The Business of Government Hour


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The Business of Government Hour features a conversation about management with a government executive who is changing the way government does business. The executives discuss their careers and the management challenges facing their organizations. Past government executives include Administrators, Chief Financial Officers, Chief Information Officers, Chief Operating Officers, Commissioners, Controllers, Directors, and Undersecretaries.

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Terry Lutes interview

Friday, June 21st, 2002 - 20:00
Terry Lutes
Radio show date: 
Sat, 06/22/2002
Intro text: 
Terry Lutes
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Complete transcript: 

Arlington, Virginia

Thursday May 16, 2002

Mr. Lawrence: Welcome to The Business of Government Hour. I'm Paul Lawrence, a partner at PricewaterhouseCoopers, and a co-chair of The Endowment for The Business of Government. We created The Endowment in 1998 to encourage discussion and research into new approaches to improving government effectiveness. Find out more about The Endowment by visiting us on the web at

The Business of Government Hour features a conversation about management with a government executive who is changing the way government does business. Our conversation this morning is with Terry Lutes, Director, Electronic Tax Administration at the Internal Revenue Service.

Good morning, Terry.

Mr. Lutes: Good morning.

Mr. Lawrence: And joining us in our conversation is another PwC partner, Jim Cook.

Good morning, Jim.

Mr. Cook: Good morning, Paul. Good morning, Terry.

Mr. Lutes: Good morning.

Mr. Lawrence: Well, Terry, could you describe the specific responsibilities the Director of Electronic Tax Administration has?

Mr. Lutes: Yes. Electronic Tax Administration's role, and I'm going to talk about that in two parts because it's right in the middle of changing right now, has been to develop strategy to develop electronic tax administration products for use by tax professionals and by citizens, and also to operate those. And right now, we're in the midst of a change because what we're trying to do as the program has gotten bigger and we have developed more and more products, we're trying to integrate the operational component back into the operating divisions that operate the rest of the programs at IRS, and we will focus primarily on strategy and on development of new e-products.

Mr. Lawrence: How long is it taking to roll this out? You say it's just gotten going?

Mr. Lutes: The overall program at IRS, it's actually been around since 1986; we processed the first electronic returns in days before most people had heard about the Internet. And the program actually grew relatively slowly until about 1996 and 1997, and we had a study at IRS that made the determination that this really appeared to be the future, was going to appear to be what people wanted to do and the way they would interact their business with government, using this new thing called the Internet.

So we created the Electronic Tax Administration organization to create an organizational focus on that. And that's what we did in '97 and the program has grown fairly significantly. We went from about 50 employees in the beginning of the organization to around 200 at our peak, and now we're moving some of those folks out of the organization and we'll end up with about 150 people remaining. But the timeline for this transition is rather significant because what we've had to do is take a look at how do you do e-government? How do you do e-business? And so we actually went and looked at the private sector, who've dealt with the same thing, traditional organizations, going to e-organizations and actually found a model of four stages, just like ours.

First you have sort of skunkworks, if you will, a research project that begins to work, then you create a central organization to create some strategic focus around it, and then you begin the process of trying to transition it and integrate it into just becoming the way you do business as opposed to a special program. Our commissioner likes to talk about the day when the special program will be the people over in the corner office who deal with the residual paper while the rest of the organization is doing electronically.

So we've been trying to integrate that back into the rest of the organization, and there is some significant issues there, because these are people who, like myself, until 1997, were really

paper-focused, and there is a significant difference. So it's a process of training, encouraging, helping them see the difference and integrating those operations back in there and recognizing now they're managing two things and you can't manage them both the same way.

Mr. Lawrence: When you were developing this, what were the skills of the 100 now or 200 people at its peak?

Mr. Lutes: Actually, we were plain old IRS employees. You know, I'm 25 years with the government -- 25 years with IRS -- with the Military before that; most of my employees were people who came out of the submissions processing organization. They actually came out of either the paper processing organization or out of the IT side of the house, and then we actually learned how to do e-government because I think we were forerunners to what's going on in a lot of other agencies now. So we made mistakes, we learned things and I think now a lot of folks come to us to find out how you do this.

Mr. Cook: Over the course of that time, Terry, and as you said, you kind of come from the paper environment, how did you personally become involved in electronic tax administration?

Mr. Lutes: That's an interesting story; you may wish you didn't ask the question. I was the guy who didn't have a job. I stumbled into it and very glad that I did. But I had moved to Washington, worked in the Associate Commissioner's Modernization Office, which was handling the big modernization effort for IRS. We were doing some restructuring there, and as it turns out, the job that I had moved into wasn't needed anymore in this restructuring. So I was working for the deputy commissioner, doing a variety of things, and this job came open and they asked me if I was interested. And I didn't know what I was getting into but I jumped into it, and that's sort of part of been my career. I've done a lot of different things in my career. I like new challenges, and this was probably more of one than I thought I was getting, but that's how I got there.

Mr. Cook: That's actually I think an interesting story. And a follow-up question would be, as you went through that process, how did you deal with the change in approach, or the philosophical or cultural change that you personally had to go through to adjust your thinking from a paper environment to an electronic environment?

Mr. Lutes: Crisis by crisis. And that's just very literally. And I think that's the way a lot of us learn when we go into new things, as -- you know, you go into it. As managers, if we've been successful and by the time we've moved to the executive level, we've got some managerial instincts or we wouldn't have been successful. And you can rely on those instincts; know what questions to ask, when to ask them, understand when something is getting critical and deal with it.

But I came into the job and I had the responsibility for the operational program in the 1997 filing season. I started two weeks before the filing season started and so I was right in the fire. And we actually had implemented a new change that year that I'm not sure I'd actually knew we'd implemented at the time the filing season started, and it was a disaster the first day. Not so that it kept us from being able to file, but a lot of returns were rejecting because of this check that we'd put in that was just creating fury -- it was actually a date of death check, and in fact, as it turned out, we were rejecting returns of even IRS employees, saying that they were dead because of the data in the file.

And so I learned very quickly about the IRS part of this, the taxpayer piece of it, but also the critical partnerships that are in there, that being the practitioner community -- for most of the returns that are filed electronically, and then very critically, the software companies and the technology companies who provide the software and actually transmit the returns to us, and the balance of how you've got to weigh all of those interests, because if any of those fail, it does not work.

Mr. Cook: How have you translated the lessons learned from that experience into your leadership approach today?

Mr. Lutes: That one experience has had an impression and has impacted my entire time in the electronic tax administration organization, because it really illustrated the importance of really coordinating changes; that the planning for a filing season -- because frankly, if taxpayers are trying to file a return electronically, or the practitioner is, and it rejects and the system goes down, if it were to go down for two days, and it's never been down for two days during my tenure, they're just going to file paper, and they may not even come back and try next year.

And one of the things about the e-government and the electronic world is the customer expectations are so different here than they are in the paper world. I will send something in on paper and I will accept the fact that through the mail, it may take four, five days to get there and so forth, but when I'm dealing with electronic, it's instantaneous or it failed is the standard. And what that means is, this coordination between all these entities is just extremely, extremely important. It's the key to the success of the whole program.

Mr. Lawrence: We often hear people talk about the culture of the IRS. I wonder if you could tell us what is the culture of the IRS and what do they mean by that expression?

Mr. Lutes: Well, the culture of the IRS; there is a couple of components of that, traditional components, and I think much of this is changing. One is, I think in the past it was a very insular organization. My first job with IRS was as a manager, and so I sort of personally experience it. That was very unusual in 1977 for somebody to come outside at a branch level, a manager's job, and fortunately for me, it took -- an old branch chief was ready to retire in Wichita, Kansas, took me under his wing and taught me a whole lot of things about how to avoid the pitfalls of that, but it was very, very difficult.

We had this unique mission, nobody else could understand it; it was just so complicated. And if you thought we should do it differently, it just meant you didn't understand how we did things. To the point today that I think there is a recognition that there is a lot of value to that component of the culture in that there is a lot of organizational loyalty. There's an awful lot of folks who have been here for the long haul. They spend their entire career; you don't get a lot of movement in and out of IRS to other agencies. It occurs, but not much. We train a lot of our own folks, and they sort of grow up in the organization from - - we've had stories of people who started in the mailroom and became a district director or service center director, an executive in the Service, and there is a lot of value in that.

But I think we've also come to understand the value of having the person from outside with a different background. Our current commissioner is the first commissioner who isn't a tax person. He comes from the technology industry. And so we've had quite a bit of that, quite a bit of that movement, and I think really beginning to appreciate and understand the value and the different perspective and the different insight into the culture. And the other change that's critical -- that's one piece -- is the outside blood. The second piece is the customer focus.

Many people view us as a compliance organization; we're here to enforce the tax law. We say that many times. But we've come to recognize that many of the things that create the need for compliance is the lack of customer focus in the earlier parts of the tax process; making sure taxpayers understand, understand early enough, before they're in trouble. Particularly with the business community, the small business community, that's a factor. So the customer focus is another piece that's changed. And I think right now, I do a lot of talking with other agencies about their e-efforts, and I think it's as strong in IRS as it is anyplace else in government right now.

Mr. Lawrence: That's a good stopping point. Rejoin us after the break as we continue our conversation with Terry Lutes of the IRS.

Have you thought about filing your taxes electronically but maybe had reservations? We'll ask Terry about the issues surrounding electronic filing when The Business of Government Hour returns. (Intermission)

Mr. Lawrence: Welcome back to The Business of Government Hour. I'm Paul Lawrence, a partner at PricewaterhouseCoopers, and this morning's conversation is with Terry Lutes, Director, Electronic Tax Administration at the Internal Revenue Service. And joining us in our conversation is another PwC partner, Jim Cook.

Well, Terry, how about some order of magnitude. I'm curious. What percentage of returns are filed electronically in any year, and is it growing?

Mr. Lutes: It's been growing every year. We have been running anywhere from our low of 13 percent, but most years, we've been running 20-28 percent level of growth. Last year, during the 2001 filing season, we had a little over 40 million electronic returns. That was about 31-1/2 percent of all the 1040 returns filed. This year, we'll probably finish up at -- 46.7 million is the current estimate. So we've grown by 6-1/2 million this year, and that will be over 35 percent of all tax returns. What's really astounding to me about this part of it is, is that if you compare that, consider the tax return to be very sensitive information; it's financial information that people don't want anybody else to see or know about, and all the security concerns and so forth, if you compare that to equivalent transactions, taxpayers actively doing online banking, taxpayers actively doing stock trading online, we're doing much better.

You know, bank figures I saw active is around 11 percent of customers who are doing online banking, after a lot of promotion from them. So I think we're doing very, very well, but the goal that Congress established for us is 80 percent, so we've got a long ways to go.

Mr. Cook: The IRS is the lead agency on two of OMB's e-government initiatives. Can you tell us a little bit about those initiatives?

Mr. Lutes: Yes, there is two of those initiatives, one of which was originally called STARS, which was essentially an acronym for an office that was trying to simplify employment taxes. We've changed the name of that to Expanding Electronic Tax Products for business to encompass the initiatives we've got for, not only for the employment tax responsibility that business have, but the basic filing requirements, their corporate returns, the form 1120, which corporations file, and the partnership returns, 1065s, and there is a whole variety. We have many forms at IRS.

So we're really talking about the broader need to meet the needs of business. We started with the 1040, which are individual taxpayers, although many of those are small businesses that file 1040s also, but now we really need to move that same success into the arena of the business filer. So it really encompasses a range of initiatives that frankly, we already had underway when the Quicksilver projects were announced. We brought them under that umbrella.

The second project is what's called EZ tax filing, and the initial concept there was to enable taxpayers to be able to file on the web for free. There were some thought initially that has occurred several times that IRS ought to have its own software on the web that you just pick forms up there, and with some wizards, this would be very usable. But the federal tax laws are a very complicated, very complicated animal, and I think our feeling is that in order to have a robust product that we would feel proud of, that we want customers to use, that you almost have to -- it's a software product, and not just forms you put on the web, and that's not really a business that we have a strong desire to go into.

So what we're actually doing is working with the software companies who, to their credit, for a number of years, have offered free Internet filing to a significant number of taxpayers, to expand those offerings to cover a wider range of taxpayers. And we're hoping over the next 60 days to have some announcements to make as a result of our work with industry in that arena. But that initiative is really to expand that offering.

Mr. Lawrence: You brought up the private sector and I was curious how you address concerns that the IRS is actually competing with the private sector by offering e-filing.

Mr. Lutes: Well, I think there is two different levels of this. One is, in essence, if you view the tax professional community, ranging from CPAs to what we call enrolled agents that are licensed to practice before IRS, or to people who just simply put up a sign and they prepare tax returns, every time we print a form or mail out a tax package, or provide them in the post office, we're competing with the private sector. So there is some levels, so you got to really define what you mean.

But I think the concern here around this issue has been, since the software industry already exists in this country, and since it was to a large extent encouraged by IRS, because in the early days of e-filing, we couldn't do it without them, the Internet wasn't there, that at this point in time, that we should not enter and have our own software product, because then we would be competing -- that's a violation of A76 -- which says where the private sector has staked out the ground, the government shouldn't go there. But of course, other people say, this is new technology, it provides new tools, it doesn't make sense for the government not to take advantage of it. So what we're trying to do is we're trying to work with industry in partnership. The objective is to make e-filing readily available to everybody in this country. We're trying to find ways to do that and to do that without becoming a software company, if you would, at this point in time.

Mr. Cook: As you expand the use of electronic filing methods, how do you assure taxpayers that it is secure?

Mr. Lutes: There is two steps to that. The one thing that I really try to emphasize to folks is since the beginning of this program, we're getting close to 300 million returns that have been processed electronically, and safely electronically during that time period. The ways we do this is, the original system was designed -- and this was a system that was designed in 1985 now. This is our -- believe it or not, our e-filing infrastructure is not modern in that sense; it's pretty old. But the original systems were not Internet-based, and we still do not accept returns over the Internet at all. They come to us through transmitters who take the outputs of software, put it into the IRS format; they've been screened, we give them logins and passwords and there is a variety of technical tools they have to have in order to dial into our systems and come in modem to modem and transmit those returns to us.   I say modem to modem; some of them have T-1 lines and ISDN, but it's still basically a connection through the public switched network through us.

On the Internet, where taxpayers are using the Internet, and filing using one of the commercial off-the-shelf products, or on the web, they are on the Internet there, but their interaction with the software company is with secure socket layer with encryption, and then that company puts it into our format and then transmits it to us over this network that we've established. And as we move into the future, we will move to accepting those returns over the Internet, and it will obviously be with the best in security in terms of encryption, secure socket layer, and we'll do it through tools that we will develop with our prime contractor.

Mr. Lawrence: It's interesting you talked about the way technology is being used now, so I'm curious to understand, I'm assuming it's a goal to do more electronically with the public. What kind of technological things is that going to require?

Mr. Lutes: Well, if I can drop back and just talk about the overall IRS need, it's pretty overwhelming when you look at what we need to do in terms of IT.   I must say that at IRS, as like, I think, most government agencies at all levels, lack of good ideas of things we can do for citizens has never been the problem. Those are a dime a dozen. The real challenge is to look at where you're at and to be able to prioritize those things and determine what should I do first, what should I do next and then deliver on those things.

And there is two levels at IRS. One is the kind of things that we could do with the Internet, provide citizens direct access to IRS systems and IRS applications. The weakness in that, or the delimiter in that is the existing infrastructure that we use. Our basic structure for our master files where taxpayer records are kept, for example, were designed in the mid-1960s. They are in COBOL; they are in flat files; they are on tapes. Today is Thursday. This afternoon, you've missed our weekly cycle cutoff, which is noon on Thursday. If you make a payment with IRS today, before that actually shows up on your master file account, it's going to be next weekend, not this coming weekend, but the next weekend.

So if I were to create your account online and let you access it online, you're seeing information that isn't up to date. I mean, we really got very fundamental problems that we've got to solve in order to be able to serve taxpayers the way they're used to being served in their financial lives by the credit card companies and by their banks. We've got some real core underlying problems to solve. It's a major project that's got to be undertaken. And so what we're trying to do is figure out in that state, what are the kinds of sort of thin-layer technology, if you will, that we can set on top of that legacy infrastructure to deliver some services to taxpayers right now while we're modernizing that infrastructure so we can deliver all the services you want to provide.

We talk about a couple of things. One is, we talk about ultimately a virtual office or cradle-to-grave tax processes being on the Internet. The technology exists to do anything you'd have to do with the IRS, the technology exists to do it on the web, and give you the choice of the web, the telephone, the office mail and create those choices. In order to get to that ultimate vision, though, there is a lot of building blocks that have got to occur. Next filing season, we will have the very first taxpayers on our modernized, what we call our CADE, Customer Account Data Engine, where we will process tax returns straight into the new master file and be able to issue refunds much faster, update accounts real-time so that our customer service folks can see and can answer questions, saying this is exactly the state of your account and can actually update it online as opposed to waiting for some weekly batch process to occur. So, it's pretty archaic, the structure that we work with right now.

Mr. Lawrence: How much is all this change affected by changes in the tax code, Congress decides something should be changed?

Mr. Lutes: Well, we don't think much about that; that's just life at IRS. It's one of the things we always have to look at, and particularly in terms of all of our resources, particularly IT resources. We always have to keep an eye on that, because those things obviously are number one priority when they occur. But the things that really create the challenges for us though is this basic underlying infrastructure, and when we modernize the infrastructure, we can do that in a way so those changes are easier to make.

Right now, many of these programs were written 20-30 years ago. The state of IT documentation was not very great in those days, at IRS and I don't think a lot of places. So it's very, very difficult and very complicated to make changes. But one of the things we intend to have as a result of this is the ability to make those kinds of changes to adjust much more rapidly than we have ever had, using today's technology.

Mr. Lawrence: That's a good stopping point. Come back with us after the break as we continue with our discussion about management with Terry Lutes of the IRS.

What management challenges does electronic filing present the IRS? We'll ask Terry when The Business of Government Hour continues. (Intermission)

Welcome back to The Business of Government Hour. I'm Paul Lawrence, a partner at PricewaterhouseCoopers, and today's conversation is with Terry Lutes, Director, Electronic Tax Administration at the Internal Revenue Service.

Joining us in our conversation is Jim Cook, another PwC partner.

Mr. Cook: Terry, we've talked a lot about e-filing and e-government, and it seems to me that from a strategic standpoint, really what you're spending a lot of time doing is looking at e-services from an IRS perspective. What I'd be interested in finding out is how you're dealing with the other aspects of an e-services program, because it is much more than just the technology component.

Mr. Lutes: The direction that we're taking now is, we're trying to look at the entire set of interactions. And we've divided interactions with the taxpayers into really three categories, and these are fairly obvious: pre-filing, filing, post filing. And there are very different types of activities that occur at each of those stages in the tax process, and we're looking and analyzing the nature of the type of interactions that taxpayers have with the service at each one of those levels and how to offer a variety, how to maximize the use of technology to offer taxpayers different options, and I think in many cases, better options in terms of how to interact with this.

For example, in the pre-filing, one of the most powerful tools we've got is our website that we created back in 1996. It was created by our forms and publication folks as a new way of distributing forms and publications, and it's been very, very powerful in that arena. What we have not done up to this point is really talked about, well, what else could we do with that. For example, last year, we got in excess of 10 million telephone calls that we could not answer. We've never really analyzed the web in terms of how can we reduce demand on the telephone lines so that we could take pure information or tax law information questions and maybe answer those on the web.

So we're trying to get focused on business value out of our website. One of the key things that we're looking at is just basically the informational website, which can have some simple calculators. Completing your W-4 and how many exemptions you can have and determining what form you need to fill out if you're going to fill out a form; to really do those. One of the things that we started this year and we're going to do more in the future, for example, there is a lot of errors that people make on returns when they file on paper that they could avoid if they file electronically, but, on the web, things like, if -- what are the 10 most common errors being made in tax returns this year and how to avoid those. So you actually can deliver value for the customer and value for the organization using that piece. So that's one set.

The second set are the transactional items. In addition to filing returns, business make payments. There are businesses that have to make a tax payment every day because of the size of the depository taxes that they have to pay. Businesses have to apply for an employer identification number.  Taxpayers apply for copies of transcripts of their return if they've lost a copy of their return for educational student loan purposes and so forth. We're looking at all those transactions and how we can use, particularly the web, to meet those needs then back to our infrastructure, these legacy systems, and the right sequencing plan to ultimately offer all those services, make all those services available electronically.

Later this year, we anticipate through the prime contractor, offering the first non-filing services. We're anticipating within a couple weeks here, taxpayers will be able to go on the Internet and check on the status of whether we have their return and the status of their refund, on the Internet, something we've never been able to do before. Later this year, we will be able to, third-parties with a power of attorney, be able to provide transcripts of taxpayers returns that they request, and will actually be able to do secure e-mail with tax professionals who have power of attorney to represent their client so they can interact by e-mail. And that's just the first of a whole series of kinds of interactions that we ultimately can make available via the web to make the whole process better for everyone.

Mr. Lawrence: I wonder if you could just take me through some of the fundamentals here. In terms of thinking through the advantages, both for the customers and for your agencies in terms of moving transactions to the electronic realm, how do you think about the win/win, I guess?

Mr. Lutes: There are two ways of approaching this. And I think in the early days, we were doing this sort of as a pilot to see what would happen, but I think a lot of times, a government agency and probably a business, focuses on what can we get out of it. And so we say, here is the problem we've got, we need to save money, we need to save resources, or we may say taxpayers are having a lot of problems here and we can't deal with those, lets use a tool. What I advocate is taking a different approach to it. I believe if you put yourself in the taxpayer shoes, and most of us IRS employees ought to be able to do that, we're supposed to be able to, in the taxpayer shoes, or remembering that 57 percent of individual taxpayers and 80 percent of businesses use a tax professional -- in the shoes of the tax professional, and then look at the process outward/in, and I think if we meet -- I believe we've got plenty of evidence that if we meet the needs of the taxpayers and their representatives, we're going to automatically get the benefits, and we'll get them much faster, because we'll design something that people want to use rather than the old 1040 e-file, we designed it and we went out and tried to convince people that it was really good. If you design it right, if something is good enough, people will steal it from you, you don't have to ram it down their throats, and so we're trying to take that approach.

And let me just give you a simple example of that. By e-filing a tax return, we reduce errors; it's not like doing a tax return. Many of the software packages, even if you do it yourself, you answer a series of interim questions, you don't even realize you're doing a tax return, and at the end of the process, you've got the data that creates a return. The accuracy checks are there, you don't get notices, you don't get letters from IRS, and you get a guarantee that your return has been filed. We give you an acknowledgement number back. You know they got it, I'm done, I don't have to worry about this until next year. You're happy. But we get benefits too.

Naturally as a result of that, fewer notices to mail out, less data entry to do, less errors to correct. There are benefits on both sides. It's a question of where you start from, and I think you really start from the customer and back in. And then the other thing that you do is, the biggest mistake that many people coming to this initially do, here is the paper process, how do we make the paper process electronic. Big mistake, big mistake. Many of these processes -- it's interesting because I would dare say, in many government agencies, probably a lot of private companies, if you go and ask them why is the paper process the way it is, try to find the answers to those questions. Sometimes you won't find anybody that will be able to answer for some part of that process, I'll guarantee you.

So one of the things that we do is we sort of determine what's the customer need, what's the customer want, what's the customer value out of this, and then we come back and we look at our internal processes and say because we did it that way on paper does not mean -- we've made a number of significant changes in IRS regulations as a result of starting to make a process electronic. Third party signatures, for example, why do we need third-party signatures on stuff. We don't even transcript a signature. If you're going to audit the taxpayer, they're required to produce the information. We change the regulation, we've changed business processes, and then you build your electronic application after you've done all that.

Mr. Cook: Terry, you've talked about taking the customer's perspective and then looking back in to determine how to provide value. Talk a little bit about some of the mechanisms and forms you're using with industry and with private citizens to understand that perspective.

Mr. Lutes: We've done a number of things. Let me just give you a couple of examples. On the individual taxpayer side with this program that we've built back in the mid-80s, we have been doing year after year since 1987 a lot of market research. We have a marketing firm; we have an internal research organization; we are continually doing customer surveys about what they like, what they don't like, what improvements, what keeps them from e-filing, why do they e-file. And that's how we've been improving the 1040. On the business side, we've been developing a new program. And let me just reference our 1120 project for corporate returns, where before we've even had one line of code written in terms of how this is going to work, we've been out, we've visited with corporate taxpayers. I've personally spent time in the tax department, one of the largest corporations in this country, trying to understand their processes.

We've got a number of large companies that sit on sort of a steering group -- Motorola Corporation is one that comes to mind -- that's actually volunteered; Tax Executive Institute, which is an organization that represents the tax heads of the large corporations in the country; AICPA, again, most of these returns are filed by professionals that do this. We've also included the software companies, and not just the tax software companies. The critical thing is we're including the accounting software companies. SAP is part of the steering effort there so that we can make sure that the accounting software and the tax software, based on these data standards that we're going to establish, work together. So we're trying to do everything we can to guarantee that when this thing rolls out, it's something everybody wants. Everybody feels like they've got to buy into it and that it will get the automatic use as a result of that. So it's a rigorous process; it's very different than the insular, we're the government and we'll decide what we need and we'll tell you all that. That is not the approach that we're talking at all today.

Mr. Lawrence: What's the role of incentivizing either people or corporations to be involved electronically; one day might you get a rebate for filing electronically?

Mr. Lutes: Well, I'm not sure. That has been proposed a couple of times as an incentive for a short period of time. Frankly, that's a political decision, but further though, I think there is a number of things that we can continue to do to make the program grow aside from that. One interesting side point is, some of the research that we've had has said that -- you would assume that price is a major determiner here, but we have some indication that price elasticity in terms of impact of price on how taxpayers make decisions is not that great. For example, you would think that people who pay $300 to a tax professional, once they can buy a $30 software to do the same thing would go to the $30 software. That's not what happens. People either choose to do a professional or I'm going to do it using software, I'm going to do it at my kitchen table.

And so what we're looking at is the, again, market research, very private sector-type research. What are the things that would incentivise people, what would encourage them, what are the marketing messages that sway the day. And we think reducing tax burden, faster refunds and the administration's proposal to extend the due date for balance due taxpayers so they can hold their money longer, are the kinds of things that will have probably more impact than a rebate, which is probably relatively small.

Mr. Lawrence: That's a good stopping point. Rejoin us in a few minutes as we continue our conversation about management with Terry Lutes of the IRS.

As our citizens become more comfortable with technology, we have to wonder what this means for the future of the IRS. We'll ask Terry for his thoughts when The Business of Government Hour continues. (Intermission)

Welcome back to The Business of Government Hour. I'm Paul Lawrence, a partner at PricewaterhouseCoopers, and today's conversation is with Terry Lutes, Director, Electronic Tax Administration at the IRS.

Joining us in our conversation is another PwC partner, Jim Cook.

Mr. Cook: Terry, you've talked a lot about a number of initiatives that you have in play right now. How do you see overall measuring success for this program?

Mr. Lutes: I think the most critical measure is adoption rate. Do people use it? We're not that different from the private sector. You know, you build a product, you want people to buy it, and that's the ultimate measure of success. But the other thing we focus on is people's happiness with it. The American Customer Service Index has been measuring satisfaction in the private sector and public sector, and one of the public sector organizations that they measure is IRS for a number of years. And we're real proud of the fact that this past year, the customer satisfaction on their index for electronic filing was 77 as compared to 70.5 for private sector electronic services. And so we're extremely pleased with that, and I think that as long as we're able to maintain that kind of customer satisfaction, have the word-of-mouth, as we say, if people try it once, generally they are not going to go back to the paper process. And so those are the measures. Satisfaction. We would like to continue to stay ahead of the private sector in terms of satisfaction with our products.

Mr. Lawrence: You've talked a lot in our conversation about working with the private sector in a sort of public/private partnership, and I'm curious how you think that might be expanded to do more in the area of tax administration.

Mr. Lutes: We're actually working in a variety of areas now. Even outside electronic tax administration, how to leverage these partnerships. We've never exactly been quite sure sometimes at IRS exactly how we felt about the tax professional community, to be very candid. In a sense, obviously, they represent taxpayers, and we respect that and we deal with them; on the other hand, there are times where, well, those people are paid and we shouldn't help them. They're paid to solve the problem. I think we're more embracing this as a partnership now, and maybe we at ETA have sort of taken the lead in sort of establishing that mindset within the agency.

But on things like problems people have about correctly applying for and receiving their earned income tax credit, we're doing a lot of educational outreach with the practitioner community to solve a variety of problems. Again, over half the individual returns are prepared by those folks. That's a tremendous opportunity for us if we can work with them effectively. We also work with them around marketing. In marketing e-products, for example, we coordinate our marketing strategy each year with the private sector so that our messages coincide with or are complementary to the marketing messages that the private sector, the software companies and practitioners use to encourage their clients to e-file.

For example, for the smaller firms, we actually provide them with the whole marketing campaign. We provide them with posters, we provide them with electronic images they can imprint on their mail-outs, we provide them if they want copies of our radio and television commercials with space in it to stick their company name in there for their own company advertising, if they can't produce it themselves. And so we're really working very, very closely with them in a variety of arenas, and I think the approach to the EITC example is now, if we've got a problem, I think one of the things that automatically comes to mind is, how can we leverage those partnerships; how can we get the software companies to make their instructions better for those people doing it themselves; how can we use the practitioner community to help us solve that problem and make life better for taxpayers. They are their customers, our taxpayers are their customers. Both of our goals are to make those people happy.

Mr. Cook: What would you say are some of the major lessons learned that you take away from this program?

Mr. Lutes: I think there are a couple lessons that's learned. If you try to do this the

traditional -- and I don't know if anybody really does, you know, the stereotypical government way, I know that still occurs in some places. If you try to do it that way, it's not going to work; this "we are the government and we can just tell you how you're going to do things." That's just not the way it works in the e-world and it's not going to happen that way. The second thing is, it really challenges our decision-making processes in two important respects. One is, you've got to be willing to reinvent the way you do business, because it's not very efficient to try to do the web in a paper way.

For example, filing individual tax returns, you have the 1040-EZ, you have the 1040-A and you have the 1040, depending on the level of complexity. And like what does that matter in electronic, it's just data. Forms are irrelevant in the electronic world, and we should not -- and if you're going to try to stick to forms, you're going to make this very complicated unnecessarily. So you've got to be willing to rethink your business process and ask why do I do this stuff in the first place. The second thing is, it's the nature of the e-world, is that -- let me just give you a simple example that I can just give you specifics on several occasions since I've been in

ETA -- we have a processing problem in a paper world, and the typical government way of dealing with things would be we've got a problem; there is a problem in a processing center but we tell folks, you'll get your refund in five to six weeks. So if there is three or four days one way or the other, nobody really notices. It's not like we're keeping secrets, but it's not that matter. So we get a committee together, we meet a couple days and we make decisions.

I had a situation several years ago where I got a call from a reporter from the Cincinnati Enquirer newspaper, telling me about a problem that was occurring in the Cincinnati service center and wondered why I never heard of the problem. The e-world is just different. And I would suggest that we really need to think about decision-making processes and the fact that we can't use that decision by committee. We've got to get the right people in the e-organizations, people that we're comfortable with, who've got judgment, know how to react. You don't make stupid decisions, you know, quick decisions, but we've got -- the timelines are much shorter. People expect things to happen faster. And with us, because the sensitivity in the public interest in the filing season, we've got a problem for a few hours, it's going to be headlines on the business section of newspapers. And so we've really got to be prepared to rethink our decision-making processes.

Mr. Lawrence: One of the observations people have had about the e-world is, actually in this interim phase, you have to run two processes. There is an electronic process and still a paper-based process. I'm curious. That's obviously true for the Service. I'm wondering what the management challenges are of that.

Mr. Lutes: It's actually not that much of a problem for us in the current structure, because we actually process the electronic returns through the same system that the paper returns are processed, and we just get it all done faster. If there is an error, and less than 1 percent of electronic returns have errors on them in most years, if the same error resolution people would work that in one of our service centers, that would work it on a paper return, the difference is, is that if you're a director in the service center, and I've spent some time in the service center, you'll have 2,000 people to deal with 10 million returns, and you'll have 20 people to deal with 5 million. And so there is a lot of attention that has to be paid to the paper process because it's such a mechanical process.

The electronic, it purrs; you've got a problem, you solve it quickly, but it hums. And so, it's a little different but, our folks have done this very well. They are processed in our processing center, the same ones that process paper really hasn't proven a problem, because they understand the importance of this to the future of the organization. It's key to our vision of where we're going to go as an organization, what we're going to do. That's understood, and so folks are able to manage both processes.

Mr. Lawrence: One of the things we've talked about is as our citizens � we've talked a lot about technology, as our citizens become more technologically savvy, what do you think that means for the relationship between them and the IRS in the future?

Mr. Lutes: It's a challenge for us to keep up with the expectations, because they expect if I can do this with my credit card company, if I can do this with my bank, then why can't I do this with my government agency? Whether it be IRS or anyone else. And so I think we've really to a challenge to stay ahead of those expectations. One of the things I keep saying, how do we get to the point that we never allow the kids growing up today to ever learn how to do a paper return. So they never learn in the first place. And they would automatically look to do things electronically, to go for their information to our website.

Mr. Lawrence: How is this changing now and even in the future, the nature of employment at the IRS in terms of the types of people and the types of skills it's looking for and using.

Mr. Lutes: We're making it pretty much a part of the day-to-day operation. When we started off the conversation, we talked about the changing role in my job, and part of pushing the operational piece out to the operating divisions and getting them more intimately involved in those rather than me simply giving guidance out and the service centers then running the systems, to actually engage them. And this actually -- I gave short shrift to that, because it's actually a couple of things. My organization used to create the electronic tax administration's strategic plan, and I have a strategy in the policy organization; it's kind of a broad one. But each of our operating units, the wage and investments, the small business operating units and so forth, they do the strategic plan. As they're looking at what they want to accomplish -- right now we're still working on the 2004 strategic plan. They are deciding what needs to be done. They are responsible for the relationship with their customer base, and I'm there to help develop corporate strategy and policy and to help them implement. But the needs of their customer base is now their responsibility. Now they're learning to do that, we're helping them learn to do that. So they're going to decide what gets done, what the needs are that's going to be building the business cases, we'll help them delivery that and then they will continue to operate it.

So, it's going to take a while to get to that point, but I think more and more, particularly at the management levels and at the headquarter levels of the organization, it's going to be part of everybody's job in the future to know what technology can do, and any time they're thinking of solving a problem, part of the thought process is what can technology do to help me solve that.

Mr. Lawrence: What advice would you give to a young person interested in a career perhaps in the IRS?

Mr. Lutes: The government has some unique learning opportunities and some unique challenges that I think would help people even if they decide to go in the private sector. And one thing I emphasize to people thinking about it now is with the retirement system that the government now has, very much like the private sector, it's very easy to move in and out of government. I think it would be a great challenge, a wonderful opportunity. And I actually think if they tried, a lot of them would be like me, they would stay for a long time.

Mr. Lawrence: Well, that's a good stopping point. Terry, I'm afraid we're out of time. Jim and I want to thank you for being with us today.

Mr. Lutes: Thank you for having me. It's been great. If folks want to know more, they can go to, and if you're an individual taxpayer, click on "individual," it will take you right to electronic services. And if you're in business, click on "business, "it will take you there and there's lots of information there.

Mr. Lawrence: This has been The Business of Government Hour, featuring a conversation with Terry Lutes, Director, Electronic Tax Administration at the IRS.  

Be sure to visit us on the web at There, you can learn more about our programs and get a transcript of today's very interesting conversation. Again, that's

This is Paul Lawrence. See you next week.

Terry Lutes interview
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