Joint taxpayer-IRS quality improvement project on information document requests.

Editor's Note: The following article is adapted from a report prepared by representatives of the Internal Revenue Service and Northern Telecom Inc. (NTI) concerning their joint quality improvement project on information document requests (IDRs). The purpose of the project was "to evaluate the current examination process utilized by the IRS and NTI in order to propose recommendations that would enhance the efficiency, effectiveness, and timelessness of the examination." The project ultimately focused on the IDR system used in the IRS's examination of NTI's tax returns, with a view toward reducing the IDR turnaround time and thereby decreasing the burden of the examination for both NTI and the IRS. The project marked first time that the IRS and a taxpayer participated as equal partners in a QIP project, and this article in being published is the hope that the project may serve as a paradigm for future projects.

Introduction

In approaching this quality improvement project, Northern Telecom Inc. (NTI) and the Internal Revenue Service (IRS) recognized the importance of conducting a quality examination to determine whether the tax liability reported on the federal tax returns being examined is substantially correct. Both parties also recognized and agreed that a quality examination is a joint effort that includes, but is not limited to:

* Joint participation in the planning process.

* Examination of substantive areas that includes a review and analysis of all relevant information and, when warranted, discussion with company personnel having such information and knowledge.

* Reduction of the burden placed upon the company during the course of an examination.

* Utilization of an effective and efficient system for requesting and providing relevant information necessary to conduct a quality examination; i.e., IDR system.

* Maintaining a continuous dialogue and open communications aimed at identifying and resolving any examination problems, concerns, or issues at the earliest time possible and at the lowest appropriate level.

* Minimizing both the actual time applied in conducting the examination and the time over which it takes to conduct the examination.

* Conducting a meaningful post-examination critique.

In addition, NTI and the IRS recognized and agreed that an effective and efficient IDR system is essential to conducting a quality examination in an orderly and timely manner. The scope of the QIP initiative was limited to studying the IDR system. The goal was to reduce IDR turnaround time and thereby decrease the burden of the examination on both the taxpayer and the IRS.

Therefore, NTI and IRS undertook a joint review and analysis of the IDR System employed and developed a series of proposals that are discussed in this article.

Description of QIP

The first step taken in the systems analysis project was to gather sufficient data on the current system to develop a baseline measure of present turnaround times on IDRs. This was accomplished by sampling the current log of IDRs maintained by the IRS. A control chart was created for turnaround times on IDRs which showed an average turnaround time of 89.3 days. (Exhibit 1.) The common objective of NTI and the IRS was to reduce average turnaround time to 42 days.

After the baseline measures were established, the team met for the first time on May 17, 1991. At this meeting, Robert L. Ashby, Assistant Vice President, Taxes of NTI and Michael R. Rucker, IRS Case Manager, joined the team to reconfirm their interest in and commitment to this project. Steve Roche, the IRS's District Quality Coordinator, provided the team with an overview of systems analysis and the steps the team would be taking in the months ahead. He shared with the team the baseline measures of what the current IDR system was delivering. The meeting concluded with the IRS and NTI members of the team agreeing to develop flow charts of their respective processes for initiating and completing IDRs for presentation and discussion.

On June 26, 1991, flow charts prepared by NTI and the IRS were reviewed by the team. (Exhibit 2.) Clarifications were made regarding the flow of the IDRs. The team agreed the next meeting should be devoted to "brainstorming" about the possible problems with the current system and the opportunities for improvement.

The third team meeting was held on August 7, 1991. At this meeting, team members sought to identify all the possible reasons IDRs took longer than the six-week target to be processed. The ideas developed through the brainstorming session were then organized and presented on an affinity diagram. (Exhibit 3.) Next, the team discussed the effect of the 10 categories they had identified in developing the affinity diagram. The effect that each category had on late IDRs as well as on the other categories was diagrammed by the team to form an interrelationship diagram. (Exhibit 4.) The interrelationship diagram focused the team on those issues having the most effect on the IDR processing system. The team then agreed to explore ways to improve the five areas that were identified as having the most effect on the system.

The fourth team meeting was held on September 10, 1991. The team looked at the following five categories of issues most significantly affecting the timely processing of IDRs:

* No warning; taxpayer cannot plan ahead.

* Requested information is difficult to compile.

* Resources required to gather information requested.

* Too many IDRs; too much information requested.

* Clarity of IDRs.

The team developed several possible solutions for addressing these issues. Team members agreed to study these possible solutions and discuss them, as necessary, within their respective organizations and functions. Both NTI and IRS members agreed to prepare a set of proposals to be reviewed at the next meeting; the goal of the next meeting would be to determine whether a consensus could be reached on a list of improvement proposals to present to Messrs. Rucker and Ashby.

On October 28, 1991, the team held its fifth meeting. At this meeting, the members discussed their improvement proposals. After substantial discussion, the team was able to reach consensus on several system improvement recommendations. A sixth meeting was held on January 29, 1992, to continue the review of the suggested proposals and to develop a presentation package. After much discussion, the majority of the proposals were accepted by NTI and the IRS. (Two of the proposals had to be reworded to gain mutual acceptance.) At the end of this meeting, Mr. Roche was given a list of IDRs completed since the last control chart was prepared. He prepared a control chart from this new information showing measurable improvement. (Exhibit 5.) The improvement illustrated the willingness of both parties to make the agreed-upon changes. Specifically, there was 59-percent reduction in the average turnaround time -- from 89.3 days to 36.8 days. In addition, the range between the high and low has also improved significantly. Under the old system, turnaround time ranged from a low of 1 day to a high of over 300 days. Utilizing the new IDR process, the range decreased to a low of 1 day to a high of 125 days.

Conclusion

The benefits of the joint IRS-NTI QIP have been substantial to both parties. In addition to greatly reducing the examination burden, the initiative significantly enhanced working relationships, heightened the level of communication, reduced the level of "distrust" by both parties, and laid the groundwork for future joint initiatives. In summary, the QIP facilitated the establishment of a solid foundation that will enable NTI and the IRS to become more current with the tax years being audited. Exhibit 6 summarizes the NTI-IRS proposals for improvement.

While the IRS and taxpayers will continue to defend their respective position on technical tax issues, there are ample opportunities to improve the effectiveness and efficiency of the basic examination process. Just as companies that have historically been rivals are now forming alliances and joint ventures to meet the challenges of global competition, so too must taxpayers and the IRS rethink their relationship. The traditional adversarial relationship between business and government in general -- and between taxpayers and the IRS in particular -- must give way to more productive "partnering" relationships. To do otherwise is to waste precious time, money, and energy on non value-added activities. "Business as usual" simply won't do anymore.