Barely Holding Its Own

he oversight board was one of the more hotly debated mandates of the IRS Restructuring and Reform Act, which President Clinton signed into law July 22, 1998. Consisting of six presidential appointees from the private sector, the Treasury Secretary, an employee representative and the IRS commissioner, the board was given unprecedented powers to oversee agency operations, including selection, evaluation and compensation of senior managers. The board is required to approve the IRS budget before it can go to the Treasury, IRS' parent department, and is required to notify Congress of IRS improprieties.

These provisions give a panel dominated by private citizens wide-ranging authority over an executive branch agency. But because the board's members have yet to take their seats, no such oversight has occurred.

The reform act gave the President six months to name the board members. In May-more than four months late-Clinton nominated the employee representative and four people from the private sector. Republican members of the Senate Finance Committee promptly expressed dissatisfaction with the credentials of two nominees, and one withdrew. Two more nominations were announced, in August and October, bringing the total to six.

When Congress went home in November, it had not begun reviewing the nominations because one remained to be announced. The senators wanted to consider and confirm all the nominees as a package, a Senate source explained.

The administration's delays in nominating board members didn't sit well with Congress. During a House-Senate hearing on the IRS last May, Republicans and Democrats castigated the White House for the delays. "The administration has really dropped the ball here," said Sen. Charles Grassley, R-Iowa. Sen. Bob Kerrey, D-Neb., told Commissioner Charles O. Rossotti, "You sort of act as if you were the board right now."

On Many Fronts

Meanwhile, Rossotti is plowing ahead with a far-reaching reorganization. After proposing the new organizational structure in January 1998, Rossotti formed the first of four new divisions almost two years later, in December 1999. The remaining three units are expected to follow in the next year or so. They are organized around customer segments-small businesses, individual taxpayers, large corporations and nonprofit organizations-rather than geographically, as the old IRS was organized.

At the same time, IRS has been instituting new performance measures. Too much emphasis on enforcement and revenue collection in the old measures is believed to be one source of the widespread loss of confidence in the agency. The new, balanced scorecard has three areas of emphasis: customer satisfaction, employee satisfaction and business results.

The agency began at the top, with managers and executives, revising critical job elements. "It is important that the critical job elements that people are evaluated against are in alignment with our balanced measures," says Kelly Cables, the agency's performance management executive.

Next up are revenue agents, revenue officers and tax examiners. "We're trying to start with the people who interact with the public," Cables explains. The agency has vowed that performance of front-line employees will not be measured by the dollars they generate, although revenue collections will be one consideration in evaluating organizational performance. Another factor, not always considered in the past, will be quality of results. For example, the customer satisfaction metrics for some jobs include the employee's knowledge of his or her job. "We want people to see that their job knowledge has a direct impact on customer satisfaction," Cables says.

Employee involvement is intrinsic to the new IRS ethos. Cables says his staff interviewed more than 400 managers in the course of developing critical job elements for managers. The agency has included the National Treasury Employees Union, which represents most of the agency's 98,000 employees, in many of the planning and implementation teams. In Senate testimony in October, NTEU President Colleen M. Kelley hailed the employee involvement as a model for federal labor-management partnerships.

The High Cost of Change

Nonetheless, the reorganization and modernization is a wrenching experience for many employees. New managers and reporting channels, new laws and rules-even new job locations in some cases-are stressful. The IRS has little extra capacity with which to accommodate the change. "We're rebuilding the house while we're living here," Rossotti told the joint congressional committee in May.

The agency has won extra funding for certain modernization expenses, but there is little wriggle room. Head counts have declined by 16 percent during the last decade, the computer systems were out of date a decade ago, and the public and Congress often won't give the agency the benefit of the doubt.

One consequence of the drive for change is a significant reduction in IRS enforcement activity-and receipts. With a smaller workforce, diversion of employees to modernization projects and new rules of behavior, employees are uncertain as to how to proceed and simply can't devote as much effort to collections. IRS audited about one-third fewer tax returns in 1999 than it did in fiscal 1997, Rossotti says. The number of liens placed by the agency on taxpayers' property, preventing them from selling before they pay the IRS, dropped from about 799,000 in 1995 to 167,867 in 1999.

As a result, revenues from collection activities dropped from $29.9 billion in 1998 to $29.2 billion in 1999. That drop-off was just a tiny fraction of the $1.8 trillion the IRS took in last year. Agency officials say that 98 percent of taxes are paid voluntarily, leaving only 2 percent to be collected by persuasion, persistence and force. They predict collections will pick up as the new organization gels. Employees are stepping up their collection activities now that they're finding that senior managers won't be over zealous in enforcing the new law's provisions aimed at halting harassment of taxpayers.

But many people within IRS are concerned about the potential effects if the decline should persist. They fear voluntary compliance with the tax laws may diminish if taxpayers believe other people are getting away with tax evasion. "Never was there a better time than today to be a tax cheat in the United States," says one agency veteran.

Service Imperative

One reason for the collections drop-off is that employees have been moved into customer service jobs. Customer service is the agency's mantra these days, and it will spend an extra $13 million a year, beginning this year, to train employees in dealing with the public. "General customer service competency norms for those front-line employees who have contact with taxpayers are currently at a standard score of 30 [out of 100 points], compared to a private-sector standard score of 50," an IRS budget summary says. "The goal is to improve critical competencies by at least 10 points per year to a standard score of 80."

Other aspects of the agency's dealings with the public need improvement as well, Rossotti acknowledges. "We are still sending over 100 million notices per year to taxpayers that often only a tax lawyer could decipher," he said last fall. "When taxpayers call us to get information or to respond to one of these notices, the chances of getting through are only about 50 percent." Once on a phone line with an IRS representative, he added, the taxpayer is not out of the woods because the agency's antiquated computer systems do not provide a fast, accurate picture of the IRS' dealings with the taxpayer.

Two and a half years after former Chief Information Officer Arthur Gross produced a blueprint for modernizing those computer systems, the IRS was still struggling to produce an updated blueprint and implementation plan. The revised plan is more ambitious, says CIO Paul J. Cosgrave, adding financial and management systems to the tax-processing ones and speeding up the expansion of capacity to accept electronic tax forms and payments from taxpayers.

Uncomplicated individual tax returns such as the 1040-EZ and the returns received by telephone will be the first processed on the new systems, and it is here where Cosgrave predicts that taxpayers will see a tangible benefit-much faster refunds. The refunds will be processed in "days, not weeks," he says.

Coalition-Building

Although Cosgrave doesn't say so, some of the modernization delays have been due to team- and coalition-building to head off political problems. Almost every change the IRS has undertaken, beginning with its new mission statement, has begun with formation of a special project team and extensive consultation with those who might be affected.

One notable example: General Accounting Office representatives have attended the meetings of the executive committee overseeing development of the agency's new tax processing systems. As a consequence, GAO is less likely to demand more information or stand in the way of funding. GAO is reviewing each IRS request for modernization funds.

"GAO is an active part of this process, every step of the way," Cosgrave says. He calls the auditors' inclusion "a much healthier way of working" and says his colleagues in other agencies should give it a try.

In many ways, the new methods seem to be succeeding. The agency is getting better press and fewer bashings in Congress. But there are persistent signs that not all is well. For one, IRS' score in the American Customer Satisfaction Index survey released in December was one point lower than a year earlier, which in turn was one point lower than the year before. IRS' score of 51 out of 100 points was the lowest of any
agency, while the federal government's aggregate score of 68.6 came close to equaling the private-sector customer satisfaction average of 72.

Some employees are becoming concerned about what they see as less communication from headquarters during a time of upheaval. They say far less statistical information about agency operations is available to employees than was available a few years ago. "That makes it very difficult to assess information and deal with it," says George L. Deller, who works with the taxpayer advocate unit in New York City.

GAO continues to criticize pervasive weaknesses in financial management and the systems that track the $8 billion in annual IRS appropriations, as well as the $1.8 trillion in tax revenues that pass through the agency.

Meanwhile, the Treasury inspector general for tax administration reported in September 1999 that the agency's offices were continuing to use audit and collections statistics in evaluating the performance of individual employees, in violation of the IRS reform act. Agency officials said they believe the new performance evaluation system, training for managers and other recent actions will stop the use of quotas, but it illustrates the difficulty of cementing changes into a large, widely distributed organization.

Long-Term Commitment

Asked about the major challenges that could sink Rossotti or his modernization program, Paul R. Lawrence, a Pricewaterhouse Coopers partner who has assisted the agency with the modernization, doesn't hesitate. He says Rossotti probably is correct when he says revamping the agency and its systems will take 10 years. But whether the commissioner's program can command the needed resources, including public and political support, for an entire decade still is by no means certain.

Rossotti needs the kind of buy-in he's been achieving with the inclusion of GAO, Lawrence says, because "if it's just the sheer weight of him doing it, he'll run out of time."

The American Customer Satisfaction Index report at year's end turned up one piece of encouraging news. Although IRS achieved a customer satisfaction score of 51 among all the tax filers surveyed, the taxpayers who filed electronically gave the agency the much higher score of 74-higher than the private-sector average.

As the agency firms up the modernization plan, it has accelerated implementation of its electronic tax return filing projects, increasing its capacity to accept returns and payments over the telephone and the Internet. Electronic filing via computers increased 27 percent last year, compared with 1998, with the biggest percentage growth among individuals using home PCs.

But there are still many taxpayers who need or merely want to call IRS with a question, or perhaps send an e-mail or fax query. The availability and quality of IRS' telephone services were worse last year than in 1998, GAO reported in December (GGD-00-37). Even more alarming, only 65 percent of IRS' responses to e-mail queries were accurate.

Technology can help IRS respond better, but ultimately it is people who must provide services to the public, and people who deal with taxpayers in arrears. This year, IRS moved 580 jobs out of operations but said it would draw the line there. "Further decreases to our staffing levels would hamper our ability to implement modernization," a budget document says. "The IRS organization has exhausted its ability to do more with less, at least until" the reorganization and new information technology are in place.

Congress agreed to maintain staffing at just fewer than 98,000 full-time equivalents, but whether it will be as supportive in coming years is an open question. Rossotti says that so far, "our stakeholders' tolerance belies the conventional wisdom of Washington that instant gratification is required." But, he warns, "eventually, patience will run thin." When that happens, the outcome will be anyone's guess. GPP report card

Return to GPP home

Return to 2000 GPP issue

1999 GPP story about IRS