Establishment of a Balanced Measurement System

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 801

[TD 8830]

RIN 1545-AW80

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

Sec. 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.

[[Page 42835]]

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).

Sec. 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.

Sec. 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 Sec. 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 Sec. 801.6) except in conjunction with an

evaluation or goals based also upon Customer Satisfaction Measures,

Employee Satisfaction Measures, and Quality Measures.

Sec. 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 Sec. 801.6)

to evaluate any other employee or to impose or suggest production

quotas or goals for any employee.

[[Page 42836]]

(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 Sec. 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 Sec. 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 Sec. 801.6).

Sec. 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.

Sec. 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.

Sec. 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

work unit'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:

[[Page 42837]]

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.

Approved: July 22, 1999.

Charles O. Rossotti,

Commissioner of Internal Revenue.

Dated: July 22, 1999.

Donald C. Lubick,

Assistant Secretary of the Treasury (Tax Policy).

[FR Doc. 99-19769 Filed 8-5-99; 8:45 am]

BILLING CODE 4830-01-U