Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss key elements of the Internal Revenue Service�s (IRS) modernization efforts aimed at fundamentally changing the way it does business. As IRS acknowledges, it is an agency fraught with long-standing and significant management problems and a history of ineffective attempts to correct them.

Building on the direction set forth in the IRS Restructuring and Reform Act of 1998 (Restructuring Act), IRS hopes that many of these long-standing issues will ultimately be addressed through the current modernization effort. To that end, Commissioner Rossotti has revised IRS� mission statement to more fully embrace customer service and fairness to taxpayers as core organizational values. He has also articulated a supporting modernization strategy that encompasses major changes in IRS� organizational structure, business practices, human capital and performance management systems, and information systems.

As we said before this Subcommittee last year, the magnitude of this modernization effort makes it a high-risk venture that will take years to fully implement. IRS has taken some important steps over the last year; however, some of its most important and difficult work lies ahead.

My statement discusses the business practice, performance management and information technology challenges IRS faces. It is based on our past work on IRS management challenges and our ongoing monitoring of IRS� modernization efforts. Specifically, my statement makes the following three points.

• IRS acknowledges that it will need to do more than make marginal improvements in the efficiency and effectiveness of its current business practices. Accordingly, IRS is planning to implement breakthrough changes to those practices. Only when these changes are implemented will taxpayers see any appreciable benefits from IRS' multiyear modernization. IRS has some initiatives of this type under way, but they, and other business practice changes, will not be easy to implement. This type of reengineering requires not only a new way of thinking, but also investments in human capital, data collection, and technology.
• No matter what organizational structure or business practices IRS establishes, successful modernization ultimately depends on whether the employees who are to lead, manage, and carry out agency programs and services can deliver IRS� new mission of top-quality customer service and improved overall compliance. Historically, IRS� performance management system emphasized revenue production at the expense of customer service. IRS is developing a new system and has taken the important first step of developing a balanced set of performance measures that is to capture both the customer service and compliance aspects of its new mission. Given the difficulties that attend so substantial an effort, it is not surprising that we have identified problems. At a fundamental level, it is not clear to us that IRS employees fully understand that customer service and compliance can be mutually supporting. Such an understanding would be fostered by a coherent set of performance measures, but IRS does not yet have a key measure for voluntary compliance. Not only is such a measure important in its own right to track performance on a key aspect of IRS� mission, but it would also provide important data for designing the kinds of products and services taxpayers need and for targeting compliance activities. IRS is working to develop this measure. Eventually, once a complete set of balance measures is developed, IRS should be able to assess whether improved customer service contributes to an increase in voluntary compliance. IRS acknowledges that it will need to address these issues as it continues to develop its new system.
• Revamping its time-worn tax processing systems is a critical aspect of modernization. However, IRS must overcome several serious management challenges in its current systems modernization effort before it will be ready to build modernized systems. In particular, IRS must (1) complete, enforce, and maintain an enterprise systems architecture, (2) establish and implement sound investment management processes to ensure only incremental, cost-effective system investments are made, and (3) impose software acquisition and life cycle management discipline on each system investment it undertakes.

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