IRS' Budget Request for Fiscal Year 1991 and Status of the 1990 Tax Return Filing Season

Published by the Government Accountability Office on 1990-03-22.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

For Release      IRS' Budget Request for Fiscal    Year    1991 and
on Delivery      Status of the 1990 Tax Return    Filing    Season
Expected at
9:30 a.m. EST
March 22, 1990

                 Statement  of
                 Jennie S. Stathis,   Director,
                 Tax Policy  and Administration   Issues
                 Before the
                 Subcommittee    on Oversight
                 Committee    on Ways and Means
                 House of Representatives
                              IRS' FISCAL YEAR 1991 BUDGET
                       IRS'     1990 TAX RETURN FILING SEASON
                                   SUMMARYOF STATEMENT
                                    JENNIE S. STATHIS
                                DIRECTOR, TAX POLICY AND
                                  ADMINISTRATION ISSUES
Faced with funding         shortfalls       of about $825 million            in the past
2 years,    IRS implemented          a hiring    freeze,     curtailed       promotions,
cut back support        services,       and reduced      compliance       programs.
Those actions      reduced revenues           by about $700 million,            according
to the administration,           and led to curtailed            service.       GAO
believes    that   IRS' budget for fiscal            year 1991 could stabilize
the agency's     fiscal     environment.         Although      factors,      such as a
decision    to implement       the President's         pay proposals,          could alter
that picture,      this year's        budget differs        enough from those of the
recent   past to warrant         optimism.       More encouraging          is the fact
that IRS has strengthened             its controls       over spending,         which
should enable      it to better         manage its resources.
IRS' budget includes             initiatives         intended       to increase    revenues by
$3 billion         in fiscal     year 1991.          The initiatives         that call for
additional         enforcement       staff     will,    in effect,       only serve to
replace      staff     that IRS lost         in the last         year and a half due to a
hiring     freeze.        Although       the other      initiatives       seem reasonable,
GAO is not convinced             they can be implemented               quickly    enough to
produce      the promised        revenues       in 1991.
Despite    funding     problems,     IRS has generally           met its varied
returns    processing       and taxpayer      service      responsibilities           this
year and in some important            respects      has even improved.              This
year,   for example,        IRS' telephone       assistors        have responded
accurately     to 78 percent       of GAO's tax law questions,                compared to
66 percent     for the same questions            last    year.       Taxpayers      should be
finding    it easier      to obtain     tax materials         this year.        IRS is
doing a better       job of stocking        its walk-in         sites     and filling      mail
and phone orders.
IRS has also processed      more returns     and issued more refunds     so
far this   year compared to last.        A relatively     small number of
refunds   have been delayed     this year for various       reasons,
including    a breakdown  in controls     that    allowed  a nondelivery  of
computer   tapes to go undetected      for about 2 weeks.
The one aspect of the filing          season that has not been as good as
last year is telephone      access.       IRS' funding    problems   have had an
adverse effect     on the ability      of taxpayers     to reach IRS on the
phone to ask a question      or order materials.          This year,   for
example,    IRS is answering      1 of 3 calls     to its toll-free    telephone
sites;   last  year it answered almost         2 of 3.
Mr.      Chairman         and Members of                      the      Subcommittee:

We are         pleased          to be here                 today       to        assist          the         Subcommittee                 in    its
inquiry          into     the        status          of      the      1990 filing                    season,              IRS'       current
fiscal         condition,                and IRS'            budget          request             for         fiscal           year      1991.
My testimony              makes the                 following              points:

--        IRS has         improved               the       accuracy              of     its      telephone                 service.
          This        year,         IRS assistors                    have         responded                accurately                to 78
          percent         of        our     tax       law questions,                      compared                 to     66 percent            for
          the      same questions                     last         year.           But        taxpayers                 are      having        more
          difficulty                reaching              an IRS assistor.                           This         year        IRS is
          answering             1 out         of       3 calls:             last        year         it      answered             almost        2
          of     3.

--        Taxpayers             should            be finding                it        easier         to obtain                tax     forms
          and publications                         this      year      compared                 to        last.           IRS is doing                a
          better         job        of     stocking            its     walk-in                sites          and filling                phone
          and mail             orders.              Taxpayers               who want             to order                 materials            by
          phone,         however,                are probably                    having        more difficulty                        reaching
          IRS than             in        1989.

          Except         for        a few problems                    that            have      delayed                 some refunds,
          returns         processing                   has gone             smoothly             this             year.          Service
           center        inventories                   are within                  what        IRS considers                     manageable
     limits         and the          percentage               of         returns             with     taxpayer                 errors         or
     IRS processing                  errors           is     lower            than       last        year.

--   Because         of       funding            shortfalls                  in     fiscal          years         1989 and 1990,
     IRS implemented                  a hiring               freeze;                curtailed           promotions;                    cut
     back      training,             travel,           and other                    support          services:                 and
     reduced         various            compliance              programs.                     The administration
     estimated             that      those          decisions                 would          reduce         revenues                 by $700
     million         over          2 years.

--   Prospects             for      a more stable                       fiscal         environment                 in         1991 are
     encouraging.                   The budget               requested                 is     12 percent                 higher          and
     IRS has          improved             its      controls                 over      spending.                  But         such
     factors         as having              to fund            the           various          pay proposais                      included
     in     the     President's                  budget,           if        they      should         be implemented,
     and the         potential               for      another                sequestration,                   could            alter
     those         prospects.

--   IRS'         budget         includes           several               initiatives                that         the
     administration                  has estimated                       will         raise         about         $3 billion                 in
     additional               revenues.              The initiatives                          that         call      for
     additional               enforcement              staff             will,         in     effect,             only         serve         to

     replace          staff         that         IRS lost               in      the    last         year      and a half                 due
     to     a hiring             freeze.            While          we generally                     agree         with         the
     objectives               of    the     other          initiatives,                      which         call         for
     redirecting                 existing           staff,               we are          not        convinced                 that      t.“.~y*
         are       achievable               quickly             enough          to produce              the     promised
         revenues              in    fiscal         year          1991.


IRS'      telephone              assistors               are      answering             tax      law questions                 more
accurately              than        last      year'         but         service         availability               has

Between         February             5 and March                  16,      1990,        we made test               calls        to 29
IRS call           sites         and scored                1,261         responses              to    20 test          questions.
Assistors             answered             the     questions               correctly             78    percent          of     the
time.          Last      year,         assistors                answered           the        same      20     questions
correctly             66 percent              of     the        time.

In     addition,            we monitored                   245 test             calls        made by IRS between
March       5 and 16.                Our scores                 of      those        calls       agreed         with         IRS'
scores         about        94 percent               of        the      time.         Given          the      consistency            of
these       results,             we believe                that         the     accuracy             rates      reported            by     IRS
for     each       of      the      2 weeks           (76 percent                 and 79 percent,                  respectively)
are     reliable.                Those           rates         show that             accuracy           has     improved            over
last      year,         when the            overall             score         from       IRS'        test      was about            63

As the        Subcommittee                   requested,              we Will                continue               to monitor                    IRS'
test      calls          throughout             the      filing            season            and will                  provide             the
results           for     the        hearing          record.

Several           factors            have      contributed                to      IRS'          improved                accuracy             this
year:       (1)         increased           managerial               emphasis                and involvement;                              (2)     a

more      stable          and experienced                      workforce;                   and      (3)      increased                    emphasis
on probing               to obtain             all     the      facts            needed           about            a    taxpayer's                       ,
situation--              a problem             we identified                     in     prior           years'              tests--as
evidenced               by the        development               and use                of    various               assistor               guides
that      identify              probes         and responses                     needed           for       various                 tax     law

IRS'      national              office         developed             a     probe            and response                     guide          when it
became        evident            during          the     design            of      last         year’s             test        that         IRS
lacked        agreed            upon standards                  that           assistors                should              use when
answering               tax     law      inquiries.                 That         guide          is      a good              first          step         in
providing               assistors            with      acceptable                  response                standards.                      IRS
regions           expanded            and revised                 the      guide            in different                     ways so that
various           guides         are        now in use.                  Although               similar                in    content,              the
guides        differ            in    the      way     probes            are          stated         and in             the         tax     law
subjects            addressed.                 These differences                            could          affect             the         accuracy
of      assistor              responses          from        call        site          to    call          site.              IRS should
review        the        various            guides,          cull        the       most         useful             information                    from

each,       and incorporate                      it     into        the         national             guide.                 Once that               is

accomplished,                       IRS should             include            information                  on how to           use the
guide         in        next        year's         training            programs.                IRS agrees                 and plans          to
take      steps           along         these           lines.

Another            IRS effort                 to    improve            telephone            assistors'                performance                 is
the      Taxpayer               Service            Expert         Assistant              System.              This       automated
system,            being            tested         at     IRS'        Boston        call        site,         contains
information                    on about            100     tax        law     "knowledge                bases".              The system
is     designed                so that         an assistor                  can     lead        the        taxpayer           through         a
series         of        questions,                each dependent                   on the         taxpayer's                 response            to
a prior            question,                 and reach            a system-provided                          answer.

We believe                    the    Expert         System            holds        promise            in     improving          IRS’

telephone                service.              Our test               suggests           a lower             accuracy          rate--72
percent            at     Boston             compared            to    a 78 percent                average            at      the   other
sites.             In     contrast,                IRS'     test        results            show that,                after      a bumpy
start,         Boston's                accuracy            rate        is     a little            better          than        the
national                average.              Similarly,               Boston's            rate         of    improvement              thus
far      is    in        the        mid-range             compared            to    other         sites.             At this        early
stage         in        the     system's            development,                   these        results           can be used to
improve            the         design         and use of               the       system.              IRS is         evaluating           the
Expert         System               to decide             on any changes                   or     expansion                to other
locations;                and we will                   continue            to     share        with         IRS any suggestions
we have.
While      taxpayers                 may be having                     less         trouble             getting           correct
answers         to     their              questions,             they         are      having             more         trouble
reaching         IRS.

--      As of          March              17,     1990,     taxpayers                  had called                  IRS about            31.5
        million             times            and IRS had answered                                about          10.7      million        of
        those          calls,              a 34 percent                 answer           rate.             Those          who did        not
        reach          an assistor                  received               busy        signals             or were put                 on hold
        and hung               up before                 LRS took             their           calls.             Taxpayers             were
        much more successful                               reaching                 IRS during                  the     comparable
        period            last            year,     when IRS answered                             11.8          million          of    19.3

        million             calls,               a 61 percent                 answer             rate.

--      IRS also               tracks             the     number           of       calls         answered              on a caller's
        first          or      second             attempt        --a       measure               that      has also              declined.
        As of          March              10,     1990,         IRS had             answered              73 percent              of
        incoming               calls             on the         caller's              first         or     second          attempt,
        compared               to         90 percent             in     1989.

--      Our test               of         IRS'     telephone               assistance                    also      showed         a decrease
        in      accessibility.                           This      year         we reached                 an IRS assistor                     on
        the       first          attempt                55 percent              of      the       time,          compared             to 69
        percent             last           year         and 76 percent                      in    1988.

IRS attributes                      its         reduced         accessibility                     to      funding          cutbacks            and

a higher             than      expected                 demand for              toll-free                 service.               Because        of

funding         cutbacks,                   for         example,           IRS reduced                 the           number           of    toll-
free      telephone                 lines          from          4,622          in    fiscal          year           1989        to     4,411         in
fiscal         year          1990.            IRS also                 estimates             that      staffing                  during          peak
workloads             will          total          4,732          employees,                 down from                5,095           employees
in     1989.          These             reductions                come in             the      face        of        taxpayer              demand
for      toll-free             service                  that,          according             to     IRS estimates,                         is
running         about          7 percent                   higher          than         last        year         and 7 percent
higher         than          IRS had projected                            for        this      year.

In     past     years,              IRS has acted                       to meet             increased                demand by hiring
additional              temporary                  employees               or        by reassigning                     employees                who
have      related             duties.                   IRS officials                   told        us they             have          opted         not
to     adopt         these          measures               this         year         so as not             to        compromise                 the
accuracy          of         assistance                  by using               lesser-trained                       staff.             Ideally,
we would             expect             IRS to maintain                         adequate            levels            of      both
accessibility                  and accuracy.                            Given          IRS ’ recent                  fiscal           problems,
however,             we believe                   its      decisions                 were      reasonable.

AVAILABILITY                  OF FORMS

IRS made several                         changes                this      year         in    trying             to     improve             the
availability                  of        tax       materials.                    Those        changes             appear           successful.

Last       year        we reported                      that       IRS needed                to     improve             distribution                      of
tax      materials                 to    the       public.                Tax        materials             were            not        always

available              at     the     IRS walk-in                    sites          we visited,                    especially              early
in    the      filing          season,             and some                sites          were          not     stocking            certain
forms         and publications                         that         they      were            required             to stock.               Also,
we did         not      receive             about         20 percent                    of      the        items       we ordered                 by
phone        and mail               from      IRS'        three            distribution                     centers,             and we often
did     not       receive            an explanation                        when an item                     we had ordered                    was
not      included             in     the      shipment               IRS sent                 us.

Our spot             checks          of     IRS walk-in                    sites             this       year       indicate            that
forms         and publications                         are more available.                                  Between          January              22
and February                  26,         1990,        we visited                  13 walk-in                  sites        in    5 states                to
check         on the          availability                    of     82 forms                 and publications                      that          all
walk-in           sites        are         required            to stock.                      One site             was missing                8
items,         2 sites              were      missing               6 items,                 and the           other        10 sites              were
missing           5 items            or less.                 That         compares                 favorably           with        last          year
when,         during          the     same general                     time         frame,              we found            15 of       35 sites
missing           10        or more of             the        79 items              that            they       were     required              to

Of this           year's            82 required                    items,          2 (Publication                      553 on 1989                  tax

law changes                  and Publication                        575 on pension                         and annuity              income)
were        not      available               to    any walk-in                     site         until          mid     to    late
February.                   The delay             in     Publication                    553 was due,                   in part,            to
legislation                  that         was enacted                late          in        1989.            According           to    IRS
officials,                  both     publications                    were          also         delayed            because

responsible                 staff      were      also        working             on the            Taxpayer                Service
Expert          Assistant             System.

Taxpayers              can also          order        tax      materials                  by mail              or phone            from one
of     three          IRS distribution                  centers.                 Between               January             22 and
February              23,     1990,      we placed             77 random                  mail         and phone                orders.
Each of          our        orders       was for            4 items            (as opposed                     to        10 items         last
year).           The orders              were     randomly               split            into         four         groups:          phone
orders          of     items         randomly         selected                from        IRS'         list         of     82 commonly
ordered          items,             phone   orders           of     items            randomly                 selected           from      a
list      of     325 less             commonly          ordered               items,         and two groups                       of mail
orders          randomly             selected         from         the        same lists.                      As of        March 9, we
had received                 266,      or 87 percent,                    of      the       307 ordered                     items.

IRS has done                 a better           job     this        year         explaining                    to      taxpayers           why
items      ordered             by phone          or mail            are        not        included              in        the    shipments
received              by the         taxpayers:             but     there            is    still              room for
improvement.                   If     an item         is out         of        stock,            for          example,           IRS is
supposed              to    backorder           the     item        and let               the      taxpayer                know.          Last

year,          IRS failed             to provide             an explanation                        for         61 percent            of         the
items      missing             from      our     orders.              In       this        year's              test,        81 of         the
307 items              we ordered           as of           February             23 were               not      included            in the
initial              shipments         we received                 from        IRS.          In        about             29 percent            of
those          instances,             we received                 no explanation.

We received                   58 percent          of our         mail-ordered                     items          and 86 percent
of     our       phone-ordered                  items     within            the         14 days          IRS tells              taxpayers
to     expect           delivery.               This     compares             with         the     on-time              rates      of     58
percent           for         mail      items     and 84 percent                     for         phone          items      that     we
found         last        year.

As was the                case        with      taxpayers          seeking              answers            to     tax      law
questions,                taxpayers             attempting             to     order         tax         materials           by phone
are     probably               having        more trouble               reaching                 IRS this          year.           As of
March           10,     1990,         according          to     IRS'        statistics,                  the      distribution
centers           had answered                  about     46 percent                 of     the         calls      on the
caller's              first          attempt,          compared         to     66 percent                  for      the     same

period           last         year.


Although              there          have    been some delays                      in      issuing          taxpayer
refunds,              IRS appears               to be doing             a good             job     processing               returns            so
far      this         year.

As of         March           9,     1990,      IRS had received                     3.5     percent              more returns
than       at     the         same time          last     year,         but        had processed                    12.5        percent
more.            Consequently,                  IRS had issued                 about             21.5      million          refunds,
or     16.7       percent             more than          last      year.             A relatively                  small          number
of     refunds            have        been delayed              this        year        due to           various          problems.

Recently,               for       example,             about        250,000             refunds,                including           about
53,000           to     be issued                  through         IRS'      electronic                   filing         program,           were
delayed           about           2 weeks.              The delay               occurred             because             a courier
failed           to deliver                  tapes      that        were        being         transported                  between          the
Cincinnati               Service              Center          and IRS'             Martinsburg,                    West Virginia
computer              facility.                  A breakdown               in      controls               allowed          the
nondelivery                   to go undetected                      for      about          2 weeks.

As many as 170,000                            additional              refunds,              including                  those     on 31,000
electronically                       filed          returns,         were        delayed             about             1 week because
tapes       containing                    data        from      returns            filed       at         the      service          center        in
Ogden,           Utah         could          not     be read         by computers                    at      the        Martinsburg
facility.                IRS officials                      said      that         although               Martinsburg               received
corrected               backup            tapes        within         24 hours,              refunds               were delayed              a
week because                   Martinsburg                  processes              refunds           weekly             and the
refunds           for         that        week had already                      been        processed.

Another           delay           affecting             much fewer                 taxpayers               occurred            because           new
IRS procedures                       to      correct          a 1989 processing                           problem         were not
properly              implemented.                     Last        year,        refunds          due spouses                   of
previously-divorced                              taxpayers           were        delayed             if      the        previously-
divorced              taxpayer               was subject              to     the        refund            offset         program.            The
entire           refund           on jointly-filed                        returns           was erroneously                      frozen
while       refund             offset              action       was taken.                  To prevent                  a recurrence              of
the      problem              this        year,        IRS planned                 to      isolate           these         returns--
which       it        calls          injured           spouse         returns           --during             processing              and

determine           the      proper            portion            of     the      refund           to offset.
Unfortunately,                    refunds           other         than         those         relating            to        injured
spouse      returns               were     set       aside          and frozen                  this      year.             Until       IRS
reviews       the     returns               in more detail,                       it     will          not     know how many of
the      13,000      refunds              frozen         under           the      injured              spouse         program
through       the         first       week of            March           were          frozen          erroneously.                   IRS
issued       n’ew procedures                     that       it      believes             will          prevent             further
errors.           According               to     IRS officials,                        refunds          for      taxpayers
affected          by this           problem             will        be' delayed                 about         4 weeks.

IRS received                considerable                 press           coverage               earlier          this         year     when
it     announced            that      about          566,000             taxpayers               received             tax      packages
that      contained               envelopes             addressed                to     the      wrong         IRS service
center.           The problem                  occurred             because             the      vendor          who printed                the
envelopes           erred          when matching                       taxpayer          addresses               with         service
center       locations.                   IRS said               that      returns              would         be properly
processed           regardless                 of    the         center          receiving              the      return             and that
this      error      should              not     delay           any refunds.                    However,             if      a return            is
processed           by a center                  other           than      the         one      that         would         normally
handle       the     return,              the       taxpayer             may not              be able          to determine                 the
status       of     his       or her           refund            through          IRS’ refund                  inquiry              program.

Service           center
inventory            levels

Although            service             center        inventories                 fluctuate               weekly,       making            it
difficult            to     assess           their         overall          manageability,                       inventory           levels
as of        March         9,     1990,          appeared            to    be within               IRS'     manageability
limits        and were                generally            lower          than        at    the     same time              last      year.
For      example,           the         entity        inventory,                 which       involves              cases      that
require           IRS ;o          update           or correct              taxpayer           files          for     such things
as name and address                          changes,            was about                 39 percent              below      last
year's         level.             Likewise,               the    unpostables                 inventory,              which
involves            transactions                   that      must         be corrected                  before       they         can be
posted         to    taxpayers'                   accounts,           was running                  about         16 percent           below
last        year.          As of           March      9,     two      inventories                  were     running           slightly
ahead        of     last         year's          pace,       although             they       were         both      within         IRS'
manageability                    limits.            The adjustments/correspondence                                         inventory,
which        includes             adjustments                needing             to    be made to                taxpayer
accounts            in     response               to taxpayer              correspondence,                       had increased                 by
about        7 percent,                 and the           unidentified                 remittance                inventory,           which
includes            taxpayer               payments          that         IRS must           research              in order          to
determine            to which               taxpayer            or    tax        period           the     payment          applies,
had      increased               by about            13 percent.

One inventory                    that       for      several          months           had been            well      above         the
level        IRS considers                   manageable               was the              adjustments/correspondence
inventory             at        the     Kansas        City       Service              Center.             One of       IRS'

criteria            for     manageability                  is        that        not     more          than       20 percent              of
the     cases        should            be unresolved                  45 days            after              receipt.           Between
June       1989 and February                       1990,         Kansas           City's            45-day             and older
inventory            was generally                     above         20 percent                and rose                as high      as 34
percent       --a         condition             service          center           officials                  attributed            to
staffing            shortages               due to        IRS'        financial                condition.                 After
staffing            was increased                 and overtime                     authorized,                  Kansas         City's          45-

day and older                    inventory             dropped          below           20     percent            for     the     week
ended        March         2,        1990,      and stood             at      about          17 percent                 as of     March           9.

Errors        on filed                returns

Continuing                a recent            trend,       the        percentage                 of         returns       with
taxpayer            errors            or     IRS processing                   errors           is      decreasing.                 IRS'

cumulative                statistics             for      the        filing            season          through           March 7,
1990,        show that                the     number       of        returns            with        errors             stood      at about
14 percent,                down from             about          16 percent               in         1989 and 18 percent                          in

IRS statistics                       show that          taxpayers                 account             for      about       61 percent
of     the    errors             and that          taxpayers                are        continuing                to make the               same
types        of     errors            as they          have      in        the     past.              Predominant               errors

are      mistakes               in    calculating               or     claiming              the       earned           income          credit
and determining                       the     correct           standard               deduction.                 As in past

years,        IRS made changes                         in tax          forms           and instructions                        in an

attempt             to     reduce           errors              in     these         areas.              Although               the    overall
error       rate           has declined,                        these          areas         continue              to     pose        problems.

IRS'      FISCAL            YEAR
1991      BUDGET

For      the        past        2 fiscal                    years,          IRS made several                       adjustments              to     its
financial                plan         to deal                with      significant                    budgetary            shortfalls--
adjustments                 that           led         to curtailed                  service             and reduced                  revenues.
The most              important               question                 to be answered                        in    assessing             IRS'
budget          for        fiscal           year             1991      is     whether            it      provides               a base      for
stabilizing                 what           has been an unstable                                 fiscal            environment.               We
believe             that        it        does.              Although           various               decisions            could         alter
IRS'      financial                   picture,                we see enough                     differences                between          this
year's          budget               and those                of      the     past         couple            of    years         to warrant
optimism.                  Even more encouraging                                   is      the        fact        that     IRS has taken
steps          to     strengthen                      its      controls            over         budget            execution--steps
that      should            enable               it         to better           manage           its         resources.

IRS'      budget            also           includes                  several            initiatives                that         are    intended
to      increase            revenues.                        The initiatives                     that         call        for      additional
enforcement                 staff           will,              in effect,                only         serve        to replace             staff
that      IRS lost                   in    the         last          year      and a half                due to a hiring                    freeze.
While          we generally                      agree          with         the     objectives                   of     the     other
initiatives,                    which            call          for     redirecting                    existing            staff,         we are

not      convinced             that       they        are      achievable                 quickly         enough         to produce

the      promised          revenues              in       fiscal        year         1991.

Funding          shortfall              in
fiscal       year        1990

As we reported                   last         year,         IRS took             several        steps        to deal             with      a
$360 million               shortfall                 in     fiscal          year       1989.        This      year,          IRS is
dealing          with      a bigger              shortfall              of       about       $465 million.                   IRS
attributed              this         year's          shortfall              to      an unfunded            pay     increase,
growth       in      salary           and benefit                  costs,           sequestration,               a transfer                of
funds       to     support            the      Government's                   War on Drugs,                and a decision                      to
spend       additional                funds          on various               activities            such      as the
distribution               of        forms       and publications                         and the         processing              of
currency           transaction                 reports.

To cover           the     fiscal             year        1990       shortfall,              IRS continued                  the     hiring
freeze       begun         in        fiscal          year      1989;          cut      expenditures              for        training,
travel,          equipment,               supplies,                and other              support         services;              limited
promotions              and position                  upgrades;               and reduced            funds         for
information              systems              other         than      Tax System               Modernization.                     Because
of    the    hiring             freeze,          IRS has not                  implemented            seven         of       the     nine
revenue           initiatives                 that        Congress            authorized            as part            of    IRS'
fiscal       year         1990        budget.               IRS also             made some program                     adjustments
in    an attempt                to    cut      costs,          such          as reducing            its      level          of
taxpayer           service.                 Treasury's               Office          of    Tax Analysis                estimated

that       the      decision          to delay            the          fiscal         year      1990 revenue
initiatives                and to         freeze         hiring           will        result       in      lost     revenues
totaling            almost        $700 million                   in     fiscal         years       1990 and 1991.

As additional                funds         have      become available                          through        reprogramming,
IRS has selectively                        lifted         the          hiring         freeze.           When the           results
of     IRS'      mid-year            financial            review              become         available            in early
April,         we will         know more about                         the       agency's        ability           to    further
ease       hiring          and spending               restrictions                    and the       effect          on
enforcement                revenues.

We discussed                the      impact         of    IRS'           fiscal        problems            with     officials           at
IRS'       National          Office;          Central,                 Midwest,          and Western               Regional
Offices:            Cincinnati,             San Francisco,                        and St.        Louis        District
Offices:            Cincinnati,              Fresno,             and Kansas              City      Service          Centers:           and
Indianapolis,                Oakland,            and St.               Louis         Automated           Collection           Sites.

Our      inquiries           showed          that        field          offices          have      had to eliminate
all      but     the       most      essential            training.                   Some officials                told      us,      for
example,            that     employees              are     not          getting         industry-specific,
computer,            and other             technical                  training         necessary            to do their              jobs
effectively.                 We were           also        told          of      positions         that       are going
unfilled            because          of    insufficient                      funds      to     relocate           employees          and
of     reductions             that        affected          the          use of         space      and equipment.

Field       operations              have       also       been     affected                 by staffing                cutbacks.
As noted          earlier,              funding       shortages                have         made it           more difficult
for     taxpayers            to get         through         to     IRS with                 their          tax       law questions
and contributed                    to    the    growth        in        Kansas            City's           older
adjustments/correspondence                                cases.              IRS'        enforcement                 activities
appear       to    have        suffered            most     from         the         cutbacks.

For     example,          service           center         officials                 told       us of            cutbacks          in
various        service             center       compliance               programs               including              those           that
involve        (1)      the        use of         information                 returns           to        identify           persons
who have          underreported                   their      income            and        (2)       the      audit          of    simple
issues       through           correspondence                 with            the        taxpayer.                Also,
enforcement            officials               at two district                       offices           said          they        expect       to
do fewer          complex           cases       because           of     a shortage                  of      higher          graded
staff       to do the              work.        And officials                       at    one automated                     collection
site       reported          that        22 vacant           tax        examiner             positions                and 3 vacant
group       manager          positions             caused         a significant                      increase               in    the
number       of      older         cases       in the        site's             inventory.                   Other          offices
complained            that         some professional                     staff            are       doing         their          own
clerical          work,        allowing            them less                 time        to do their                 normal
enforcement             activities.

Attachment            I contains               a list        of        the     various              effects           cited        by
field       offices           in    discussing             IRS'         funding             cutbacks.

Prospects              for      a more stable
fiscal       environment                   in
fiscal       year            1991

IRS'      proposed              budget          for      fiscal          year          1991        totals         $6.1        billion            and

provides           for         118,759          average              positions,               an increase                of     about
$635 million                   (11.6       percent)                 and 3,667              average          positions             (3.2
percent)           over         the       authorized                 levels          for      fiscal         year        1990.             The
$635 million                   increase            is a net             of     various             increases             and
decreases.                   The increases                 are         (1)         $377.7         million         to maintain
current       operating                   levels         and handle                  an anticipated                    workload
growth       in        the      processing               of         returns          and the           printing           of      forms;
(2)      $191.0          million           to fund             several              initiatives              directed             at
collecting               additional                tax     revenues;                  (3)     $146.2         million            for
information                  systems,           including               Tax System                 Modernization:                     and (4)
$23.7      million              for       the      War on Drugs                     and an expansion                     of     Internal
Audit       coverage.                    The decreases                  involve             (1)      $58.2        million             in
program           reductions               needed          to offset                 unfunded           pay costs,                (2)       $22.2
million           in     anticipated                  savings,               (3)     $12.4         million            transferred                to
the      Department                 of    Justice             for      the     War on Drugs                  and to Treasury's
Inspector              General,            and (4)             $10.5          million             in nonrecurring                     costs.

For      several             reasons,           this       budget             would         appear          to    provide             the
foundation               for        a more stable                    fiscal          environment                 at    IRS than             has
existed           in     the        recent         past.

IRS,      like      other              federal           agencies,                 was not            allowed             to     include
funds       for      the         1989 and 1990 general                                   pay      increases               in     its         fiscal
years       1989 and 1990 budget                                 submissions.                        In    contrast,              IRS'          1991

budget         submission                 includes               funding               for      one-half            of     the         expected
3.5     percent               1991      general               pay raise.                     Also,        unlike          last         year,          the
1991      budget           reflects               the         impact         of        unfunded            pay      costs--program
reductions               of      $58.2          million              and about                1,600        staff          years.              The
administration                      estimates                 that      the        unfunded               part      of     the         pay      raise
will      reduce           revenues              by $82 million                          in     1991       and by an additional
$153 million                   in      fiscal       year             1992.

Part      of      the         fiscal        year          1989         and        1990        shortfalls                 were     attributed
to     IRS underestimating                              its      baseline                salary           and benefit                  costs.               In
response           to      that         problem,               IRS has reprogrammed                                its      1990        budget           to
ensure         more        adequate               funding              of    baseline                salary         and benefit                    costs
and has based                    its      1991       request                on that             corrected                baseline.                 IRS
officials            believe              that,          barring              unforeseen                  cost       increases,                 the
1991       request             will       cover          their          anticipated                   on-board             personnel
costs.            There          also       appears              to be a heightened                              sensitivity                  in      IRS
regarding               the      need       to consider                     the        long-term              implications                    of
staffing           and promotion                     decisions                    in     terms        of      personnel                and
benefit           costs.               National               office          officials                told        us that             a failure
to     adequately                consider               those          implications                    had contributed                        to      IRS'
problems           in         1989       and      1990.

IRS'         fiscal          stability             should        also         be enhanced                 by improved
controls              over      spending.                IRS now has              the            budget      execution                module
of     its      Automated                 Financial          System           on line,             which             enables
financial              plan         managers,            including              the        recently-appointed                         Chief
Financial              Officer,             to     better        assess          past            and current              spending
trends,             compare          regional            spending             patterns,              analyze             specific
expenditures,                   and project                 future        spending                requirements.                   That
improved              monitoring              capability               should          contribute                    to better
financial              control             and accountability                     Service-wide.

IRS'         prospects              for      an improved               fiscal          condition             in        1991      appear

good t but             several             factors          could       alter          that        prognosis.                  The
President's                  budget          includes           provisions                 for     several             pay-related
reforms,              including              locality           pay      in     three            major     cities,             higher
entry         level          salaries             in grades            5 and          7,     and hiring                and retention
bonuses.               On the             basis      of our          review           last        year     of         IRS'
recruitment                  program,             we believe             that         IRS would            benefit             from      being
able         to offer           higher            pay.       But       IRS'      budget            does      not         include
funds          to     cover         any costs            that        might       be incurred                    if     these
proposals              are       implemented.                   IRS'      financial                plan      could            also     be
affected              by the          anticipated               postal          rate          increase,               which      is    not
provided              for      in     the        budget,        and by a fiscal                      1991            sequestration,
should          that         occur.

IRS'         fiscal          year         1991     budget        also         includes              some questionable
savings.               As in          past        years,        the      budget              includes           savings          expected

from      studies         done        under     OMB Circular                 A-76--savings                     that            IRS has
not      realized         in     the     past      and will            probably            not         realize             in        1991.
The budget             also      includes          anticipated                savings             from        IRS'         conversion
to     the     FTS-2000          telephone          system--           savings            that         IRS thinks                may be
overstated.               To the         extent       these         savings             go unrealized,                         IRS will
have         to absorb         the     difference.

Revenue         initiatives

A major         feature          of    IRS'      budget        is      the        inclusion             of     several
initiatives             that      are     expected           to     raise            $3 billion               in     tax
revenues          in    fiscal         year       1991     and about               $10.0          billion            through
fiscal         year     1995.          Those       initiatives                fall        into         two main

The first             category         provides           more      resources                to    allow            IRS to            (1)

increase          collections             of      additional            taxes           owed but              not     paid,            (2)
audit         more     tax     returns          and refund             claims,            (3)      verify            more
taxpayer          deductions             and credits,               and       (4)       hire       contract

instructors             to     train      new revenue               agents.               IRS is             asking            for     $191

million         to     implement          these          initiatives                 and expects                   them to
produce         $500 million               in enforcement                    revenues             in     fiscal            year        1991 .

The second             category          contains           management                 initiatives                  that        do not
require         additional              resources           but     provide,              instead,             for         a
retargeting             of     existing           resources.                 In      these        initiatives,                       IRS

intends          to    (1)     accelerate            the      closure             of    tax       shelter            cases,            large

audits,           and large-dollar                            appeal           cases:              (2)         audit        more excise                      tax
returns:           and          (3)        do more actuarial                           examinations                      of        small
retirement               plans.                  IRS expects                  this          retargeting                  of        resources                 to
generate           $2.5             billion             in additional                       tax        revenues               in     fiscal            year

The objectives                       of         all     these      initiatives                         seem reasonable.                               IRS'
success           in     achieving                     the    objectives,                     however,              and generating                           the
expected           revenues                     will     depend          on its               ability             to     implement                    the
action         plans            it     has prepared                     for      each             of     the      initiatives.                         In        the
first       category,                  revenue               initiatives,                     we believe                 IRS has a
reasonable               chance                 of     implementing                   its         plans.               IRS'         action            plan
for      the      accounts                 receivable               initiative,                        for       example,             includes                   a
step       that         calls             for         deploying          staff              "in        a manner               that        will
maximize           revenue                  collections".

With       regard          to         the         second        category,                   management                  initiatives,                     we
are      not      convinced                     that         IRS can implement                            those         action            plans             in
the      manner           or         time            necessary          to      achieve                 its      objectives                 and
produce           the      expected                    revenues           in         fiscal            year        1991.             Our opinion

is      based          primarily                     on the      fact         that          these             initiatives                 are
predicated                on pervasive                        changes           to      the            way IRS now does                          business,

which,          taken           together,                    can pose           a significant                          challenge                 to     IRS.

The Congressional                               Budget         Office           (CBO) expressed                           its        views            on the
 initiatives                   in     a report                issued          on March                  5,      1990.              With      respect                 to

the      first            category               of     initiatives,                        CBO said                   that        it      agreed             that            ,

the      initiatives                    "could               be effective                        in      increasing                     revenues,                 but
not      as rapidly                   or        as substantially                            as the               Administration
estimates.'                      Regarding                   the      proposed                  management                    initiatives,                        CBO
said       that           "IRS        has been unable                         to       adequately                          document              how [the
reallocation                     of     staff]               would         be successfully                                 implemented                  in        the
field         and how it                    would            raise         additional                      revenue."

In      the      past,           IRS has been unable                                  to         track           its        progress              in
implementing                     such           initiatives                 or        to demonstrate                              success              in
generating                  the       projected                 revenues.                        We understand                          that      IRS is
developing                  a tracking                   system            to monitor                      implementation                         of         the
fiscal           year          1991         revenue                initiatives.                          One step                 that         must         be
taken          in developing                          such a system                        is         to determine                      the      baseline
against              which            to measure                   accomplishments.                                   In    that         regard,

staffing              levels               in     IRS'        enforcement                        programs                  have         eroded          since
inception                 of      the       hiring            freeze             in    October                   1988,            to     the      point              that

increases                  called           for        in     the       1991          budget               may only                serve          to
backfill              some of               that         erosion--            especially                         if        the     hiring              freeze

remains              in     effect              for      the        rest      of           the          fiscal             year.           After             a major

staffing              increase                  authorized                 by Congress                       in        fiscal            years              1987        and
1988,          for         example,               IRS had 17,323                           revenue               agents            on board                  as of
September                  30,        1988.            As of          February                   1990,           after            about          1 l/2             years

of      a hiring                 freeze,              that         number          had decreased                            to         15,924.               Even

with          the         increase              of     revenue             agent                staff        years               called          for         in      the

1991 budget,                IRS will             still          be below           the     September                     30,      1988,

We    also       have       some specific                      concerns           about        individual                      initiatives.
For      example,           while             we agree          in concept              with      the             desirability                  of
accelerating                the         closure          of     tax     shelter           cases,             large             audits,          and
large-dollar                appeal             cases,          IRS should              assure         that           is        has controls
in place           so that              pressures              to     close       cases        and collect                      dollars          do
not       lead     to      inappropriate                      settlements.                with        regard               to the
proposed           shift          of     resources              to do more               actuarial                 examinations                  of
small        retirement                 plans,           IRS should             ensure         that          it      has adequate
staffing           to      meet         its     other          responsibilities                    in        the         exempt
organization/employee                             plans         area.           And,      while          using             contractors
to    train        revenue              agents       may be a cost-effective                                      decision,               such       a
change           needs      to         be adequately                  assessed           before          IRS implements                         it
across           the     country.                These         concerns           may be assuaged                          as we learn
more about               IRS'          plans.


IRS has had to make some difficult                                               decisions              in        the      past       2 years
 to deal          with      funding              shortfalls            --decisions                that            have         affected

 IRS'       ability          to do its              job.            We believe             that         the         budget           for

 fiscal          year      1991 lays              a foundation                   for      improving                 that         fiscal

 environment.                    More         importantly,                 it    appears          that             the     events          of        the

 past        2 years         have         heightened                IRS'        sensitivity                  to     the        need to

better       manage         its      resources_and                to    maintain               stricter
accountability                for     the       use of      those           resources.                We are      especially
encouraged            by the         leadership            we see           being          provided        by IRS'           Chief
Financial           Officer          in    bringing         more direction                         and oversight             to    the
budget       execution              process.

Despite       its      funding            problems,         IRS has generally                         been able             to
satisfactorily                meet        its     varied      returns            processing               and taxpayer
service       responsibilities                     during         the       filing           season.        Although              the
refund       delays         are      troubling,            they        have      apparently               affected           a
relatively            small         number        of    taxpayers.               We will             continue        to
monitor       that      area         during        the     rest        of     the         filing      season.           We will
also      continue          to monitor             IRS'     progress                 in    answering         taxpayers'
tax      law questions.                   We applaud          the       significant                  increase          in the
accuracy         of    answers            being        provided         by IRS'              assistors,          but        are
somewhat         troubled            by the decreasi,ng                     ability            of    taxpayers          to get
through       to      the     assistors.

That      concludes  my prepared                         statement.              We will             be happy          to
respond       to any questions.

ATTACHMENT I                                                                 ATTACHMENT I
                                             EFFECTS OF
                                  IRS'      FUNDING CUTBACKS
These effects   were obtained  through     discussions       with various    IRS
officials   and were not independently      verified.        In many cases we
were unable to get specific    information        to quantify     the impact
(in terms of lost   revenues,  for example).
Cutbacks    in    training,       travel,     and other    support    services.
   Because of a 50 percent        reduction   in the region's      training
budget,   most outside    training,      all advanced technical       training,
and most cross-functional         and management training       that was not
provided   by December 3'1, 1989, wil!l       be eliminated.      (Midwest
   Cutbacks   in training   have affected    specialists       (such as people
iorking    in resources   management and information         systems)  because
those kinds of people need outside        training.      (St. Louis District)
    Funds are not available       to train    programmers            in new computer
ianguages.    Without   training,      personnel    cannot           provide  the kind
of support   needed to write,       modify,    and update            computer programs.
 (St. Louis District)
   Other than a l-day course on the Taxpayer       Bill    of Rights,
Examination     personnel    have not been trained on 1987 and 1988 tax
law changes.       We were told that Examination   personnel     started
working    1987 cases     in the summer of 1989 and that training        for
the 1987 and 1988 tax law changes is scheduled          for May 1990. (St.
Louis District)
   Very little,       if any, continuing            professional   education    has been
irovided     in the last     2 years for          Examination    and Automated
Collection      Site personnel.       Only        2 or 3 of the 10 Examination
employees who needed training             in      the insurance     area received   it.
 (Cincinnati     District,    Indianapolis           Automated   Collection    Call
  Positions        could      not be filled   through  internal    transfers
because    of    limited       relocation   money. (Midwest     and Central
   The number of telephone  lines                in such activities        as Examination
ind Collection  was reduced from                 1,200 to 900.      District     officials
said that about  half of the cut                 lines  were probably        not needed.
 (San Francisco District)

. The space allocated       for a district     office   move was based on the
expectation     that  it would be furnished        with systems furniture.
Because there      is not enough money to buy all of that furniture,
the new space will       be inadequate     to accommodate some staff.      (St.
Louis District)
   The district     is renting      about 15,000 square feet of office
ipace at a cost of about $350,000            a y-ear.  Because of the hiring
freeze,   the district        does not know how many people      it will have
to accommodate in the space and thus has not laid              telephone  lines
and computer    cables.        In the meantime,    the space remains vacant.
 (San Francisco     District)
   Funds were not available      to maintain     the district's      local               area
Network.    When the system failed,       the district      was able to
purchase   only 12 of the 36 machines        needed to replace       the           old
system.    We were told that,      as a result,     the district's
automation    effort has gone backwards.         Instead    of pressing             a key
to use electronic    mail,   users now have to print          a copy of            the
document,   make copies,    and address     envelopes    or hand carry               the
document.     (St. Louis District)
Cutbacks    in   staffing
   We heard pervasive   complaints    about lack of support   staff                      and
;he need for higher-graded      employees   to do clerical  work.
   Staffing     cuts caused the percent       of overaged   cases in the
idjustments/correspondence       inventory      to rise   to as high as 34.4--
well above IRS' level       of manageability.       (Kansas City Service
   The accessibility     of IRS' toll-free            telephone    assistance   has
dropped   this year compared to last.               This year,     for example,    IRS
is answering      1 out of 3 calls;    last        year,    it answered almost 2 of
3. (Nationwide)
   Work in the Underreporters      Program (whereby      IRS identifies
income underreported     through   matching    of information      documents
with tax returns)    was deferred.      (Kansas City and Fresno Service
Centers)   A Fresno official      estimated    the revenue    effect    to be
about $16.6 million    in unrealized      assessments.
   Work in the Substitute             for Return      Program (whereby       IRS uses
iata on information           returns     to create      income tax returns      for
nonfilers)       was cut back.          (Cincinnati,       Kansas City,     and Fresno
Service     Centers)       Fresno had a backlog           of about 200,000 cases
which, we were told,            would average        about $5,000      in tax liability.
A center     official      estimated       the revenue      effect  of the shortfall
 in this program to be about $42 million                    in unrealized
assessments.          Kansas City had a backlog             of about 65,300 cases
which,     we were told;        would average        about $5,000 in tax liability.
     We were told,    also, that these cases could eventually         be worked
     because there    is no statute  of limitations       but that their
     deferral   could reduce IRS' potential       for collecting   anything     on
     these cases by making it more difficult          for IRS to locate     the
     . The Service    Center      Correspondence     Audit     Program (whereby IRS
     audits   simple  issues      through   correspondence)        was reduced about 20
     to 25 percent.      As a     result,   the center     will    work about 15,000
     fewer cases this     year.       We were told     that the average assessment
     for this    type case is       $1,500.   (Kansas City Service        Center)

        Tax examiners        were moved from the Service           Center
      Correspondence        Audit    Program to do clerical        work in the
      Examination       Support     Unit.   The clerical     work in the Examination
,     Support    Unit involved        processing   paperwork     related    to tax
    ' shelters     including      the paperwork    necessary     to protect       the Statute
      of limitations        on shelter     cases.   (Fresno   Service     Center)

     . Because     of limitations      on what kinds of cases can be worked by
     employees     at certain     grade levels,   the cutbacks      in hiring    and
     promotions      have caused some higher-graded         enforcement     cases to go
     unworked.     (Cincinnati     and St. Louis Districts)
        Agents in the Criminal         Investigation         function     have been taken
     off the line        to act as managers because vacant management
     positions    cannot be filled.        (Midwest      Region)       That same region
     noted that about l/3 of its special                agents would be retiring        in
     the next 5 years and that it should                already      be in the process of
     hiring    and training     replacements        because it takes about 3 years
     to get a new agent ready.            The   hiring     freeze     has affected  the
     region's    ability     to do that.
         Because Information         Systems cannot   hire backups,     they do not
      always have properly         trained  people  to fill  positions.      (Kansas
      City Service    Center)
         The presence     of 22 vacant tax examiner       positions        and 3 vacant
      group manager      positions  contributed      to a significant         increase     in
      the number of      overaged  cases in the Automated         Collection        Site's
      inventory   and    caused the site     to curtail   sending      letters      to
      taxpayers   for    whom they had no phone numbers.           (Indianapolis         Call