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Transformation at the IRS

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The manager may have the power to change an organization’s policies with the stroke of a pen but changing a deep-rooted culture may be the managers’ toughest task. Commissioner Charles Rossotti realized the task before him and the commitment it would take to produce the necessary changes at the Internal Revenue Service (IRS). Rossotti had to win the hearts and minds of the people that work at the IRS, politicians, and the American People to convince them that his proposed changes would produce a flatter organization, customer service oriented and up to date technology. The evaluation of the Transformation of the IRS case study will examine the stakeholders, what prompted the change, why the change was controversial, why the IRS considered outsourcing, and how Kotter’s 8-step model could be used in this transformation.

The primary stakeholders are the IRS, United States Government, and the American public. The IRS is the number one stakeholder because they are the collectors; they collect the taxes and fund the Government. The Government is a stakeholder because they depend on the IRS as their main source of income. The taxes collected fund the government and allow it to function. The American public is a stakeholder because they pay income taxes to fund the government through the IRS. Prior to 1998, the main focus for the IRS was to collect the taxes by whatever means necessary. After that date, it became mandated that they would provide a service to its customers first, and collect the taxes second. One of the main issues with dealing with the American public as a customer is the diversity ranging from individuals, small businesses, self-employed, large corporations, government entities and non-profit organizations. Each of these taxpayers has unique needs that need to be fulfilled. These differences made customer services a nightmare. In order for the IRS to care for stakeholders, specialized personnel were needed in each of the various fields of taxation in order to provide a top quality service. Once this was complete the IRS has been able to better deal with the primary stakeholder, the American public.

The IRS success rate of collecting voluntary tax payments is the highest in the world and the new proposed changes would increase the percentage even more. The main reason for the increase projected was based on the fact that people are more willing to pay when they have a top quality service and get their questions answered (Palmer, I., Dunford, R., & Akin, G. 2009). In the last two decades of the 20th Century the IRS was constantly criticized from every aspect of tax collection, both current and delinquent taxes. The criticism came from almost every corner of the spectrum and the issues where many. The issues ranged from tax forms that where overly complex, taxpayer rights being violated, questions not be answered, and collection and compliance randomly enforced. The biggest problem with these issues was that the IRS systems were “outdated and service levels strikingly low compared with those of private-sector industries” (Edmondson & Frei, 2002). With the complaints in hand Commissioner Rossotti asked for all past studies on needed improvements and reviewed 5,000 of them before he decided that “there had to be bigger, more sweeping change” to reverse the trends and attitudes within the IRS and from the public.

First of all, the change “was not just a good idea, it was mandated by law” (Edmondson & Frei, 2002), the Restructuring and Reform Act in 1998 (RRA98) was the beginning of the transformation of the IRS. The focus was to change the image of the IRS by redirecting a majority of the efforts into customer service not just collecting taxes. The objective goal is to provide consistent service and prove that the IRS could “function as a well-managed private-sector service organization” ((Edmondson & Frei, 2002). With this focus on customer service came a new mission statement; “Provide America’s tax payer’s top-quality service by helping them understand and meet their tax responsibility and by applying the tax law with integrity and fairness to all” ((Edmondson & Frei, 2000). Commissioner Rossotti identified five levels of change that would produce change to the IRS structure, organization, culture, and operations such as: customer-focused operating divisions, management roles with clear responsibility, revamped business practices, new technology and balanced measures of performance.

All the proposed initiatives helped the introduction of e-filing, a self-paced online tax services which any individual can file their income tax return without the help of a tax accountant to prepare returns. On October 22, 2004, President Bush signed into law the American Jobs Creation Act that included a provision that allowed the IRS to outsource the collection of delinquent taxes to private collectors or law firms. This allowed for controversy since many people were concerned that the use of outsourcing would provide personal information to debt collection agencies that could become public and misused. In addition, the opponents are also worried about the agencies’ being paid on percent collected. This would encourage the collectors to use pressure tactics to collect the maximum amount. The use of private debt collection companies and private law firms to collect delinquent monies, was not new to the United States, it had been used by other departments to collect past due monies mostly for the Department of Education to collect overdue student loans.

Another reason why many people did not believe that a change so immense could become a reality in the IRS was because in 1986 a modernization initiative was launched named the Tax Systems Redesigns (TSR) project, but ten years past and $4 billion spent no real change occurred. So when Charles Rossotti proposed the overhaul in 1997 for the IRS many doubt his ability to formulate the transformation of a large government department into a flat organization that could compete with similar corporations of the private sector. Kotter’s 8 Step to Change model consists of creating urgency, forming a powerful coalition, creating a vision for change, communicating a vision, removing obstacles, create short-term wins, and build on the change. Kotter’s 8 Step to change appeared to have been utilized when Commissioner Rossetti identified five levels of change and applied them. Another way to assist in the Transformation of the IRS was to remove obstacles by removing management that would not adhere to change, and re hire new management with new business practices.

The reason for considering outsourcing was due to the “increasingly overly burdened IRS collection resources” (Resnick, 2005). There were a number of factors that contributed to the need of outsourcing such as from “1992 through 2001 the workload increased by 16%, the number of employees decreased by 16%, Field Compliance personnel decreased by 28%, and from 1997 through 2002, 12 million more tax returns were filed” (Resnick, 2005), and maybe the biggest factor is that the tax code constantly changes. Outsourcing consideration came into question when the pilot programs were reviewed and brought up concerns that were associated with private collection of delinquent taxes. Primary, the review showed that the programs “failure to reap any financial benefits for the IRS, the IRS cited lost-opportunity costs of about $17 million because it had to move collection personnel off line to work on the pilot” (Resnick, 2005). Secondly, the reviews showed other problems such as legal interpretations of tax codes, taxpayer rights, and privacy issues. Due to these problems, legislation has been passed to address the troubles and protect the taxpayer. The legislation includes The Fair Act, Taxpayer Bill of Rights, and the Taxpayer Bill of Rights II.

In this specific transformation case, changes were needed badly. The IRS’s plan to outsource their collections was thought to have the ability to save money, minimize re-structuring and improve customer service. Commissioner Rossetti reported in 2002, “that hiring an additional 5,450 employees at a cost of $296.4 million would allow the IRS to collect and additional $9.47 billion of know tax debts” (Resnick, 2005). That would be a “$31 dollar return for every dollar spent versus a $3 to $1” (Resnick, 2005) with private companies. With this information the cost analysis is overwhelming in favor of IRS collecting delinquent taxes if not just for the money but for the protection of the taxpayer. The IRS had challenges in four different areas such as managerial, restructuring the organization, creating a database system to store customer’s information and centralized customer service.

The managerial area will of course have numerous existing managers that will rebel against the changes. This is to be expected and can be overcome with logical explanations about why the changes are needed and the benefits that they’re going to receives. The ones that still refuse will eventually be let go to make room for those that accept the needed changes. The restructuring of the IRS, as a whole, is another massive challenge since required breaking things down by special tax needs and having directors for all of those individual areas of expertise. The IRS will also need to streamline the top levels managers to put single directors over regions that have all of the expertise to answer the different questions from the American public.

The creation of a database that will allow information to be brought up by any Customer Service Representative (CSR) no matter where they are located, also need to be able to supply answers based on simple queries quickly. Having a centralized database system with all the tax codes and customers information provided would help CSR provide a better customer service experience every time a customer calls. The last main challenge for management will be to create specialized customer service center that is based on the type of questions for different types of consumers whether it is an individual, small business, and corporations. This is going to require taking the finest employees in each area and assigning them to coach the other employees on their team how to quickly answer questions in the approved manner.

In the evaluation of Transformation of the IRS it was discovered that Commissioner Rossotti primary focus was on solving the IRS’s reputation and making the IRS a customer service based organization. The primary stakeholders all had a stake in the outcome and even though the process was painful the outcome has become a success story. The transition has allowed taxpayers to get answer when needed, file their taxes by many means, and the transition has also assisted in changing the reputation of the IRS. While these changes have been good, there are still problems with the system that includes complicated tax forms and selective enforcement in collecting back taxes. The use of outsourcing has been considered a failure due the cost of the programs versus actual funds collected. The use of Kotter’s 8-step model allowed for aggressive change with effective communication and objectives being presented and followed to meet the challenges that now have changed the IRS into a customer service based organization with a reasonable ability to collect the funds to run the government. In 2009 according to Cleveland.com, in 70% percent of filers qualified for free electronic filing of federal returns showing a great success to Commissioner Rossotti’s changes initiatives.


American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418. Edmondson, A.C., & Frei, F.X. (2002) Transformation at the IRS Fair Debt Collection Practices Act, Pub. L. No. 104-208, 110 Stat. 3009 (1996) (codified at 15 U.S.C. § 1692).

Internal Revenue Service Restructuring and Reform Act of 1998 (RRA), Pub. L. No. 105-206 § 3466, 112 Stat. 685.
Kotter. (n.d.). Mind tools. retrieved from
Murray, Teresa D. (February 2010) As e-filing turns 20, IRS trying to win over remaining third of taxpayers from paper returns. Cleveland.com website. Retrieved January 18, 2012 from http://www.cleveland.com/business/index.ssf/2010/02/as_efiling_turns_20_irs_tryin.html Palmer, I; Dunford, R., & Akin, G (2009). Managing Organizational Change: A Multiple Perspectives Approach, (2nd ed.); Boston: McGraw-Hill/Irwin Resnick, M.T. (2005) Outsourcing Federal Tax Collection, Houston Business and Tax Law Journal. Retreived January 18, 2012 from http://www.hbtlj.org/v05/v05Resnickar.pdf What Is Outsourcing? Sourcing Magazine (January, 2012). Retrieved January 17, 2012, from Sourcingmag.com: http://www.sourcingmag.com/content/what_is_outsourcing.asp

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