IRS performance measures.

October 1, 1999

On October 1, 1999, Tax Executives Institute submitted the following comments to the Internal Revenue Service concerning the development of performance measures for employees in the IRS's Coordinated Examination Program. The comments, which were directed to Richard W. Teed, acting National Director, Corporate Examinations, were prepared under the aegis of TEI's IRS Administrative Affairs Committee, whose chair is Robert J. McDonough, Jr. of Wang Global, Inc. Also participating in the development of the comments was Sandra A. Carroll of Nortel Networks, Inc. On November 3, Mr. Teed, together with Thomas J. Smith, who is the executive in charge of the IRS's "balanced measures" initiative, met with Mr. McDonough and other representatives of the Institute to discuss TEI's comments and recommendations. That meeting is discussed elsewhere in this issue.

On August 5, 1999, the Internal Revenue Service promulgated final regulations to establish a balanced performance measurement system within the IRS. The regulations implement the changes in performance measures mandated by the Internal Revenue Service Restructuring and Reform Act of 1998 and provide the general outline for measuring performance on both an organizational (program) and employee-by-employee basis. In respect of the evaluations of individual employees, the next step in the process will be the development of the job elements and standards that are critical to the successful completion of an examination.

Tax Executives Institute's interest in IRS performance measures has a long history, with the topic being a mainstay at the Institute's liaison meetings with the Commissioner and other National Office, regional, and district officials for many years. During previous discussions there has been agreement that, in order to succeed, the IRS must adapt to the ever-evolving business environment and become more taxpayer-service oriented. Experience teaches that reliance on measurements such as the dollars proposed for adjustment will not produce overall solid results. The new measurements established by the final regulations are a good start toward achieving a better balanced, more efficient administration of the tax laws.

Background

Section 1201 of the IRS Restructuring Act requires the IRS to establish a performance measurement system to set goals and objectives for individual and operational unit performance. These performance measures are to be used in granting employee awards, setting merit pay increases, and taking other personnel actions. Section 1204 of the Act expressly prohibits the use of tax enforcement results to evaluate IRS employees or to set production goals. TEI has previously submitted comments to the IRS affirming our belief that tax enforcement results (particularly the use of proposed adjustments) should not be emphasized in the measurement of agent performance. Thus, TEI welcomes the opportunity for change provided by the new legislation and we applaud the IRS's efforts to eliminate reliance on enforcement results.

In enacting the IRS Restructuring Act, Congress expressed concern that an evaluation system based on quantitative goals or tax enforcement statistics -- even if only applied at the management level -- may result in examinations unduly focused on raising revenue, rather than the verification of return information. This concern grew out of congressional hearings at which IRS employees testified that the agency's performance measurement system had created an environment that promoted achievement of certain quantitative goals, especially in respect of collection matters. Although the IRS cannot turn a blind eye to its responsibility to collect taxes, the Institute strongly believes that the adoption of a revised system of measuring performance is essential to fostering voluntary compliance (as stated in the IRS's new Mission Statement) and ensuring the long-term success of the Coordinated Examination Program. Thus, we are pleased that the IRS has issued regulations implementing the legislation. The final regulations outline a balanced performance measurement system based on three elements: (1) customer satisfaction, (2) employee satisfaction, and (3) business results of the various organizations within the IRS. These measurements are based on quantifiable data and will be applied by an internal review function.

Under the regulations, customer satisfaction surveys will be issued to a statistically valid sample of cases. Taxpayers will be asked whether they received courteous service and if they were informed of their rights. A staff of IRS employees dedicated to reviewing these surveys will score the quality of the work performed by the operational unit. Employee satisfaction will be measured by a survey in which employees will anonymously provide feedback to IRS management about their work environment, including the adequacy of their training.

To measure business results, the IRS will use an approach consisting of quality and quantity measures. Quality measures will be based on a statistically valid sample of cases handled by the operational unit. An internal IRS group dedicated to this function will review and score the quality of the work performed by the operational unit. The review will concentrate on proper and timely service to taxpayers, correct application of the tax law, protection of taxpayer rights, and similar areas.

Quantity measures will be based on "outcome-neutral production and resource data." Examples given are the number of cases closed, work items completed, customer education and assistance, hours expended, and other items.

Some people may question whether the IRS can overcome the cultural barriers to using non-financial measurements such as those outlined in the final regulations. TEI believes it can. We applaud the establishment of such measurements and submit that they will produce more quality audits, improve the efficiency of the IRS, and decrease the time spent on examinations -- to the mutual benefit of the audited taxpayer and of taxpayers as a whole (i.e., the public).

TEI remains concerned, however, about how the principles underlying the new regulations will be applied in evaluating the performance of personnel in the Coordinated Examination Program (CEP). For example, 26 C.F.R. [sections] 801.6(b) provides that the quality measure will be determined by a review of a "statistically valid sample of work items." The term "work items" is not defined, although the preamble to the proposed regulations notes that this measure will focus on the quality of work done in a sample of "cases." It is questionable how a measurement based on a "statistically valid sample of cases," however, may be applied to employees in the CEP program, where an employee may work on only one case for the entire fiscal year.

Similar questions exist concerning the prohibition on using tax enforcement results in evaluating performance. A "tax enforcement result" is defined (in 26 C.F.R. [sections] 801(6)(d)(1)) as the outcome produced by an IRS employee's exercise of judgment recommending or determining whether or how the IRS should pursue the enforcement of the tax laws. Examples of "tax enforcement results" that may not be used to evaluate an employee include the amount assessed or collected. Records of such results also do not include "tax enforcement results of individual cases when used to determine whether an employee exercised appropriate judgment in pursuing enforcement of the tax laws based upon a review of the employee's work on that individual case." TEI believes that the prohibition needs to be clarified. For example, will CEP personnel be evaluated on whether proposed adjustments are sustained at Appeals? Or on whether the proposed adjustments are immaterial or incorrect? TEI believes that taking such factors into account in measuring performance is appropriate. In other words, the critical elements of CEP job performance reviews must address (and counteract) any inclination an agent might have to write up an issue merely because the employee expended an inordinate amount of time pursuing a dead end. In addition, if an agent issues notices of proposed adjustments that are continually overturned at Appeals (on the merits), that factor should be taken into account in the agent's evaluation.

Finally, we are concerned about how the evaluations of organizational and individual performance are harmonized. 26 C.F.R. [sections] 801.3(a) provides that "organizational measures will not directly determine the evaluation of individual employees." TEI believes that, as long as the organizational measures are outcome-neutral, the goals of the operational unit and its employees should be the same. In short, measurement standards for individual employees should parallel those for the operational units. This will ensure that the IRS employees firmly support the goals and objectives of the operational units.

Application of Measurement Criteria to the CEP Program

TEI believes that the critical elements used to measure employee performance should encourage the employee to (i) resolve issues at the lowest level; (ii) substantially improve the timeliness of examinations; (iii) raise technically sound and well-developed issues; and (iv) foster an effective working relationship between the IRS and taxpayers. With these goals in mind, TEI offers the following comments.

1. General Comments. 26 C.F.R. [sections] 801.3(e)(1) provides that no employee of the IRS may use records of tax enforcement results to evaluate any other employee or to impose or suggest production quotas or goals for any employee. TEI wholeheartedly agrees and suggests that measurement standards for each group within the IRS should be tailored to support each unit's mission. In other words, the measurement standards for revenue agents should not be used to evaluate collection, criminal enforcement, service center, or clerical personnel.

The criteria should also include measurements that support the IRS's new mission statement to provide taxpayers top quality service by helping them reasonably meet their tax responsibilities and by applying the tax law with integrity and fairness. In TEI's opinion, emphasis on these goals is needed in the employee's performance measures.

2. Customer Satisfaction. 26 C.F.R. [sections] 801.4 provides for gathering information on customer satisfaction goals and accomplishments of the operating units within the IRS, including questionnaires, surveys, and other mechanisms. The information will be used to measure whether customers of a particular unit believed they received courteous, timely, and professional treatment by IRS personnel. The regulation notes that taxpayers will be permitted to provide information under conditions that guarantee anonymity. The IRS needs to address how this promise of confidentiality (perhaps through the use of an outside firm to compile the results) will be assured in respect of CEP personnel, where an agent may work on only one or a few cases.

The final regulations do not specify what information will be sought from taxpayers relating to customer satisfaction. Information solicited from taxpayers for use in evaluating the performance of the CEP examination team should focus on the taxpayers' assessment of the agent's efforts to increase the efficiency and timeliness of audits. Specifically, the information should go toward measuring --

* Adherence to the procedures set forth in the IRS Manual and in National Office directives;

* Knowledge of the taxpayer's industry and industry practices (including the effort to gain such knowledge);

* Knowledge of tax and accounting principles and application of those principles to the taxpayer's facts;

* Involvement of the taxpayer in the audit-planning process;

* Involvement of the taxpayer in the development of information document requests (IDRs) before they are issued;

* Development of factual issues;

* Communication with the taxpayer (i.e., were IDRs clear and concise, were they relevant to the taxpayers' business, were new issues raised late in the process, were notices of proposed adjustments issued periodically during the examination or held to the end, etc.);

* Use of "one-stop shopping" by assisting the taxpayer in solving problems that may not be directly related to the examination;

* Courtesy and professionalism in their dealings with taxpayers and taxpayer representatives.

In addition, we recommend that the agent's understanding and application of the concept of materiality be explicitly injected into the evaluation of an agent's performance. Even if a particular approach or position is legally defensible, it may impose inordinate costs on the taxpayer (and the IRS). In our view, from both a policy and revenue perspective, the pursuit of such an approach or position should reflect negatively on the examiner's performance.

Finally, we believe it is critical that the CEP team demonstrate a commitment to resolving issues at the lowest level. In this regard, the critical elements should prompt employees to use alternative dispute resolution procedures -- such as the accelerated issue resolution (AIR) procedure, advance pricing agreements (APAs), early referral to Appeals, and mediation. Moreover, should the IRS develop a pre-filing agreement procedure designed to resolve contentious or recurring issues before a business enterprise taxpayer files its tax return, the CEP team's performance measures should be adjusted to encourage the use of the procedure. Likewise, the number of agreed issues should also be taken into account. By including the utilization of such procedures in performance standards, the IRS can foster an environment that encourages the resolution of issues at the lowest level.

3. Employee Satisfaction. Consistent with the customer satisfaction measures, 26 C.F.R. [sections] 801.5 provides that employee satisfaction measures will be compiled on the basis of information gathered via various methods, including questionnaires and surveys. We suggest that the solicitation of employee input on the adequacy of training and support services include input on what changes are needed in those functions.

4. Quality Measures. 26 C.F.R. [sections] 801.6 provides generally that the business results measures will consist of numerical scores determined under the "Quality Measures" and the "Quantity Measures." The quality measures will be determined on the basis of a review by a specially dedicated staff within the IRS of a statistically valid sample of work items handled by certain functions or organizational units.

Care must be taken to ensure that the review staff's assessment of an operational unit's performance is impartial and objective, which may not be easy given the complicated nature of the tax issues addressed in the course of a CEP examination. It is not clear how even the most highly skilled internal review team could properly evaluate whether an agent "provided proper and timely service to the taxpayer ... [and] protected taxpayer rights by following applicable IRS policies and procedures." Lastly, TEI believes that operational units and functions should be measured on how well they train their employees on the latest technical developments in the tax law and National Office directives.

5. Quantity Measures. 26 C.F.R. [sections] 801.6(c) provides that the quantity measures will consist of "outcome-neutral production and resource data," including the number of cases closed, work items completed, and hours expended. TEI suggests the following measures may also properly be used in evaluating CEP personnel:

* The sustention rate of the issues at Appeals;

* The number of issues resolved at the examination level (including a comparison to prior cycles);

* Total elapsed time from the opening to the closing conference;(1)

* The currency of the audit cycle;

* The use of alternative dispute resolution techniques;

* Whether issues are returned by Appeals for factual development; and

* Total reduction in the number of hours spent on a CEP case by the same team that examined the previous cycle. (New teams could also be measured by this factor, though adjustments would have to be made for a learning curve.)

6. Specialists. The final regulations do not specifically address how specialists will be evaluated. TEI suggests that specialists should be measured by the same quality and quantitative measures used for other CEP personnel (i.e., did they provide proper and timely service, not unduly prolong the audit, and adequately seek resolution of issues at the audit level). In this regard, we note that the IRS Customer Satisfaction Task Force Report addresses the need to adjust the critical elements of measures for both specialists and team managers to facilitate the integration of specialists into the audit team.

Conclusion

In these comments, TEI has discussed the factors it believes should be taken into account in assessing the performance of personnel within the Coordinated Examination Program. The key, of course, is to ensure that the system ultimately adopted rewards good performance, discourages poor performance, and accordingly advances the IRS's mission by driving agent behavior. Whatever approach the IRS ultimately decides upon, TEI will be pleased to lend its support.

(1) The IRS's "pointing" system (which, we understand, may assign higher "points" to longer audits) may need to be examined to determine how it interacts with this criterion.