Establishment of a Balanced Measurement System

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 801 [TD 8830] RIN 1545-AW80

TITLE: Establishment of a Balanced Measurement System

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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

These regulations further prescribe rules relating to the
measurement of employee performance and implement requirements 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.

DATES: These regulations are effective September 7, 1999.

FOR FURTHER INFORMATION CONTACT: Michael G. Gallagher, 202-283-7900
(not a toll free number).

SUPPLEMENTARY INFORMATION:

Background

On January 5, 1999, the IRS published in the Federal Register (64 FR
457) a notice of proposed rulemaking regarding the establishment of
a balanced system of measures for the IRS. Comments were received
and a public hearing on the proposed regulations was held on May 13,
1999.

This document adopts, with modifications, the proposed regulations
as final regulations.

Explanation of Revisions and Summary of Comments

A commentator suggested that certain organizational changes might
add clarity to the regulation. We have adopted this suggestion and
have reorganized the regulation to contain separate sections that
describe the system for measuring organizational performance and the
system for measuring employee performance.

Consistent with the suggestion of the commentator, we have revised
the heading on the latter performance measurement system to make it
clear that it relates to measuring "employee" performance. The
organizational changes required incidental reordering within the
regulation, as well as the renumbering of additional sections.

A commentator suggested that the discussion of the performance
criteria applicable to Senior Executive Service (SES) employees make
explicit reference to 5 U.S.C. 4313, which contains certain
performance criteria. We have adopted this suggestion and included
references to 5 U.S.C. 4313 in section 801.3. The same commentator
also suggested that the regulation be modified to provide that SES
and managerial employees of the IRS will be evaluated on the basis
of organizational performance, as measured under the balanced
measurement system for organizational performance. While the IRS
will modify the performance criteria for all employees to ensure
that they support the organizational measures adopted in this
regulation, it will evaluate employees on the basis of the
performance criteria made applicable to the positions those
employees occupy. Accordingly, this suggestion was not adopted.

A commentator suggested that, while it would be appropriate to
gather data regarding customer and employee satisfaction via
"questionnaires, surveys and other types of information gathering
mechanisms" and a "questionnaire," respectively, as the proposed
regulation provides, the IRS might in the future find other
appropriate means to gather such data and should not be confined by
the regulation from adopting such other information gathering
techniques. Although the IRS intends in the near term to gather such
customer and employee satisfaction data via questionnaires and
surveys, it may in the future determine that other methods of
information gathering can provide accurate data. Accordingly, we
have adopted the commentator's suggestion and made it clear that
questionnaires and surveys are only examples of the information
gathering techniques the IRS may employ to measure customer and
employee satisfaction.

Sections 801.4 and 801.5 of the regulations reflect the changes. A
commentator suggested that since certain organizations within the
IRS provide service to customers other than taxpayers, the final
regulation should make clear that information gathered from persons
other than taxpayers could be used in measuring customer
satisfaction.

We have adopted this suggestion and modified §801.5.

A commentator suggested that the quantity element of the business
results measure be eliminated because, in an attempt to improve
organizational performance with respect to that quantity element,
managers might exert pressure upon employees to dispose of taxpayer
cases too quickly or without regard to merits of the issues
presented. The fundamental premise of the balanced system of
organizational measures is that the presence of measures that
evaluate the quality of the work done by the unit, the satisfaction
of customers served by the unit (including taxpayers), and the
satisfaction of employees working in the unit will obviate the risk
that managers place undue emphasis upon the quantity of work
completed. The absolute prohibitions (1) on the use of tax
enforcement results and (2) on the use of quantity data to evaluate
non-supervisory employees who exercise judgment with respect to tax
enforcement results operate as effective checks against the
overzealous use of enforcement authority. Accordingly, we have not
adopted this suggestion. We have slightly modified the description
of the quantity measure to include customer education, assistance
and outreach efforts.

A commentator suggested that taxpayers against whom collection
actions have been taken would be unable to provide objective
information regarding their interactions with IRS personnel and
therefore should not be included among the taxpayers requested to
provide information regarding customer satisfaction. IRS experience
with customer satisfaction surveys, including those taken at Problem
Solving Day events, indicates that this commentator's comments are
not well founded.

Accordingly, the suggestion was not adopted.

Finally, a commentator suggested that IRS should limit the authority
delegated to lower-level employees. This suggestion was beyond the
scope of the current regulation and was not adopted.

Special Analyses

It has been determined that this Treasury decision 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, the notice of proposed rulemaking preceding
these regulations was submitted to the Chief Counsel for Advocacy of
the Small Business Administration for comment on its impact on small
business.

Drafting Information The principal author of these regulations is
Michael G. Gallagher, Office of the Assistant Chief Counsel (General
Legal Services). However, other personnel from the Internal Revenue
Service and Treasury Department participated in their development.

List of Subjects in 26 CFR Part 801 Government employees,
Organization and functions (Government agencies).

Amendments to the Regulations

Accordingly, 26 CFR Chapter I is amended by adding part 801 to
Subchapter H to read as follows:

PART 801--BALANCED SYSTEM FOR MEASURING ORGANIZATIONAL AND EMPLOYEE
PERFORMANCE WITHIN THE INTERNAL REVENUE SERVICE

Sec.

801.1 Balanced performance measurement system; in general.

801.2 Measuring organizational performance.

801.3 Measuring employee performance.

801.4 Customer satisfaction measures.

801.5 Employee satisfaction measures.

801.6 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).

§801.1 Balanced performance measurement system; In general.

(a) In general-- (1) 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 (Public Law 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.

(2) 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) Effective date. This part 801 is effective September 7, 1999.

§801.2 Measuring organizational performance.

(a) 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) 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 (Public Law 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) (Public Law 104
-106, 110 Stat. 186, 679); the Government Performance and Results
Act of 1993 (Public Law 103 -62, 107 Stat. 285); and the Chief
Financial Officers Act of 1990 (Public Law 101-576, 108 Stat. 2838).

(b) Limitation--quantity measures (as described in §801.6) 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 §801.6) except in conjunction with an
evaluation or goals based also upon Customer Satisfaction Measures,
Employee Satisfaction Measures, and Quality Measures.

§801.3 Measuring employee performance.

(a) In general. All employees of the IRS will be evaluated according
to the critical elements and standards or such other performance
criteria as may be established for their positions. In accordance
with the requirements of 5 U.S.C. 4312, 4313 and 9508 and section
1201 of the Internal Revenue Service Restructuring and Reform Act of
1998 (Public Law 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.

(b) 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.

(c) 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 4313 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.

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

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

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

(ii) 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.

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

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

(ii) 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.

(e) Limitations--(1) No employee of the Internal Revenue Service may
use records of tax enforcement results (as defined in §801.6) to
evaluate any other employee or to impose or suggest production
quotas or goals for any employee.

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

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

(A) Any required or requested performance rating.

(B) 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, (Public Law 105 -206, 112
Stat. 685, 713-716 ).

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

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

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

(2) Employees who are responsible for exercising judgment with
respect to tax enforcement results (as defined in §801.6) 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.

(3) Performance measures based in whole or in part on Quantity
Measures (as described in §801.6) 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 §801.6).

§801.4 Customer satisfaction measures.

The customer satisfaction goals and accomplishments of operating
units within the Internal Revenue Service will be determined on the
basis of information gathered via various methods. For example,
questionnaires, surveys and other types of information gathering
mechanisms may be employed to gather data regarding customer
satisfaction. Information to measure customer satisfaction for a
particular work unit will be gathered from a statistically valid
sample of the customers served by that operating unit and will be
used to measure, among other things, whether those customers believe
that they received courteous, timely and professional treatment by
the Internal Revenue Service personnel with whom they dealt.
Customers will be permitted to provide information requested for
these purposes under conditions that guarantee them anonymity. For
purposes of this section, customers may include individual
taxpayers, organizational units or employees within Internal Revenue
Service and external groups affected by the services performed by
the Internal Revenue Service operating unit.

§801.5 Employee satisfaction measures.

The employee satisfaction numerical ratings to be given operating
units within the Internal Revenue Service will be determined on the
basis of information gathered via various methods. For example,
questionnaires, surveys and other information gathering mechanisms
may be employed to gather data regarding employee satisfaction. The
information gathered will be used to measure, among other factors
bearing upon employee satisfaction, the quality of supervision and
the adequacy of training and support services. All employees of an
operating unit will have an opportunity to provide information
regarding employee satisfaction within the operating unit under
conditions that guarantee them anonymity.

§801.6 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 Internal
Revenue Service 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 Internal
Revenue Service 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 Internal Revenue Service
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 Internal Revenue
Service 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, customer education, assistance
and outreach efforts undertaken, 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 Internal Revenue Service
employee's exercise of judgment recommending or determining whether
or how the Internal Revenue Service should pursue enforcement of the
tax laws.

(i) Examples of tax enforcement results. The following are examples
of a tax enforcement result: a lien filed; a levy served; a seizure
executed; the amount assessed; the amount collected; and a fraud
referral.

(ii) Examples of data that are not tax enforcement results. The
following are examples of data that are not tax enforcement results:
case closures; 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; number and type
of customer education, assistance and outreach efforts completed;
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.

(2) 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 do not include tax
enforcement results of individual cases when used to determine
whether an employee exercised appropriate judgment in pursuing
enforcement of the tax laws based upon a review of the employee's
work on that individual case.

(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 evaluating the employee.

Example 2. When assigning a case, a supervisor may discuss with the
employee the merits, issues and development of techniques of the
case based upon a review of the case file.

Example 3. A supervisor may not establish a goal for proposed
adjustments in a future examination, based upon the tax enforcement
results achieved in other cases..Example 4. A headquarters unit may
use records of tax enforcement results to develop methodologies and
algorithms for use in selecting tax returns to audit.

Commissioner of Internal Revenue
Approved:
Assistant Secretary of the Treasury (Tax Policy)

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