[Fair Use: For Education and Research Purpose Only] Change Comes Slow at the Internal Revenue Service By Albert B. Crenshaw and Stephen Barr Washington Post Staff Writers Sunday, February 27, 2000; Page H1

One day last year, during one of his periodic visits to "the field," Internal Revenue Service Commissioner Charles O. Rossotti decided to tag along with a revenue agent who was about to start an audit of a small business.

Company officials were cooperative and polite, but after about 20 minutes the company's financial officer remarked that he was "a little confused" because the firm had undergone an audit only the year before and had answered pretty much all the same questions he had prepared.

Rossotti was appalled. The audit was a waste of the taxpayer's time and the agency's resources, and it had come about, the commissioner later learned, because the field agent had no easy way of knowing whether a taxpayer has been previously audited.

"That's almost an incredible example of a crazy situation," Rossotti said.

More than two years after widely publicized congressional hearings focused national attention on the IRS's failings, and almost 18 months after enactment of a law designed to correct them, the IRS remains a far cry from the high-tech, 21st-century agency that its friends and foes alike want it to be.

As this year's tax filing season moves into high gear, the IRS looks to many of its "customers" much as it did last year and the year before and the year before. And the agency concedes that many of the improvements it is making will not be visible to taxpayers for several years at best.

Progress is measured mostly in things that didn't happen: The agency's elderly computers didn't collapse on Jan. 1, 2000, and recent filing seasons  including, so far, this year's  have seen no major foul-ups.

At the same time, those elderly computers are still the backbone of the agency, many taxpayer phone calls still don't get through, enforcement actions  levies, liens and seizures  have all but stopped, audit rates have shrunk to the vanishing point, there is no reliable data on the scope of tax cheating, and the work force struggles with bouts of anxiety.

"From the employee's standpoint, it's a little bit difficult to deal with change this fast," said Terry Little, an IRS worker and president of the Denver chapter of the National Treasury Employees Union.

Little said the total change in outlook demanded of the agency has been particularly difficult. "In the past Congress kind of wanted us to be the pit bulls, so to speak, and unfortunately we may have been too much of one. It's hard to change overnight."

Other employees said they fear the agency will not be given the budget it needs to do all these jobs effectively.

"We definitely need new people," said Terri Huskie, an IRS employee in St. Louis. "Congress doesn't seem to have a clue as to how many people it takes to staff these phones and be available for the vast numbers of calls we get."

At the same time, the IRS has been deluged with claims from taxpayers seeking "innocent spouse" relief under a 1998 law designed to protect divorced and widowed people  mostly women  from tax liabilities run up by their ex-spouses. This seemingly straightforward and equitable provision has proven far more complicated to administer than either the IRS or Congress expected. There is now a backlog of about 46,000 claims.

Rossotti, brought on board in 1998 as the technocrat who could restore the agency to the respected status it once enjoyed, remains optimistic. But realistic. He measures IRS progress not in milestones but in what he calls "inchstones."

"We're right about where we thought we'd be," he said in an interview.

The past two years have been consumed with carrying out immediate changes mandated by Congress and with getting ready for Y2K, Rossotti said.

From now through April 17  the deadline for Americans to file their taxes this year  Rossotti and the IRS staff will be focused on processing returns from about 127 million taxpayers and collecting more than $1.7 trillion to finance the government's programs  from preschool Head Start classes to complex military weapons.

"I hope this will be the final year of basically putting together, if you will, the infrastructure of what we need and we can really start to see some real improvements throughout the agency," Rossotti said.

But Washington is a town with a short memory and already members of Congress, who two years ago were all but likening the agency to the Gestapo, are beginning to chide it for failing to collect all the taxes that are owed.

Thus, while Rossotti is highly regarded on Capitol Hill and within the Clinton administration, some experts outside the agency wonder if he will be given the time and money for the meticulous, ground-up rebuilding that he and they think the IRS requires.

Outside experts are increasingly concerned that the new laws strengthening the hand of the taxpayer in dealing with the IRS, coupled with devotion of much of the agency's resources to dealing with internal problems, is opening the door very wide indeed for tax cheating.

"The word is out among the tax practitioners and preparers of more difficult returns  I'm not talking about 1040EZs here  that you are not being audited, and the audit lottery is almost a guaranteed winner. It's quite unrealistic to expect people not to take advantage of the opportunity that's been presented to them," said former IRS commissioner Donald Alexander, who is now a Washington lawyer.

Remember, he said, "if compliance drops about 5 percent, there goes our [budget] surplus."

Rossotti's goal is to create an agency that would collect all the taxes while responding quickly, accurately and politely to taxpayers' questions and requests.

To get there, he is relying on three broad changes:

A top-to-bottom reorganization of the agency that will match different types of taxpayers to agency employees who are well acquainted with the laws, procedures and forms that apply to each class of taxpayers.

Modernized computers that will place taxpayers' complete records at IRS workers' fingertips, allowing for quick responses to inquiries, while also allowing a more sophisticated attack on cheating.

A retrained and re-energized work force that, armed with top technology and properly targeted incentives, will be helpful to law-abiding taxpayers and effective in catching crooks.

Of the three, the agency is furthest along on reorganization.

Rossotti's plan, as he has outlined it for Congress and tax professionals, is to move away from a system in which all offices tackle all types of tax issues. Instead, he is carving the agency into four key operating divisions: one devoted to taxpayers with wage and investment income (most taxpayers); one devoted to small business and the self-employed; one devoted to large and mid-size businesses; and one devoted to tax-exempt and government entities.

Once this is in place, most taxpayers will deal with only one division, and the people there will be well trained on the types of issues that are likely to arise. This should reduce misunderstandings and "we'll have to get back to you" delays, and Rossotti hopes it will also allow workers the time and expertise to help taxpayers get things right in the first place so fewer hassles ever arise.

Rossotti only last month named the last of the commissioners  as the heads of these divisions will be called  and they are still to recruit managers to work with them. The reorganization will remain in the background this year, and taxpayers will not see any changes in filing their returns or other processing until 2002 at the earliest, according to the IRS.

For this spring, the best taxpayers can expect is modest improvements in day-to-day dealings with the agency.

In keeping with the 1998 reform law, the IRS plans to keep stressing its new "customer service" role aimed at helping taxpayers meet their obligations. Officials hope to encourage the use of electronic filing programs, by telephone and by computer, as a way to speed refunds and reduce errors. Toll-free telephones will be staffed seven days a week, around the clock, and the agency will expand walk-in services at its offices and provide translators for persons who use English as their second language.

"We've got to keep the agency going, we've got to stabilize what we're doing currently while we invest in the future to improve," Rossotti said in a recent interview at IRS headquarters in Washington.

Few people in the agency or on Capitol Hill expected the IRS to be transformed overnight. Previous efforts at modernizing computers went on for years  and millions of dollars  without reaching their goals. And anyone familiar with big organizations, and particularly big government organizations, realizes that changes in procedures and attitudes take time to sink in.

In the meantime, however, there is growing concern about how well the agency will be able to carry out its age-old and least popular function  collecting all the taxes that are owed.

Many members of Congress have been happy to use the IRS as a whipping boy in their fund-raising and election campaigns. Republicans especially like to refer to the Internal Revenue Code as the "IRS code," implicitly holding the agency responsible not only for its own failings but for the tax law in general.

This atmosphere, coupled with changes in the law and in the IRS's procedures, have sharply reduced the agency's collection efforts.

IRS seizures of property to collect back taxes plunged 98 percent last year, while liens and levies  other methods of attaching taxpayer assets  dropped 69 percent and 86 percent, respectively.

Enforcement revenue declined 13 percent, or $5 billion, last year, and corporate income-tax collections fell by 2 percent, according to David Williams, the Treasury Department's inspector general for tax administration.

"These numbers . . . send a very clear message: We've had an overreaction," Sen. Kent Conrad (D-N.D.) said at a recent hearing.

IRS officials do not dispute the numbers but ascribe them to temporary conditions brought on by the transition to the "new IRS."

They point to three key factors:

A change in the agency's methods of measuring worker productivity. In the past the agency kept close track of levies, liens and seizures, and whether intentionally or not, they came to be regarded as a measure of workers' productivity and of managers' effectiveness.

But these are among the most draconian of the IRS's enforcement tools, and critics charged that the agency's methods encouraged their use when they weren't necessarily needed. The agency eliminated their use as a measuring stick and also imposed tough restrictions on their use.

The result was an almost total cessation of levies, liens and seizures. Officials call that temporary and say that use of these tools will rebound as workers adjust to the new environment.

Demands of customer service initiatives and the new law. In addition to dealing with the Y2K problem and launching the reorganization, the IRS over the past 18 months had to incorporate more than 800 tax-law changes into its processes. The agency last year devoted about 2 million hours to training just on the provisions of the IRS restructuring act, and it estimates that the equivalent of 3,000 full-time workers is required just to administer these provisions.

The innocent-spouse provision is just one of 71 new rights bestowed on taxpayers by the restructuring measure.

With its fiscal 2000 budget essentially unchanged from fiscal 1999, the IRS had little choice but to pull workers away from other tasks, including enforcement.

Rossotti, however, said the IRS continues to devote more than 70 percent of its efforts to tax collection and audits, and the enforcement decline is not a sudden event.

"The idea that we've shifted a lot of resources from A to B is not true," he said.

There are fewer audits, but the primary reasons for the decline can be attributed to staff cuts, budget restraints and an increasing workload, Rossotti said. "You can go back to at least five or six years and you would see things being eroded every year," he said.

Work-Force Turmoil

The new law, in addition to new taxpayer rights, imposed a number of restrictions on IRS workers when dealing with taxpayers. One group, which quickly became known as the "Ten Deadly Sins," called for automatic firing for any worker who violated them. Many of the forbidden actions were obvious, such as assaulting a taxpayer, but others, such as violating a taxpayer's civil rights, were so broad that some IRS workers said they were afraid to take any firm stance with a taxpayer.

Senate Finance Committee Chairman William V. Roth Jr. (R-Del.) said, and Rossotti agreed, that "employees must engage in egregious activity to be fired," but Rossotti acknowledged that the agency did a poor job of training workers to avoid the Ten Deadly Sins.

"What we had was a period of real confusion, I would say, anxiety, about, you know, what are we really supposed to do," Rossotti said.

He said, however, that additional training is providing workers with a better understanding of the law, and with that, less reason to fear they will lose their jobs for doing them vigorously.

At the same time, though, the reorganization will reduce the number of management layers at the IRS and will likely result in substantial numbers of mid-level managers moving to new jobs or undergoing retraining for different work. That has set off a fierce competition for jobs and training inside the IRS, according to employees.

Several employees said the agency is spending time and money providing managers with training sessions, mock interviews and other mentoring benefits. But front-line employees have received much less counseling on how to compete for jobs, the employees said.

A number of employees expressed skepticism about the "old culture" in management ranks that opposes change. Some field offices try to prevent Rossotti from getting reliable, accurate information about workplace conditions, some managers still wrongly use statistical data to evaluate employees, and some managers seek retribution against workers who speak up, the employees said.

Others fear the IRS cannot keep pace with the private sector's technology improvements, will not retain competent staff to gather data properly and may find some of its work shifting to companies that sell taxpayer products.

"I think the IRS is kind of falling off a cliff," said Jennifer Long of Houston, an IRS employee who testified at the Senate Finance Committee hearings. "It is just hard to see what is going to happen, but we're not prepared for the big changes."

But Long and other IRS employees support Rossotti's effort and think he has a chance to refurbish the agency's image with the public. His chances for success, though, require stable, adequate funding to modernize computers and retrain employees, the IRS workers said.

"I think it is going to be better once we all get used to it," said Huskie in St. Louis. "It has been sort of confusing to us as employees, but it is going to be good for the taxpayer."

Gary Brown, a local NTEU president in Portland, Ore., thinks the IRS has taken "giant steps" in improving taxpayer services. "We'll proceed forward, in my view," he said. "The cup is more than half full."

Beyond all this, the agency still faces a long-term problem in that it doesn't have reliable information on uncollected taxes  "how much money is being left on the table," in Rossotti's words.

For many years, the agency relied on special audits called Taxpayer Compliance Measurement Program audits. In this program certain returns were selected as representative of various taxpayer types and then audited line by line.

The unlucky taxpayer was required to document every item of income and every deduction and to produce other records that might show unreported income. TCMP audits gave the agency useful information about mistakes and dodges and told it much about where to look for cheating. But they were very intrusive, and Congress barred their use.

As a result, the agency has what Rossotti called "a huge problem in that [we] haven't had any measurement of compliance since 1988," even as tax law and the economy have grown vastly more complex.

Rossotti said the agency is working to devise some less intrusive method of gathering the needed information, since flying blind can mean both that taxes go uncollected and out-of-date guidelines cause the agency to audit the wrong things, wasting its own time and the taxpayers'.

He called it "a pressing question" but added: "It's just that, you know, we have a lot of things to do and this is one of them, so we can't do all of them at once."

http://www.washingtonpost.com/wp-dyn/business/A38761-2000Feb26.html

-- Martin Thompson (mthom1927@aol.com), February 27, 2000