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Chapter I THE INTERNAL REVENUE SERVICE BACKGROUND The office of the Commissioner of Internal Revenue was created by law on July 1, 1862,~ and the Service, as it is known, functions as an operating arm of the Department of the Treasury. As such, it is responsible to the Secretary of the Treasury, who must approve various management decisions. For example, deci- sions about computer equipment and data processing systems involve the Office of Computer Science, Office of the Secretary. Basic TRS activities include taxpayer service and education; determination, assessment, and collection of internal revenue taxes; determination of pension plan qualifications and exempt organization status; and preparation and issuance of rulings and regulations to supplement the provisions of the Internal Revenue Code. The sources of most revenues collected are the individual income tax and the social insurance and retirement taxes; other major sources are the corporate income, excise, estate, and gift taxes. The Internal Revenue Service, with 71,771 full time permanent employees in fiscal year 1979, is more than half the size of its parent, the Department of the Treasury. It is larger than all cabinet departments and independent agencies except the Departments of Defense, Health and Human Services, Agriculture, and Trans- portation; the U.S. Postal Service; and the Veterans Administration. ORGANIZATION The {RS has three organizational levels: the National Office, Regional Offices, and District Offices and Service Centers. Districts may have local offices, the num- bers and locations of which are determined by taxpayer and agency needs. The National Office The National Office, in Washington, D.C., develops nationwide policies and programs for administering the internal revenue laws and provides overall direc- tion to the field organization. To assist the Commissioner of Internal Revenue there are a Deputy Commissioner and eight Assistant Commissioners, each in charge of a functional area: Resource Management; Taxpayer Service and Returns Process- ing; Compliance; Data Services; Employee Plans and Exempt Organizations; In- spection; Planning and Research; and Technical. Legal services are provided by the TRS Chief Counsel, who is as well an Assistant General Counsel of the Treasury Department; there is also an Assistant to the Commissioner for Public Affairs. The National Computer Center, in Martinsburg, West Virginia, and the Data Center, in Detroit, Michigan, are assigned to the National Office. 12 Stat. 432; 26 U.S.C. 3900. 1

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2 Field Organization As a largely decentralized organization, the TRS assigns most of its personnel and activities to field installations. Regional Offices: The seven Regional Offices supervise and evaluate the operations of District Offices and Service Centers. Each is headed by a Regional Commissioner, who is assisted by six Assistant Regional Commissioners. There is also an appeals activity, headed by a Regional Director, to hear disputes from taxpayers. Located in Regional Offices, but not supervised by the Regional Commis- sioner, are the Regional Counsels, who report to the {RS Chief Counsel, and the Regional Inspectors, who report to the Assistant Commissioner (Inspection) in the National Office. District Offices: Each of the 58 District Offices is administered by a District Director. Depending on population, a district may encompass an entire state or a number of counties within a state. District Office responsibilities include taxpayer service, examination, collection, criminal investigation, resources management; and, in some offices, pension plans approval and review of exempt organizations. Each director is responsible for the deposit of taxes received in the district and for initial processing of tax returns received. Local offices may be established to meet special taxpayer needs or to accommodate {RS workload requirements. Service Centers: The 10 Service Centers, under the supervision of the Re- g~onal Commissioners, are in Austin, Texas; Chamblee, Georgia; Covington, Ken- tucky; Kansas City, Missouri; Andover, Massachusetts; Ogden, Utah; Fresno, Cali- fornia; Memphis, Tennessee; BrooLhaven, New York; and Philadelphia, PennsyI- vania. Each receives and processes tax returns and related documents and main- tains accountability records for taxes collected. Responsibilities include the process- ing, verification, and accounting control oftax returns; the assessment and certifica- tion of tax refunds; and the administration of assigned examination criminal inves- tigation, and collection functions. DATA PROCESSING EQUIPMENT As of June 30, 1980, data processing equipment supporting tax administration systems included the following complement of computers. Service Centers 11 CDC 3500 computers 12 HIS 2050A computers 11 Univac 90/30 computers 10 H 200 computers National Computer Center 1 IBM 370-168 computer 1 Itel AS-6 computer 1 IBM 370-165 computer 6 IBM 360-65 computers

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3 OPERATING STATISTICS Table 1, taken from the Annual Report of the Internal Revenue Service for fiscal year 1979, shows pertinent operating statistics for the Service. THE PROBLEM Over the years, the {RS has had good reason for satisfaction with the present system's performance and adaptability to changing tax law. This is true not only of its overall architecture, with the Service Centers and a National Computer Center, but also of the various computer-based data systems. In some years legisTa- tively mandated modifications have been made on extremely short notice, and periodic equipment upgrades have kept pace with a workload that sometimes has grown at an unanticipated pace. The system's ready accommodation to change is the result of good short-range few-year planning and implementation, rather than of a comprehensive long-range multi-year plan. TRS had devoted considerable thought and energy to long-range planning over a decade or so; the outcome was the proposed Tax Administration System (TAS) of 1976. Regrettably, it was considered too ambitious, was delayed repeatedly, and was finally disapproved. During TAS planning, the existing system in its entirety was treated as the medium-range interim component; TAS itself was the Tong range portion. It is no surprise that existing systems have gradually developed serious defici- encies and limitations for the long run. The IRS has described these deficiencies as follows: "Insufficient capacity is the most urgent problem. Long-range projections show that the Integrated Data Retrieval System at the Service Centers will reach saturation in larger centers by the mid-1980's. This will happen despite severe management restrictions on the development of new IRS applications for it. Action now is needed to provide a replacement system which can be installed in time to accommodate the workloads into the 1990's. "Outmo(led technology is inherent in installecl equipment; maintainability is gradually becoming a problem. New equipment has advanced signifi- cantly in such areas as power consumption, miniaturization, software operating systems, and price-performance. "Inefficient design of the operational but old software has inevitably re- suited from repeated piecemeal additions to it. "Assembly-level programming language is used predominantly on all present systems. This fact plus the extensive patching makes on-going life-cycle support inefficient and sometimes awkward and time-consuming. The programs need to be recast in a structured overall design and imple- mented in an appropriate contemporary high-order programming lan- . guage. "The cost of microfilm research is higher than it should be. Current state- of-the-art technology can significantly reduce the cost of researching tax accounts by eliminating some of the manual labor TRS is currently per- forming."

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4 Table 1 Internal Revenue Collections, Costs, Employees, and U.S. Population, 1950 through 1979 Av~9e posltlons reallied ~1 War . ~~— —~~ —~ Anal Pope Tax p Tobl No Fetid (1) (2) (3) ~) (5) (~ ~ (~ 1950 ................. 23O,408,200 38,957,131,768 0.59 152,271 255.84 55,551 4,303 51,248 1951 ................. 245,869,538 50,445,686,315 0.49 154,878 325.71 55,805 4,208 51,597 1952 ................. 271,872,192 65,009,585,560 0.42 157,553 412.62 56,309 3,953 52,356 1953 ................. 268,590,806 69,686,535,389 0.38 160,184 435.00 53,463 3,834 49,629 1954 ................. 268,969,107 69,919,990,791 0.38 163,026 428.89 51,411 2,707 48,704 1955 ................. 278,834,278 66,288,692,000 0.42 165,931 399.50 50,890 2,675 48,215 1956 ................. 299,894,710 75,112,649,000 0.40 168,903 444.71 50,682 2,583 48,099 1957 ................. 305,537,814 80,171,917,000 0.38 171,984 466.16 51,364 2,832 48,532 1958 ................. 337,428,789 79,978,476,484 0.42 174,882 457.33 50,816 2,909 47,907 1959 ................. 355,469,228 79,797,972,806 0.44 177,830 448.73 51,226 2,969 48,257 1960 ................. 363,735,359 91,774,802,823 0.40 180,671 507.96 51,047 2,910 48,137 1961 ................. 413,295,238 94,401 ,086,398 0.44 183,691 513.91 53,206 3,042 50,164 1962 ................. 450,080,420 99,440,839,245 0.45 186,538 533.09 56,481 3,401 53,080 1963 ................. 500,804,314 105,925,395,281 0.47 189,242 559.74 59,71 1 3,657 56,054 1964 ................. 549,692,131 112,260,257,115 0.49 191,889 585.03 61,059 3,839 57,220 1965 ................. 597,387,471 1 14,434,633,721 0.52 194,303 588.95 62,098 3,881 58,217 1966 ................. 624,861,929 128,879,961,342 0.48 196,560 655.68 63,508 3,982 59,526 1967 ................. 667,080,295 148,374,814,552 0.45 198,712 746.68 65,946 3,894 62,052 1968 ................. 699,190,304 153,363,837,665 0.46 200,706 765.48 67,574 3,967 63,607 1969 ................. 758,785,475 187,919,559,668 0.40 202,677 927.19 66,064 3,862 62,202 1970 ................. 886,159,162 195,722,096,497 0.45 204,878 955.31 68,683 4,103 64,580 1971 ................. 981,065,297 191,647,198,138 0.51 207,053 925.63 68,972 4,358 64,614 1972 ................. 1,127,390,411 209,855,736,878 0.54 208,846 1,004.83 68,549 4,134 64,415 1973 ................. 1,162,009,945 237,787,204,058 0.49 210,410 1,130.11 74,170 4,505 69,665 1974 ................. 1,312,894,661 268,952,253,663 0.49 21 1,901 1,269.24 78,921 4,310 74,61 1 1975 ................. ·1,584,711,486 293,822,725,772 0.54 213,559 1,375.84 82,339 4,531 77,808 1976 ................. ·1,667,311,689 302,519,791,922 0.56 215,142 1,406.14 84,264 4,732 79,532 1977 ................. ·1,790,588,738 358,139,416,730 0.50 217,329 1,647.91 83,743 4,994 78,749 1978 ................. ·1,962,129,287 399,776,389,362 0.49, 219,033 1,826.61 85,329 4,919 80,410 1979 ................. ·2,116,166,276 460,412,185,013 0.46 220,999 2,083.32 86,630 5,003 81,627 *This figure represents actual IRS operating costs from FY 1975, exclusive of reimbursements received from other agen- cies for services performed. While the operating costs figures for fiscal years prior to 1975 may in some cases include reimbursements, those amounts are sufficiently small so as not to alter the cost figures in column 3. Economic Stabilization Program average positions included in 1972,1973, and 1974. Federal Energy Program average positions included in 1974. 1972 adjusted by 3,990 average positions to reflect the AT&F transfer July 1973. AT&F included in years 194~71. Eleven average positions transferred to office of the Secretary in 1965. Twenty average positions transferred to office of the Secretary in 1963.

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5 The Equipment Replacement Program is the long-range plan for dealing with such shortfalIs.2 The TRS will acquire state-of-the-art hardware and software projected to handle workload growth throughout the system's life. To accommodate future growth that at best can be only estimated and to provide a ready capability to implement unforeseeable changes in tax law and administration, families of upward compatible computers will be chosen, and software will be structured in modular form. 2 "Equipment Replacement Program Management Plan." Internal Revenue Service, Assistant Com- missioner (Data Services), September 1979.