A Struggling IRS Collects Its Fair Share of Problems
By Albert B. Crenshaw
Betty and Gerald Wesley of Annapolis knew they had a tax problem last year when they tapped his retirement account and faced a hefty extra levy from the IRS. Unable to pay all at once, they worked out a deal to send $175 monthly installments.
But the Wesleys soon faced a far worse IRS problem, caused by mistakes at the agency that led to the seizure of their checking account. Their experience illustrates what critics say is a culture of mismanagement at the IRS -- a situation that's especially galling at this time of year, as Americans prepare for tomorrow's deadline for filing income tax returns.
The difficulties for the Wesleys began after they missed a payment in November, when Gerald Wesley became sick. The Internal Revenue Service sent a notice that unless the couple caught up in 30 days, the installment agreement would be canceled and the full amount would be due. So the Wesleys quickly arranged a personal loan and paid up four days later.
They made their next payment as scheduled and were confident the issue was behind them. On Feb. 7, however, the IRS seized the checking account, leaving them with 23 cents in cash. The matter was straightened out and the lien on their account was lifted the following Tuesday. The Wesleys, meanwhile, were left shocked and mystified at their experience.
"Nobody at the IRS can explain why this happened. They honestly do not know," Betty Wesley said.
These days, it seems, a lot of things are happening at the IRS that the agency can't explain. From unanswered telephones to nonworking computers to unauthorized access to taxpayer files, the nation's chief tax collection agency seems to lurch from one disaster to the next, with a growing posse of critics at its heels.
Critics in government and the private sector are asking whether the agency is capable of continuing to administer the tax code without a top-to-bottom overhaul. To fend off the critics, the Treasury Department has proposed revamping the agency's management and bringing in a professional manager rather than a tax expert to head the agency.
To an extent, the attacks on the IRS reflect a blood-in-the-water syndrome: The agency's well-publicized problems have emboldened some critics whose real animus is toward taxes and who paint the agency in the blackest terms in hopes of undermining the current tax system.
But the agency has given them plenty of ammunition:
Computers. The IRS has been trying for nearly two decades to update its antiquated computer systems. After three false starts and $3.5 billion in expenditures, it still does much of its work on 1960s-era mainframes and is nowhere near the fully integrated system it dreams of. While much of the $3.5 billion went for systems that did work and for things that can still be used -- communications systems, for example -- about $400 million of it was simply wasted.
Service. Although the agency has begun calling taxpayers "customers" and tries to seem user-friendly, it remains unable to answer the phone much more than about half the time when taxpayers call. There also is an agency culture that seems to view apologies as a form of weakness.
An IRS worker who contacted the Wesleys about the erroneous lien "tried to blame it on our bank," Betty Wesley recalled.
Snooping. Over the past five years, thousands of IRS employees have been caught or suspected of browsing through taxpayer records they were not authorized to see. They snooped through the returns of celebrities, friends, and relatives, raising questions about security and taxpayer privacy. Though it does not appear that the information was misused, a snooper in the IRS's Boston office turned out to have been a member of white supremacist groups, and a witness testified that the worker said he planned to use the tax data to build dossiers on people.
A Senate hearing on unauthorized browsing is scheduled to be held tomorrow on Capitol Hill.
Tax gap. Each year Americans underpay their taxes by about $100 billion. The IRS ultimately collects much of this "tax gap," but a lot goes undetected, while other sums are assessed but never collected. The backlog stands at $216 billion, according to the General Accounting Office.
The bulk of the evasion takes place in commerce, where there is neither withholding nor third-party reporting, primarily in small businesses and services that operate in cash. However, the IRS audits only a fraction of the returns it receives each year, and its troubles have encouraged Congress to halt funding for a big compliance initiative it had undertaken.
The IRS once was a model of government efficiency and effectiveness. One of the earliest agencies to make widespread use of computer technology, it led the way in modernizing government processes 40 years ago.
What went wrong?
The answer lies partly within the agency and partly outside.
In the years since the agency's heyday in the 1950s and 1960s, the nation's economy has changed, as have tax laws and technology. The IRS has struggled to keep up but has managed to stave off collapse.
In fact, this filing season has been one of the smoothest in recent years. Refunds are up, delays are down and there have been no widespread glitches.
"Compared to the rest of the world we're in good shape," said Sen. Bob Kerrey (D-Neb.), who with Rep. Rob Portman (R-Ohio) chairs the congressionally created National Commission on Restructuring the Internal Revenue Service.
"But relative to the demands of the customer, the citizens of the country, it has a long ways to go. Our expectations are higher," said Kerrey, whose panel has spent nearly a year studying ways to improve the agency.
In many ways, the agency's efforts to upgrade its computers stand as an allegory for all of its difficulties -- and the solution to many of them. The IRS has tried one grand solution after another, conceived and largely carried out entirely within the agency, only to see each one come to grief.
"A crucial problem is that people try to build the Taj Mahal and then specifications change," said Deputy Treasury Secretary Lawrence H. Summers. He added that in the mid-1980s, when the most recent effort was begun, large systems were considered the best approach.
In the meantime, to keep older systems going and to give IRS workers some online access to taxpayer information, the agency patched together an array of other highly complex stand-alone systems that could solve an immediate problem but did not add up to an integrated system.
Today the agency still conducts much of its business on a mixture of 1960s mainframe computers and these separate, "stove pipe" systems. Such systems take data in at one end, process it, and put the results out the other, but cannot communicate easily with each other.
This means that an IRS worker talking to a taxpayer on the telephone may be able to call up part of the taxpayer's file on his or her terminal, but not necessarily the part necessary to resolve the problem.
"Overall, the IRS computing environment evolved into an extraordinarily complex array of systems," said Arthur A. Gross, who joined the IRS last year as chief information officer.
Critics don't dispute that the demands the agency must put on any system are enormous. Not only does the IRS collect and process more than 200 million individual and corporate tax returns each year, it handles another 2 billion "information returns," such as W-2s, 1099s, and other third-party reports that help the agency check income and deductions. It must also answer 100 million taxpayer questions, chase down tax cheats and other crooks, and research the effectiveness of the tax laws and its efforts to implement them. What bothers critics is that after spending more than $3 billion the problem is not solved. Last year's halt of the Tax Systems Modernization program, launched in 1989 to replace the old computer system, "is the fourth failure we've had with this going all the way back to the 1960s," said Rep. Jim Kolbe (R-Ariz.), chairman of the House appropriations subcommittee that oversees the IRS budget. There are two principal reasons for the agency's failure to implement new technology, critics said: the lack of clear goals and a plan for achieving them and an insular internal culture that led officials to try things in-house that the agency couldn't accomplish.
The IRS's technical problems first exploded into public view in the mid-1980s, when workers in the Philadelphia service center were discovered hiding unprocessed returns and stuffing them into trash cans, some with checks still attached.
The Philadelphia crisis stemmed from an attempt to bring some high-speed data-processing systems into service without proper testing, and they didn't work. The IRS was able to persuade Congress that the solution was to increase funding for new systems.
The agency began a host of other projects that contributed to the patchwork that Gross referred to and was criticized by the General Accounting Office, Congress's investigative arm. That in turn led to the 1989 modernization effort, with a projected cost that grew to $8 billion from $4 billion.
Plagued by what the GAO called "persistent and pervasive management and technical weaknesses," the project was brought to a halt by the Treasury Department last year, and Summers recently promised congressional appropriators "a sharp turn" in the agency's approach to technology.
The IRS canceled $36 million worth of technology projects last year because there wasn't an adequate "business case" to continue them.
Other agencies ranging from the Federal Aviation Administration to the Immigration and Naturalization Service to the FBI have had problems modernizing computers.
In fact, said Rona Stillman, the GAO's chief computer scientist, all giant computer projects run into trouble, and the government must learn to cut projects into manageable pieces and begin a new segment only after previous ones have shown they work -- something the private sector has learned the hard way.
At the same time the IRS was struggling with its computers, the tax laws it administers were growing more complex. "The Tax Reform Act of 1986 added tremendous complexity to the tax code while flying under the banner of simplicity," said Rep. Bill Archer (R-Tex.), chairman of the tax-writing House Ways and Means Committee.
Archer is among those pressing for an entirely different tax system -- in his case, a consumption tax that would be levied on the purchase of goods and services rather than income.
"In some ways [the IRS's problems are] a natural outgrowth of the increasing complexity of the American economy," Archer said, but in his view, unless tax laws are changed fundamentally, "the IRS will remain beyond meaningful reform."
The Clinton administration has no plans to abandon the graduated income tax, in which higher-income people are supposed to pay more, but agrees that the law should be simplified. How that can be done without allowing some taxpayers to get away with something isn't clear, since many tax experts agree that fairness and simplicity are hard to reconcile.
THE FILING SEASON SO FAR
Through the week ended April 4
Average refund $1,327 $1,245
Total refunds, in billions $61.499 $57.882
Number of refunds processed,
in millions 46.335 46.509
Filed by PC, in millions 4.488 3.871
Filed by phone, in millions 4.072 2.591
Total taxes received
electronically, in millions 13.007 11.022
Total processed, in millions 56.366 57.349
Total taxes from individual tax
returns, in millions $66.873 $67.093
SOURCE: Internal Revenue Service
© Copyright 1997 The Washington Post Company