In evaluating how the IRS should approach its three strategic objectives of improving customer service, increasing voluntary compliance, and finding efficiency gains, the Commission adopted two guiding principles. These principles mirror the recommendations of the Commission’s Measures Working Group, which included representatives from Congress, Treasury, IRS, outside stakeholders, and the Commission.
· The IRS should only initiate contact with a taxpayer if the IRS is prepared to devote the resources necessary for a proper and timely resolution of the matter.
· Customer satisfaction must be a goal in every interaction the IRS has with taxpayers, including enforcement actions. Taxpayers expect quality service in all interactions with the IRS, including taxpayer assistance, filing tax returns, paying taxes, and examination and collection actions.
The American public expects timely, accurate, and respectful service from the IRS, but surveys rate the IRS low in customer satisfaction when compared with other service organizations. While this may stem in part from the dual nature of the IRS as both a tax administration and law enforcement agency, the Commission believes most citizens compare the service they receive from the IRS with the service they receive from financial service institutions. Because far more taxpayers are touched by the IRS in its tax administration role than its law enforcement role, this is only natural. Today’s customers expect to be able to withdraw money, access account information, pay bills electronically, resolve account problems, and send and receive information twenty-four hours a day with minimal inconvenience or cost. Modern financial service companies have redefined completely the acceptable levels of customer service in the past twenty-five years. For better or worse, the public judges the IRS by these standards.
The Commission believes that good customer service and taxpayer education, which assists taxpayers in meeting their tax obligations to the government, leads to increased compliance. Two initiatives in the past decade—Compliance 2000 and the compliance research approach—embody IRS efforts to turn away from high-cost enforcement solutions to noncompliance to lower-cost, non-enforcement solutions. The traditional enforcement approach to compliance was focused on one-by-one enforcement of taxpayers through audit and examination of individual taxpayers. Not only was this approach expensive, but it did not identify patterns of noncompliance. The new approach shifts emphasis to preventing noncompliance by identifying areas in which noncompliance is most likely to occur. By integrating these research efforts with other IRS compliance programs, and ensuring proper training and technology resources, the result will be an IRS that better serves the needs of the American people.
1. Improving Customer Service
The IRS must develop a strategic plan for improving customer service that is based on communicating more effectively with taxpayers, using information as a strategic asset, and increasing its organizational commitment to training and education.
Communicating through notices
IRS notices and correspondence to taxpayers often fail to explain the problem in a clear and simple manner and fail to inform the taxpayer how to resolve it. Notices often lack essential and basic information needed by taxpayers. In a survey of certified public accountants, eighty-seven percent said that IRS notices do not contain a precise explanation of the problem. Moreover, when a taxpayer calls for assistance, the customer service representative (CSR) does not always have the background information needed to resolve the taxpayer’s inquiry. Even if the taxpayer understands the notice, and fully complies, the taxpayer rarely receives confirmation of compliance, and is left with the lingering doubt that the IRS has not resolved the problem. In short, the notice process at the IRS is a struggle with a bureaucracy, rather than an interaction with a customer friendly organization seeking to resolve taxpayers’ problems. The IRS should continue the progress made in its notice reengineering effort, designing its notices to provide concise explanations of the amounts owed, how the adjustment was calculated, and how the taxpayer should comply.
Communicating through telephones
Historically, taxpayers have had extreme difficulty accessing the IRS by telephone. Between October 1995 and September 1996, the IRS answered twenty-one percent of all calls, seventy-four percent of attempted calls received a busy signal, and five percent of all calls were abandoned. At the time of the drafting of this report, the IRS appeared to show substantial improvement in taxpayers’ access to IRS CSRs during the 1997 filing season. The latest statistics available to the Commission show that between October 1996 and April 1997, the IRS answered fifty-one percent of all calls, thirty-six percent of attempted calls received a busy signal, and thirteen percent of all calls were abandoned. Even with this improvement, however, the level of access continues to be unacceptable and inferior to service performance in private sector service organizations.
Quality should not be sacrificed for quantity. In this regard, the IRS has made great progress in telephone response accuracy over the last few years. The IRS uses sample calls to monitor and measure the accuracy of its telephone assistance. In fiscal year 1996, according to IRS measurements and sampling, 93.3 percent of taxpayers with an account question received accurate information, and 91.6 percent of taxpayers with a tax law question received accurate information.
Technology can be used to facilitate increased customer satisfaction. For example, call routing technology, including automated call distributors (ACDs) and voice response units (VRUs), and associated analysis and scheduling packages, can provide flexibility and efficiency in routing calls to CSRs. Of course, the IRS must provide sufficient staffing so that an adequate number of CSRs are available to answer calls and respond to taxpayer inquiries. Moreover, these CSRs must be trained to use these tools effectively and efficiently. A trained workforce with the right tools and access to taxpayer information can help lead the way toward increased customer satisfaction.
The IRS also must improve its traditional means of communicating with taxpayers—computer generated notices and correspondence, as well as telephones—and expand its use of technology to offer new forms of taxpayer communication. For example, the IRS now distributes tax information and forms through its internet web site. The IRS internet experience has been very positive in terms of the number of users (hits) and public acclaim. Based on this success, the IRS should continue to explore the use of electronic mail, with appropriate security and privacy controls, to communicate with practitioners and taxpayers.
Using information strategically
Access to timely and accurate taxpayer information is an essential ingredient for improving customer service and compliance. The recently released Modernization Blueprint recognizes this, demonstrating how the IRS plans to migrate toward an integrated set of databases that will serve both functions. By migrating from its stovepipe legacy systems to an environment in which IRS employees, as well as taxpayers, can access accurate, updated taxpayer information, the IRS will be positioned to deliver taxpayers the quality service that they expect, and to improve compliance efforts as well.
The IRS does not have an integrated database that would allow CSRs to have real time access to all relevant taxpayer data. Currently, the IRS uses the Integrated Data Retrieval System (IDRS) and the Integrated Case Processing system (ICP). Although the latter system allows a CSR to access separate account information databases from a single computer terminal, ICP is a "read only" system that only can be used to look at information, but not to update information in the accessed databases. Moreover, the IRS has only 3000 workstations equipped with ICP. The ICP is no substitute for a truly integrated accounts management database. Without such a database and information access, the IRS will continue to have significant difficulty improving its customer service.
One major problem with IRS databases is that the master file, which was designed in the 1960s, is based on a weekly posting cycle. Instead of updating taxpayer accounts each day, the data is accumulated during the five business days of each week and put into the taxpayers’ accounts in the master file on weekends. Thus, taxpayer data received at the service centers may not be available on the master file for as many as ten days from the date the information is transmitted to the Martinsburg Computing Center. The result is that online access to this data by CSRs is delayed. The access is even further delayed by the need to update IDRS, the primary system used by CSRs to resolve taxpayer account issues.
The second problem stems from the stovepipe nature of IRS operations. The individual databases generally perform stovepipe functions that reflect the stovepipe organizations for which they originally were developed. The consequences of such a design can hinder customer service. For example, separate tax assessments for the same taxpayer could be found on six separate systems.
Obtaining a comprehensive view of all data required to resolve a taxpayer’s account issues may require a CSR to research all six systems.
To address the stovepipe nature of legacy systems, which is a major impediment to quality customer service, IRS business and technology experts must work together to develop solutions. The starting point must be to establish a comprehensive vision of customer service and the measures the IRS will use to evaluate progress in achieving strategic customer service objectives in everything it does to facilitate taxpayers meeting their tax obligations.
The Modernization Blueprint makes integrated databases for improved customer service and compliance its first priority. The IRS needs to develop performance measures to gauge success in this effort. Working in partnership with its prime contractor, the IRS can then develop a detailed plan and schedule, consistent with the overall requirements of the Modernization Blueprint, to migrate from the legacy environment to a modernized information access system.
Training and education
A fundamental component of quality customer service is a well trained workforce with the knowledge and ability to help taxpayers resolve their problems. As discussed in Section 2 of this Report, the IRS must increase its organizational commitment to training and education, including the cultural changes necessary to encourage front-line innovation and initiative. In recent years, the IRS has begun to develop a school of taxation that incorporates the elements and principles of corporate and academic models, and the IRS should have university quality training. Ultimately, the IRS leadership must decide how to increase its commitment to training and education to ensure that IRS personnel are as well trained as their private sector counterparts.
An important aspect of customer service is understanding what is necessary to achieve customer satisfaction. Public-private partnerships, which can be institutionalized as formal advisory groups, can help in this regard when the IRS takes their advice into account. The IRS uses several such groups to advise the Commissioner on various issues, including information reporting and art valuation. In addition to the private sector guidance that the IRS will receive from the Board of Directors and new senior leadership, the IRS should continue to partner with the private sector and state tax administrators to improve its operations, particularly with respect to information reporting, training and education, customer service and compliance, electronic commerce, and financial management.
2. Improving Compliance
The IRS should continue with its new approach to addressing noncompliance of emphasizing research to prevent noncompliance before it occurs.
The IRS constantly struggles to ensure compliance with the tax law in a system that depends on citizens to voluntarily calculate and pay their taxes. The IRS traditional enforcement approach to compliance focuses on specific taxpayers, using examination and collection resources to ensure payment of the proper amount of tax. In addition to auditing between one to two percent of all individual returns, most of which are selected for audit using the discriminate function (DIF) formula, the IRS compliance approach targets collection of assessed taxes and criminal investigation of certain transgressions. While these efforts are necessary components of a balanced, strategic compliance program, they are expensive and do not identify patterns of noncompliance.
Recent efforts, which began with the Compliance 2000 program and were supplanted by the current compliance research approach, embody a new emphasis on preventing noncompliance by identifying and addressing areas in which noncompliance is most likely to occur. This approach, which focuses on taxpayer education and outreach, is intended to yield long-term improvements in compliance. The IRS has established district offices of research and analysis (DORA) in nearly every district, and coordinates their work through a national office of research and analysis (NORA). These offices attempt to identify compliance problems, prioritize them, develop and implement focused responses to these problems, and measure the impact of the responses. In addition, the recently deployed compliance research information system (CRIS) is designed to help NORA/DORA offices identify emerging noncompliance trends.
Integrating research and enforcement
The information available from the new approach to compliance, which emphasizes research and analysis of trends, should be utilized throughout the organization. For example, the NORA/DORA offices generally focus on nonenforcement solutions to noncompliance, unlike the IRS examination and collection offices. Working together, however, these personnel can apply analytic tools developed through the NORA/DORA program to increase efficiencies and effectiveness of examination efforts, including audit selection.
Training and resources
DORA staff members interviewed by the Commission expressed the need for more training in methods and data analysis. Because the NORA/DORA approach is designed to be heavily computer and data driven, the staff must be able to manipulate and interpret the data for the effort to be successful. Staff also must have access to computer systems that are properly maintained. To date, DORAs have not had adequate technical support. For DORAs to succeed, significant investments must be made in the staff and in the maintenance of the computer infrastructure.
Taxpayer education and outreach
The IRS has diffused authority and responsibility for taxpayer education between its taxpayer service, examination, and collection functions. Taxpayer education is core to voluntary compliance. There are many facets to taxpayer education, including outreach programs, post office and library programs, small business education programs, programs at post and secondary educational institutions, practitioner education, pro bono tax clinics, emergency assistance, media information programs, volunteer tax assistance, and the distribution of tax forms and publications. Professional educators and adult education techniques facilitate greater compliance by emphasizing education over enforcement. If properly designed, taxpayer education and outreach can be a proactive method of enhancing compliance.
One of the most significant criticisms of the IRS compliance research approach is the lack of current, reliable data on noncompliance. A statistically valid and consistently applied approach to developing compliance initiatives (including enforcement, education, outreach, and legislative and regulatory initiatives) should be established. The methodology for data gathering should be developed by private research and statistical experts. Consistency ensures that the method for selecting returns for examination does not become obsolete or substantially ineffective. Finally, the IRS should keep in mind that taxpayers involved in any statistically valid process are helping the IRS, and they should be treated accordingly.
There is a significant difference between taxpayers finding themselves in unexpected financial difficulties trying to meet their tax obligations and taxpayers who continuously or frequently fail to meet their tax obligations. The former category of taxpayers are not encouraged to voluntarily comply when it is more burdensome to pay taxes owed than to escape through bankruptcy. Various information systems and audit programs intended to allow the IRS to manage its nonfiler inventory, track recidivism, and monitor federal tax deposits have not been successful. To address these problems, the IRS must use technology to tailor compliance programs that target repeat offenders and allow the IRS to stop compliance problems earlier in the cycle. Only by continuously improving collections programs and procedures, including payment procedures that reflect taxpayers’ circumstances, will the IRS be able to improve voluntary compliance, reduce burden on honest taxpayers who have made honest mistakes, and focus enforcement resources on the small number of repeat offenders.
3. Efficiency Gains
Inquiry into the potential cost savings of private sector partnering and outsourcing, managed competition, enterprise management, and performance management is warranted.
Private sector partnering and outsourcing are approaches that public organizations use to cut their costs and increase their quality. The most important question is not whether to outsource an activity, but how to get the most effective and efficient performance for taxpayer’s dollars. Sometimes this can be done through partnering or outsourcing, but there are a number of related approaches that the IRS should consider as well. The following discussion, which is taken from testimony to the Commission by David Osborne, the co-author of Reinventing Government and Banishing Bureaucracy, focuses on three such approaches—managed competition, enterprise management, and performance management. The IRS should carefully consider using a mix of these approaches to produce the proper incentive structures to motivate managers and employees to embrace continuous improvements and cost savings.
Private sector partnering and outsourcing are business decisions. The preconditions for making strategic decisions regarding private sector partnering and outsourcing include:
· Defining clear, measurable business objectives;
· Benchmarking cost and performance data in order to compare it with potential contractors;
· Examining which functions and processes are so intertwined that they must remain in-house;
· Deciding which powers of the IRS are so sensitive that private industry cannot hold them; and
· Deciding what are the core competencies of IRS, and outsourcing operations that either can be done better by the private sector or will divert management away from its core responsibilities.
The IRS will continue to have difficulty making decisions about who should do what work until accurate cost data, clear program priorities, and performance measurement standards are in place.
In many cases, it is wise to include public organizations in the competitive contracting process. This approach is known as "managed competition." It requires potential providers of government services—private firms and public agencies—to compete against one another for contracts, based on their performance.
Public employees often work in inefficient, bureaucratic systems they did not invent. Most of them want to be empowered to cut through the red tape that binds them. They are victims of the bureaucracy, not perpetrators. As Indianapolis Mayor Steve Goldsmith explained, "Before we let entrepreneurs provide government services, let’s allow government service providers to become entrepreneurs." Also, managed competition would allow IRS to maintain some public capacity to step in if private contractors fail. In addition, some organizations decide they need to preserve some in-house service delivery so they do not lose the hands-on knowledge necessary to act as an intelligent buyer.
The most compelling reason to let public providers compete, however, is to maximize competition. When public employees face competition they often figure out how to slash costs below those of private competitors, giving the taxpayers a better deal. Managed competition does not suggest cutthroat competition for every public service. To make competition work, the IRS will need to structure it fairly and manage it carefully. It requires a significant investment and a great deal of work, and there are pitfalls at each step—one reason an approach called "enterprise management" also should be considered.
Another way to create competition, enterprise management forces public service delivery organizations to function as business enterprises with financial bottom lines, usually in competitive markets. Rather than acquiring their revenues from government appropriations of tax dollars, they earn money by selling goods and services directly to their customers. To earn their keep, in other words, they must succeed in the marketplace. Failure brings financial loss, which can lead to job loss. Success can result in increased economic rewards.
Public organizations are candidates for enterprise management only if they produce goods or services that can be sold to customers. This applies to agencies that serve "external" customers, like citizens and businesses. It also applies to government’s "internal" providers. At the IRS, enterprise management would be most applicable to these long-standing internal monopolies, including data processing, printing, and notice mailing.
When neither enterprise management nor managed competition is appropriate—whether for rational reasons or because of political obstacles—the alternative is performance management. This approach uses performance measures, standards, rewards, and penalties to motivate public organizations. These rewards and penalties can be financial, like gainsharing, or they can be quasi-economic, like giving three-day weekends to units that achieve their monthly performance targets. They also can be strictly psychological, like recognition and award programs.
Managed competition, enterprise management, and performance management are not mutually exclusive. Organizations that operate as public enterprises or that compete for contracts typically use many performance management tools to maximize their competitive advantages. One of the most powerful tools available under performance management is gainsharing, which gives employees a guaranteed portion of financial savings their organization achieves, as long as they meet specified levels of service and quality. This gives workers a clear economic stake in increasing their productivity.
Dealing with employees
Enterprise management, managed competition, and outsourcing often force public organizations to downsize, sometimes rapidly. How should the IRS deal with this possibility? Unless the agency is in a fiscal crisis so deep that it simply cannot afford to do so, the IRS should minimize reductions in force. Employees did not create the bureaucracies in which they work, and they should not pay the price of reinventing those bureaucracies. Many proponents of managed competition propose a no-layoff policy, gainsharing for employees who work more efficiently, and creating a menu of options for employees whose jobs disappear. The menu of options to help displaced workers includes:
· Shifting dislocated employees into other public jobs;
· Shifting public workers into private firms taking over the work;
· Encouraging contractors to provide comparable compensation;
· Helping managers take their organizations private; and
· Offering economic incentives and outplacement services to those who choose to retire or look for jobs elsewhere.
The key is to use attrition to downsize, shifting displaced employees into jobs vacated by those retiring or departing. The IRS may need flexibility to move people around. It can use the authority to create demonstration projects granted by the 1978 Civil Service Reform Act to do so, and can use the other flexibilities discussed in Section 2 of this Report.
The most important question is not whether to outsource a public activity, but how to get the most effective and efficient performance for the taxpayers’ dollar. Sometimes this can be done through outsourcing. Often it is better done through public versus private competitive bidding, or through enterprise management. The key issue is not whether the public or private sector delivers the service, but rather what incentives operate upon that service deliverer and how much freedom from red tape that service deliverer enjoys. If one can give the operator freedom from bureaucratic restraints and genuine consequences for performance, efficiency and effectiveness usually will improve dramatically. If one can protect public employees from the threat of unemployment in the process, they will eagerly put their talents to the task and often produce remarkable results.
Again, the Commission is convinced that our recommendations regarding oversight, governance, management, budget, and workforce, as outlined in Sections 1 and 2 of this Report, are necessary prerequisites to accomplishing the IRS strategic objectives.