September 01, 1993
Many IRS Programs are in Line with
National Performance Review Recommendations
The National Performance Review (NPR) task force report, issued September 7, 1993, offers a number of recommendations to make government work more effectively for American
At the Internal Revenue Service (IRS), some initiatives of the type envisioned in the
NPR are underway already. Since 1987, the IRS has been working under an agreement with the
National Treasury Employees Union in efforts to improve quality. In 1992, the IRS Ogden
Service Center was awarded the President's Award for Quality -- the only civilian agency
yet to receive this award.
Here are highlights of some of the efforts going on at the IRS which show that
"reinventing" government is not only possible but increasingly a part of
NPR Recommendation: Modernize the IRS
The IRS has begin a multi-year Tax System Modernization (TSM) effort designed to bring
the IRS' computer and information technology fully up to date by 2001. The current IRS
system design has remained virtually unchanged since the 1960s, and the systems put in
place at that time are no longer able to provide the American public with the service they
get in the private sector.
TSM requires an investment of $8 billion over the $15 billion it would cost to keep the
old system operating through the rest of the century. This investment does not include the
increase in taxes which could be collected by re-investing productivity savings into
improved tax compliance programs, but each 1 percent improvement in compliance adds $7
billion in government revenue each year.
Modernization is already making a difference for taxpayers. Electronic filing of
individual tax returns, for example, has gone from 25,000 returns in its first year (1986)
to more than 12 million returns this year. The IRS plans to expand electronic filing to
more types of tax returns.
Last year, the IRS installed 800 new computer terminals in telephone assistance sites
to increase the ability to respond to account questions. Because of a systems
modernization enhancement, new information on taxpayers' master file account data was
accessible on line. As a result, the IS answered almost 35 percent more account calls (1.6
million calls) on line than in the previous year.
Another systems enhancement is called the Returns Transaction Data System (RTVUE) on
line. This system allows employees to provide taxpayers with specific information about
math error and other notices issued automatically during tax return processing. For the
first time, an IRS employee can retrieve this tax return and transaction data on line,
rather than requesting the return from a service center. RTVUE should eliminate pulling
1.1 million returns a year, at a savings of $1.2 million.
The IRS can now provide taxpayers with transcripts of their account information within
24-48 hours. In the past, the information was available only by getting a copy of the tax
return, a request which took 6 to 8 weeks. Since the transcripts is the equivalent of a
copy of the tax return, taxpayers in the recent floods in the Midwest, for example, could
more promptly apply for disaster relief and low-interest loans. Transcripts also could be
used for student loan or housing grant applications.
Modern technology can also benefit the nations' employers. The IRS is testing a program
called TAXLINK in three southern states, in cooperation with the Bureau of Financial
Management Services and the Federal Reserve Bank in Atlanta. TAXLINK is designed to take
the paper out of the Federal Tax Deposit (FTD) System by allowing employers to make
payroll tax deposits without leaving their offices. The planned adoption of TAXLINK
nationally would eliminate 80 million paper coupons each year. It would also eliminate the
accompanying problems of incorrect addresses and incorrect tax and tax period
designations. In just a year's time we have nearly 2,000 business participating in the
prototype to make FTDs electronically.
NPR Recommendation: Foster Federal-State Cooperative Initiatives
by the IRS
The IRS has an active FedState program to encourage cooperation between the federal
government and the states in tax administration and to implement joint projects in tax
administration. These projects are designed to reduce taxpayer burden; to improve all
areas of tax administration, including compliance, enforcement, and taxpayer service; and
to create efficiency and cost effectiveness, while protecting taxpayer rights, privacy,
A major FedState venture is joint electronic filing of federal and state tax returns.
After a research test with the state of South Carolina in 1991, the program has grown
quickly. In 1993, fifteen states participated in joint electronic filing, generating more
than 600,000 joint electronic returns. The states participating were Indiana, Kansas,
Kentucky, Louisiana, Maine, Michigan, MIssissippi, New Mexico, New York, North Carolina,
Oklahoma, South Carolina, Utah, West Virginia, and Wisconsin.
Next year nine states -- Arkansas, Colorado, Connecticut, Delaware, Idaho, Iowa,
Missouri, Nebraska and Oregon -- will be added to the list, and IRS expects almost 2
million joint electronic returns to be filed.
Three states -- Kansas, North Carolina and South Carolina -- had state-wide joint
electronic filing for all their citizens this year. Next year, eight new states will offer
this service -- Indiana, Louisiana, MIssissippi, New Mexico, New York, West Virginia,
Wisconsin, and Utah.
Other FedState projects include providing one-stop service through stocking both state
and federal tax forms at many of the same sites and offering joint preparation of state
and federal tax returns at assistance sites through the Volunteer Income Tax Assistance
(VITA) and TAx Counseling for the Elderly (TCE) programs. In addition, several states have
joined the IRS in the effort to bring nonfilers back into the tax system.
Many states join with the IRS in taxpayer education efforts. For example, one area of
interest to many states is programs to give new business owners the information they need
to keep compliant with the Oklahoma Tax Commission and the IRS contact holders of new
Employer Identification Numbers to tell them about their tax responsibilities.
Cooperative efforts go beyond filing assistance. Under the law, the IRS can release
information about tax audits to states to cross match records and prevent non-compliance.
Currently a major effort involves joint audits and investigations in the motor fuel excise
The IRS is working with many states, the Department of Justice and the Federal Highway
Administration through a joint FedState Motor Fuel Excise Tax Compliance Project to close
the gap of about $250 million in federal diesel fuels excise tax. About $100 million of
this gap may be due to criminal tax evasion. A tax gap in this excise tax causes
shortfalls in the Highway Trust Fund, which is dedicated for national highway
infrastructure improvements. In 1992, the IRS increased audits in this area to 5.6 percent
coverage and over the past three years has doubled criminal investigator staffing for this
The value of working together towards a common goal is apparent to both the states and
the IRS. Efforts are underway to find new ways to deal with delinquent taxpayers. Some of
these efforts are geared to reduction of burden for the taxpayer and some on finding ways
to collect delinquent taxes from certain segments of the taxpayer population that have a
relatively high delinquency rate. An example of burden reduction can be found in the area
of joint installment agreements. When a taxpayer owes balances on both the state and
federal tax bill, it makes sense for the two jurisdictions to work together to see that
the money is collected in a way that is as painless as possible for the taxpayer. This
concept is being tested in Maine and in the Los Angeles area. The taxpayer can arrange a
payment plan that will cover both tax debts at one time.
An example of working together to collect unified returns from a certain segment of the
taxpayer population can be found in a joint project being conducted by the IRS Fresno
Service Center and the California Franchise Tax Board. They worked together to identify
and then secure tax returns from tax preparers who had not filed income tax returns with
either the IRS or the state.
NPR Recommendation: Simplify Employer Wage Reporting
The IRS, the Social Security Administration (SSA), and the Department of Labor are
evaluating the feasibility of allowing employers to file wage and tax information with a
single agency, which would in turn provide the data to other federal and state agencies.
Today, employers make multiple filings of similar wage and tax information at federal and
state levels. Employers are now required to file the following forms: annual Federal Wage
and Tax Statements (Form W-2), Transmittals of Income and Tax STatements (Form W-3),
Employer's Annual Federal Unemployment Tax Returns (Form 940), Employers' Quarterly
Federal Tax Returns (Forms 941, 942, and 943), and Federal Tax Deposits (FTDs). Employers
must also submit equivalent wage-related information to state governments and, in some
cases, local governments.
This effort to eliminate duplication in wage reporting is called the Wage Reporting
Simplification Project (WRSP). It involves close cooperation with states and other
stakeholders. WRSP could result in a significant reduction in the number of paper federal
returns for the nation's 6 million employers.
The IRS, the SSA, and the Federation of Tax Administrators are participating in a
simplification project in which the SSA provides the IRS with state tax data from the 1993
W-2 forms filed by employers in 11 states -- California, Colorado, Kansas, Oklahoma, South
Carolina, and Utah -- at the SSA's Albuquerque, N.M., and Salinas, Calif., processing
centers. The IRS distributes this information to the states in machine-readable format,
giving them electronic data which could in the future replace 40 million paper W-2s. The
states will use the IRS-generated electronic information to make projections of how much
they could improve state tax compliance by using FedState electronic information rather
than paper W-2s. The project does not change how the employers file their Forms W-2. They
will continue sending paper W-2s to their state governments. The states would have to
change legal or regulatory requirements if they decided to drop the paper return
requirement and adopt joint electronic returns. National implementation of this program
would eliminate 60 million paper returns and 140-160 million magnetic returns each year.
NPR Recommendation: Improve Agency Compliance with Employment Tax
Federal agencies are required to file information returns with the IRS at the time they
enter into all but small, short-term contracts. When the IRS receives this information in
a timely manner, there is time to check to see if vendors who are awarded such contracts
have outstanding federal tax obligations and to levy contract payments to cover
outstanding tax bills.
Despite this requirement, the IRS frequently cannot check on the tax status of vendors.
Problems include missing Taxpayer Identification Numbers (TINs), mismatches between
contractor names and TINs, inability to maintain separate addresses of the multiple
procurement offices of many large agencies, and delays between initiation of a contract
action and availability of information for IRS use.
The IRS is testing the feasibility of Compliance checks on prospective bidders for IRS
contracts. A review of IRS contracts indicated that 97 of 316 contracts (31 percent) had
some type of discrepancy that would hinder or prohibit their use in the compliance
program. More than half of the contracts with discrepancies (51) had no recorded TIN. The
name and TIN on the reporting document did not match the name/TIN control established on
the IRS file for 46 contracts.
Last year, the IRS took action in 599 cases to use federal contractor information to
satisfy outstanding federal tax liabilities. These cases involved $50 million in total
delinquent taxes. The IRS levied the delinquent taxpayers' government contracts in some
cases and secured more then $1 million. Other enforcement actions resulted in more than
$1.2 million in collections. An additional $10 million was accounted for when the IRS got
information to straighten out the delinquent taxpayers' accounts through credit transfers
and payment tracer actions. About half of the 599 cases are still in process. The majority
of the contracts reported are from the Department of Defense (47 percent) and the U.S.
Postal Service (15 percent). A Department of Defense (DOD) review of its own reporting
revealed a major systemic problem which, when corrected, produced a 30 percent improvement
in DOD TIN processing.
Federal agencies are also required to file an information return at the end of the year
for any sole proprietor or partnership which has been paid more than $600 under contracts
with that agency. Agency compliance with this requirement has been low, partly because of
confusion between this end-of-year filing requirement for payments over $600 and the
immediate reporting requirement when contracts over $25,000 are awarded.
The IRS and the Office of Management and Budget (OMB), the Federal Procurement Data
Center of the General Services Administration (GSA), and the U.S. Postal Service are
cooperating to improve the accuracy and timeliness of both types of reporting. The GSA has
provided the IRS with computer tapes covering 114,000 vendors for 1991 and 1992 contracts,
and it has mailed computer-readable forms to its vendors to allow it to update TIN
information in these files. The IRS will analyze this data and report on compliance.
The House-Senate conferees on this year's tax bill asked the executive branch to look
into the year-end reporting problem. The conferees asked the OMB to provide a report to
the Chairmen of the House Ways and Means Committee and the Senate Finance Committee within
six months, recommending ways to improve this type of information reporting compliance by
federal executive agencies. Such recommendations could include, for example, requiring
federal executive agencies to disclose their level of compliance in their published annual
reports and requiring the OMB to report annually to the chairmen of the two tax-writing
committees regarding federal executive agencies' compliance with information reporting
obligations. The conferees also asked that the OMB report address appropriate sanctions
for federal executive agency noncompliance with all information reporting requirements and
any changes to the law that may be needed to impose such sanctions. The conferees
encouraged the IRS to establish a pilot TIN matching program as soon as practicable and to
include government agencies in this effort.
Provide Customer Services Equal to the Best in Business
Although IRS Customer Service is not listed as a recommendation in the NPR report, it
is featured in the test as an area of improvement in progress at the IRS. The IRS focuses
on service to taxpayers is having these results:
- The rate of accuracy for telephone inquiries from the public was nearly 90 percent
during the past filing season, an increase from about 63 percent three years ago. The IRS
was among the first agencies to use 1-800 telephone numbers and automated telephone
networks, which now handle nearly 70 million calls a year.
- Since 1989, the IRS has included a notice in millions of tax packages mailed to
taxpayers of its policy that penalties will be waived if the taxpayer relied on incorrect
advice given by the IRS. The taxpayer must show that he or she gave sufficient and correct
information and filed the return after receiving the advice. The policy is also included
in Publication 1, Your Rights as a Taxpayer.
- The timeliness and accuracy of correspondence with taxpayers also is improving. In the
1993 tax season, for example, 85 percent of all correspondence handled by our Returns
Processing function was answered within 30 days, in accordance with a new IRS standard
send any taxpayer whose letter cannot be answered within 30 days a letter explaining why
and when a reply can be expected.
- The IRS conducts an annual taxpayer survey to gauge the quality of products and
services. The most recent survey of taxpayers indicated that forms needed to be made more
simple and that taxpayers who used toll-free telephone assistance generally were satisfied
with the service they received.
- The IRS conducts field tests and focus groups of tax forms. As a result, a number of
simplified forms have been developed, including 1993 modifications to Form 1040EZ, to
allow married taxpayers with no children to file this simple 11-line tax return.
- Although processing a tax return could take as long as six weeks, in the 1993 tax
season, the average time from receipt of a return to mailing of a refund was 37 days.
Refunds for returns filed electronically were received by taxpayers within three weeks --
two weeks if the taxpayer chose direct electronic deposit of the refund.
- The IRS goal is that the vast majority of taxpayer inquiries will be made by telephone
and will require only one contact to get resolved. Right now, 96 percent of calls to our
toll free telephones from taxpayers with questions about their accounts are handled while
they are on the line or within two weeks, with no further action required from the
- The IRS is upgrading its telephone system to make more use of Voice Response Unit (VRU)
capabilities allowing the taxpayer to interact with the system. Features of the upgrade
now being tested would allow taxpayers to find out when their refund checks will be sent
out, enter into installment agreements to pay bills, order forms and publications and
perform other transaction.
- The overall rate for accuracy in processing paper tax returns has climbed over the past
few years to more than 82 percent in 1993. For electronic returns, the accuracy rate is
about 98 percent. Fewer errors mean that processing is faster, refunds are issued more
quickly and there is less chance of incorrect notices to taxpayers.
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