Establishment of a Balanced Measurement System

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 801

[REG 119192-98]

RIN 1545-AW80

Establishment of a Balanced Measurement System

AGENCY: Internal Revenue Service (IRS), Treasury.

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

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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

March 8, 1999. 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

[[Page 458]]

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)):

[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

\1\, a number of 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.

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\1\ Both the Chief Financial Officers Act of 1990, Pub. L. 101-

576, 104 Stat. 2838 (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.

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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

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``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

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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 chairman 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

Collection directly led to inappropriate seizures. Hearings Before the

Subcommittee on the Department of the Treasury, U.S. Postal Service,

and General Government Appropriations 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

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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, 105th Cong., 1st Sess., at

3, 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 September 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 30, 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

[[Page 462]]

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

agencies).

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).

Sec. 801.1 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.

(b) Effective date. This part 801 is effective thirty days after

the date these regulations are published as final regulations in the

Federal Register.

Sec. 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

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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 Sec. 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 Sec. 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 Sec. 801.5) to evaluate any other

employee or to impose or suggest production quotas or goals for any

employee.

(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 Sec. 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 Sec. 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 Sec. 801.5).

Sec. 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.

Sec. 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.

Sec. 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

[[Page 464]]

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.

[FR Doc. 99-110 Filed 1-4-99; 8:45 am]

BILLING CODE 4830-01-U