For Better And Worse

owns lay in ruins. Debris from homes, stores and car dealerships pocked the Oklahoma landscape where a powerful twister had left a 38-mile long scar. More than 40 people died on May 3, 1999, in a storm that brought with it some of the worst tornados the Sooner State had ever seen.

Devastated families showed up at disaster recovery sites for assistance. Naturally, Federal Emergency Management Agency workers and American Red Cross volunteers were on hand to help. More surprising, perhaps, amid the water bottles, bandages and aid workers, were groups of employees from the Internal Revenue Service. Michael Birdsong, the IRS governmental liaison officer for Oklahoma, and other IRS workers were there to help people file for immediate refunds on their 1998 taxes as a small measure of financial relief. "Normally it would take 45 to 60 days to prepare and turn around claims," Birdsong says. "We were able to get a seven- to 10-day turnaround."

IRS workers provided similar assistance to victims of the Sept. 11 terrorist attacks on the World Trade Center and the Pentagon, quickly drafting policies to ease the financial burden of the disaster on families and businesses. In addition, a recently passed law will grant retroactive tax relief to victims of the 1995 Oklahoma City bombing, and Birdsong and his fellow IRS colleagues will be there to help. Disaster can bring out the best in organizations. But it can also serve as a stark contrast to normal times, when organizations can seem mired in mediocrity. Take the IRS. Its workers have responded with speed and kindness in times of disaster. But its day-to-day service record is lackluster. Callers to the IRS telephone service get busy signals or give up 40 percent of the time and wait an average of five minutes to talk to someone when they do get through. They get wrong answers to their tax law questions 24 percent of the time and wrong information about their accounts 31 percent of the time.

Letters from the IRS sometimes are unnecessarily threatening. Some 60,000 military personnel who served in combat zones in recent years-and who were therefore entitled to special tax treatment-received letters early this year warning them to respond-or else. "If you don't answer this letter, we will update your account to show no combat zone service," the IRS letters said. After hearing from Defense Department officials, the IRS promised to send less threatening letters and assured war veterans that they wouldn't lose their special tax treatment.

IRS National Taxpayer Advocate Nina Olson, whose position was created in 1998 partly to help the agency get better at dealing with the public, says employees live by the book-a good thing, within limits. "Their allegiance to the 'Internal Revenue Manual' can be the saving grace for a large bureaucracy," she says. "On the other hand, it can become a wonderful weapon against common-sense thinking. If the manual doesn't say we can and it doesn't say we can't, that means we shouldn't do it.

"It's a 'Mother-May-I' approach to creativity," she says. That approach helped create a homegrown disaster for the IRS in the late 1990s.

The Doom Loop

"The IRS in about 1997 and 1998 was basically blowing up and being put back together again," says IRS Commissioner Charles Rossotti, who took over the agency in November 1997. Rossotti came to the IRS from American Management Systems, a Fairfax, Va.-based technology company he helped found in 1970. Before that, he worked in the Office of the Secretary of Defense in its systems analysis unit. His appointment broke with tradition, putting a management specialist, not a tax expert, in the high-profile position.

Rossotti had inherited an organization stuck in what business author Michael Collins calls "the doom loop" in Good to Great (HarperBusiness, 2001.) IRS leaders lurched from providing service to cracking down on suspected tax cheats and back again. They forced employees through a series of upending, but not particularly effective, reorganizations. The agency managed its technology much the same way, floundering among priorities and frequently reshuffling the modernization deck. "Since the IRS is an agency that touches everybody, I think what's most important is what the confidence of the public in the IRS is. That's why we were in trouble," Rossotti says.

"[Polling firm] Roper has done a survey since the early 1980s of the IRS' favorability rating. Over a 15-year period, the IRS went down a straight track, and in 1997 hit 32 percent-the lowest number Roper had ever recorded. More than two-thirds of the public had an unfavorable opinion of the IRS. No wonder the place blew up.

"Ironically, it goes back to the budget," he adds. "If Congress reflects the will of the people, then it drives the budget further into the ground. It's a vicious cycle downward."

When the Federal Performance Report last graded the IRS at the beginning of 1999, Rossotti had been aboard for one year. He had just begun a completely new strategic planning process aimed at better focusing the agency on results. The ink was still drying on the restructuring act, which included new powers for IRS leaders to break from standard civil service rules and a sweeping mandate to improve customer service. The agency's technology specialists were working overtime on the year 2000 computer glitch. That potential disaster was avoided. Handed an agency in disarray, Rossotti has worked to end the downward spiral and get the IRS moving in a positive direction.

The Flywheel Effect

Given the IRS' image as a technological backwater, you would expect Schwartz to be sitting behind a steel desk in a harshly lit room, toiling over a box full of paper files and counting beans on an abacus. Instead, Schwartz often works at home on her laptop computer, tapping into the IRS' system via a secure, dial-in modem. She can send e-mails, research real estate holdings, check locator services for missing taxpayers, generate audit reports, keep activity records and review taxpayers' accounts, wherever she and her laptop are. When it's necessary to speed things up, Schwartz even can log in to the IRS system while she's on-site with a taxpayer. Across the country, workers like Schwartz have been getting new desktop computers or laptops over the last three years, and they are increasingly able to access numerous applications at one time.

The improvements are part of Rossotti's effort to get the right tools to employees so they can do their jobs better. But Rossotti is careful to explain that the modernization is not going to be completed overnight. While Schwartz can easily multi-task on her laptop, she still has to request old tax returns using a paper form, and they may not arrive for six to eight weeks-delaying completion of an audit. To speed up audits, Schwartz and other agents often ask taxpayers to fish out copies of their old returns themselves. Schwartz has also been victim of a phenomenon agents call "The Blue Screen of Death," a message that pops up from time to time warning agents that everything is going to be dumped from their computers. Thankfully, the threat usually isn't fulfilled.

In Cincinnati, revenue officers-those who deal with taxpayers primarily on the phone-have laptops on which they can do some work from home, but they don't have secure dial-in access. They also have to use four separate workstations in the office to access all the applications and information they need, some of which are available on only one computer per work group. "When you have 13 people competing for one computer, you don't have a lot of time frames to choose from," revenue officer Barbara Boemker says.

Melody Oswalt, a group manager of revenue agents, notes that because the case assignment system is updated only once a week, she has to enter assignments for her agents into a computer system by Wednesday each week if they are to reach agents by Monday. If she enters an assignment on a Thursday, it won't reach the agent for a week and a half.

But even with the limitations of their technology, IRS employees report that they are better off than they were three years ago. In a 2001 employee survey, 48 percent of respondents said computer information systems had improved over the last year, compared with 33 percent who saw no change and 19 percent who thought the systems were worse. That's not wildly impressive progress, but at least it's progress. Little steps are important when trying to get out of the "doom loop." In fact, they're essential to a turnaround, says Collins-"a cumulative process-step by step, action by action, decision by decision, turn by turn of the flywheel-that adds up to sustained and spectacular results."

That flywheel effect is not readily apparent in conversations with IRS information technology executives in Washington. They speak mostly in the future tense, having spent most of the last three years writing long planning documents that plot the next decade of IT modernization and making sure myriad technology projects all fit into one big picture. The Business Systems Modernization, as the headquarters-led effort is called, has so far rolled out two products-a software package that does complex calculations for revenue agents and a system that more effectively routes telephone calls to the IRS' toll-free telephone service.

But most of the modernization is slated for the future. Five more projects are due for completion this year, including the first steps toward moving taxpayer information off 1960s-era computer tapes and into modern databases. Even with those first steps, it will be years before the IRS is totally free of its magnetic tape system, the bane of the agency's technological existence. The system allows updates only once a week, meaning taxpayers often get computer-generated warnings after they've already resolved problems with IRS phone representatives.

One reason progress seems slow-only two modernization projects have been completed in three years-is the complexity of the effort. The IRS had to start from scratch four years ago to first develop a new overarching business strategy, and then figure out how technology would fit into it. As the business strategy has been tweaked, the technology plan has had to change as well. Planners had to map out existing systems and figure out how to keep them operating-and tax money coming in-as new systems were installed. They had to consider the effects on the entire system of changing any individual component.

"This is a very large contract, probably the largest, most complicated civil contract that I've ever seen," says Stephen Kalish, president of Computer Sciences Corp.'s civil group and a 37-year veteran of the federal technology market. CSC is the IRS' prime modernization contractor, overseeing the work of dozens of subcontractors. "Contracts are as much about culture and organizational change as they are about technology. The IRS was used to its methodology of enhancing and maintaining the current operating environment, rather than developing a new architecture," Kalish adds.

Another reason modernization is behind schedule is turnover. The IRS has had three different chief information officers in the past four years. Turnover has also been frequent among IRS executives and CSC managers overseeing the Business Systems Modernization effort. The IRS' Information Technology Services Division, which maintains the agency's current systems, was about to go through a major reorganization when new CIO John Reece took the reins last year. He halted the reorganization and is now working with field representatives on a new plan.

Financial management is so closely tied to the success of the systems modernization that the lack of major progress in IT has meant improvements to the agency's accounting system have come to a standstill. The IRS gets clean audits on its financial statements, but only after exhaustive manual efforts by the agency's finance staff. In addition, the agency has no cost accounting system, making it difficult in some areas and impossible in others for managers to figure out what results they get for the money they spend. "We need to get to the point where we can spread [costs] like rent and postage by business unit," says IRS Chief Financial Officer Todd Grams. Barry Bozeman, a Georgia Tech professor who has extensively studied technology management at the IRS, credits agency officials for developing a modular, incremental approach to modernization. A key problem with the previous modernization push, which ended in 1997 with little to show, was the IRS' desire to spend a lot of money quickly to get projects done fast, he says. Some problems persist. One is insularity-longtime IRS technologists see their world differently from the contractors who come in to modernize the systems and the private sector executives who oversee them all. Another is the bureaucratic impulse to become obsessed with processes and lose sight of results. "The IRS has a tendency to let process become a prison," Bozeman says.

Despite those problems, the flywheel is moving. With five modernization projects scheduled to roll out this year, 2002 could decide whether the momentum will continue. Bozeman is optimistic. "They're pretty much on the right track," he says.

Asking Tough Questions

Rossotti expects the same kind of follow-through from his executives. When he took over the agency in 1997, he says, "there was no strategic plan, but more importantly there was no strategic planning of any substance." The commissioner has spent the last four and one-half years indoctrinating his executives in the disciplines of strategic planning and performance measurement. IRS executives and others who have presented plans and follow-up reports to the commissioner say he asks the toughest, most pointed questions they've ever heard. "You're institutionalizing a process of managing, of thinking," Rossotti says. "My feeling is it's better to at least have a thinking process going even if you don't have perfect data."

As an example of the process, Rossotti points to an investment the agency made in software. Executives made the case to Rossotti for a software package that would automatically perform tax calculations for revenue agents. The executives promised a return on investment in the form of more productive agents. After the software was installed and put to use, the executives failed to show any gains in productivity. He recalls saying to the executives: "But we had a business case a year ago that said we were going to gain so many staff years of revenue agents' time. They were going to be able to do some tax calculations on an automated basis and you wouldn't have to waste their time doing it."

Rossotti says the project leaders responded: "Well, you know, blah, blah, blah, you know, we weren't really sure whether we were going to get it."

But Rossotti wouldn't let them off the hook. "No. This is what we agreed on. Go back and take a look at it," he told them. Later, the executives were able to show a return on investment. "In the end, there was nothing wrong with it," Rossotti says. "People are inherently conservative. They don't want to stick their neck out and say, 'Yeah, we're really going to save these number of staff years.' But now they're getting the message that we have to do this."

Instilling a culture of follow-through-making sure people do what they promise-takes time. Rossotti says the discipline is still far from perfect, but it has become more ingrained each year he has headed the agency. During his first year on the job, Rossotti discovered agency executives had formed an ad hoc committee to manage the tax filing season. "I said, 'Wait a minute, isn't there a filing season every year? This is a surprise? Why don't we have it organized so that we know who's in charge?'" Now the success of the filing season is the responsibility of one executive.

Rossotti is driving home the message of follow-through by tying executive bonuses to the achievement of agreed-upon results. Executives, in turn, are tying senior managers' bonuses to lower-level results. This results-based pay system reaches four levels down into the agency. That system of accountability is possible because of the sweeping reorganization that Rossotti instituted in October 2000. The agency is now divided into four primary business units, each focusing on a separate segment of the taxpayer population-individual taxpayers, large- and medium-sized businesses, small businesses, and tax-exempt organizations and government agencies. Before, the agency was geographically structured, with 33 district offices overseeing all taxpayer segments in their districts.

The goals handed down the new chains of command fall into three categories: customer satisfaction, employee satisfaction and business results. Under this "balanced measures" approach, managers must meet standards in each area. "In the past, the IRS was pretty much consumed with one component of business results. That was quantity. There was not that much focus on quality or employees' or customer satisfaction," says CFO Grams. "We're no longer measuring components of the organization on how much money did you collect, how many liens did you issue or how many seizures did you make."

The new pay-for-results system prevents executives from giving outstanding ratings to all of their subordinates. There are only so many "points" that an executive can hand out in each rating cycle, and the limit on points means that some managers will receive mediocre marks. Wayne Hicks, head of the IRS' Cincinnati processing center, says the new system requires a careful thought process and open communication with subordinates. "It shouldn't be surprising you if we have a deal breaker," Hicks says. "There has to be a system. I don't mind the game as long as I understand the rules and everyone else understands the rules."

Despite the deepening discipline of follow-through, Rossotti concedes that the agency has a long way to go to instill accountability. In a Federal Performance Project survey, managers reported that it was difficult to reward or punish employees based on their performance. An IRS-sponsored survey in 2001 asked whether employees thought the agency was well run; 50 percent of respondents gave management one of the two lowest marks on a five-point scale.

The other key challenge in performance measurement is discovering whether the IRS is collecting all of the taxes that Americans owe. The agency hasn't measured taxpayer compliance since 1988, and even then the method was flawed, Rossotti says. In January, Rossotti announced that the IRS would conduct random audits of 50,000 taxpayers, which would give the agency a statistically valid sample to estimate the amount of taxes that people are and aren't paying. But the IRS has to tread carefully, since previous random audits tarnished the agency's reputation and helped fuel the resentment that led to the management disaster in 1997-1998.

"The ultimate measure of the IRS is, are people paying all the taxes that are due and are people satisfied with the service they get from the IRS," Rossotti says. "That's what we call strategic measures. We don't have those measures yet."

The Human Toll

But within the agency, popular opinion about the effect of reform is mixed. In response to the agency's 2001 employee climate survey, 42 percent of employees said the organizational changes have had a negative effect on them, compared with 24 percent who reported positive effects and 34 percent who reported no effect. "The whole organization has been turned on its head," reports Colleen Kelley, president of the National Treasury Employees Union. "Em-ployees who have been there their whole careers probably would tell you they don't recognize the place." Ronald Sanders, chief human resources officer for the agency, explains that the low satisfaction numbers are natural in an agency that is going through the amount of reform the IRS is going through. "Not everybody is on board," Sanders says. "Not everybody has bought into our mission strategy."

Sanders' office is the source of many changes, fueled by the human resources flexibility the 1998 restructuring act granted. Working with the union, Sanders has rewritten performance expectations throughout the agency and changed hiring rules to attract more outside candidates. The changes have most affected the management ranks. In addition to the new pay-for-results system, reforms eliminated two levels of management, cut hundreds of managers' jobs, revoked the budget authority of field offices and changed reporting structures completely. The expected initial confusion has been slow to dissipate as managers work out new relationships with their bosses. The IRS' geographically based structure, which many say fostered fiefdoms, was eliminated. Now almost all budget power rests in Washington, a change that didn't win the hearts of all managers. "People are trying to hold on to their turf," says Laura Banks, a local National Treasury Employees Union president in Cincinnati. "You don't just say 'left' and everyone turns."

The reforms also cut into the enforcement side of the IRS. Hundreds of revenue agents and tax auditors each year have been moved into customer service positions-the total number of agents and auditors dropped 17 percent from 1998 to 2001. The loss of agents and auditors was compounded by a provision in the 1998 reform act that prevents the IRS from collecting enforcement statistics at the group level. Front-line managers aren't allowed to know how much money their agents collect.

Agents also have spent less time in recent years out on the street. Over the past three years, agents and auditors have spent a greater amount of their time in training sessions. Between 7 percent and 9 percent of agents' total hours were spent in training from 1999 to 2001, compared with 5 percent or less from 1996 to 1998. But employees say that getting a lot of training is not the same thing as getting the right training, and they don't feel that training sessions are properly tailored to their needs. The IRS' training division has been slow to find its footing in the newly reorganized agency. Managers hope that once the division gets its act together, training will improve.

The extensive training and refocus of the organization appear to have improved customer service. Many hardnosed enforcement officers have been turned into pre-filing helpers, getting out into communities to offer taxpayer assistance in two new education and assistance offices-one for individual taxpayers and one for small businesses. Large and Medium Sized Business Division chief Larry Langdon has redeployed employees to craft pre-filing agreements and provide industry-by-industry taxpayer advice to help reduce wrangling between his office and big businesses.

But the widespread personnel reshuffling has yet to guarantee that the IRS is matching its workforce to its workload appropriately. Over the past four years, for example, the backlog of taxpayer requests for compromise settlements with the IRS on the amount of back taxes they owe has tripled, even though the staff devoted to the backlog has doubled. A General Accounting Office review found that putting staff on the compromise program may be hurting other collection programs. The large percentage of bad information given to taxpayers by IRS employees also shows that the right people with the right skills are not in place in customer service jobs-though the IRS is retraining customer service representatives to improve accuracy.

Still, the Roper survey that found that two in three Americans didn't trust the IRS in 1997 now finds a reversal of opinion-two-thirds of those polled in 2001 reported confidence in the tax agency. At the same time, enforcement has fallen. The percentage of taxpayers subject to in-person audits dropped 66 percent from 1998 to 2001. The number of levies imposed on taxpayers for failing to pay their tax bills dropped from 2.5 million in 1998 to 450,000 in 2001. Observers worry that reduced enforcement may lead more people to cheat on their taxes. The IRS Oversight Board asked taxpayers in 1999 and 2001 how much, if any, they thought was an acceptable amount to cheat on their income taxes. In 1999, 87 percent of respondents said not at all. In 2001, only 76 percent said the same.

But two other statistics suggest that enforcement is not stuck in a loop of doom the way customer service was five years ago. First, enforcement numbers rose slightly from 2000 to 2001 in most categories, suggesting the decline has stopped. Second, the amount of money the agency collected through letters, phone calls, in-person audits and other enforcement activities hit a seven-year high, $32.2 billion in 2001. People have become more likely to respond to first notices from the IRS-the response rate increased 9 percent from 2000 to 2001 alone.

Rossotti likens the IRS' transformation to refueling a jumbo jet in mid-flight-the agency must continue collecting taxes every day while simultaneously installing entirely new computer systems and new organizations. The fact that change has been incremental over the past four years is no surprise. "We're not even halfway through what we need to do to get the IRS to where it needs to be," Rossotti says. Whether momentum can be sustained or the doom loop of the late 1990s will return, and whether the IRS can learn to respond to day-to-day concerns as well as it responds to crises, will depend heavily on the progress of computer modernization this year and on the performance of Rossotti's successor. The commissioner ends his five-year term in November. Regardless of the fate of reform, union president Kelley is preparing her members for constantly tumultuous re-forms and change. "We thought we would have stability by now," Kelley says. "I think now the real answer is, [change is] never going to be over."

Created: 1862

Mission: To provide America's taxpayers with top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.

Top official: Charles O. Rossotti