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Refund? What refund? Why the IRS is screwing up.

Even though he's been running the outfit since 1981, Ronald Reagan still gets away with denouncing Big Government. Prominent in the Reagan pantheon of bureaucratic villains is the Internal Revenue Service. The president has fumed over the IRS's "demeaning practices" and accused it of treating people's earnings as its "personal property." Campaigning for tax reform this spring, Reagan sounded as if he were endorsing popular defiance of the IRS's mission. The tax code, he said, "corrupts otherwise honest people by encouraging them to cheat.... After all, ...what's immoral about cheating a system that is itself a cheat? This isn't a sin, it's a duty."

Sadly, the IRS actually live up to Reagan's damning portrayal this year. Once considered one of the most efficient bureaurcracies in town, the agency has turned into an incompetent bully. Without justification, liens were placed on property and bank accounts were frozen. Returns were lost, purposely misplaced, even destroyed. Refunds were months late, and when they didn't arrive at all, the IRS told taxpayers to start from scratch and refile. If this kind of bureaucratic behavior were directed toward criminal tax evaders, it might be understandable. But its victims are ordinary, honest people who deserve to be treated decently by their government.

Administration officials have attempted to write off the nightmarish filing season as a fluke--the result of a balky new computer. But far more important than any mechanical breakdown is the shift of attitudes and priorities that has taken place inside the Reagan IRS. While the agency's workload has grown tremendously, the administration has cut by more than 20 percent the staff that processes returns, answers taxpayers's questions, and gets refunds out on time. To compensate, IRS supervisors have enforced unrealistic work quotas that, in turn, have led to errors, low employee morale, and the improper destruction of documents. The result: worse service for loyal customers and widespread ill will toward government in general. Then again, to a president whose main enemy is Washington, and who seems to resent paying any taxes at all, that may not sound like such a bad combination.

Don't call us, we'll call you

The first signals that 1985 would be the IRS's worst year ever came from Philadelphia, home to one of the agency's ten regional service centers. In January, businesses in several mid-Atlantic states served by the Philadelphia office began complaining about mysterious delinquency notices dispatched by the IRS computer. Threats to attach property followed, and at least five businesses had their assets impounded. By February it become clear that 27,000 corporate taxpayers had been mistakenly threatened because the IRS had lost track of $300 million in payments for taxes withheld from employees' paychecks in 1984.

In the following months, thousands of people victimized by the Philadelphia center, which serves taxpayers in Washington, D.C., Maryland, Delaware, and Pennsylvania, came forward with their own tales of woe. One diligent Philadelphia taxpayer, who filed in January, spent the better part of February, March, and April calling the IRS to find out why she hadn't gotten a refund. By April 17, the woman had called 203 times; the line was busy 189 times. On 11 occasions when she did get through, she was told the computer was down; no information available. Twice, IRS employees couldn't resolve the problem with the computer up and running. Finally, she got an answer: the IRS had no record of her return, so she would have to refile.

Explaining the agency's reasoning in this kind of situation, one IRS spokesman says, "There are some cases where the data[is] erased accidentally. We still have the actual paper documents, but they would be too time-consuming to find, so we ask for the duplicates." These people seem to forget that they work for the public, not the other way around. Apparently, the IRS now expects taxpayers to correct the government's mistakes and foot the bill as well.

The bad news out of Philadelphia transcended mere carelesness with individual returns. According to press accounts and information provided by IRS employees to congressional offices, no fewer than 27,000 tax returns were improperly shredded at the Philadelphia center. An undertermined number simply disappeared, and an estimated 100 returns were found hidden in a women's restroom. A General Accounting Office inquiry revealed that 150,000 taxpayers had received incorrect delinquency notices from PHiladelphia alone.

The mayhem was not by any means limited to the City of Brotherly Love. At the IRS service center in Fresno, California, officials admitted in mid-May that workers had shredded 60,000 letters from people trying to resolve tax problems. Another 20,000 such letters were destroyed at the Austin, Texas center, while documents also disappeared in Andover, Massachussetts. Officials of the National Treasury Employees Union, which represents 60,000 IRS workers, say privately that there has been talk among employees of similar misdeeds throughout the country. Nor is this anything new. Overwhelming workloads have led to large-scale foul-ups for the last three to four years--well before the arrival of the new computer, says one union official, adding, "The difference is, this year, it's in the newspapers."

That's not what you hear at IRS headquarters in Washington. Officials there don't attribute the mishaps and delays to bad management. The culprit, they say, is their new $103 million computer system, which replaced older equipment at all ten regional centers. "We expected problems from the conversion, and we experienced somewhat more problems than we anticipated," IRS Commissioner Roscoe Egger said with considerable understatement during one in a series of uncomfortable appearances this spring before congressional committees.

IRS officials discovered that the new software program adopted for the computer was inefficient and slowed the processing of returns. Difficulties also arose when employees attempted to transfer information in the regional centers to magnetic tape for shipment to a central information repository in Martinsburg, West Virginia. A variety of other bugs turned up across the country. In Philadelphia, for example, the computer's data storage unit failed to function 45-percent of the time in January and February, leaving many workers staring at blank video display terminals.

That the new computer was needed, there is little question. For more than 20 years, the IRS had been patching up a system designed in the late fifties. There was some debate, however, as to whether the new system should have been rushed into operation just before the 1985 filing season and after only minimal testing. A staff member for the House IRS oversight subcommittee says that "with 20/20 hindsight [Congress] might have expressed more skepticism" over the pace of computer modernization. But he points out that many of the programming flaws should be eliminated in coming years, and Congress may appropriate additional funds for more hardware in the fiscal year 1986 budget. "The real question is whether running computers solve all of the problems," he says. "And the answer is they don't.... This is more than just Philadelphia. This is an agency with a lot of troubles."

Cooking up those numbers

The story behind the headlines about IRS computers running amok begins with some basic numbers. Not surprisingly, the workload of the IRS grows each year. In 1980, taxpayers filed 137.4 million returns; in 1985, 173.7 million. Five million additional returns are expected in 1986. Moreover, every time Congress changes the tax code, the IRS must retool with new computer programs and personnel training. Since 1980, there have been major revisions each year. Yet over the same five-year period, the total number of people working for the agency has remained essentially the same, approximately 87,500. And while the returns piled up higher and higher, the number of people in the two key areas serving the law-abiding taxpayer has fallen dramatically. Under Reagan, the staff that processes returns has shrunk by a fifth, from 28,744 to 23,111. The division that helps taxpayers find their way through the complexities of the tax laws has gone from 5,591 to 4,370, a 22 percent decline. The administration actually tried to kill the entire direct taxpayer assistance program, but Congress blocked the move.

The administration's explanation for cuts in processing and taxpayer assistance is a simple one: "productivity savings." Every year, automation is expected to increase, and managers look for new ways to use the same number of employees to do more work, the IRS has told Congress. It is, of course, laudable that the IRS would seek productivity savings and perfectly plausible that better machines and management would improve efficiency. But is it not a scientific certainty, as this year's mechanical snafus and mismanagement have demonstrated. "Productivity improvements'--now that can be put in quotation marks," says Donald Alexander, IRS commissioner from 1973 to 1977. "Some of them are real, and some of them are imaginary." Congress, Alexander explains, will usually accept the administration's estimates for lack of any better information.

Congressional staff members responsible for analyzing the IRS confirm that legislative oversight often isn't all that it's cracked up to be. One House aide, after six months in IRS oversight, describes the experience: "Some administration spokesman comes before the committee and says 'X number of employees will do X job because of X productivity savings.' Someone like me makes the decision. I'm sitting here"--in a cramped and noisy office in the Longworth building--"what do I know about how many processing people versus enforcement people are needed in Philadelphia?"

Inadequate staffing in areas that serve the dutiful taxpayer has a direct effect on the quality of that service. A taxpayer in quest of her refund might intuitively sense this when she has to make 203 telephone calls to find out that the IRS has lost her return. But the best vantage point from which to view IRS operations is inside of a service center.

The people who process tax returns hold low-level civil service ranking, in the GS-4 range, and earn an average of $14,000 a year. (Overall, IRS salaries average more than $22,000 a year; in the national office, more than $40,000.) IRS processing employees work in sprawling, hanger-like buildings cluttered with paper and computer terminals. Pat Wilson, a union official and 20-year veteran at the Philadelphia center, says that filing seasons are always hectic, but only in the past three of four years have workers "started to crack and break. There's too much to do for this number of people." In a report completed in April, the General Accounting Office concluded that "inadequate staffing (in terms of numbers and/or skill) was one of the factors that contributed" to record backlogs in Philadelphia this year.

The pressure begins with the IRS's stringent "performance expectations." Imposed in 1980 in response to new civil service regulations, these standards are, in effect, work quotas. They an employee must process within a specified time period. Previously, service center employees were evaluated primarily by means of a "peer group average," which measured the output of an entire unit rather than that of individual workers. Under the new system, bonuses and promotions may be awarded for beating the quotas. Failing to meet them can lead to dismissal.

Clearly it is wise to encourage workers to meet reasonable output standards. But IRS employees contend that as the volume of returns has increased, and the number of workers in processing has decreased, service center managers have hiked the quotas to unrealistic levels. Employees say they have had to move paper more rapidly, without concern for accuracy. Desperate because they fall behind the required pace, workers say there is sometimes a gnawing temptation to ease their load by destroying documents. In the case of correspondence from taxpayers--for example, letters protesting incorrect delinquency notices--employees can meet their quotas simply by shredding the letters and reporting the cases resolved.

Under any sort of output requirement, workers tend to set aside difficult cases so they can fulfill the quota with easier ones, according to a former federal official with experience running a large bureaucracy. When the quotas become too demanding, says the former officials, the difficult cases are the most likely candidates for calculated misplacement or destruction. That any of this activity could go undetected for months suggests a failure on the part of supervisors to keep close track of the paper flow at the service centers.

When fewer documents emerge at the end of the processing line than went in, shouldn't that be a signal that something is a miss?

Work quota problems exist in most of the service centers, according to union officials. "Morale is terrible," says Michelle Cummings, a local union leader who works in the Ogden, Utah facility. Assigned to an "adjustments" unit, Cummings attempts to untangle the most complicated mistakes and inconsistencies in returns. Her quota is four cases per hour, which she says is "pretty difficult to do with easy ones" and sometimes "just impossible." Realizing that the requirement is often not feasible, supervisors instruct the adjustments staff to resolve "the immediate issue raised by the taxpayer and ignore any other problems" with the account, says Cummings.

The General Accounting Office three years ago confirmed such anecdotal evidence with a nationwide study showing that haste caused IRS workers to make nearly twice as many arithmetic mistakes in processing tax returns as taxpayers do in filling them out. At the time the study was conducted, IRS work quotas were considerably less demanding than they are today.

While fewer people process more returns with less accuracy, an equally overmatched taxpayer assistance staff tries to man the telephones and walk-in advice offices. This guidance has become more essential in recent years as the tax laws have reached the complexity level of quantum mechanics. Yet a GAO survey of telephone assistance in 1985 found that fewer than one-third of the tens of millions of taxpayers calling for help reached an IRS staff person on their first try; the rest hit busy signals or languished on permanent hold. Seventy-eight percent of such callers got through as recently as 1978. An IRS official told The Washington Post in March--apparently with a straight face--that it was "acceptable" if taxpayers had to make on normal days. (The official didn't say how many taxpayers he thought slammed down the telephone in disgust and decided to fudge a little on their returns to get even.)

In any case, the IRS is gradually phasing out this kind of one-on-one personal assistance in favor of a computer answering service that plays pre-recorded answers for a limited number of possible questions.

Confused callers are getting less helpful advice because the administration's attempts to eliminate taxpayer assistance have driven away many competent employees, says Robert Tobias, president of the Treasury employees union. "It's not seen as a stable area, where you'll have your job next year," says Tobias. "People who looked at taxpayer assistance as a career, who looked to develop some expertise in dealing with the public, have simply abandoned it.... Now, the people who go into that area are either temporaries or are looking to get out to some other job as fast as possible."

As a result, most members of the assistance staff do not have the experience or skills to solve anything more than the simplest questions. "If it's more than "where's my refund," one worker from the Philadelphia center says of the taxpayer assistance staff, "most times they don't have an answer." The employee explains that to resolve a complicated problem, the IRS adviser "might have to deal with a number of departments--adjustments and correspondence, the entity department, the file department, editing and coding." The telephone advisers, he says, "probably wouldn't make it through all that."

Take my staff, please

Major failings such as these should prompt immediate action by the person in charge. And they did. Commissioner Roscoe Egger went back to Congress this spring, asking for cuts in his budget and less personnel for processing and taxpayer assistance. "The deficit is growing, tax compliance is getting less, we've got snafus all over the country, and you're telling me you need less people?" demanded an incredulous Rep. J.J. Pickle, chairman of the House IRS oversight subcommittee. Upon the subcommittee's recommendation, the House rejected the administration's budget for the IRS and approved increases in funding and staffing.

Egger, no doubt, was relieved by this outcome. Although the commissioner was unavailable for comment, other agency officials privately acknowledge the obvious--that they need more rather than fewer workers. "We don't always get what we ask for," concedes Stanley Goldberg, assistance commissioner for returns and processing. Or, to put it more bluntly than loyal team players Egger or Goldberg would: the Treasury Department and the Office of Management and Budget have repeatedly refused IRS requests for increased money and manpower. "There was restraint on IRS, as on every other agency," says Edwin Dale, spokesman for the OMB. "There was consistency--that was the goal."

Even if tax collection were strictly a financial matter, the administration's thinking would be cockeyed. "Consistency" makes no sense in the case of the IRS, because unlike most other agencies, it produces far more money than it consumes. Depending where you put it, a dollar invested in the IRS will return between $5 and $20 in tax revenue. Increased funding for Internal Revenue is a potential multi-billion dollar deficit reduction plan that has been completely ignored by the White House and the OMB. It's almost as if some of the Reaganites are more than willing to see the IRS go hungry as one tactic in their holy war against government. Reagan has always believed that in the long run the only way to scale down federal activities is to limit the money available to Congress for appropriations. You can do that by lowering taxes, and you can also do it by failing to support the agency that collects the taxes.

Starving the IRS, however, results in more than lost revenue. If the agency fails to perform competently, millions of willing taxpayers may be hurt. To this, IRS officials seem oblivious. Admitting that he needs more people in processing, Assistant Commissioner Goldberg, for example, must be conceding that IRS productivity claims are exaggerated--that the agency is shorthanded. No, Goldberg insists, the figures are accurate. "The proof of the pudding," he adds, "is in the eating--did we get the job done?"

The obvious answer is "no." Goldberg supposedly oversees the people who process returns. That he even asks the question suggests that he is something less than Johnny-on-the-spot regarding the troubled service centers. Take the work quotas, for example. Set by supervisors in the field, the standards must be approved by the national office. Goldberg says they are manageable, although a review in under way in the wake of the past tax filing season. Goldberg stresses that officials in Washington "don't sit here and say Jane Smith in Austin [should] keypunch in X number of documents."

Fair enough. But when asked to evaluate a variety of specific quotas cited by workers as unrealistic, Goldberg responds, "Whether [they are] reasonable or not, I don't know." In other words, Washington approves the numbers, apparently without the foggiest idea how many returns Jane Smith in Austin can keypunch in an hour and how many errors she's likely to make at a given speed. It would seem elementary that managers who use output quotas need to know whether they are creating impossible burdens for their workers and whether corners are being cut to meet the standards.

Over in the taxpayer assistance division, George O'Hanlon, the national "taxpayer onbudsman," speaks with pride about the hundreds of thousands of problems resolved in 1985. But when asked to consider the connection between millions of futile taxpayer inquiries and significant staff cuts, O'Hanlon--the people's advocate--says tersely, "I don't care to discuss that at this time." Ideally, how many more people would he like to have for taxpayer assistance? "I can't give you an idea on the numbers we need."

If the taxpayer ombudsman doesn't know how many more problem-solvers he needs, who does? Similarly, if IRS telephone advisers cannot tell an honest taxpayer how to fill out his return correctly or why his refund is months late, who can? Informing the taxpayer that the computer is down does not settle the matter. People count on refunds to make this month's payment on the car or to take the family on a vacation. And it's likely that they'll wonder why the mightly IRS didn't think to have a backup computer system available for such emergencies. "Those [IRS] people don't see it from the taxpayer's point of view," says Rep. Pickle. "They've become sufficient unto themselves, handling things the way they want to."

The compliant taxpayer who has been burned by the IRS probably would not be soothed very much if told that the administration has shifted resources to enforcement and added new traps for the dishonest. For instance, the agency now cross-checks the forms of interest and dividends paid with taxpayer's versions of the same information. Similar comparisons are being done with other deductions, and the administration has proposed the addition of 7,500 more auditors beginning in fiscal year 1987. Obviously, chasing down liars and crooks is important. But if enforcement is augmented at the expense of returns processing and taxpayer assistance, the IRS will find itself pursuing a lot of the wrong people. Judging from this year's performance, beefed by enforcement will yield more taxpayer inquiries to the service centers, more incorrect delinquency notices, more innocents shared in IRS nets because of human and computer processing errors. Who will be there to rescue them?

"Getting the tax returns and refunds under control is absolutely essential before you do anything else," says Sheldon Cohen, IRS commissioner during the Johnson administration. "You have compliant taxpayers out there who have confidence that you will get the job done." Without the cooperation of the vast majority who obey tax laws, the system would collapse in a swirl of blank Form 1040s. Just since 1980, the amount of deliquent taxes owed the government has increased by $25 billion to $87 billion.

For most people, dealing with the IRS is their main personal contact with the federal government. No other agency has such a direct impact on their lives. If they are harassed or hung up on by uninformed IRS employees, they might well be tempted to shout, "Get government off my back!" or applaud when someone else does. Trust lost is not easily regained. Cynicism sets in, and noncompliance becomes easier to justify. As a great tax reformer once said, cheating a system that it itself a cheat isn't a sin, it's a duty.
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Title Annotation:Internal Revenue Service
Author:Barrett, Paul M.
Publication:Washington Monthly
Date:Sep 1, 1985
Previous Article:Saving the underclass.
Next Article:Put the politics back into political science.

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