Establishment of a Balanced Measurement System

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 801 REG 119192-98 RIN 1545-AW80

TITLE: Establishment of a Balanced Measurement System

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains proposed regulations relating to the
adoption by the IRS of a balanced system to measure organizational
performance within the IRS.

These proposed regulations further implement a requirement that all
employees be evaluated on whether they provided fair and equitable
treatment to taxpayers and bar use of records of tax enforcement
results to evaluate or to impose or suggest goals for any employee
of the IRS. These regulations implement sections 1201 and 1204 of
the Internal Revenue Restructuring and Reform Act of 1998. These
regulations affect internal operations of the IRS and the systems
that agency employs to evaluate the performance of organizations
within IRS and individuals employed by IRS. This document also
provides notice of public hearing on these proposed regulations.

DATES: Written comments and electronic comments must be received by
[INSERT DATE 60 DAYS AFTER DATE OF PUBLICATION OF THIS DOCUMENT IN
THE FEDERAL REGISTER]. Outlines of oral comments to be presented at
the public hearing scheduled for Thursday, May 13, 1999 at 10 a.m.
must be received by Thursday, April 22, 1999.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-119192-98), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday
through Friday between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG-119192-98), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue NW., Washington, DC.
Alternatively, taxpayers may submit comments electronically via the
Internet by selecting the "Tax Regs" option on the IRS Home Page, or
by submitting comments directly to the IRS Internet site at
http://www.irs.ustreas.gov/prod/tax_regs/comments.html. The public
hearing will be held in room 2615, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed
regulations, Julie Barry (202) 401-4013; concerning submission of
comments, the hearing, or to be placed on the building access list
to attend the hearing, Michael Slaughter, (202) 622- 7180 (not toll-
free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed regulations to establish a Balanced
System for Measuring Organizational and Individual Performance
Within the Internal Revenue Service (26 CFR Part 801).

Section 1201 of the Internal Revenue Service Restructuring and
Reform Act of 1998 (RRA), Public Law 105-206 (112 Stat. 685, 713 et
seq (1998)), requires the Internal Revenue Service to establish a
performance management system for those employees covered by 5 U.S.C
4302 that, inter alia establishes "goals or objectives for
individual, group, or organizational performance (or any combination
thereof), consistent with the Internal Revenue Service's performance
planning procedures, including those established under the
Government Performance and Results Act of 1993, division E of the
Clinger-Cohen Act of 1966 ..., Revenue Procedure 64-22 ..., and
taxpayer service surveys." It further requires the IRS to use "such
goals and objectives to make performance distinctions among
employees or groups of employees," and to use "performance
assessments as a basis for granting employee awards, adjusting an
employee's rate of basic pay, and other appropriate personnel
actions ...." Finally, section 1201 expressly requires that any
performance management system adopted by the IRS conform to the
requirements of section 1204 of RRA.

Section 1204 of RRA provides that the IRS shall not use "records of
tax enforcement results" in the evaluation of IRS employees or to
suggest or impose production goals for such employees. It further
provides that the IRS shall use the "fair and equitable treatment of
taxpayers by employees as one of the standards for evaluating
employee performance." Finally, section 1204 requires that "each
appropriate supervisor" certify quarterly in a letter to the
Commissioner "whether or not tax enforcement results are being used
in a manner prohibited by" that section.

Antecedents to Sections 1201 and 1204

Until the recent change, the Mission Statement for the IRS had
provided, in part:

"The purpose of the Internal Revenue Service is to collect the
proper amount of tax revenue at the least cost ...." Consistent with
this Mission Statement, the IRS has long adhered to the principle
that all IRS officials with discretion to make decisions regarding
enforcement matters in individual cases should do so only on the
basis of the correct application of the law to the facts of each
individual case. It has also sought to give the taxpayers maximum
efficiencies in its day-to-day operations and has applied many
modern management techniques to measure and encourage such
efficiencies.

In order to achieve these dual goals, the IRS has adopted a number
of systems by which it sets goals for and measures the success of
its various operating units, and directs the activities of its
employees. The ultimate objective of these measurement systems is to
help the IRS achieve its overall mission.

Measuring Organizational Performance

In General. The Government Performance and Results Act of 1993,
Public Law 103-62 (107 Stat. 285 (Aug. 3, 1993)) (GPRA), requires
the IRS and other federal agencies to establish a hierarchy of
performance measures and goals applicable to various organizational
units within their agencies. These performance measures and goals
should be expressed in objective, quantifiable and measurable forms
to define the level of performance to be achieved by a program
activity.

As indicated by the General Accounting Office ("Executive Guide:
Effectively Implementing the Government Performance and Results
Act," (GAO/GGD-96-118 at 24)):

Both the Chief Financial Officers Act of 1990, Pub. L. 101-576, 104
Stat. 2838 1 (1990), and Division E, National Defense Authorization
Act for Fiscal Year 1996 (the Clinger-Cohen Act of 1996), Pub. L.
104-106, 110 Stat. 186, 679 (1996), also contain requirements that
federal agencies establish performance measurement systems.

[L]eading organizations ... strive to align their activities and
resources to achieve mission-related goals[;] they also seek to
establish clear hierarchies of performance goals and measures. Under
these hierarchies, the organizations try to link the goals and
performance measures for each organizational level to successive
levels and ultimately to the organization's strategic goals. They
have recognized that without clear, hierarchically linked
performance measures, managers and staff throughout the organization
will lack straightforward roadmaps showing how their daily
activities can contribute to attaining organizationwide strategic
goals and mission.

The legislative history underlying passage of GPRA indicates that
not only must performance goals be established on an hierarchal
basis throughout an organization, but those goals must reflect the
full range of the organization's objectives. As the Senate Report
accompanying the Act indicates (S. Rep. No. 103-58, 103d Cong., 1st
Sess. at 29 (1993)):

The Committee believes agencies should develop a range of related
performance indicators, such as quantity, quality, timeliness, cost,
and outcome.

A range is important because most program activities require
managers to balance their priorities among several subgoals. ....
Reliance on any single one of these measures could create a perverse
incentive for managers to achieve one subgoal at the expense of the
others.

As a government agency responsible for collecting 95 percent of the
nation's revenues, the IRS adopted, pursuant to GPRA and other
statutes , a number of 1 performance measures that focus on the
amount of adjustments proposed by examination units or the dollars
collected by collection offices. For example, the budgets submitted
by the IRS since the mid-1990's have contained performance measures
that were heavily focused upon enforcement revenue collected or
protected.

The two performance measures for field examination units contained
in the FY 1997 budget request were examination dollars recommended
and examination dollars recommended per employee (FTE). A similarly
enforcement-focused set of measures applied to field collection
functions: dollars collected, dollars collected per FTE, and average
cycles per TDA/TDI (tax delinquency account/tax delinquency
investigation) disposition.

Measures of Special Compliance Programs.

The IRS, apart from requirements imposed upon it by statutes and
regulations of general applicability, has periodically been required
by Congress to establish and to report on other performance
measures. For example, in connection with expected additional
funding promised for FY 1995 through FY 1999 pursuant to a
Compliance Initiative, the IRS made a commitment to generate $9.179
billion in additional enforcement revenues. It was expected both to
track how those additional funds were employed and to provide
"quarterly reports ... identifying the progress being made through
these enhanced activities to collect taxes due." S. Rep. No.
103-286, 103d Cong., 2d Sess. at 40 (1994); see H. R. Rep. No.
103-534, 103d Cong., 2d Sess. at 33 (1994); "IRS FY 1995 Compliance
Initiatives Final Report," Document 9383 (Rev. 1- 96), Catalog
Number 21508R.

More recently, the appropriation for the IRS for FY 1998 provided
additional monies for "funding essential earned income tax credit
compliance and error reduction initiatives." The Conference Report
accompanying that appropriation bill stated (H. R.

Conf. Rep. No. 105-284, 105th Cong.,1st Sess. at 64 (1997)) that
"the IRS should establish a method to track the expenditure of funds
and measure the impact [of the additional funding] on compliance.
The IRS shall submit quarterly reports to the Committee on
Appropriations which identify the expenditures and the change in the
rates of compliance." In the absence of accurate information
regarding compliance rates, the IRS has attempted to comply with
this congressional requirement by reporting, inter alia, on amounts
of revenue protected or collected by various EITC compliance
programs. See,e.g., "IRS Tracking Earned Income Tax Credit
Appropriation," Document 9383 (Rev. 6-98), Catalog Number 21508R.

Measuring the Performance of Employees

The IRS also must comply with a variety of government-wide mandates
to measure the performance of individual employees. The civil
service rules require that the IRS evaluate the performance of
employees on an annual basis. Performance evaluations also figure in
recommendations for awards, incentives, allowances or bonuses, an
assessment of an employee's qualifications for promotion,
reassignment or other change in duties, and the ranking of other
than full-time permanent personnel for purposes of release/recall
schedules. While these individual performance ratings are based upon
the elements set forth in various workplans and job elements, a
manager's success in achieving organizational goals will inevitably
play an important role in any evaluation of his or her performance.
Other employees' performance with respect to items set forth in
their job elements will be viewed in light of these goals.

Past Criticisms

Over the years, the IRS has been repeatedly criticized for placing
too much reliance upon tax enforcement measures it has adopted. The
critics have charged that front-line personnel have felt pressured
by performance measures that were focused on tax enforcement
outcomes, such as dollars assessed per FTE or dollars collected per
FTE, to take inappropriate enforcement actions in order to achieve
perceived enforcement goals. The bulk of this criticism has focused
on the impact such tax enforcement measures have had upon field
personnel in the examination and collection functions.

For example, in 1955, a report by an advisory group appointed by the
Chairman of the Joint Committee on Internal Revenue Taxation (The
Internal Revenue Service:

Its Reorganization and Administration, July 25, 1955, at 6)
describes a 1954 initiative by the IRS to "establish specific office
standards of production [for examination personnel in regional and
district offices], so that both supervisors and employees know what
is considered normal." This advisory group reported that imposition
of these standards "appears to have caused a worsening of the
enforcement picture." [U]nder the established production quota
system proper standards of individual performance and proper
standards of examination are ignored in favor of number of returns
examined. The established production quota procedure has too
frequently reduced the agent's investigation to a cursory
examination of readily available records and a quick look for a few
obvious items on which a change can be made so as to close the case
and meet the quota set.

In 1957 and again in 1959, questions were raised during hearings
before the House Ways and Means Committee regarding IRS production
quotas. "Reorganization and Administration of the Internal Revenue
Service," Hearings before the Subcommittee on Internal Revenue
Taxation of the Committee of Ways and Means, 85th Cong., 1st Sess.,
at 118-119 (1957); "Income Tax Revision, Panel Discussions before
the Committee on Ways and Means, House of Representatives," 86th
Cong., 1st Sess. at 805, 808 (1959); "Compendium of Papers on
Broadening the Tax Base Submitted to the Committee of Ways and
Means," 86th Cong., 1st Sess. at 1527, 1533 (1959).

In November of 1959, the IRS issued a revised policy statement that
provided, in part:

If the duties of the position require the exercise of judgment based
on detailed knowledge of laws and regulations or involve material
factors of technical or professional judgment, performance must be
evaluated in the light of the actual cases or other assignments
handled, and no quantitative measurement may be utilized which does
not take such differences into account. Dollar production shall not
be used as the measurement of any individual's performance.

Policy Statement P-1200-9, approved Nov. 24, 1959

Questions regarding "the rating of revenue agents on the basis of
numbers of examinations made and amounts of additional tax
recommended" were again raised during the 1961 confirmation hearings
held for Commissioner-designate Caplin.

Hearings Before the Committee on Finance, United States Senate, 87th
Cong., 1st Sess., at 14-15 (1961). Following his confirmation,
Commissioner Caplin announced in July of 1961 that the IRS was
embarking on a "New Direction," which was designed to counter what
he described as the "undue emphasis" placed upon production
statistics and the "adverse effect" the perception that production
statistics formed the "main basis" for evaluation of offices and
individuals had upon examination quality. Under this "New
Direction," production goals and statistics would be de-emphasized,
statistical data would be given more limited circulation and
qualitative measures of performance would be adopted. "New Audit
Program Concepts: Views of Commissioner Caplin on Evaluation of
Individuals, Programs and Offices in the Audit Activity."

The following year, Commissioner Caplin issued a Special Message to
All Audit Personnel, discussing some misunderstandings that had
arisen regarding the new audit program. The Commissioner indicated
that while supervisors were not allowed to evaluate performance on
the basis of statistics or to pressure agents to produce
deficiencies at the cost of inadequate audits or inequities to the
taxpayer, nothing in the new audit program prohibited supervisors
from keeping track of the quality and amount of work produced by
agents. Indeed, "this is exactly what the supervisor of a group of
agents is expected to do." The Message went on to state "Special
Message from the Commissioner," dated September 7, 1962, at 2:

More serious than these misunderstandings, is the fact that
enforcement results have fallen off very substantially. Despite
having 1,022 more agents and office auditors in FY 62 than in FY 61,
the number of returns examined decreased by 13,000, while additional
taxes and penalties recommended decreased by $66 million.

You can readily see how this drop-off endangers our Long Range Plan
for gradually increasing our manpower and doing our work more
effectively. Under this plan, we have been allowed almost 10,000
additional people over the last three years, and it calls for the
addition of about 24,000 more by 1968. Yet, when a substantial
increase in staff is followed by this kind of a drop in our
enforcement results, the appropriating authorities naturally begin
to wonder about the wisdom of financing the rest of our proposed
expansion.

Issues regarding the IRS' use of production statistics also came up
during Commissioner Alexander's 1973 confirmation hearings before
the Senate Finance Committee. When questioned about his opinion
toward production quotas, Commissioner Alexander responded that he
was completely opposed to their use.

Hearings Before the Committee on Finance, United States Senate, 93d
Cong., 1st Sess., at 4-5 (1973).

In November of 1973, the IRS adopted the current version of Policy
Statement P-1-20, revising its policies regarding the use of records
of tax enforcement results and prohibiting absolutely the use of
enforcement statistics to evaluate the performance of enforcement
personnel; this statement permitted the accumulation and use of
enforcement statistics only for "long-range planning, financial
planning, allocation of resources, work planning and control,
effective functional management, or other related staffing
utilization systems and plans." In an accompanying Special Message
to all Enforcement Personnel, Commissioner Alexander stated that
this prohibition was applicable to all personnel who exercised
judgment in determining tax liability or the ability to pay.
Commissioner Alexander further declared, "[i]ndividual case or
dollar goals-formal, informal, or implied-are not permitted and will
not be tolerated." During 1974, Senate Appropriations Committee
hearings again focused on allegations that taxpayers were being
mistreated as a result of production quotas (both case closings and
dollar amounts). A number of witnesses and the Committee chair-man
expressed concerns that individual production statistics were being
used to evaluate field employees, notwithstanding the existing
policy. Testimony during those hearings also indicated that pressure
to increase the number of cases closed in Col-lection directly led
to inappropriate seizures. Hearings Before the Subcommittee on the
Department of the treasury, U.S. Postal Service, and General
Government Appropri-ations of the Committee on Appropriations,
United States Senate, 93d Cong., 2d Sess., at 2-25, 520, 543-546,
574-584, 586-601, 653-670 (1974); see also, "Taxpayer Assistance and
Compliance Programs," Hearings before the Senate Committee on
Appropriations, 93d Cong., 1st Sess. at 41-46, 568-569, 642-643,
680-681 (1974).

In 1988, the Senate Appropriations Committee held hearings focusing
again on allegations that the IRS' use of enforcement statistics to
evaluate programs and personnel had led to inappropriate enforcement
actions. Treasury, Postal Service and General Government
Appropriations, Fiscal Year 1989, Before the Committee on
Appropriations, 100th Cong., 2d Sess. at 588-590 (1988). On November
10, 1988, the Technical and Miscellaneous Revenue Act of 1988,
Public Law 100-647 (102 Stat.

3734 (1988)) (TBOR 1) was enacted. Section 6231 of that measure
prohibits the use of records of tax enforcement results:

1) to evaluate employees directly involved in collection activities
and their immediate supervisors, or

2) to impose or suggest production quotas or goals [for such
employees and supervisors].

During the appropriation hearings for FY 1989, Commissioner Gibbs
testified about the TBOR 1 prohibition (Treasury, Postal Service and
General Government Appropriations, Fiscal Year 1989, Before the
Senate Committee on Appropriations, 100th Cong., 2d Sess. at 589
(1988)):

The problem that I have with our policy statement--that policy
statement, by the way, being in the taxpayer bill of rights--is that
it tells our people what not to do. It says, "Don't use enforcement
statistics." ... I don't think that this helps someone on the front
line very much to tell them what not to do.

What we have started, within the last 18 months that I have been the
Commissioner, is to begin to develop at the working level criteria
as to what constitutes a quality collection action, what constitutes
a quality examination action. It is an entirely different approach
to collection and examination, trying to train the people as to how
to approach what they are doing so that if they do it the right way,
the numbers will flow. The idea is to get away from simply dollar
amounts, comparing one another in terms of how they are doing with
respect to collections, or seizures, or anything like that.

The General Accounting Office has expressed a somewhat different
view of the appropriate use of enforcement results to measure IRS
performance. Its December 10, 1991, report on "IRS' Implementation
of the 1988 Taxpayer Bill of Rights" stated (GAO/GGD- 92-23 at
14-15):

In an October 1987 letter to the Chairmen of the House Committee on
Ways and Means and the Senate Committee on Finance, we commented on
various proposals to prohibit the use of collection statistics in
performance evaluations.

Our position then and now is that collection statistics should not
be the only indicator of performance but, along with other factors,
could very well be a useful tool in evaluating employees. We pointed
out that relying on a single factor can place more emphasis on that
factor than on overall performance. We said that it is not totally
inappropriate to generally consider the amount of revenues collected
as part of an employee's evaluation if that consideration is only
one of several factors under review. We added that setting arbitrary
quotas for amounts collected, property seized, or cases closed
cannot be justified in evaluating performance, particularly because
of the negative impact that trying to achieve those quotas can have
on taxpayers.

In its May 11, 1993, report on "Tax Administration: New Delinquent
Tax Collection Methods for IRS" (GAO/GGD093-67 at 9), GAO reiterated
this view:

As we have stated in the past, IRS should be able to use collection
performance as a criterion in determining compensation and rewards
for individual collectors.

We believe that information such as taxes collected is a reasonable
basis on which to judge the performance of employees whose job it is
to collect taxes as long as other criteria, such as fair and
courteous treatment of taxpayers, are also evaluated.

In a similar vein, a December 23, 1993, report by the GAO on the
offer in compromise program ("Tax Administration: Changes Needed to
Cope with Growth in Offer in Compromise Program" (GAO/GGD-94-47 at
24) indicated:

The Commissioner of Internal Revenue should develop the indicators
necessary to evaluate the Offer in Compromise Program as a
collection and compliance tool. The indicators should be based on
accurate data and include (1) the yield of the program in terms of
costs expended and amounts collected, (2) the amount of revenues
collected that would not have been collected through other
collection means ....

In September 1997, the Senate Finance Committee held three days of
widely-publicized oversight hearings on the Internal Revenue
Service. During these hearings, several IRS employees testified that
IRS' performance measurement system was creating an environment in
which they felt pressured to achieve certain quantitative goals for
tax enforcement results (such as dollars recommended or collected).
In his testimony at the conclusion of these hearings, the Acting
Commissioner responded to the concerns that had been raised about
the negative impact of the IRS performance measurement system by
announcing a number of immediate changes in the system. In
particular, he announced that IRS would suspend the comparative
ranking of its 33 district offices and suspend distribution of any
goals related to revenue production to field offices. "Practices and
Procedures of the Internal Revenue Service," Hearings before the
Committee on Finance, United States Senate, 105 Cong., 1 Sess., at
3, th st 105-106, 123-128, 153, 155-156, 162-163, 206-209, 212-213,
303-304, 310, 317-318, 320-322, 325-326, 330, 333, 351-356.

Following these hearings, the IRS Office of Chief Inspector
undertook three management audits to determine how enforcement
statistics were then being used as part of the IRS performance
measurement system. See, "Review of the Use of Statistics and the
Protection of Taxpayer Rights in the Arkansas-Oklahoma District
Collection Field Function," Internal Audit Reference Number 380402
(December 5, 1997); "Use of Enforcement Statistics in the Collection
Field Function," Internal Audit Reference Number 081904 (January 12,
1998); "Examination Division's Use of Performance Measures and
Statistics," Internal Audit Reference Number 084303 (July 7, 1998).
These three inquiries generally confirmed that IRS performance
measures were focused largely on enforcement goals and productivity
as defined by statistics relating to dollars recommended, assessed
or collected, or other enforcement actions taken. They found a lack
of corresponding emphasis on quality casework, adherence to law, and
protection of taxpayer rights.

In order to deal with specific allegations of misconduct made during
the Septem-ber hearings, or discovered in the course of the
management audits described above, the IRS Office of Chief Inspector
also undertook a number of individual investigations.

The Commissioner then established a Special Review Panel of career
executives from outside the IRS to review the evidence and to
recommend appropriate personnel actions. The Special Review Panel
issued a Report to the Commissioner in August 1998. In its Report,
the Special Review Panel agreed with earlier conclusions that IRS
had responded to external pressures to close the revenue gap through
improved productivity by shifting management emphasis to goals and
measures that placed a heavy emphasis on use of enforcement
statistics. See also "IRS Personnel Administration: Use of
Enforcement Statistics in Employee Evaluations" (GAO/GGD-99- 11,
November 39, 1998).

Internal Revenue Service Restructuring and Reform Act of 1998

Sections 1201 and 1204 of the Internal Revenue Service Restructuring
and Reform Act of 1998 (RRA) represent the most recent legislative
action regarding performance measures used by the IRS. Section 1201
directs the IRS, consistent with its current performance planning
procedures, including those established under the GPRA, to establish
a performance management system that will establish "goals or
objectives for individual, group, or organizational performance."
The IRS is directed to use this performance system in the evaluation
of employees or groups of employees, in determining salary
adjustments and awards, and in other personnel matters. The
Conference Report accompanying RRA (H. R. Conf. Rep. No. 105-599,
105th Cong., 2d Sess., at 228 (June 24, 1998) indicates that "in no
event would performance measures be used which rank employees or
groups of employees based solely on enforcement results, establish
dollar goals for assessments or collections, or otherwise undermine
fair treatment of taxpayers."

Section 1204 of RRA repealed section 6231 of TBOR 1 and replaced
TBOR 1's prohibition on the use of "records of tax enforcement
results" to evaluate or to impose or suggest goals for personnel
directly involved in collection activity with a prohibition against
using such records of tax enforcement results to evaluate, or to
impose or suggest production quotas or goals for, any IRS
"employee."

Explanation of Provisions

Proposed Effective Date

These regulations are proposed to be effective thirty days after the
date of publication in the Federal Register of the final
regulations.

Balanced Measurement System

These proposed regulations provide guidance and direction for the
establishment of a balanced performance measurement system for the
Internal Revenue Service. They also provide guidance for
implementing the restrictions on the use of "records of tax
enforcement results" in evaluating, or imposing or suggesting goals
for employees and for establishing "fair and equitable treatment of
taxpayers" as one of the standards for evaluating employees.

These proposed regulations establish a new balanced system for
measuring the performance of and establishing performance goals for
various operational units within the Internal Revenue Service. The
three elements of this balanced measurement system are (1) Customer
Satisfaction Measures, (2) Employee Satisfaction Measures and (3)
Business Results Measures. These measures will, consistent with
GPRA, be based on "quantifiable and measurable" data, and will be
numerically scored.

The proposed regulations do not provide procedures for certifying
whether or not records of tax enforcement results have been used in
a manner prohibited by section 1204. Subsequent guidance will
provide that information.

a. Customer Satisfaction

To measure customer satisfaction, the IRS will develop data from
customer satisfaction surveys it receives from a statistically valid
sample of taxpayers with whom it has dealt. Among other things,
taxpayers will be asked to provide information regarding whether
they were treated courteously and professionally, whether they were
informed of their rights and whether they were given an opportunity
to voice their concerns and adequate time to respond to IRS
requests. Using data derived from these surveys, the IRS will derive
quantitative indices of customer satisfaction which will be used to
measure progress in achieving customer satisfaction goals.

b. Employee Satisfaction

To measure employee satisfaction, the IRS will utilize an employee
survey that permits employees to provide, on an anonymous basis,
their assessment of the wide variety of factors that determine
whether employees believe that the work environment permits them to
perform their duties in a professional manner. Among other items
included in the employee survey, the questionnaires should elicit
information regarding employees' assessment of the quality of
supervision and the adequacy of training and support services. As in
the case of the Customer Satisfaction measures, the goals and the
accomplishments of units subject to the balanced measurement system
will be expressed in quantified form.

c. Business Results

The IRS will employ two parallel avenues to measure business
results.

1. Quality Measures

The first of these approaches will focus on the quality of the work
done in a sample of cases that were worked on by employees. Such
reviews will be conducted of a statistically valid sample of cases
worked on by units designated by the Commissioner, such as a
collection or examination unit. A staff of personnel specially
dedicated to the task will review and numerically score the quality
of work done by IRS personnel. These reviews will focus on such
factors as whether IRS personnel provided proper and timely service
to the taxpayer, properly analyzed the facts, correctly applied the
law, protected taxpayer rights by following applicable IRS policies
and procedures, devoted an appropriate amount of time to the case,
made appropriate judgments regarding liability for tax and ability
to pay and provided accurate answers to tax law or account questions
posed by callers.

2. Quantity Measures

The quantity measures element of the business results measure will
focus exclusively on outcome-neutral production data. Accordingly,
as described in the regulation, data concerning the enforcement
outcome in cases, such as the dollar amount of audit adjustments,
the numbers of liens filed or levies served, and the number of
referrals for criminal investigation, would be excluded from the
production data used in the quantity measures. On the other hand,
outcome-neutral production data, such as cases closed, time per
closing or cycle time, which do not reflect the outcome produced by
any IRS official's exercise of judgment in determining liability for
tax or the collection mechanism to be employed may be used in
determining the production element of the business results measures.
The IRS has determined, however, that as a matter of policy such
outcome-neutral production data may not be used to set goals for or
for evaluating any non-supervisory employee with tax enforcement
responsibilities.

Further, an organization with enforcement responsibilities may not
be given a goal or an evaluation based on enforcement-neutral
production data regarding matters calling for the exercise of
judgment with respect to tax enforcement results unless that goal or
evaluation constitutes only one element in a set of goals or one
element in an evaluation based also upon the balanced measurement
system.

Special Analyses

It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations and,
because these regulations do not impose on small entities a
collection of information requirement, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory
Flexibility Analysis is not required. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice of proposed rulemaking will
be submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any electronic and written comments
(a signed original and eight (8) copies) that are submitted timely
to the IRS. The IRS and Treasury specifically request comments on
the clarity of the proposed regulation and how it may be made easier
to understand. All comments will be available for public inspection
and copying.

A public hearing has been scheduled for Thursday, May 13, 1999,
beginning at 10 a.m. in room 2615 of the Internal Revenue Building,
1111 Constitution Avenue NW., Washington, DC. Due to building
security procedures, visitors must enter at the 10th Street
entrance, located between Constitution and Pennsylvania Avenues, NW.
In addition, all visitors must present photo identification to enter
the building. Because of access restrictions, visitors will not be
admitted beyond the immediate entrance area more than 15 minutes
before the hearing starts. For information about having your name
placed on the building access list to attend the hearing, see the
"FOR FURTHER INFORMATION CONTACT" section of this preamble.

The rules of 26 CFR 601.601 (a) (3) apply to the hearing. Persons
who wish to present oral comments at the hearing must submit
comments and an outline of the topics to be discussed and the time
to be devoted to each topic by Thursday, April 22, 1999. A period of
10 minutes will be allotted to each person for making comments. An
agenda showing the scheduling of the speakers will be prepared after
the deadline for receiving outlines has passed. Copies of the agenda
will be available free of charge at the hearing.

Drafting Information

The principal author of these regulations is Julie A. Barry, Office
of Assistant Chief Counsel (General Legal Services). However, other
personnel from the IRS and Treasury Department participated in their
development.

List of Subjects in 26 CFR Part 801

Government employees, organization and functions (Government
agency).

Proposed Amendments to the Regulations Accordingly, 26 CFR Chapter I
is proposed to be amended by adding part 801 to Subchapter H to read
as follows:

PART 801--BALANCED SYSTEM FOR MEASURING ORGANIZATIONAL AND
INDIVIDUAL PERFORMANCE WITHIN THE INTERNAL REVENUE SERVICE Sec.

801.1 Balanced performance measurement system; in general.

801.2 Balanced performance measurement system.

801.3 Customer satisfaction measures.

801.4 Employee satisfaction measures.

801.5 Business results measures.

Authority: 5 U.S.C 9501 et seq. ; secs. 1201, 1204, Pub. L. 105-206,
112 Stat. 685, 715-716, 722 (26 U.S. C. 7804 note).

§801.0-1 Balanced performance measurement system; in general (a) In
general. The regulations in this part 801 implement the provisions
of sections 1201 and 1204 of the Internal Revenue Service
Restructuring and Reform Act of 1998 (Pub. L. 105-106, 112 stat.
685, 715-716, 722) and provide rules relating to the establishment
by the Internal Revenue Service of a balanced performance
measurement system..23 (b)Effective date. This part 801 is effective
thirty days after the date these regulations are published as final
regulations in the Federal Register.

§801.2 Balanced performance measurement system.

(a) In general. Modern management practice and various statutory and
regulatory provisions require the IRS to set performance goals for
organizational units and to measure the results achieved by those
organizations with respect to those goals. To fulfill these
requirements, the IRS has established a balanced performance
measurement system, composed of three elements: Customer
Satisfaction Measures; Employee Satisfaction Measures; and Business
Results Measures. The IRS is likewise required to establish a
performance evaluation system for individual employees.

(b) Measuring organizational performance--(1) In general. The
performance measures that comprise the balanced measurement system
will, to the maximum extent possible, be stated in objective,
quantifiable and measurable terms and, subject to the limitation set
forth in paragraph (b)(2) of this section, will be used to measure
the overall performance of various operational units within the IRS.
In addition to implementing the requirements of the Internal Revenue
Service Restructuring and Reform Act of 1998, Pub. L. 105-206, 112
Stat. 685 , the measures described here will, where appropriate, be
used in performance goals and performance evaluations established,
inter alia, under Division E, National Defense Authorization Act for
Fiscal Year 1996 (the Clinger-Cohen Act of 1996), Pub. L. 104-106,
110 Stat. 186, 679; the Government Performance and Results Act of
1993, Pub. L. 103-62, 107 Stat. 285; and the Chief Financial
Officers Act of 1990, Pub. L. 101-576, 108 Stat. 2838.

(2) Limitation--quantity measures (as described in § 801.5) will not
be used to evaluate the performance of or to impose or suggest
production goals for any organizational unit with employees who are
responsible for exercising judgment with respect to tax enforcement
results (as defined in § 801.5) except in conjunction with an
evaluation or goals based also upon Customer Satisfaction Measures,
Employee Satisfaction Measures, and Quality Measures.

(c) Measuring individual performance. All employees of the IRS will
be evaluated according to the critical elements and standards or
other performance criteria established for their positions. In
accordance with the requirements of 5 U.S.C.

4312 and 9508 and section 1201 of the Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206 (112 Stat. 685
), (as is appropriate to the employee's position), the performance
criteria for each position will be composed of elements that support
the organizational measures of Customer Satisfaction, Employee
Satisfaction and Business Results; however, such organizational
measures will not directly determine the evaluation of individual
employees.

(1) Fair and equitable treatment of taxpayers. In addition to all
other criteria required to be used in the evaluation of employee
performance, all employees of the IRS will be evaluated on whether
they provided fair and equitable treatment to taxpayers.

(2) Senior Executive Service and special positions. Employees in the
Senior Executive Service will be rated in accordance with the
requirements of 5 U.S.C. 4312 and employees selected to fill
positions under 5 U.S.C. 9503 will be evaluated pursuant to
workplans, employment agreements, performance agreements or similar
documents entered into between the Internal Revenue Service and the
employee.

(3) General workforce. The performance evaluation system for all
other employees will:

(i) Establish one or more retention standards for each employee
related to the work of the employee and expressed in terms of
individual performance; and--

(A) Require periodic determinations of whether each employee meets
or does not meet the employee's established retention standards; and

(B) Require that action be taken, in accordance with applicable laws
and regulations, with respect to employees whose performance does
not meet the established retention standards.

(ii) Establish goals or objectives for individual performance
consistent with the IRS's performance planning procedures; and --

(A) Use such goals and objectives to make performance distinctions
among employees or groups of employees; and

(B) Use performance assessments as a basis for granting employee
awards, adjusting an employee's rate of basic pay, and other
appropriate personnel actions, in accordance with applicable laws
and regulations.

(4) Limitations. (i) No employee of the IRS may use records of tax
enforcement results (as defined in § 801.5) to evaluate any other
employee or to impose or suggest production quotas or goals for any
employee..26

(A) For purposes of the limitation contained in this paragraph (c)
(4), employee has the meaning as defined in 5 U.S.C. 2105(a).

(B) For purposes of the limitation contained in this paragraph (c)
(4), evaluate includes any process used to appraise or measure an
employee's performance for purposes of providing the following:

(1) Any required or requested performance rating.

(2) A recommendation for an award covered by Chapter 45 of Title 5;
5 U.S.C.

5384; or section 1201(a) of the Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206 (112 Stat.
685, 713-716 ).

(3) An assessment of an employee's qualifications for promotion,
reassignment or other change in duties.

(4) An assessment of an employee's eligibility for incentives,
allowances or bonuses.

(5) Ranking of employees for release/recall and reductions in force.

(ii) Employees who are responsible for exercising judgment with
respect to tax enforcement results (as defined in § 801.5) in cases
concerning one or more taxpayers may be evaluated with respect to
work done on such cases only on the basis of information derived
from a review of the work done on the taxpayer cases handled by such
employee.

(iii) Performance measures based in whole or in part on Quantity
Measures (as described in § 801.5) will not be used to evaluate the
performance of or to impose or suggest goals for any non-supervisory
employee who is responsible for exercising judgment with respect to
tax enforcement results (as defined in § 801.5).

§ 801.3 Customer satisfaction measures.

The customer satisfaction goals and accomplishments of operating
units will be determined on the basis of data derived from
questionnaires, surveys and other types of information gathering
mechanisms. Surveys designed to measure customer satisfaction for a
particular work unit will be distributed to a statistically valid
sample of the taxpayers served by that operating unit and will be
used to measure whether those taxpayers believe that they received
courteous, timely and professional treatment by the IRS personnel
with whom they dealt. Taxpayers will be permitted to provide
information requested for these purposes under conditions that
guarantee them anonymity.

§ 801.4 Employee satisfaction measures.

The numerical ratings to be given operating units within the IRS for
employee satisfaction will be determined on the basis of information
derived from a questionnaire which will be distributed to all
employees of the operating unit; the employees will be permitted to
provide information on an anonymous basis. Data from these surveys
will measure, among other factors bearing upon employee
satisfaction, the quality of supervision and the adequacy of
training and support services.

§ 801.5 Business results measures.

(a) In general. The business results measures will consist of
numerical scores determined under the Quality Measures and the
Quantity Measures described elsewhere in this section.

(b) Quality measures. The quality measure 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 determined by the Commissioner or
his delegate such as the following:

(1) Examination and collection units and Automated Collection System
units (ACS). The quality review of the handling of cases involving
particular taxpayers will focus on such factors as whether IRS
personnel devoted an appropriate amount of time to a matter,
properly analyzed the issues presented, developed the facts
regarding those issues, correctly applied the law to the facts, and
complied with statutory, regulatory and IRS procedures, including
timeliness, adequacy of notifications and required contacts with
taxpayers.

(2) Toll-free telephone sites. The quality review of telephone
services will focus on such factors as whether IRS personnel
provided accurate tax law and account information.

(3) Other workunits. The quality review of other workunits will be
determined according to criteria prescribed by the Commissioner or
his delegate.

(c) Quantity measures. The quantity measures will consist of
outcome-neutral production and resource data, such as the number of
cases closed, work items completed, hours expended and similar
inventory, workload and staffing information, that does not contain
information regarding the tax enforcement result reached in any case
involving particular taxpayers.

(d) Definitions--(1) Tax enforcement result. A tax enforcement
result is the outcome produced by an IRS employee's exercise of
judgment recommending or determining whether or how the IRS should
pursue enforcement of the tax law with respect to any assessed or
unassessed tax.

(i) Examples of data containing information regarding tax
enforcement results.

The following are examples of data containing information regarding
tax enforcement results: number of liens filed; number of levies
served; number of seizures executed; dollars assessed; dollars
collected; full pay rate; no change rate; and number of fraud
referrals.

(ii) Examples of data that do not contain information regarding tax
enforcement results. The following are examples of data that do not
contain information regarding tax enforcement results: number of
cases closed; time per case; direct examination time/out of office
time; cycle time; number or percentage of overage cases; inventory
information; toll-free level of access; talk time; and data derived
from a quality review or from a review of an employee's or a
workunit's work on a case, such as the number or percentage of cases
in which correct examination adjustments were proposed or
appropriate lien determinations were made.

(iii) Records of tax enforcement results. Records of tax enforcement
results are data, statistics, compilations of information or other
numerical or quantitative recordations of the tax enforcement
results reached in one or more cases, but does not include
information, including the tax enforcement result, regarding an
individual case to the extent the information is derived from a
review of an employee's or a workunit's work on individual cases.

(e) Permitted uses of records of tax enforcement results. Records of
tax enforcement results may be used for purposes such as
forecasting, financial planning, resource management, and the
formulation of case selection criteria.

(f) Examples. The following examples illustrate the rules of this
section:

Example 1. In conducting a performance evaluation, a supervisor may
take into consideration information showing that the employee had
failed to propose an appropriate adjustment to tax liability in one
of the cases the employee examined, provided that information is
derived from a review of the work done on the case. All information
derived from such a review of individual cases handled by an
employee, including time expended, issues raised, and enforcement
outcomes reached may be considered in setting goals or evaluating
the employee.

Example 2. A supervisor may not establish a goal for proposed
adjustments in a future examination, even though the goal was
derived from analyses of previously-handled cases, because such
enforcement goals are not based upon an analysis of the newly-
assigned case.

Example 3. A headquarters unit may use records of tax enforcement
results to develop methodologies and algorithms for use in selecting
tax returns to audit.

Charles O. Rossotti
Commissioner of Internal Revenue

SEARCH:

You can search the entire Tax Professionals section, or all of Uncle Fed's Tax*Board. For a more focused search, put your search word(s) in quotes.

1999 Regulations Main | IRS Regulations Main | Home