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Out-of-date IRS struggles with modernization that may soon be obsolete


Reaching the Internal Revenue Service by phone rarely has been easy. But several years ago callers to the Buffalo, N.Y., office had more trouble than usual.

The Treasury Department investigated and found that IRS telephones "may have been set so that false busy signals registered when taxpayers called the office."

But that was the old IRS, agency officials insist now. There's a new one on order. Say goodbye to the uncaring, overworked paper shuffler of years past. Say hello to a customer-friendly computer whiz.

IRS managers declare that their $23 billion plan to remake the agency by 2008 remains on track. "We think we have made major progress," said modernization executive Larry Westfall.

Others see an agency that is overwhelmed, abusive to the public and unhappily wedded to technology three decades out of date.

The General Accounting Office, Congress' investigative arm, says the IRS spent $2 billion over the last eight years making "only marginal improvements in its operations."

Even if the agency can revamp its technology, there's the human factor. "The IRS has to act in a reasonable fashion. I don't believe it will," said Bob McKenzie, a Chicago tax lawyer and author of two books on the agency. "We have some real fools working for the IRS."

So serious have been the problems afflicting the agency that some warn of a total collapse. Modernization "must proceed in order to prevent a major breakdown of the nation's tax system," the National Research Council, an independent adviser to the government on technical matters, found after a study.

"The warnings are there, and they've been there for a number of years," said former IRS Commissioner Lawrence Gibbs. "The American people had better understand the stakes here."

In its attempt to administer the nation's bewildering array of tax laws, this year the agency will process 208 million returns and collect more than $1.2 trillion. It will use methods largely unchanged since John F. Kennedy was president.

While much of the country routinely does business through electronic transfer of funds and facts, the IRS has moved only haltingly toward the modern age.

"We may very well be the largest information organization on the face of the Earth," said Mr. Westfall, the modernization 'u executive. "Most of that information is on paper, and we are drowning in paper."

The Austin, Texas, Service Center, one of 10 regional processing centers nationwide, receives more than one million pieces of mail on its busiest days. Of the 16 million returns it processes each year, all but three million are on paper.

A keyboard operator must hand-enter each figure from the returns into a computer. One out of five returns contains an error -- made either by the filer or the IRS clerk.

Old equipment has thwarted some streamlining, as with the 1990 work of the IRS Notice Clarity Unit. The unit redrafted the often-confusing -- and in some cases erroneous -- notices mailed to filers informing them of overpayments, underpayments and problems with returns.

Anyone with a simple word processor could have made the suggested changes easily. But by 1993 more than a third still had not been implemented. The reason, according to a GAO study: Notices are maintained on a computer system so old that the alteration of a single character requires complete reprogramming.

RTC "In the area of technology," IRS Commissioner Margaret Richardson said in a recent speech, "the past has overstayed its welcome and left the future waiting in the wings."

Ex-Commissioner Gibbs recalled bringing in consultants to assess IRS computer systems after a 1985 filing season marked by thousands of lost returns. "It was not a surprise to them that we had this bad filing season," Mr. Gibbs said. "What was a surprise to them was that our system was worse than any Third World system they'd ever seen."

He added: "It's basically the same system we're using now."

Of the $23 billion tab for modernization, about $9 billion will go toward new hardware and software. With it, the IRS aims to process returns faster and deal with taxpayers more efficiently.

No longer will workers have to key in each figure. A computer will scan a return and produce an electronic image.

The phone system is slated for improvement as well. Now, citizens inquiring about their accounts often endure a frustrating series of phone calls to agents who do not have access to complete files, and are therefore unable to answer all questions.

(This assumes taxpayers can actually contact the IRS help line. Auditors from the GAO, conducting a test, reached tax assisters with only 13 percent of their calls.)

Phone upgrades, the IRS pledges, will allow resolution of 95 percent of taxpayer inquiries with one call.

Even critics acknowledge that the proposed improvements are needed and laudable. But, they said, the modernization program is a mess so far. In a February House hearing, Republican Jack Kingston of Georgia went so far as to call it "criminal, absolutely criminal."

The IRS has no master plan for its own overhaul, auditors said. "Most of the systems delivered to date simply automate old processes without substantially improving service to taxpayers," a GAO official told a House subcommittee in February.

Other, older problems persist. The IRS continues to be "hampered by serious, pervasive financial management problems," the GAO reported last year. Its effort to track and collect billions in delinquent taxes is "in some respects worse today than it was five years ago."

The annual tax gap -- the amount Americans owe but haven't paid -- grew from $76 billion in 1981 to $127 billion in 1992.

The IRS has said repeatedly that it is moving toward solving its financial management problems as well as closing the tax gap. Mr. Westfall said he finds the attacks on the agency's technology-upgrade program misguided.

As proof of progress he points to the 16 million electronic returns filed last year, transmitted over phone lines to IRS computers.

One goal of modernization is to furnish the IRS with more collection tools. Better and easier access to various databases, such as bank records and property rolls, will give tax examiners more ways to evaluate a return. A filer who declares $20,000 in income but owns a $70,000 car would arouse suspicion.

This gives pause to some critics. "To grant the IRS greater power without something to rein in their worst people is a nightmare," said Mr. McKenzie, the attorney. For example, he said, "maybe I'm a ne'er-do-well, but I live in a nice house because my mother worked hard and she left it to me. Yet the IRS may say, 'Prove you can afford it.' "

A bill now before Congress would shift the burden of proof in civil tax cases from taxpayer to the IRS. "Innocent until proven guilty. . . . That's what my bill is all about," said its sponsor, Democratic Rep. James A. Traficant Jr. of Ohio. "Too many lives have been ruined unjustly and without cause by an IRS that is all too often out of control."

The IRS vigorously opposes the bill. But it acknowledges a need to work on a public image so poor that a House subcommittee once ordered an investigation into whether it was abusing citizens. (It was, the investigation found.)

Among IRS "performance goals" for the next century: "We will conduct business openly, efficiently, equitably and honorably" and "treat the public with dignity, fairness and respect."

Few expect the transformation to be easy, and constantly shifting tax laws will make it harder still. Since 1980, the U.S. tax code has been amended more than 100 times.

Mr. Westfall said the prospect of change -- such as the $500 tax credits for each child approved by the House last week -- intensifies the need for improved equipment.

Some Republicans in Congress have threatened radical simplification of the system with a flat income tax. Others have said they want to do away with income taxes and the IRS altogether. Then $23 billion in improvements could be instantly obsolete. Said Mr. Westfall, "That's a possibility."

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