IRS Reorganization: The Effect on Practitioners This Tax Season and Beyond

When I became Commissioner of Internal Revenue in 1997 I pledged to turn the IRS into an organization that would consistently deliver the highest quality service to America’s taxpayers. The IRS must measure its success or failure not only by the taxes it collects but also by its effect on the people it serves. To achieve this goal, the IRS undertook a historic reorganization, the most comprehensive since the 1950s, to improve performance in all areas.

Change has been gradual and much remains to be done. A complete modernization of the IRS, especially its technology, will take the better part of a decade. Over the next three to four years, however, we will institute a number of changes that ultimately will make a major difference in how we work to better serve taxpayers.

New organization and management

One reason we reorganized the IRS is that its traditional structure did not adequately support taxpayer demands. We created a modernized organization geared to understanding and solving problems from the taxpayers’ point of view. It is led by management teams with the broad range of experience needed to direct current operations while modernizing business practices and technology to achieve the IRS’s mission and strategic goals.

As CPAs are aware, the current IRS structure consists of

Four operating divisions: Wage and Investment; Small Business and Self-Employed; Large and Mid-Size Businesses; and Tax Exempt and Government Entities (see “Modernization Update: New IRS Up and Running,” JofA, Mar.00, page 72 ). This new centralized focus is helping to ensure uniform and consistent practices nationwide.

Two service organizations: Information Systems and Agency-Wide Shared Services.

Separate specialized independent channels for taxpayers: Appeals and the Taxpayer Advocate Service.

Criminal Investigation, a line unit with sole responsibility for investigation of criminal violations of the tax law.

The Office of the Chief Counsel, which provides tax advice, guidance and legislative services to all sections of the agency.

A smaller national headquarters, which sets broad policy, reviews operating unit plans and goals and develops major improvement initiatives.

The shift to e-filing

Encouraging electronic filing is a key initiative at the IRS. The IRS Restructuring and Reform Act of 1998 mandated electronic filing of at least 80% of returns by 2007. The electronic tax administration (ETA) system provides many benefits for both taxpayers and practitioners and also within the IRS, including speedier refunds to taxpayers, positive acknowledgment of returns and a reduction of the number of errors. A strong ETA will reduce the amount of time taxpayers spend dealing with the IRS.

The first and most visible ETA initiative was to allow taxpayers to file 1040 returns electronically. In the 2000 filing season, 35 million individual taxpayers took advantage of this option, and the IRS plans to expand that number. We also aim to convert from paper-based to electronic methods of doing business. The Internet, in particular, offers exciting new opportunities, particularly through the IRS Web site (the Digital Daily), which as of fall 2000 already had received 1.3 billion hits. Our business systems modernization program will provide the foundation for transforming the way the IRS does business.

Taxpayers, industry and practitioners have told us we must make electronic filing more attractive and remove barriers. To address these concerns

We are expanding the number of forms that can be filed electronically. For the 2001 filing season, we are adding 23 additional forms to the 1040 e-file program. These include form 2106-EZ for unreimbursed employee business expenses; form 2688, application for additional extension of time to file a return; and form 8379 for injured spouse claims.

We plan to include the remaining 40 forms and schedules for the 2002 filing season. This means we will expand e-file eligibility to 99.1% of all taxpayers, potentially adding 3.8 million new e-filers to the growing rolls. Equally important, those who prepare tax returns essentially will be able to go 100% electronic for all of their clients by 2002.

We plan to eliminate the requirement for a separate paper document with the e-file return. Our tests of the use of a personal identification number as the taxpayer’s signature were very successful. (See “The ETA Needs You,” JofA, Oct.99, page 97.)

We added electronic payment options. We now accept debit payments through TeleFile, and we take credit cards for form 1040ES, estimated tax payments, and form 4868, extension of time to file. As of early September 2000, more than 200,000 payments averaging $2,935 each were made via credit card and another 237,281 averaging $1,614 were made by Automated Clearing House Direct Debit, which allows taxpayers to authorize debits from either their checking or savings accounts.

Our prototype “secure messaging system” will provide participating practitioners with a Web-based means for resolving account-related issues. This pilot will involve a limited number of practitioners and focus on the resolution of notices, account problems, transcript requests and installment agreements. A major priority of our business systems modernization program is to build a secure infrastructure that will permit authorized practitioners to exchange information with the IRS through the Internet.

Information technology

The IRS depends entirely on its computer systems to administer the tax system and to collect and properly account for about $1.7 trillion of net tax revenue each year, yet our systems are fundamentally deficient and must be replaced. Reorganizing the agency’s outdated structure and replacing its archaic technology will take years to accomplish, but it is necessary if we are to reach a higher performance level. For any information-intensive, service-oriented enterprise, an efficient information technology system is essential for satisfying ever-increasing customer service demands.

While technology modernization is essential to carrying out the provisions of the 1998 act, it poses many challenges. The IRS is revamping business practices and establishing an overall architecture for a set of new business systems that will accommodate all essential tax administration functions. During the next few years, taxpayer accounts will be moved over gradually to a new system, until all taxpayers, both individuals and businesses, can benefit from improved service.

An ongoing process

Although the IRS has been changing its organizational structure, taxpayers and practitioners will continue to work with their current contacts. District liaison and similar groups will be improved. We will continue to implement the new IRS structure over the next several years by realigning our personnel resources and revising our business practices and strategies; institute enhanced information technology; and putting into place a balanced performance measurement system.

I believe we are making real progress on the short- and long-term goals and mandates of the 1998 restructuring and reform act. As we continue our modernization, we will be able to produce the tangible and visible changes in service, compliance and productivity that America’s taxpayers expect and deserve.