measure our performance, train people, organize ourselves, as well as many very detailed procedures and especially our technology programs. Collectively, this all affects the skills attitude tools that constitute the way we serve taxpayers. In addition, as you have noted, Mr. Chairman, a number of times the information technology on which the IRS critically depends, is fragile and inefficient and I believe cannot be fixed short of nearly a total replacement. In addition to technology, there are other major areas of change needed to achieve our strategic goals, including reengineering our basic business processes. This includes many of the aspects that pose burdens on taxpayers such as our forms and filing procedures, as well as our internal organization, management and performance measures. And I recently sent, I believe, to you both-to you gentlemen a copy of a document that we recently wrote called "Modernizing America's Tax Agency," which lays out in some detail, which we don't have time for today, this overall program. I do want to note that this is a massive amount of change; and it has to, of course, be coupled with continuing ongoing operations. And this all means that there is a significant risk in what we're doing, that we may have unanticipated problems, and that we may have operational errors as we go along. In other words, in the current situation the IRS is in, I don't believe there is any risk-free plan. But, although we know that there are inherent risks, knowing that they exist, means that we can try to manage them so that no setback is fatal and we can be reasonably confident of ultimate success. And in this regard, I would like to mention two important aspects of our management process: one is the need to rigorously set priorities in light of the fact that we have limited organizational capacity. The other, of course, is to establish effective management over each of our major change processes. Like any organization, we have limited capacity to manage change. And even before the Congress passed the Restructuring Reform Act and we began our modernization program, the IRS organizational capacity was, in fact, stressed to the maximum in an attempt to respond to actually thousands of individual recommendations that were coming from many studies and proposals, as well as legislative mandates and tax law changes. And the process of reacting to this many inputs was actually using up all of the available capacity without, actually, in my view at least, addressing many of the underlying problems. So what we have done now is to establish a set of programs to try to manage these activities and priorities in an orderly way, in an orderly sequence so that we attempt to get the most benefit out of the organizational capacity we have, though also building increased capacity to make the improvements come even faster into the future. Now, Chairman McIntosh, I would like to report just a bit on the one part of our program that is attempting to deal with, specifically, the paperwork burden aspect of our mission. And I would just like to note that the situation, the reality that we face, is that the growth of the economy-the growth in the complexity of the economy and the growth of the Tax Code, all combined to not only impose the paperwork burden that you noted in your opening statement but also to inherently increase it each year. In the filing season that ends today, for example, we expect to receive about 3 percent more total returns. That's because of the growth of the economy. In addition, because of the two recent tax bills that were passed, we're actually revising 153 forms to reflect Tax Code changes and unfortunately adding two more forms. And it's estimated that under current estimating methodology that those changes alone would add 92 million hours of burden. So when you combine all of those economic growth changes and tax law changes, we actually increase just by that alone, 41⁄2 percent to the burden of 5.8 billion hours that was already estimated by OMB. So that's just handling the reality of economic growth and Tax Code changes. My view of what our mission is, and what my mission is in the agency, is to deal with that reality; we have to note that it's there. But our goal is to try to make it as easy as possible for the taxpayers to comply with those obligations and to essentially rethink our way of doing business, as much as is in our control in order to make it as easy as possible for taxpayers to file and pay. Now, as I noted, we do have limited organizational capacity. So we have to set priorities. In order to reconcile these various demands, we've tried to give priority to making those changes that we think will benefit taxpayers as quickly as possible. And, of course, we are also making those changes that are mandated by law, while also working on some longer-term changes that we think will really improve service and reduce burden even more in the future. For the near term, we have basically three strategies that we're pursuing, all in the near term, to deal with this issue. The first is to increase the ability of taxpayers to both file and pay electronically, which we think eliminates errors in paperwork. And this filing season we were successful in increasing electronic filing by about 17 percent of the taxpayers, getting close to 30 million. This includes the 5 million telefile returns which the taxpayer just handles the transactions by dialing the phone. They don't have to file a return at all with telefile. For small businesses, we also have a similar system for quarterly employment tax returns where they can file by telephone without having to actually file a form at all. And we are taking a number of steps to try to increase this method of filing. So electronic tax administration is one strategy. A second one is to eliminate the need for some taxpayers to file at all, where we can. For example, over the last year we raised the threshold for small businesses that are required to make monthly tax deposits; and by doing this we've eliminated 500,000 small businesses from having to make these monthly deposits at all, which eliminates 6 million pieces of paper. We also have noted that there are some taxpayers who file who don't need to, and we've sent letters to 2 million individual taxpayers simply informing them that based on the data that we have they didn't need to file returns, we encourage them not to file. So I mean that's the ultimate paperwork reduction-just get people A third thing we're doing is that we are working with private contractors to help us redesign certain of the forms and instructions that go with them to make them easier to file and less error prone. We know that there are some good ideas and expertise out there in the private sector. And I can give you some examples that I have with me of working on this. We're going to continue to aggressively pursue all three of these strategies over the next year, within the limits of our capacity. Another major step that we are taking is to redesign the way we measure burden. Frankly, the measurements that we have today that address the question of burden are based on a 15-year-old methodology that is very seriously flawed. I came into office-I looked at this, and I said, "this really does not help us very much to determine what we should be doing." It doesn't take into account, for example, anything about the currently very extensive and growing use of tax preparation software. I think we've learned from our private contractors that this methodology actually sometimes points us in the wrong direction by telling us that a certain way of designing a form makes it more burdensome when, in reality, it makes it less burdensome. And finally, it doesn't take into account what is some of the, I think, most important kinds of transactions that the taxpayers have-which is what happens if there's an error in a form. Then it requires interaction with the IRS after the form is filed, referred to as postfiling. So we're working with another private contractor to redesign this whole method of measuring burden. We hope this will give us better tools enabling us to improve in the future. And, finally, what I think is really the most important step dealing with increasing our long-term capacity to improve, is our plan to redesign our whole organization structure. That will have a number of objectives, but one of the most important objectives is that it will enable us to put in place a set of management teams that will each have the responsibility for dealing with a particular group of taxpayers. For example, you mentioned small business taxpayers, which is a sector with which I have some familiarity. We know there are some of the greatest burdens in this sector. Small business needs are very, very different when compared to a typical wage earner who simply files a return once a year and gets a refund in most cases. In keeping with the Restructuring Reform Act, we're putting in place a whole new structure. Part of this is that we will have a team-this will take a few years-of people whose job it will be to understand very clearly the needs, for example, of a small business taxpayer, as differentiated from a wage earner. The team will have the responsibility for figuring out what we can do to improve the way we provide service to those taxpayers and reduce, not only their paperwork burden, but other burdens in dealing with us. So those are some of the approaches that we're attempting to take. Recognizing we have many demands on us, we're trying to balance our priorities and address what we think will do the most good the quickest. Let me stop there. Both Chairman Horn and Chairman McIntosh, I would be happy to take your questions. [The prepared statement of Mr. Rossotti follows:] TESTIMONY OF COMMISSIONER OF INTERNAL REVENUE BEFORE THE HOUSE GOVERNMENT REFORM SUBCOMMITTEES ON INTRODUCTION Chairman Horn and Chairman McIntosh, I welcome this opportunity to testify before the subcommittees on the enormous amount of change that is occurring throughout the Internal Revenue Service, and just as importantly, how we are managing that change both in the shortand the long-term. In July of last year, Congress passed by nearly a unanimous vote the IRS Restructuring and Reform Act of 1998 (RRA 98). This bill included many provisions to enhance taxpayer rights and to deal with specific aspects of the IRS. As important as these specific provisions are, the bill collectively said something even more important. It told the IRS that we must fundamentally change direction. We must not only collect taxes, we must think about our job as serving the people who are paying the taxes, America's taxpayers. The IRS is fundamentally changing, Mr. Chairman, in the direction Congress mandated. We are not only implementing the letter of the law that Congress prescribed in RRA 98, we are rethinking and redesigning our whole way of doing business. The amount of change required for the modernization of the IRS, coupled with current complex operations, such as the filing season, means that there is significant risk that unanticipated problems will arise, plans or milestones may have to be changed, and operational errors will occur. When these events occur, time and money will be needed to address them. Mr. Chairman, as we have discussed, given the current situation at the IRS, there is no low-risk plan. Any attempt to retain the status quo or make modest incremental changes would fail. It would merely increase the gap between the IRS' ability to deliver required services and what the public and Congress expect, while imposing increasing direct and indirect costs for administering the tax system. In addition, the information technology on which the IRS critically depends is fragile and deficient and cannot be fixed short of a near total replacement. Yet, success in modernization of technology can only be achieved with the appropriate management and organization structure and a program to modernize business practices. Although there are inherent risks in the modernization process, knowing that they exist means that they can be managed and mitigated so that no setback is fatal and we can be reasonably confident of ultimate success. In this regard, two items are critical: (1) setting overall priorities in light of the limited organizational capacity; and (2) establishing effective management over each major change process. |