew at a high level where we wanted to go. The one really big thing that has been done on that score since the last time is that, through that visioning process, this enterprise architecture, we now have a much more established, clear vision of what the future state of IRS collections would be; and that is the guideline that we're going to--we hope to, later this year, assuming we get the funding release from Congress, to really begin in a serious way the initial design work on that program. It will still take several years before the first implementation of it, but it lays out the vision in a fairly clear way, and it also does what we've talked about at a more general level, which is to try to quantify what we can do with this. We believe we can significantly improve our ability to address all of the collection issues that we currently have, which we can't do now because of resources. We will need a little bit more resources, in terms of staff, which we can get by redeploying from other functions mostly. But, mostly it will be through the support of the additional technology. Finally, not to go on too long on this, but one of the other things that has been key in the Congress's view, I think Mr. Putnam notices this in the collection area, is protection of taxpayer rights. A lot of RRA was about taxpayer rights. We have implemented all of the provisions of RRA with respect to our current collection process. But, a lot of it relies on training employees to remember to do this, to remember to do that, to check off a sheet, to do things manually. We intend in our future collection vision to have all these taxpayer rights built in to make it--I will never say foolproof because I have learned that there is no such thing as foolproof when people are doing things, even with computers--but, essentially build right into the process that the computer has control so it will be very difficult, if not impossible, for somebody to violate taxpayer rights, for example to try to execute an enforcement action before the time has expired for the person to get the notice of their appeals. Those are very doable things that we can do. We tried to jerry-rig them as best as we could with our existing systems, but these systems are limited. So, I think we have a really major opportunity to dramatically improve our ability to collect money, reduce the burden on taxpayers, protect taxpayer rights, and improve efficiency, all at the same time. It will require some investment. Mr. Horn. Well, to what degree are you going to use private debt collectors? That would cut down your request for a budget increase. The last I knew, a lot of bill collectors were pretty effective and get the job done; and I don't see that really being used very much. Just how many collectors do we have now that are private? Mr. Rossotti. That are private? Mr. Horn. Yeah. Mr. Rossotti. We're not using private debt collectors right now. I think we have talked about this before. There are some with the computer systems we have. In order to effectively use private or public debt collectors, you have to provide the people clear, accurate information about what you're collecting, about what needs to be collected, and about the history of the people that you have tried to collect on. That's what we don't have. I think we did an experiment once before, before I got here, and I have looked at that. I know that the people who worked on it on the private side thought they were given garbage collections to do. Mr. Horn. The problem under your predecessor was that when they had this great pilot project, it was 5-year-old debt which they hadn't done anything about to start with, and now they wanted to dump that on a private debt collector. It just didn't work. It was a phony operation. That sent me right through the ceiling. I don't understand why we can't get private debt collectors. If the Federal Government--they ought to be--you ought to be training the people so they can have a higher level job, I would think, in terms of working and interacting with the taxpayer. Then I had a lot of nonsense about, oh, it's a privacy problem. There is no privacy problem. Give them the address, tell them how much, and if they say I don't owe that, they say, ``fine, here's an appointment with a revenue officer, maybe you can work it all out.'' But, I just think--I can't believe we're still not moving ahead to get private debt collectors. Mr. Rossotti. And I think that, again, that is something that we have discussed, to try to--notwithstanding some of the issues about how old the debt was that was given in the previous pilot, if we were to attempt to do it today, with the best intentions, we would still have two fundamental constraints, which is most of the debt we're collecting on is very old, just because of the nature of our inventory; and, second, the systems--that we have to get accurate and current information is a fundamental requirement to do accurate collection. You have to know who you're collecting on, what you're collecting on, and history, which is precisely what we lack because of our computer systems. So, if we were to do it again, even with trying to improve it, we would run into some of the same issues, maybe not as bad as last time. I think that as we move forward with this vision that I talked about there are some elements that it might be very possible--assuming we can work out the systems issues and the other contractual issues, it might be possible to provide a portion of that inventory that could be part of the solution to dealing with this inventory as we move forward. Mr. Horn. Well, I would sure hope we can be a little more efficient on that side, because I think it's an outrage when all the rest of us pay our taxes and these people sit there and get away with it. We've recently had a thing related to pardons, for example. I'm taking about big fat cats, the ones that do it repeatedly, that go out of business and, say, ``oh, sorry, we're all bankrupt.'' Then they're back in 2 days or they have the name changed or something. Meanwhile, everybody else is paying their taxes and these guys aren't. That bothers me. Does it bother you? Mr. Rossotti. It does. It's one of many things about the IRS that bothers me right now. Mr. Horn. How are we going to deal with it then? Mr. Rossotti. I really think that the key thing that we have to do--and the computer systems really are part of this, because you can't collect debt effectively, no matter whether it's private or public, without having accurate, up-to-date, timely information about who is likely--who is delinquent, what the probability is of their going further delinquent, and so forth. Any private debt collector has to have that. That's what we lack. That's one of the reasons why it's so slow. I think the solution is---- Mr. Horn. Is OMB giving you the money this year. Mr. Rossotti. There is $397 million in the President's budget request for the ITIA account, which is very significant. It's probably the most significant. Mr. Horn. Million or billion. Mr. Rossotti. It's $397 million for 2002. That was in the blueprint that was published earlier by the administration, and that's an important step. Mr. Horn. I'm sure that you'll be provided that. So, you think that will help bring this pile down. Mr. Rossotti. We've just finished this whole exercise. One of the key projects is this whole collection project. I wish I could tell you that there was a quick way that we could just deal with this and, if there were, you know, we would be doing it, I can assure you. It wouldn't involve private debt collectors or anything. I really don't think that there is a quick solution to this. I think there's a solution. I don't think there's a quick solution. Mr. Horn. Well, I think you're right. When they didn't give them any notices and pretty soon somebody says, ``oh, gee, I remember getting a grant from the Federal Government,'' and they don't think of it as a loan. Students are the same way, and we expect bankers to collect the debt. But, bankers don't because the law, which was written long before my time, you know, states that if they default, they get paid by the government anyhow. That's just a recipe for absolute stupidity, and maybe we oughta tighten that one up, too. The gentleman from Florida, Mr. Putnam, any questions? Mr. Putnam. Mr. Chairman, I appreciate the opportunity to be a part of this hearing. Let me just ask you a couple of basic questions for the slow learner on the group. What percent of returns are prepared by taxpayers themselves versus professionals? Mr. Rossotti. About 45 percent on individual returns. Mr. Putnam. And how many employees do you have currently? Mr. Rossotti. Employees, we have, well, about 100,000 equivalent employees, including averaging the seasonals in there. Mr. Putnam. Do you know what the estimated accounts receivable are, or debts owed to the IRS? Mr. Rossotti. Well, in the financial statements which GAO prepared, there's what's called the net accounts receivable, financial accounts receivable in here is about $22 billion. That is net of---- Mr. Putnam. $22 billion? Mr. Rossotti. $22 billion. That's net of, you know, estimated allowances for bad debt losses. The gross receivables are more than that. I think they're around $80 billion, if I recall correctly. I've got this number here, but the--that's really the total inventory that we can conceivably collect on. Obviously, we're not going to collect it all, but the financial statements really net it out down to about $22 billion. That is estimated. Mr. Putnam. And what is your average turnover rate among your employees? Mr. Rossotti. The turnover rate? Well, you have to really break it down between full-time, or let's call them permanent employees, and seasonal. We have a lot of seasonal employees that work during the filing season, which is what we call the period before April 15th. There are about 80,000 permanent employees of the IRS, slightly more than 80,000, and the turnover rate, I would have to get that for you. It varies by job classification. I believe that it is around 4 percent right now, 4, 4\1/2\ percent. So, it would be about 3,500 employees leaving every year, of the permanent work force. The seasonals, it's not quite the same kind of a calculation because they're coming back to some degree year after year, but they're also only working part time. Mr. Putnam. The observation that I make based on--I mean, I take that as a very low turnover rate. Mr. Rossotti. It is relatively low. Mr. Putnam. They're obviously well compensated, fairly satisfied with their job. Otherwise they would be fleeing in an economy like this, I would observe. Is that not correct? Mr. Rossotti. Well, I think that it is interesting. It is a relatively low turnover rate compared to what I had in the private sector, and I think what it reflects--and I have studied this quite a bit--I don't think you would get agreement from our employees that it's because they're all very happy and feel they're well compensated. I think the reality is we have a very aging work force. A substantial percentage of our work force is getting to the point where in 5 years--I think--I don't have the exact numbers, but many job categories, half the people will be eligible to retire in 5-years, or 40 percent. What happens in the Federal Government, partly because of the way the retirement system works, is once people get in and stay a certain number of years, they tend to stay in until they can get to the retirement program, and I think that has been very helpful actually in terms of keeping our work force stable. What it means, though, is that we're looking at a very serious problem. I think GAO has made a lot of notes of this across the whole Federal Government--as a key point, I know that Mr. Walker, the Comptroller General, has been focused on that we have this bubble coming up where a very substantial percentage of our skilled employees, especially, are simply going to be leaving, you know, in the next 5, 6, 7 years. The reason that this situation exists is because in the IRS, among the permanent work force--forget the seasonals for the moment--there has been minimal hiring since 1995. I mean, one of our key occupational classes in the IRS is what's called the revenue agents. Those are the most skilled people-- actually, the accountants that go out and audit corporate returns and more complex returns. Because of the budget limitations, and essentially the near hiring freeze we've been in, until this year, until 2001 when we got money, there was virtually no hiring. I mean there had been virtually no revenue agents except for a handful hired since 1995. So, you know, even though the people that are there are staying, every year they get 1 year closer to retirement, and we are now in a position where we have a substantial percentage of these folks that are getting close to retirement. So fortunately, in the 2001 budget, we did get some money and we've begun to resume our hiring program, and in fact, you will see some advertisements on the Internet and other places, on college campuses, the IRS is going out and hiring for the first time. Mr. Putnam. Do your employees have the training and the professional development that they need to deal with these technologies that you are moving toward, and are they prepared to make the most of our IT investment? Mr. Rossotti. That's an excellent question. And I think maybe the answer is not one that you would expect or that I would have expected. You know, having come from the private sector, one of the ironies of the IRS is it was one of the first organizations of a large scale to make use of computer technology on a pervasive basis. I mean, you know, the systems, some of them we're using were built in the 1960's. So actually, compared to many organizations, our front line employees are very literate in terms of using computers, or they're very used to using computers. As a matter of fact, if you were to look at what some of our employees who answer the phones in customer service do with the 30-year old systems they have, which are much harder to use than the systems that exist today, much harder because they require entering little codes, they are really quite adept at it. So, our employees are dying for this new technology. They're not resisting it. That doesn't mean they don't need training. They will need training, not so much in the use of computers, because they're really quite used to doing this, but rather in the new business practices that we are going to be able to establish. For example, in our collection area, we're going to be changing, as I said to the chairman, the whole way we do business. So, that part of the training is where the training is going to come up. But, in terms of just basically enabling people to use computer technology, we have a surprisingly adept work force in using and being resourceful in using what are really quite difficult systems to use. Mr. Putnam. Is there an incentive in place, or is there a disincentive in place to--for your agency to retain a portion of old debt or collections that can be reinvested in your agency, in IT or in professional development or whatever your needs may be--let me be very careful in how I phrase it-- without an incentive for a quota system, but certainly an incentive to retire these old debts, collect them? Mr. Rossotti. Well, I think just to clarify, in terms of the way the financial model works, we don't retain any revenues that are collected. I mean, we are an agent of the Federal Government, and all of the revenues, every penny that is collected from the taxpayer, is turned over to the Treasury, you know, directly, and we have to account for it. There's one minor exception. There's about $70 million of what are called user fees that we're allowed to impose for certain kinds of services that we provide, but with the exception of those user fees, you know, the entire $1.8 trillion that we collect net is turned over. So there's no incentive or disincentive in a financial sense. Now, on the other hand, with respect to what we do, I mean, our mission and our goals are basically, as I related them, one of them, is fair and efficient--fair application of the tax law to every taxpayer. We've translated that down into a series of measurement systems we call a balanced measurement system, which in the debt area, has to do with respecting taxpayer rights, you know, closing cases on a quality basis. It does not involve dollar factors, though, because under section 1204 of the Restructuring Act, the IRS is not allowed to use dollar quotas or what are called ``records of enforcement results'' to set goals or evaluate anybody. As a matter of fact, as I sometimes point out, the oversight board can't evaluate the commissioner based on how many dollars we collect either, because I'm an employee of the IRS. But all joking aside, the way that we have to measure performance in the IRS is very much not focused on dollars any longer, but in terms of effective execution of our plans, quality casework and the amount of cases that we process but not based on any kinds of dollar figures. Mr. Putnam. Mr. Levitan, in your testimony--and welcome as a fellow Gator, glad to have you--there was--for the first two- thirds of your testimony, I was ready to loan you a gun and just go ahead and put the agency out of its misery. You identified that they do not provide quality service to each taxpayer in every interaction as they have identified in their strategic plan; the agency does not provide top quality service through fair and uniform applications of the law; nor does it provide productivity through a quality work environment. How much of an investment are we going to have to make in people or computers, and if you would, please clarify for me, we've-- you've identified an additional staffing requirement and additional technology requirements. Is there a way that we can invest in one and save on the other? Mr. Levitan. First, the investment will be long term and it will be significant. And in the long term, you will save on personnel and operating costs by making the investment in the new technology and the new business processes. The modernization program will probably last somewhere between 7 and 10 years. It will just take that long to get it completed. It's entirely too long. Everyone would like it to move a lot faster than that, but there is so much that needs to be done, the systems are so large and complex and interrelated with each other and with the existing systems, and just the management ability of the IRS to manage all of that change will require it to take that long a period of time. The IRS has developed a very detailed plan on how that investment should be made, what should be done, when it should be done, how long it will take, and what the benefits are. The Commissioner talked about--mentioned that the President's budget includes a recommendation for $397 million to be put into the information technology investment account. The Oversight Board recommends that the budget for 2002 for ITIA not be $397 million, but should be $1 billion, and we think that there are very strong reasons for it to be that much. First, the biggest part of it is that we're recommending that the account be funded for a 2-year period of time. The $1 billion would cover planned expenditures for both 2002 and 2003. When ITIA was originally established, one of the major reasons to set up the account that way was to provide continuity of projects and funding for projects that will last over fiscal year periods of time, and so you do not reach a point in time that you know you run out of funding, that it goes to zero. You have to artificially slow down or start projects in the next fiscal year. Initially the account was funded on that basis. Unfortunately, by the end of this fiscal year 2001, and for the first time that the account has been in place, it will be down to zero. That's a dangerous situation. It can be a highly inefficient situation. So, we are recommending that 2 years of funding be put into it. Second, our recommendation is that funding be set up for $450 million in 2002 and $550 million in 2003. So, there is a difference between our recommendation and the administration's recommendation of something like $53 million for 2002. You might say, well, $400 or $397 or $400 million is an awful lot of money, and it certainly is, but the IRS has detailed plans in place of what needs to be done, and the price tag on it, if they do it all in that period, would be about $450 million. If only $400 million is appropriated it will take a program that is already taking too long and it just extends it out further than that. So, again, it's going to be a long-term investment. It will be over the next 7 to 10 years, but by making that investment, you have the capability to create a completely different IRS, an IRS that is much more efficient, an IRS that serves the taxpayers much better, an IRS that collects a much, much higher percentage of the taxes that are due to the Federal Government. Mr. Putnam. Where would the bulk of that modernization money be spent? At the customer service level? At the collections level? At the audit level? Mr. Levitan. Really, on all of those things there are a large group of new systems. First of all, what needs to be done is we need a technology infrastructure put into place. That technology infrastructure includes new communications, the kind of improved security that you've heard talked about, and the need for that described earlier. It includes new data bases which would have current, up-to-date, consistent data about all taxpayers, about all tax returns, so it could be made available, both to the taxpayers that need that information themselves, as well as the employees that are providing both service to taxpayers, as well as following up on the enforcement activities. So it's all of that. One of the first things I did when I first started working with the IRS is I visited a number of the centers. I had the opportunity to sit down with someone who was answering the telephone and trying to answer questions from taxpayers, and if you would do that, it's amazing. You're almost embarrassed at how poor the systems are, how poor the information is. The individual trying to answer the questions couldn't get accurate, up-to-date information in order to respond to the fairly basic questions that the taxpayers were asking, and because the systems are so antiquated they need to be replaced and put in. But again, to answer your question, you know, the new technology would address all three of those primary objectives that the IRS has established in their strategic plan. Mr. Putnam. Thank you, Mr. Chairman. Mr. Horn. I thank the gentleman, and let me ask on a follow up on that. Commissioner, you're an expert in dealing with computers. Are we already too far down the path or could you use the money if Congress took the recommendation of the chairman of the Oversight Board, or are there other things---- Mr. Rossotti. Oh, could we use the money, I feel certain we could use the money. I think, you know, as with any agency head, within reason, if we had more we could do more. So yes, I believe that we could use the money. I will say that the way the ITIA account works, and I'm cognizant of what the GAO testimony was, which we take very seriously, is that we don't want to get our projects ahead of our management capacity. So, we're constantly working on both of those, but I think we feel that within the bounds that we're talking about here we could manage it and we would manage very carefully. The way this ITIA account goes, the money goes in and it's appropriated, but we don't actually get the money until we present a specific plan to Congress. Right now we have a plan for the second half of this year that is before the appropriation committees and it's being reviewed by GAO. So, even if the money is in the account, we're not going to be able to spend it, nor would we ask to spend it, unless we were sure, as we get closer to that period of time, that we would be prepared for that. Mr. Horn. How much did we spend last year for modernization in your budget? Mr. Rossotti. Well, this is an interesting point. In the current fiscal year, there was only $71 million. I mean, I know that's a lot of money, but relative to what we're talking about---- Mr. Horn. $71 million? Mr. Rossotti. $71 million. However, we had $300 million of carryover funds from prior years, from the prior account. So assuming that if Congress, and the appropriation committees approved the release request that we currently have pending, which we're waiting to hear, but if they do, then with that money we will have essentially spent--you know, obligated about $370 million, which is all that we had. So, in other words, because of the carryover nature of this account, even though there was $71 million of appropriations, there is actually $371 million of funds available, taking into account what was carried over from prior years. Mr. Horn. The carry over now is how much? Mr. Rossotti. About--little over $300 million. Mr. Horn. $300 million. Well, that isn't chicken feed. Mr. Rossotti. None of this is chicken feed. It's serious money. It's serious money. Mr. Levitan. Mr. Chairman, if you don't mind, I wanted to comment on talking about the size of the spend on the modernization. When you do major technology programs, they tend to start at a relatively small level and go up as they progress. You start with the planning phases of the project, you move into the design phases, and then you move into the development phases where you know you're making major acquisition of hardware and software and developing the new systems, and the costs go higher. There is a plan in place and what that--and we believe that the plan is reasonable. It needs to be managed every step of the way and oversight provided by our board, by Congress, by the GAO and others, but that plan shows the expenditure levels going from, you know, about 300 and so, $370 million in this fiscal year to $450 next fiscal year, to $550 in the following fiscal year and then peaking out for a number of years at about a $700 million level. So the numbers will continue to go up, and you should not be surprised at that. It's just the nature of the beast that we are trying to conquer here. Mr. Horn. I was just checking my memory here. When I first came to Congress in 1993, I went out and looked at the Federal Aviation proposals and actions. They were doing all this wonderful computer design and everything about 20 miles out of town. There was absolutely no management, and then they went through a series of people and passed it on, and then IRS was also in modernization, but that was chaos, too, $4 billion down the drain, I think I remember right. I asked both of them when we had them in, I said ``how about stopping at $4 million, maybe $40 million, how about $400 million? Why do we always get the taxpayers' money going down the drain in some $4 billion thing where they haven't planned it out, managed it or done anything?'' It was the stupidest operation I have ever seen in both of them. So what did we ever do with the $4 billion earlier, before you got there? Mr. Rossotti. Well, it was before I got there. I mean, that's my best answer. I think, you know, I don't really know whether it was $4 billion. I don't know exactly what it was. We have been looking for it. There were some deliverables that were realized out of that. It wasn't a complete loss, but clearly it did not solve the problem. I mean, that's an accurate statement. I mean, most of our fundamental systems were not replaced, and you know, we could go back and look at that, and I think there are some very fundamental reasons. Just to tick off some of the things that we have now, and I don't mean by saying this to minimize the risk of this, because I think Mr. Levitan said, and you know I agree with this, that this is a high risk program. It's a very high risk program, and it's not a program that frankly I wish that we had to have the IRS do. You know, most organizations would never get this far behind, and they would never have to do a program like this. So, it's not something that you wished you had to do, but there is no real alternative. So, we have to manage it as well as we can. But just to tick off a couple of items. First of all, from an organizational standpoint--this is most fundamental--the IRS had at least--when I got there, at least 15 different information systems organizations. There were many different units, and they all had their own CIO. The CIO had effective control only of the headquarters portion of that, not the whole thing. There was virtually no standardization of any technology. So, even if you had a system--and frankly, this was one of the problems--even if you had a new system that you successfully developed, it could take 10 years to deploy it because every place had a different standard. So, organizational standardization just in basic technology, that has largely been resolved. Not all of the standardization has been fully implemented, but the organization structure for information systems is a centralized structure, all the resources are in one place, management is under one place. We have a new CIO that has recently just come in that I'd like to come up and introduce to you, former CIO of Time Warner Corp., very qualified individual, and we have some other people. So, we have an organization in place. We have standardization close to being where we need it to be. We've set up a program management office to run the modernization program. We have a prime contractor with the resources of the private sector that has been brought in. We have a rigorous methodology in place. We have an enterprise architecture. Now, as GAO constantly notes for us, and we agree with this, it's not a mature process. Not all of this is mature. It's not functioning at a level--I'll call it maturity--that it needs to be. For example, there is more work to be done to fill in some of the details in the enterprise architecture. We don't have all of our configuration management processes as well developed as they should be. I think the enterprise life cycle is approaching much more maturity, but I could go on and on with these things. We are working constantly to increase the maturity level of our management processes at the same time we deliver. We can't put a fully mature management process in place for something this huge without actually doing some real projects. I mean, it would be like going into a sports team and just doing spring training all year around and never actually playing any games. You would never really learn. So, we have a constant challenge of maturing, increasing the maturing of our management processes at the same time we actually work on delivering these systems, and I think we're making some serious progress, but you know, every day that goes by we learn. I will say to you, Mr. Chairman, that we are not in chaos. We are not just spending money without a plan, without management discipline in place. I view it, and I think all of my management team that's come in from the private sector, as well as those that have signed on to this, view it as though it were their own company. I mean, I don't want to spend a dollar on this program if I wouldn't spend it exactly the same way if it was my own company, and that's the way I feel about this program. I don't want to have anybody working on it that doesn't feel the same way. Even under the best of circumstances, though, it is a high risk program. There's going to be some delays. There's going to be blind alleys. There are going to be things that are going to go wrong. I will finally just finish up--and I know I may be going on too long with this--to say that even though it's high risk and we will make some mistakes along the way, you know, it does not follow from that this program is destined to fail. That is not the conclusion I'm saying. In fact, I don't believe that it will fail. I believe it can succeed and will succeed, and it will pay off enormously as long as we manage it intensely and we're not afraid to recognize when we have problems, back up and try something different, slow down and speed up depending on how much we learn, and just manage this on a sustained basis. It can succeed and I think it will succeed, and I think we know how to make it succeed as long as we stick with it and are not afraid to recognize the reality of what we're dealing with. Mr. Horn. Well, I think that's good advice. Let's move to a couple of other things. Tax advocates. How do you feel about that program? Mr. Rossotti. The taxpayer advocate? Mr. Horn. Yeah. Mr. Rossotti. Well, I think that is a program which has made a great deal of progress. We have established the taxpayer advocate service, as we now call it, as was required by RIA. So this is a distinct entity within the IRS that has its own line structure. Has about, a little over 2,000 employees. There's taxpayer advocates in every State. We have a new taxpayer advocate that has just come within the last month, and I'd like to bring her over to meet you, Mr. Chairman. Her name is Nina Olsen. I think she was with the Oversight Board, which was actively involved with working with us to recruit her, and she has a long background as not only a tax practitioner, but as a person who took the lead in establishing a network of low income tax clinics. She has got a lot of experience dealing with taxpayers with hardship, and that's one of the aspects of the taxpayer advocate service. So, I think that we have really made some good progress here and have really put them in place to be, in effect, the safety valve that they need to be where you have a taxpayer who has either one of two things. Either they're not getting the service that they should, or they have a hardship that needs some special consideration, and I think that's working. We have, obviously, our challenges, there as in other places, defining exactly how they relate to the rest of the service. But, I really feel quite proud of what's been done there under the previous taxpayer advocate, Mr. Oberson, and now Nina Olsen, who I think is going to be an excellent leader for that organization. Mr. Horn. I happen to have visited some of the ones in the West, and I was very impressed by them. My staff, I think I have told you this before, from my District Office, have had nothing but praise for your people at Laguna Niguel in terms of working with the various congressional offices in the region. We have hundreds of cases, all sorts of things, and they can't be resolved unless we've got good people at the other end of the bureaucratic line, and we've had no problems or anything. So, I congratulate you on putting the right people in the right place there. Let me go back a minute on the business modification, and the Commissioner made a point there on how much money they can really absorb. What would be the General Accounting Office's views? Mr. Dacey. Let me defer to Randy Hite, who can address that issue. Mr. Hite. Mr. Chairman, our position on the funding of large modernization programs has always been that it's very difficult to estimate what it's going to cost to do many things over many years. Therefore, we have advocated an incremental approach to funding large modernization programs. The law has been set up with the ITIA account because, regardless of the amount that goes into the ITIA account each year, in order for that money to be released, IRS must give an expenditure plan to the Appropriations Committees, and that plan needs to be reviewed and approved by Treasury, by OMB, and by GAO, and then we advise the Appropriations Committees on their decisions for release of that money. So, having said that, the precise amount of money that they would be asking for in 2002 and 2003 is not that much of a concern to us. The expenditure plan is the means by which you manage the prudent and deliberate release of that money in relation to how it's going to be spent in the near term, but you can estimate with some precision. Mr. Horn. I have one more question and then Mr. Putnam will wind it up. The question is how many of those browsers have been caught and what's happened to them? Have they been fired or what? Mr. Rossotti. That's the so called unauthorized access program, and we have, as a matter of fact, been very active working with the Inspector General for tax administration, expecially, on identifying those people, and our policy is, in fact, to terminate people if it's established that they have had a UNIX violation. We've been getting--and I've got the statistics here, I can give them to you more precisely if I can find them--approximately 200 cases that have been investigated. Some of those have been found after further investigation to be not---- Mr. Horn. In 1 year? Mr. Rossotti. This was for fiscal 2000, for last year. It was slightly less than--I'm just trying to find it. I've got so many statistics in here. Mr. Williams. Mr. Commissioner, I have some data. I apologize for not telling you earlier. Mr. Rossotti. Go ahead. Mr. Williams. Since the program began, 373 employees have been removed or resigned during the investigation for unauthorized access. Mr. Horn. Any other comment on that? Mr. Rossotti. No. I was just trying to find the numbers. Thank you very much. Mr. Horn. I yield to the gentleman from Florida for questions. Mr. Putnam. Thank you, Mr. Chairman. I also am very concerned about this unauthorized access issue, and I'm curious to know if part of your modernization plan includes additional tools to detect this type of unauthorized access, and in addition to IRS employees viewing taxpayer records, I'm also concerned about the GAO report of serious weaknesses in the e- filing systems that allowed hackers to view, copy, and modify taxpayer data during the last filing season. What steps have you taken to prevent those occurrences from happening this filing season, and what is the long term solution to this? Mr. Rossotti. Well, as far as the issues identified by GAO in the last filing season, I do want to make clear that while those were important vulnerabilities, there was no evidence that there was anybody that actually got in and looked at any taxpayer--damaged any taxpayer data. I think GAO did an outstanding job of identifying some vulnerabilities that could have led to unauthorized access, but as far as we know--and of course there's always the possibility that something happened we didn't know--but we don't believe there was any unauthorized access from outside the IRS. As far as what we've done about it, GAO came up with, I believe it was 59 specific recommendations or 56 that they gave to us last summer, as soon as they found some of these problems, and we acted very, very quickly to address those issues, and we addressed most of the--all the critical issues, that GAO indicated. Now, GAO has not come back in to verify that yet, but we have certified our e-filing systems before this filing season with our own internal security office to make sure that we've actually followed through on those, and we are looking forward to getting GAO back in to verify that. As far as the longer term is concerned, you asked the question, will the new architecture help us to identify, you know, unauthorized access of all kinds. The answer to that is yes, it will, and in two ways: One way is that right now we have a system that we work with Mr. Williams' staff on. We provide information to them from some of our systems, which allows them to run computer programs that identify possible cases of unauthorized access. They have a staff that is dedicated to doing that. It does an excellent job. When they find one of these cases they refer them to us for discipline, and that works reasonably well. However, it has two limitations that we believe will be addressed in the new architecture. One of them is that it--just because we have 123 different systems right now that are not integrated, the ability to identify these possible accesses, you know, is not complete. It identifies them in the most common system, the most likely places they would occur, but it's not complete. So, there could be cases of unauthorized access that we currently don't identify just because of the limitations of our computing systems. The other thing is that the tools we have to prevent the access in the first place are somewhat limited. In other words, the security controls that we have are there, but they're not as effective as they would be in the new environment. So, on both detection and prevention, we will have better capabilities in the new environment, and that is one of the most expensive pieces of the new architecture. We have a whole project that is basically building a security architecture, a foundational issue, a foundational part of our architecture that is really aimed at providing robust security, and part of that, a major part of that, will be to prevent unauthorized access and to allow us to detect any attempts at unauthorized access. Maybe Mr. Williams might have some comments. Mr. Putnam. In addition to the 383 that were engaged in the unauthorized browsing, how many instances of inappropriate use of information, illegal use of information, identity theft, how many instances of those sort have occurred among employees of the IRS? Mr. Williams. If I may I'd like to provide you a more detailed written response, but essentially---- Mr. Horn. Without objection, it will be put in the record at this point. Mr. Williams. Thank you, Mr. Chairman. We conduct about 4,000 investigations a year, and about half of those regard employees and half of those regard external employees. With regard to---- Mr. Putnam. External employees or external---- Mr. Williams. I'm sorry, external parties, and that's some sense to the number of investigations we do with--of all sorts of misconduct. The subset of unauthorized accesses and identity theft and the other kinds of disclosure issues that you raised, if I may, I'll provide. Mr. Putnam. I will be very interested in that. People certainly ought to feel safe and secure in providing important information to the IRS and to any other government agency, and we ought to vigorously pursue anybody who would betray that trust. Mr. Williams. Well, thank you. I appreciate your saying that. Of the employees that were involved in the access, some of those involved browsing. About 20 percent of those did involve disclosure or financial crimes, and that led to 65 criminal indictments in addition to the figures that I provided earlier to you. Mr. Putnam. So, when we talk about browsing versus illegal use, they're just curious to know what a particular movie star or celebrity made? Is that the bulk of the browsing problems? Mr. Williams. Those are the ones that are merely browsing. Probably the largest subset are relatives of the employees. Mr. Putnam. I see. Mr. Williams. There's also revenge as a motive when this very sensitive personal tax data is obtained. We've had instances in which it's been obtained for financial gain. There was one instance in which one of our seasonal employees actually did access a citizen's record, find out their address and other kinds of information regarding their lifestyle and habits, so that they could kill them. They were a witness to a crime that was committed. Mr. Putnam. One final question, Mr. Chairman, if I may. Commissioner, I believe you indicated that you have about 20,000 seasonal employees? Mr. Rossotti. Actually, if you count everybody that works at all, it's probably closer to 30,000. Mr. Putnam. How do you prepare these seasonal employees? How do you train them so that the answers that taxpayers receive are consistent, clear, and on message when you're dealing with a tax policy as complicated as we have? Mr. Rossotti. Mr. Putnam, you just put your finger on one of the hardest problems we have. I mean, we have a very complex--with respect to answering taxpayer's tax law questions. We have a very complex tax code. We have many different kinds of people that ask many different questions, and a high percentage of those kind of questions come in in a very short period of time, 3 months prior to the filing season. I'm not aware of anyplace else--I have looked around--I'm not aware of anyplace else--there are lots of other private sector companies that have, you know, lots of phone calls and some have seasonal, but our calls tend to be about three times as an indicator for an example of commercial calls. So, this is a major problem. How are we dealing with it? Well, first of all, many of our seasonal employees actually return from year to year. This is an interesting thing, but we are actually able to retain--and this is one of our goals--seasonal employees. There are people who actually, because of their own personal situation, actually prefer not to work all year round, and we have been reasonably successful, at least for the people that deal with things like answering phone calls, we have a lot of seasonal employees that do mechanical tests like just key entry, sorting mail, and things like that, but for the more skilled ones they tend to be, and as much as possible, we get them to come back year after year, so they are not starting fresh the second time. The second thing, of course, is that we do bring them in ahead of schedule so that they go through training before they go on to the filing system. But, there is one thing that we are doing now, one very major thing that we are doing now, that we think will enable us even more--to do an even better job, especially on the quality, which is to rethink the entire way that these set of assisters are organized. We have about an average of 9,000 people answering phones on our toll free lines, but it gets up to almost twice that, or not quite twice, but well over that during the filing season, and in the past they had been managed through--they're in about 25 different locations. Each location had somewhat managed its work force kind of separately. What we're doing now--this is a major part of our reorganization--is we are rethinking the entire network of all these 25 sites and rethinking from the point of view of what is the specialization of the particular kind of questions they can answer from simple to hard, how we can specialize these so that we will for any given question, people that are relatively less experienced answering the simple questions, then going up to people that know how to answer the more complex questions, so that we can--and using the new technology we will be able to route the calls all around the country to the person who has ideally just the right level of experience and specialization to answer these questions. This is a major part of the combination of our reorganization and our technology which is really a critical thing in terms of improving the quality. Right today in the filing season, so far on tax law calls, about 75 percent, we have very a extensive system for monitoring these calls and about 74, well, 74\1/2\ percent of the tax law calls have been answered correctly. That's the other side of the 25 percent have not been answered correctly. On the account calls, about 86 percent have been answered correctly. We have made some improvements on that through training, but the real strategy in the long term is to create this network of specialized assisters so that we will be able to get the right level of training, the right level of experience answering each type of question, and then route the calls to those people because that is really one of the hard problems we have to deal with. Mr. Putnam. Thank you, Mr. Chairman. Mr. Horn. On the seasonal worker problem, is there a problem in not giving them security checks, or do you treat hiring them just as you would hiring permanent employees? Mr. Rossotti. Well, that was a question--an issue that was identified by GAO a couple of years ago as a critical issue, fingerprinting and security checks, and in the past we did not, but we began this program actually in response to the GAO's recommendations about 2 years ago, and we have, I believe at this point, very close to 100 percent where they go through, even the people that work for a very short period of time. I'd have to get you the numbers to know whether there were any exceptions that we may not have gotten 100 percent this filing season, but it is our goal to have 100 percent, and I think we've come close to it this year. I don't know--do you know whether we've gotten to 100 percent? Mr. Horn. OK. What I'm going to do is the last question, I expect an answer from each of you. What are the three most important challenges facing the IRS in the next 3 to 5 years? Let's start over there with the Inspector General for tax administration. Mr. Williams. Well, certainly the modernization, its successful completion and managing the ramp up that Mr. Levitan described to you. We also need to recover from the effects of both restructuring and modernization efforts which have been a tremendous drain. So, that brings me to the second, the drop in enforcement activity and rates; and the third is the continued efforts to raise customer service. Mr. Horn. What's the gap that you see in the enforcement aspect? Do they not have enough personnel or they are not trained yet or what? Mr. Williams. Enforcement levels have dropped seriously since 1996. They have dropped about 25 percent in the examination area, and about 39 percent in the collections area. In addition, that reduced force is being used to help on customer service problems when the IRS' normal work force becomes overwhelmed during this season. Another problem is the criminal enforcement group, the CI is migrating back into to its classic role that the Webster Commission recommended to it, and that it agreed to do. That migration has been a bit slow. They need to complete it. Then the modernization will provide a great deal of assistance in all areas, but enforcement is one of them. Mr. Horn. Mr. Dacey, what do you feel--what's your two best shots in the next three--or the three most important challenges, whatever, in the next 3 to 5 years? Mr. Dacey. I think in line with our testimony today there are really challenges in making sure the IRS gives the right information to the right people, that it is reliable, useful, and timely. I think that has a big effect on their ability to do their work and provide a level of service to the taxpayers that they demand. I think there are challenges in the short term in making sure they continue to manage those projects to ensure they deliver the promised value on time and in budget. In relation to that, their organizational transformation, or realignment, is highly dependent. Some of the long-term goals are highly dependent upon having that type of information. So, I think those are probably the biggest challenges. Those also have an impact on financial management and computer security, that have to be built into the processes that go forward. Mr. Horn. How about you, Mr. Levitan, what do you and your colleagues think ought to be the three most important challenges? Mr. Levitan. The three areas that must be addressed are modernization, customer service, and enforcement. Now, those really are in three separate areas. All of them are tied together and integrated. Modernization will provide the tools to completely reinvent how service is provided and how information is done, and so in the long term the way to solve the service and enforcement challenges is through effective implementation of the modernization program, and managing that program to success is by far the most important and the most difficult. In the short term, service and enforcement can be improved with additional manpower, additional resources. Now, as I indicated earlier, that's not the long-term way to do it. That's kind of like sticking your finger in the dike, you know, to stop the immediate leaking, and in the long term, we've got to rebuild the dikes, and the bridges, and the roads, and all of that, and that's what modernization is about, and the focus on successfully managing modernization is absolutely critical. Mr. Horn. Commissioner. Mr. Rossotti. I think we're all saying the same thing. Mr. Horn. You want the chief financial officer to comment on this at all? Mr. Rossotti. Well, I'd like to ask him. Mr. Rogers. The issues that we're talking about here, and I think the Commissioner is going down this road and I agree with Mr. Levitan, is that it really is an integral piece, and from a personal standpoint as a retiree, if I might say so, I think the country really needs to make an investment in improving this agency, and that's going to mean money, and a little time, and a little faith in making this work. From a financial management standpoint, I'd like to say that this year I think we made great strides. I'm very proud actually of the agency and what happened here, and I join Mr. Rossotti in thanking the GAO team. I think it was a team effort in bringing this about. We are planning the improvements for the coming year, and we think that when we appear here next year, we will have more good things to say about our improvements. Mr. Horn. OK. Commissioner. Mr. Rossotti. Well, I think that we're all saying the same thing in slightly different ways, but let me try to just crystallize it in terms of how it looks when people are trying to manage it. I mean, I said that we have two tracks at the same time. We have to operate effectively and we have to modernize. In terms of the operating effectively part, there are significant opportunities over the next 2 years to improve the way we operate. That has to do with the area of our management team, our reorganization, and our performance measurements. The reason that we've made progress this year as compared with last year is really not due to modernization because it's just starting, and modernization in the technology sense of modernization. It has to do with our organizational and performance measures, and essentially what that boils down to, it's a whole new way of learning to run the organization. You know, every manager from the ground up is learning how to manage in a way that balances customer service, compliance, you know, that looks at things on the basis of continuous improvement, all of those things, and I think we can make significant head way. But, I believe we have an excellent management team in place and we have got a good plan, this plan which I gave to you, which says how to do that. That is one major challenge. The other major challenge which everyone has noted is modernizing, and modernizing is not a technology project. I mean it is a technology project, but if it was only technology, we would be back into the same failures, you know, that we had previously. It really is a different way of doing business. So, those two things together are the sort of the twin challenges. If you wanted to add a third one, which is a sleeper, I think one of the questions that--Mr. Putnam raised this--is that we have to renew our whole work force. You know, we have an aging work force. There's been nobody hired for years in the professional capacities. GAO's Mr. Walker has noted this as a problem across the whole Federal Government, but in the IRS, we are frankly at a dangerous point. I mean, there has been so little hiring for so many years that, you know, the art of actually bringing people into the organization and training them has virtually been lost. We're virtually starting up from scratch this year, and no matter how much you do with technology, you have to have skilled people in order to deal with taxpayers. I mean, you don't send out, you know, automatons to deal with taxpayers. You send people. So, that's on top of everything else, and I think that fortunately the Congress did, in 2001, give us some resources, and we've begun to rebuild that, but it's not a 1-year project. It is not just adding people. It's just replacing the ones that we have. And so, when you add that to it, you've really got the three key dimensions which is learning how to manage in this new way effectively, modernizing, which means changing the way just about everything is done as well as putting in new technology, and rebuilding the work force. That's quite a bit to do. Mr. Horn. Well, we wish you well. Let me thank the staff that prepared this hearing: J. Russell George, staff director, chief counsel sitting behind me; Diane Guensberg is a professional staff member on detail from the General Accounting Office; Bonnie Heald, director of communications; Earl Pierce, professional staff; Matthew Ebert, policy adviser; Grant Newman, assistant to the committee chair; Brian Hom, intern. And our minority staff is Michelle Ash, professional staff; Jean Gosa, minority clerk; and our two able court reporters are Julia Thomas and Melinda Walker. We thank you all for what you did, and gentlemen, we appreciate your coming. Let's see if we can't get a few private collectors to get that money. That's all I'm interested in. Thank you. The hearing is adjourned. [Whereupon, at 4:55 p.m., the subcommittee was adjourned.] [Additional information submitted for the hearing record follows:] [GRAPHIC] [TIFF OMITTED] T7055.093 [GRAPHIC] [TIFF OMITTED] T7055.094 [GRAPHIC] [TIFF OMITTED] T7055.095