TQM at the IRS.

The IRS is embracing private-sector management techniques to solve its problems.

Total quality management (TQM) is an accepted and proven management technique in the private sector, but it only recently found acceptance in the public sector. In the face of well-documented and well-publicized quality problems, the Internal Revenue Service introduced a quality improvement program in 1986 and reaffirmed its commitment to quality with A Plan for Improving Quality, Customer Service, and Organizational Performance in 1991. This strategic plan outlines the top-down approach necessary to transform the IRS into a quality organization that consistently produces and delivers services exceeding customers' needs and expectations.

TQM is finding acceptance in the government. A number of state and local governments have implemented TQM programs. Federal agencies also are climbing on the bandwagon, with over two-thirds reporting some level of TQM implementation in a recent GAO survey. Most of these agencies are in the early stages of developing TQM programs, with over 75% beginning implementation in 1990 or later.

This article discusses key characteristics and expected results of a TQM management approach and examines the IRS's application of it. Specifically addressed are the integration of TQM with two of the IRS's primary initiatives for the 1990s: tax systems modernization (TSM) and Compliance 2000.

THE IRS's COMMITMENT TO QUALITY

The IRS collects and accounts for over $1 trillion in revenue each year. Yet it is estimated another $100 billion of tax owed each year is not collected. In addition, millions of unnecessary taxpayer contacts are made annually requiring countless hours of taxpayers' time.

Taxpayer service also leaves much to be desired. The General Accounting Office (GAO) reported that while IRS staffers correctly answered 89% of questions posed by test callers in 1993 (up from 88% in 1992), three out of four calls during filing season were not answered at all.

Individual taxpayers sometimes are the beneficiaries of IRS quality problems. In 1992, the IRS sent out erroneous tax refunds in excess of $175 million to more than 270,000 filers. Faced with increasing criticism about the quality of its services, the IRS has begun to modernize its technology and empower employees to better serve taxpayers. However, the IRS needs a systematic approach to integrate its quality improvement programs.

IMPLEMENTING TQM AT THE IRS

The IRS has three major goals: Enhancing quality and productivity through its business processes, reducing the taxpayer burden and improving voluntary compliance. It plans to achieve these goals through a combination of quality improvement initiatives and modernization efforts including

* Increasing the quality of services provided to taxpayers through employee empowerment--equipping workers with appropriate skills, resources and authority to do the job right.

* Adhering to the highest standards of professional and ethical conduct through active leadership that both clarifies and communicates expectations for ethical behavior and also fosters a climate supporting and demonstrating a commitment to such behavior.

* Embracing and managing diversity to capitalize on the different experiences, values, perspectives and concerns in the work force.

* Implementing TSM.

* Implementing the Compliance 2000 initiative.

TQM and TSM. The specific objectives of TSM include

* Modernizing tax document input processing.

* Minimizing paper processing.

* Making taxpayer information readily accessible to IRS employees.

* Reducing recordkeeping and tax administration costs.

* Increasing the security and privacy of sensitive taxpayer information.

* Ensuring adequate capacity and flexibility to meet the IRS's future needs.

From a taxpayer viewpoint, technological modernization of the information processing and telecommunication systems should help eliminate unnecessary contacts, provide more timely responses to questions with fewer hassles and provide more timely access to tax returns and other taxpayer information.

The IRS currently processes about 1.7 billion pieces of paper each year--including 200 million paper tax returns--using what essentially is batch-based computer technology from the 1960s and 1970s. Without technological modernization, the IRS simply cannot provide the type and level of services its customers require. However, while TSM is necessary for the IRS to reach its goals, it alone is not sufficient.

TQM, and its focus on continuous process improvement and changes in management systems, must accompany TSM. This is a lesson learned the hard way by American automobile manufacturers. In the 1970s, as U.S. manufacturers' market share decreased due to Japanese competition, the initial response was to modernize. However, even with improved technology, U.S. companies still found themselves behind in quality, cost and customer service.

The IRS had its own experience with failed modernization. In the mid-1980s, it installed new computers and software. However, insufficient planning and a lack of technical and managerial expertise within the IRS resulted in chaos. Tax return processing bogged down, resulting in late refunds and angry taxpayers. Clearly, technological modernization alone will not make a total quality organization. While TSM is intricately related to the TQM concepts of continuous process improvement and eliminating rework, waste and non-value-added activities, its role in other TQM requirements is not as clear. Compliance 2000 addresses some of these deficiencies.

TQM and Compliance 2000. Developed as a customer-focused method of decreasing the taxpayer burden and improving voluntary compliance, Compliance 2000 identifies groups of taxpayers with common needs and expectations so the IRS can tailor its services accordingly. It is geared toward providing taxpayers with information that will reduce not only the emotional stress taxpayers face when dealing with the IRS but also the payment, processing and filing burden. Thus, it provides the customer focus that is an integral part of TQM systems. However, as with TSM, its function in other TQM fundamentals is not as clear.

QUALITY IMPROVEMENT SUGGESTIONS

While TSM and Compliance 2000 are necessary to reach the IRS's goals, they are not sufficient to make the IRS a total quality organization. To become such an organization, the IRS also must

* Make a long-term commitment to TQM. Various elements of government culture make a long-term commitment difficult. While the IRS has only two political appointees (the commissioner and chief counsel), recent turnover could cause delays in implementing quality improvement projects. A long-term IRS commitment to TQM also requires a commitment by Congress and the Clinton administration to continue supporting and funding the programs necessary for its implementation.

With the possibility of unpredictable funding, the IRS must develop a strategy to survive budget cuts by reducing costs while enhancing service quality. This entails using cross-functional teams to identify and eliminate activities that do not add value to IRS-provided services. Using innovative incentive systems in conjunction with teamwork can boost morale and motivate employees to enhance service quality while reducing costs.

* Identify the needs and expectations of other customers. Compliance 2000 focuses on identifying individual taxpayers as customers. The IRS also must view the government and tax practitioners the same way. These diverse groups must be satisfied as the IRS goes about its mission of collecting the proper amount of tax at the least cost. While the public, Congress and the Treasury Department may expect the IRS to accomplish its goals at minimum cost, taxpayers may insist on a level of service that can be delivered only at high cost. Given these seemingly incompatible demands, the IRS may have to deliver a level of service that reflects a compromise. TQM techniques can help the IRS become a "lean producer" of services with a focus on continually reducing costs and rework, thereby reducing the amount of compromise that may be necessary.

Although taxpayers certainly are the IRS's customers, the term may not fully explain their relationship. Taxpayers also are suppliers who provide data and other information to the IRS on their returns. Viewing third parties (brokerage firms, payroll companies, retirement plan administrators, life insurance companies and state and local governments) as suppliers that provide the IRS with information (on forms 1099 or forms W-2) also may be beneficial. The IRS must provide these suppliers with specifications and instructions that help them supply accurate information. The IRS also must provide feedback on the adequacy of the information supplied.

* Justify its investment in TSM using fact-driven decision processes. TSM requires massive investments in computer system hardware and software. Nearly $1 billion already has been allocated to TSM and total costs are estimated to exceed $23 billion. The biggest obstacle the IRS faces may be ensuring TSM is carried out.

* Encourage employee empowerment. While technological modernization is essential, it is not adequate to achieve error-free services. Automation gives employees new opportunities, but continuous training is needed to take advantage of them. Employees must believe they are valued for their skills and constantly challenged to improve the way their work is done. Successful modernization also requires teamwork at all levels of the organization.

* Develop process-and-result measures. These include customer satisfaction, taxpayer burden, productivity and voluntary compliance. Developing these measures requires an analysis of the components of quality services, including accuracy, reliability, timeliness, accessibility and responsiveness. These measures can then be used to develop baselines against which future performance can be evaluated. Once baselines are established, ambitious goals for improvement can be developed. Benchmarking the best performers for specific processes is one approach to establishing and accomplishing ambitious goals.

* Establish benchmarks for process improvement. The IRS and its operations are unique. Yet they can be broken down into processes similar to those in other private-and public-sector organizations. Benchmarking is a TQM technique of measuring and comparing the performance of IRS processes to the best performers in the private and public sectors. It helps establish priorities and targets leading to process improvement.

Examples the IRS might use for benchmarking include

Martin Marietta Electronic Systems Center, Orlando, Florida. Martin Marietta's modernization efforts resulted in an automated paperless factory that could be used as a model for IRS systems development. While the IRS has taken steps to improve the labor-intensive processing of paper returns with electronic filing, such returns accounted for only 12% of individual returns filed in 1992.

Lotus and Lacerte. The customer and technical support operations of these companies provide one-stop service by training customer service representatives to respond to highly technical customer questions much like those IRS employees receive from taxpayers. To benchmark private-sector practices, the IRS must train employees and provide on-line taxpayer information and other technical resources so taxpayer questions are answered accurately and timely.

The city of Phoenix. Phoenix improved its customer communications by using quality response cards extensively at various city departments. The IRS could develop and attach survey cards to completed audit reports and other taxpayer correspondence to learn more about taxpayers' needs and expectations. Likewise, they could provide response cards at local service centers encouraging taxpayers to comment on service quality and identify service opportunities.

The GAO. The GAO reduced its report review process from six months to four weeks by revising the process itself. Using teamwork to determine a report's content, direction and scope, the GAO ensured quality was maintained throughout the process so it did not have to inspect the finished work. The IRS could use these lessons to coordinate and plan audits, reducing overall audit time.

American Express, AT&T and other credit card companies. These companies have considerable experience in accurately reading and continually improving the processing of handwritten credit card slips. These processes are similar in many ways to the handwritten tax returns received and processed by the IRS. In May, the IRS began a pilot program to test an imaging system that can process information directly from a tax return.

Milliken & Co. and its employee empowerment and performance appraisal system. At Milliken, cross-functional teams operate at every level of the organization. Performance measures are tied to team rather than individual performance. Employee pay is based on the number of different job skills mastered. The backbone of the reward system is job satisfaction, education and self-improvement opportunities. Milliken offers courses at "Milliken University" to enhance employees' analytical, human relations and communication skills. Milliken's training program might be used as a model for developing an "IRS University."

LOOKING TO 2000

TQM provides a systematic approach the IRS can use to integrate TSM's technological improvements and Compliance 2000's customer service focus to achieve enhanced quality and productivity throughout its business processes. More important, TQM can result in improvements in customer perceptions, increased taxpayer and employee satisfaction and continuous improvement in the tax collection process. TQM also can help the IRS justify its investment in technological modernization and secure future funding for such initiatives. TQM techniques such as benchmarking also should be used as process improvements are made to ensure a focus on continuous improvement. Detailed process analysis for continuous improvement, driven by highly motivated employees in a team environment, is required for the IRS to become a total quality organization by the year 2000.

EXECUTIVE SUMMARY

* IN THE WAKE OF SEVERAL well-publicized quality lapses, the IRS reaffirmed its commitment to quality in its plans for the future.

* WHILE TAX SYSTEMS Modernization (TSM) and Compliance 2000 are necessary to reach the IRS's goals of reducing taxpayer burden, increasing voluntary compliance and enhancing quality and productivity throughout its business, they are not sufficient to make the IRS a total quality organization.

* TOTAL QUALITY MANAGEMENT (TQM) provides a proven, systematic method with which the IRS can accomplish its goals in an integrated way.

* TQM IS A CUSTOMER-FOCUSED management technique that strives for continuous improvement in the quality of an organization's manufacturing or service processes.

* QUALITY IMPROVEMENT suggestions are based on key TQM techniques including organizational commitment, customer focus, fact-driven data analysis, employee empowerment, process measurement and improvement and benchmarking.

AL Y. S. CHEN, DBA, is assistant professor of accounting, North Carolina State University, Raleigh. He is a member of the American Accounting Association and the Institute of Management Accounting.

ROBY B. SAWYERS, CPA, PhD, is assistant professor of accounting, North, Carolina State University, Raleigh. He is a member of the American Institute of CPAs, the IMA and the AAA.