Report: IRS comes up short

Funding increases to support modernization, training recommended

The Internal Revenue Service is winning the battle and losing the war when it comes to finding tax cheats, according to Charles Rossotti, the agency's outgoing commissioner.

Although the IRS is seeing some successes in its plan to replace its aging computer systems and create a customer-friendly e-filing system, it needs more money and staff to make the agency work better and ensure that taxpayers comply with tax laws, he said.

"Computer systems alone, even with the productivity gains from modernization, cannot solve the problem," he said in a Sept. 24 report to the IRS Oversight Board. "Trained and effective staff is also required."

Rossotti recommended that overall IRS staffing should increase by 2 percent a year through 2010. In the past five years, the IRS has lost 3,000 full-time positions, according to the report.

But Rossotti said that even a 2 percent increase would keep the agency's workforce below the level it was 20 years ago, when it was doing a better job enforcing taxpayer compliance.

In addition, he said it is important to make sure there are adequate increases for computer modernization programs to accelerate the delivery of projects that will provide better service, more efficiency and increased productivity.

In the fiscal 2003 budget, the Bush administration recommended $1.6 billion for information systems at the IRS, including $450 million for modernization, an increase from $391 million in 2002. But Rossotti said this funding level must remain consistent during the next decade.

"Together with effective management of the IRS, this modest level of resources can reverse the dangerous trend the tax system is currently taking — but only if it is consistently provided," he said.

But if the trends of the past 10 years continue, such as more demands on the tax system and less staff to deal with the problems without more money, "the eventual cost for our nation is certain to be enormous," according to Rossotti.

The IRS, always scrutinized by a wide variety of watchdog groups and congressional oversight committees, still has a long way to go to become an effective agency, according to Don Alexander, a former IRS commissioner.

"I think how the IRS spends its money is almost as important as how much the IRS gets," he said. "If I were back at the IRS, they would be spending less money on consultants and more on audits."

"More resources" has become a familiar refrain from the IRS during the past several years, said Pete Sepp, vice president for communications at the National Taxpayers Union, a watchdog group.

"But unfortunately, singing from the same old songbook doesn't always play well with the general public," Sepp said. "Congress is constantly tinkering with the tax laws, which makes the IRS' job like shooting at a moving target. But simply saying we need more personnel and money for modernization doesn't make the case that they are smartly using their existing resources."

Rossotti did not make a strong enough case that he needs more people, according to Ray Bjorklund, an analyst at Federal Sources Inc.

"I do not see a strong correlation between the number of people required and the productivity needed," Bjorklund said.

Still, the report said the IRS has made major improvements for its customers, such as its Web and e-filing services.

In addition, Rossotti said that the IRS cut the number of management layers and eliminated administrative duties for executives and senior managers.

"A new model of executive recruitment was successfully established, which includes recruitment of a limited number of highly experienced top executives from private industry and other government agencies," Rossotti said.

The agency also consolidated mainframes from 12 centers to three and established a single standard for desktop and laptop hardware and software.

But despite all those changes, Rossotti said the future still spells trouble, with increasing demands on the tax administrative system and a steady decline in IRS resources due to budget constraints.

***

Slow and steady

The Internal Revenue Service is moving slowly but steadily toward offering electronic services. Some of its accomplishments:

* Last year, the agency's newly designed and more accessible Web site broke usage records with 2.7 billion hits and 336 million files downloaded.

* E-filing has tripled during the past five years.

* This year, virtually all 1040 forms and schedules can be filed electronically with no paper signatures required.

* The Electronic Federal Tax Payment System allows large and small businesses to make federal payments online.

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