Mr. Chairman and Members of the Subcommittee:

We are pleased to participate in the Subcommittee�s inquiry into the status of the 2000 tax filing season and the fiscal year 2001 budget request for the Internal Revenue Service (IRS).

Our statement is based on (1) the preliminary results of our review of the 2000 tax filing season; (2) our review of IRS� fiscal year 2001 budget request and supporting documentation; and (3) past and ongoing reviews of various IRS activities, including those related to information systems and IRS� reorganization. Much of our analysis is based on data provided by IRS that we did not verify. However, those data generally came from management information systems that we have used in the past to assess IRS operations.

With respect to the 2000 filing season, our statement makes the following points:

• IRS made several important changes to its tax processing systems before the 2000 filing season, and those systems have operated without significant problems. Various data sources indicate that the systems are actually performing better than in 1999.
• The use of electronic filing continues to grow, which is partly attributable to various IRS initiatives to make electronic filing paperless and to better promote the program.
• Compared to last year, when IRS experienced serious problems, telephone service has improved, but it has yet to reach the level of service achieved in 1998. IRS officials cited two factors that have likely played a part in keeping the level of service below the 1998 level�a drop in productivity compared to 1998 and fewer staff dedicated to answer telephone calls.

IRS is requesting about $8.986 billion for fiscal year 2001, an increase of about $729.8 million, or 9 percent, over IRS� proposed operating level for fiscal year 2000. IRS is also requesting (1) a supplemental appropriation of $39.8 million for fiscal year 2000, which is included in the proposed operating level for that year, and (2) an advance appropriation for fiscal year 2002 for its multiyear capital account. With respect to those requests, our statement makes the following points:

• The supplemental appropriation and a significant part of the increase for fiscal year 2001 is for an initiative that would increase staffing levels in several of IRS� program areas and which has budget implications for future years. While many aspects of the initiative seem appropriate, we are most concerned about (1) IRS� ability to implement the initiative given its past history of being unable to fill enforcement positions funded by Congress and (2) that part of the initiative that would increase staffing for IRS� toll-free telephone assistance program. Congress should consider withholding approval of the requested increase for telephone service until IRS provides a more realistic estimate of the level of service it can expect to provide in fiscal year 2001.
• IRS� request includes $1.58 billion for its Information Systems appropriation and $494 million for its multiyear capital account, $375 million of which would be an advance appropriation for fiscal year 2002. Because the $494 million request is not adequately justified, Congress should consider denying the request and directing IRS to develop a credible and verifiable fiscal year 2001 budget request for the capital account that it can use in seeking, if necessary, a supplemental appropriation.
• IRS� includes $182 million to cover expenses associated with its reorganization. Over the past year, IRS has developed detailed designs, selected management officials, and put in place management structures for several of its new operating units. IRS plans indicate that reorganization costs will peak in fiscal year 2001 and end in fiscal year 2003. Other costs associated with IRS� modernization, such as the costs of training and systems modernization, should continue well past 2003.
• IRS� budget request does not provide clear links between the resources being requested and expected results. We recognize that establishing such links is difficult and that agencies throughout the federal government are struggling with the same issue. As IRS proceeds with its reorganization and its efforts to develop new performance measures, it has an opportunity to make future budget requests more useful to Congress.

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