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 taxpayers.

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 day-to-day business.

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, and confidentiality.

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 tax area.

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 work.

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 Reporting Requirements

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 taxpayer.

• 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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