Oversight board says IRS needs $10 billion budget

The Internal Revenue Service needs a fiscal 2002 budget of more than $10 billion to sustain its modernization effort, increase compliance rates and improve customer service, according to the agency's oversight board and experts from government and industry. During a meeting Tuesday of the IRS Oversight Board, witnesses and board members voiced concern over the agency's antiquated business systems, a decline in tax audits during fiscal 2000 and staff shortages. "While IRS has made significant strides, in the view of the board, it is still not meeting the needs of the American taxpayer," said Larry R. Levitan, the board's chairman and a retired partner at Andersen Consulting. The nine-member board, which includes six members from the private sector, was established by the 1998 IRS Restructuring and Reform Act. The board oversees agency operations, recommends candidates to be IRS commissioners and advises the President when it feels a commissioner should be fired.

Board members said they were worried the agency's funds for information technology improvements will be depleted by the end of fiscal 2001. The IRS' Information Technology Investment Account was created in 1999 to provide a consistent level of funding to support long-term IT projects. Board members called on Congress to allocate $1 billion for the account in fiscal 2002. "The IRS' systems are woefully antiquated… and the systems are the backbone to making modernization work," said Nancy Killefer, a board member and senior partner at McKinsey and Co. In February, the General Accounting Office released a report criticizing the IRS for security gaps in its electronic filing program during the 2000 tax filing season. GAO auditors hacked into the agency's computer system, gaining access to taxpayer information.

IRS Commissioner Charles O. Rossotti said the agency has been working to improve security for the e-filing system and taxpayers should feel comfortable using electronic means to file their tax returns during the 2001 tax season. The 1998 restructuring law calls for 80 percent of all tax and information returns to be filed electronically by 2007. President Bush proposed close to $400 million for the modernization of IRS' outdated computer systems in his preliminary fiscal 2002 budget. The board advocated that the IRS receive an overall budget of $10.26 billion in fiscal 2002-higher than Rossotti's proposed budget of $9.8 billion. Participants in the meeting also blamed a lack of funding on the decrease in audit rates over the past few years. "All taxpayers need to know that there are consequences for failure to comply with the tax law. Currently the IRS does not have the resources or personnel to do the necessary enforcement," said Judith Akin of the National Association of Enrolled Agents, who are licensed by the Treasury Department to represent taxpayers before the IRS. According to IRS statistics released last month, the agency's audit rate dropped to 0.49 percent in fiscal year 2000 from about 1.68 percent in 1995. Colleen M. Kelley, president of the National Treasury Employees Union, echoed Akin's comments in her remarks at the meeting, attributing lackluster audit statistics to staff shortages. However, earlier this week, Senate Finance Committee Chairman Charles Grassley, R-Iowa, questioned the agency's audit statistics. In a March 19 letter to Rossotti, Grassley asked whether the numbers for the audit rate take into account computer-based audits as well as those conducted in-person. "I am concerned that understatements may be used to justify budget and staff increases-and that it is statements such as this that could undermine our tax system," Grassley said in his letter. IRS customer service is also not what it could be, according to Ed Maher, chairman of the Brooklyn, N.Y., IRS Citizens Advocacy Panel. Maher said the biggest complaint he hears from taxpayers is that they cannot get through on the toll-free phone number the agency set up to field taxpayers' questions. Maher said greater use of the Internet and taxpayer information kiosks in public places, along with simpler instructions for filing taxes, may help reduce taxpayers' reliance on the phone.

During the 1990s, staffing levels at the IRS dropped by 17,000, while the number of tax returns grew by 8 percent. At the same time, toll-free telephone service and electronic filing for taxpayers have grown as well. A few participants in the oversight board hearing were blunt about the responsibility of Congress to provide adequate funding for the IRS. "Congress instituted the massive and much-needed reforms in the IRS; it is crucial that it now support their implementation," said David Lifson, immediate past chairman of the American Institute of Certified Public Accountants. In September 2000, Congress approved a $32.8 million stopgap spending plan to fund IRS information system modernization programs. That measure came in response to a draft GAO study that found the IRS had not met four congressional requirements for continued funding to upgrade the nation's tax system. GAO's final report confirmed that while the agency had not met congressional requirements, the IRS had made substantial progress.

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