Shirley D. Peterson, Commissioner of Internal Revenue
Spring Meeting of The Tax Division,
American Institute of Certified Public Accountants
Washington, DC, June 18, 1992

Good afternoon. I am truly pleased to be here to meet with the AICPA. Your organization has worked long and hard with the IRS for many years. I am glad we are able to continue the tradition of cooperation through meetings such as this.

I want to share with you some of the exciting developments taking place within the Service today. We are entering an era of fundamental change:

• change in our philosophy of tax administration; such as Compliance 2000 and our efforts to reduce taxpayer's burden;

• change in technology -- our Tax System's Modernization effort which will be implemented gradually over the next decade. First examples are the automated underreporter program and the totally integrated examination system; and,

• change in our organization and structure due to our looking at managing our core business systems across functional lines.

IRS has conducted its business in essentially the same way for 40 years. During that time, the volume of our work has exploded, laws have become more complex, and public expectation for performance has increased as technology has changed business in the private sector. The change that we envision is in direct response to the need to improve the quality of our service to the American public. Our new approaches are designed to advance our three principal objectives of improving voluntary compliance, reducing burden on taxpayers and improving productivity and customer satisfaction.

In the short time that I have with you today, I cannot begin to describe all of the changes that we have on the drawing boards. However, I want to focus on one area in which you and we have in common interest. That is compliance.

We mean to increase the compliance rate, and we invite you to assist us in that effort. We will do our part. We are working to improve up-front assistance to taxpayers, to simplify forms and procedures, to identify and remove barriers to compliance, and to focus our enforcement resources more carefully.

We need the help of the AICPA and our other outside stakeholders as we undertake this rather daunting challenge. My goal is to raise the rate of voluntary compliance by at least ten percentage points by 1996. That is going to require a lot of hard work and imagination, and I invite you to help me make is happen.

Let me tell you how we intend to begin this journey.

COMPLIANCE 2000

Compliance 2000 is both a philosophy and a program for change. Through Compliance 2000, we are trying to reach taxpayers where they are now and to tailor our compliance efforts to taxpayers' individual problems, whether it be lack of knowledge or outright criminality.

Compliance 2000 is premised on two key elements: outreach and enforcement. The first element, outreach, recognizes that some noncompliance is caused by confusion, complexity, or misunderstanding of the law. Some taxpayers want to comply but for some reason fall short. Our goal is to become involved at the front end of the tax process to help prevent this unintentional noncompliance. We welcome your suggestions as we design these outreach programs.

The second element, enforcement, recognizes that some noncompliance is intentional. Some taxpayers simply refuse to comply. We need to identify these taxpayers and to recover the taxes they owe. We also need to decrease intentional noncompliance by increasing its cost. The cost for noncompliance will range from the imposition of monetary penalties to criminal prosecution in appropriate cases.

We began our Compliance 2000 efforts by soliciting ideas to identify key areas where noncompliance is significant. We are now moving to address these areas of noncompliance using the Compliance 2000 philosophy.

We have identified segments of the population that share a common compliance problem. For example, one segment consists of independent contractors; another consists of non-filers. We are now examining the causes for noncompliance in those areas, and we are working to eliminate those causes. To illustrate, we have formed partnerships with two industry associations to negotiate agreements on a nationwide basis about the appropriate classification of workers within each industry. By eliminating the uncertainty associated with this determination, we can achieve more responsible tax reporting in the future.

We also have compliance projects for international taxpayers and payroll tax depositors. In each of these areas, we will be working to address problems on a group-wide basis. Some of our efforts will focus on education and simplification alone. For example, we consider the proposed payroll tax regulations to be one of the fruits of Compliance 2000. The compliance problem in the payroll tax deposit area was born almost exclusively of complexity in the regulations. We hope to seen even greater simplification as we work towards an electronic system for payroll tax deposits.

Our outreach efforts will go beyond these broad-based, before-the-fact solutions. We also are reaching out to taxpayers on an individual basis, to cure whatever defect has taken them out of the system and to bring them back into compliance. Often, taxpayers make one mistake (such as not filing one year's return), and then fear leads them to compound the mistake by continued noncompliance. Taxpayers must understand that failing to file is not the solution and that we are ready to work with them to resolve the problem.

When taxpayers decide to report past noncompliance, our goal will be to help them find a way to meet their past obligations and so to proceed with a clear conscience. Thus, we will use our installment payment and offers-in-compromise arrangements when a taxpayer acts in good faith. But we will condition those agreements on continued compliance. If the taxpayer leaves the system again, we will have lost the benefit of our bargain and we will not hesitate to take strong measures to recover the full tax the government is owed.

A good example of what I just said is the non-filer strategy we are undertaking.

We know from our experiences working with non-filers that a good deal of the motivation is fear. Part of that fear is not having the money to pay. I have described how we will work with the taxpayers to resolve those doubts. But another part of the fear stems from the fear of criminal prosecution. As you know, the effect of a voluntary disclosure of noncompliance on a subsequent criminal prosecution is spelled out in our IRM. There will be no change in our position that a true voluntary disclosure is usually the deciding factor in decision about prosecution.

The non-filer strategy has potential to be a new day for taxpayers who want to become complaint. And it also holds potential for a new sort of cooperation with you, the practitioner community. Bringing non-filers back into the system is as much an opportunity for you as it is for us -- and as much an obligation for you as for us. Many non-filers will need help in taking that first step back, and I hope that in the weeks ahead we can discuss various ways that you can offer your help and encouragement to them, also.

I would also like to discuss Compliance 2000 in another context of enforcement activities and that is penalty administration. Any sound tax system incorporates penalties. Without them, taxpayers could take improper reporting positions with relative impunity. The consequences of being caught would be no worse than if the taxpayer had complied in the first instance. Penalties change that calculus and make noncompliance the risk that it ought to be.

But as you know, the penalty system grew increasingly complex during the last two decades. in 1954, there were only 14 penalties. By 1988, that number had grown to 150. Complexity generated a lack of uniformity and began to setback the compliance purpose of penalties.

We are taking a big step to fix that misdirection with our new policy statement and handbook dealing with penalties. The assistance of the AICPA and our other stakeholders has been invaluable in bringing sorely needed attention to this important aspect of compliance. These documents -- the policy statement and the handbook -- are very much in keeping with our Compliance 2000 philosophy and set out the basic philosophy about penalties. Simply stated, the only reason to have penalties is to improve compliance -- not to raise revenue, not to punish.

The policy statement and the handbook are in printing and will be distributed within the next few weeks. I encourage you to let us know what you think of it. The handbook is designed to be a practical everyday guide for administering and computing penalties. As part of the Internal Revenue Manual, it should serve as a guide for you, also.

The goal is to ensure that taxpayers are treated uniformly in assessing as well as abating penalties and that the system is reasonable, consistent and fair. Taxpayers should not be treated differently depending on how and where they are situated. And there should be clear guidance on such matters as what is needed to support a request for abatement, specifies on determining the reasonable cause standard and the authority of front-line IRS employees to make determination on the basis of oral information. Our policy statement and handbook are bringing that sort of clarity.

If our up-front education and outreach efforts are successful, we should see a decline in unintentional noncompliance. There should be fewer instances in which taxpayers claim confusion or uncertainty as a "reasonable cause" defense.

As we move forward with all our compliance efforts, we will receive some help, largely in the form of computer technology. We are very pleased that the Treasury Multi-User Acquisition Contract (TMAC) has been approved and we can at last proceed to purchase some of the equipment that we need so badly. With the computer technology, we will be better able to track noncompliance and to identify areas where up-front outreach would be most useful. To make the most efficient use of the technology, we will be considering greater standardization of forms and will be encouraging taxpayers to submit more data in machine-readable form. I will be interested in any comments you may have about these possibilities.

All of this probably sounds fine in theory, but I will guess that each of you has one or two unpleasant stories about the IRS and its compliance efforts. Just remember that huge institutional changes do not happen overnight. I hope you are seeing some movement already; perhaps you cannot expect more at this stage. But we will get there -- you have my promise. We will not turn away from the goal of revolutionizing the tax system.

As we proceed, we need to revisit our internal structure. Perhaps it no longer makes sense to organize the IRS along both functional and geographic lines. We will strive to integrate all our efforts and promote the same consistency that is at the center of our Penalty Handbook. We also will give more authority to our front-line employees, for example, by allowing them to make "reasonable cause" judgements as I mentioned earlier. By so doing, we can speed up the process and place routine decisions where they belong, in the hand of those most knowledgeable of all the facts and circumstances. I believe in delegation and not micro-management. I have confidence in the ability of our front-line employees to make sound decisions.

We also must develop new measurement systems that transcend our traditional functional measures and reflect the impact of our activities on long-term revenue. Along that same line, we believe that the Compliance 2000 philosophy must penetrate all IRS programs as they stand and move them closer together. Creating a separate bureaucracy might actually impede the assimilation of this new philosophy into the existing functions of the organization because it would seem to be "assigned" to someone. Instead, we have named a Compliance 2000 executive to coordinate these efforts. Also, a multi-functional board in the National Office is providing overall policy direction and guidance.

To accomplish all we have set out for ourselves, we must work together, as we have done so well in the past. I particularly want to recognize the AICPA's contribution to the Penalty Handbook. Thank you for all the good ideas you contributed. But don't relax -- your work is not done yet. The second phase begins soon and will cover preparer penalties.

I look forward to working with you on this and other important projects. Thank you for your kind reception and your attention. I believe that together we will succeed; together we can usher in a new era of tax administration.

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