[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]
INTERNAL REVENUE SERVICE MISMANAGEMENT AND IDEAS FOR IMPROVEMENT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY
of the
COMMITTEE ON
GOVERNMENT REFORM
AND OVERSIGHT
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FIRST SESSION
__________
APRIL 14, 1997
__________
Serial No. 105-43
__________
Printed for the use of the Committee on Government Reform and Oversight
U. S. GOVERNMENT PRINTING OFFICE
43-913 WASHINGTON : 1997
___________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
J. DENNIS HASTERT, Illinois TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland ROBERT E. WISE, Jr., West Virginia
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
STEVEN SCHIFF, New Mexico EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California PAUL E. KANJORSKI, Pennsylvania
ILEANA ROS-LEHTINEN, Florida GARY A. CONDIT, California
JOHN M. McHUGH, New York CAROLYN B. MALONEY, New York
STEPHEN HORN, California THOMAS M. BARRETT, Wisconsin
JOHN L. MICA, Florida ELEANOR HOLMES NORTON, Washington,
THOMAS M. DAVIS, Virginia DC
DAVID M. McINTOSH, Indiana CHAKA FATTAH, Pennsylvania
MARK E. SOUDER, Indiana TIM HOLDEN, Pennsylvania
JOE SCARBOROUGH, Florida ELIJAH E. CUMMINGS, Maryland
JOHN B. SHADEGG, Arizona DENNIS J. KUCINICH, Ohio
STEVEN C. LaTOURETTE, Ohio ROD R. BLAGOJEVICH, Illinois
MARSHALL ``MARK'' SANFORD, South DANNY K. DAVIS, Illinois
Carolina JOHN F. TIERNEY, Massachusetts
JOHN E. SUNUNU, New Hampshire JIM TURNER, Texas
PETE SESSIONS, Texas THOMAS H. ALLEN, Maine
MICHAEL PAPPAS, New Jersey ------
VINCE SNOWBARGER, Kansas BERNARD SANDERS, Vermont
BOB BARR, Georgia (Independent)
ROB PORTMAN, Ohio
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
Judith McCoy, Chief Clerk
Phil Schiliro, Minority Staff Director
------
Subcommittee on Government Management, Information, and Technology
STEPHEN HORN, California, Chairman
PETE SESSIONS, Texas CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania
JOE SCARBOROUGH, Florida MAJOR R. OWENS, New York
MARSHALL ``MARK'' SANFORD, South ROD R. BLAGOJEVICH, Illinois
Carolina DANNY K. DAVIS, Illinois
JOHN E. SUNUNU, New Hampshire
ROB PORTMAN, Ohio
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Anna Miller, Professional Staff Member
John Hynes, Professional Staff Member
Andrea Miller, Clerk
David McMillen, Minority Professional Staff Member
Mark Stephenson, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on April 14, 1997................................... 1
Statement of:
Davis, Shelley, former IRS Historian; Sheldon Cohen, IRS
Commissioner during the Johnson administration, fellow,
National Academy of Public Administration; and Robert
Tobias, president, National Treasury Employees Union....... 70
Dolan, Michael, Deputy Commissioner, Internal Revenue
Service, accompanied by Jim Donelson, Chief Compliance
Officer; Tony Musick, Chief Financial Officer; Arthur A.
Gross, Chief Information Officer; and David Mader, Chief,
Management and Administration.............................. 137
Trinca, Jeffery S., chief of staff, National Commission on
Restructuring the Internal Revenue Service................. 230
Willis, Lynda D., Director, Tax Policy and Administration,
General Government Division, U.S. General Accounting
Office, accompanied by Rona B. Stillman, Chief Scientist
for Computers and Telecommunications, U.S. General
Accounting Office.......................................... 28
Letters, statements, etc., submitted for the record by:
Cohen, Sheldon, IRS Commissioner during the Johnson
administration, fellow, National Academy of Public
Administration:
Followup questions and responses......................... 134
Prepared statement of.................................... 90
Davis, Shelley, former IRS Historian, prepared statement of.. 74
Dolan, Michael, Deputy Commissioner, Internal Revenue
Service:
Followup questions and responses......................... 228
Information concerning outcome oriented measures......... 218
Information concerning the number of cases of
unauthorized access, or browsing, that were appealed by
employees.............................................. 204
Prepared statement of.................................... 143
Horn, Hon. Stephen, a Representative in Congress from the
State of California:
Article from Time Magazine............................... 220
Excerpts from the IRS Management Report, High Risk Series 210
Information concerning fiscal year 1998 performance
measures and targets................................... 207
Information concerning section 6103 of the IRS Code...... 219
Prepared statement of.................................... 5
Mader, David, Chief, Management and Administration,
information concerning browsing cases statistics........... 202
Maloney, Hon. Carolyn B., a Representative in Congress from
the State of New York, prepared statement of............... 9
Sanders, Hon. Bernard, a Representative in Congress from the
State of Vermont, prepared statement of.................... 13
Tobias, Robert, president, National Treasury Employees Union,
prepared statement of...................................... 110
Traficant, Hon. James A., Jr., a Representative in Congress
from the State of Ohio, prepared statement of.............. 19
Trinca, Jeffery S., chief of staff, National Commission on
Restructuring the Internal Revenue Service, prepared
statement of............................................... 234
Willis, Lynda D., Director, Tax Policy and Administration,
General Government Division, U.S. General Accounting
Office:
Followup questions and responses......................... 66
Prepared statement of.................................... 33
INTERNAL REVENUE SERVICE MISMANAGEMENT AND IDEAS FOR IMPROVEMENT
----------
MONDAY, APRIL 14, 1997
House of Representatives,
Subcommittee on Government Management, Information,
and Technology,
Committee on Government Reform and Oversight,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2154, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Present: Representatives Davis of Virginia, Sununu, and
Maloney.
Also present: Representative Sanders.
Staff present: J. Russell George, staff director and
counsel; Anna Miller and John Hynes, professional staff
members; Andrea Miller, clerk; and David McMillian and Mark
Stephenson, minority professional staff members.
Mr. Horn. The Subcommittee on Government Management,
Information, and Technology will come to order.
Today, the subcommittee revisits the issue of management at
the Internal Revenue Service, IRS. The problem before us is the
apparent inability of the IRS to adapt to the information and
accountability demands of the late 20th century.
One year ago, this subcommittee held a hearing on financial
management at the IRS. At that hearing, we discussed the IRS'
revenue accounting system, which is in such disarray it cannot
even be audited. We also reviewed the IRS' problems with
collections, management of accounts receivable, filing fraud
and fraudulent refunds, records retention, tax lien recovery,
and personnel browsing of taxpayer records. It was not a short
hearing.
Last September, we held another hearing on IRS financial
management. At that session, we received more reassurances that
improvements were under way. Yet, here we are today, reading a
steady stream of press reports on feeble management, failed
automation, and poor customer service at the IRS.
The list of failed projects only grows longer: The tax
system's Modernization Project, a $4 billion attempt to
modernize the IRS' decades-old computer systems; Cyberfile, a
project that would have allowed taxpayers to prepare and
electronically submit their tax returns from their personal
computers; Integrated Case Processing, a program that would
have allowed IRS representatives to access all data needed in
order to answer all taxpayer questions over the telephone; the
Document Processing System, a system that would have scanned
paper documents and electronically captured data for subsequent
processing and retrieval; and even the Service Center
recognition/image processing system, the failed document-
scanning program that the Document Processing System was
designed to replace.
I hope we will not have to add to this list the year 2000
computer software conversion problem. It would be a catastrophe
not only for the IRS, but for all other agencies and
organizations that depend on IRS information.
A Senate hearing last week focused on the problem of
certain IRS employees snooping in the agency's taxpayer
computer files. The IRS had previously announced a policy of
zero tolerance for this inappropriate browsing and assured
Congress that the problem had been solved. Yet the General
Accounting Office has just released evidence that personnel
snooping continues.
It is attempting to solve many of the problems at the IRS
by contracting out various functions, especially those in
information technology development. But this will only work if
the IRS can specify its objectives and assess the costs and the
time it will take. The IRS must also be able to determine
whether delays in delivery of components of the system are
going to cause delays in the whole implementation process and
what the implications of such delays will be. It is not clear
that the leadership of the IRS at this point is up to the
challenge.
Contracting out is clearly not a panacea. One can hope that
the Government Performance and Results Act is forcing top
management at the IRS to re-evaluate what they are doing and
how they are doing it. Federal agencies right now are supposed
to be consulting with congressional committees of jurisdiction
to refine their strategic and performance plans and proposals
for how they are going to measure results. This is an excellent
opportunity to put into place a new approach to doing business.
But from what we have seen so far of the plans and performance
measures that the IRS is developing, it is still business as
usual.
At this point, the subcommittee hopes that improvement will
occur. There are several important questions that must be
answered: What does the IRS need to do to get its Modernization
Project back on track? How is the Treasury going to ensure that
IRS embarks on a modernization plan that will work? What sort
of milestones or benchmarks should a modernization plan have so
that its progress can be monitored? How long do we have to wait
to see results? Will the right people be held accountable? How
can we overcome obstacles to change, such as the organizational
culture of the IRS? How do we modify it? How do we make sure
the IRS can manage multimillion-dollar information technology
development projects that often amount to several billion
before we know they failed, even if such projects are going to
be given to outside contractors?
The IRS needs to be accountable. Americans have a right to
know whether the agency that collects taxes from their hard-
earned money is capable of managing internal operations in an
efficient, fair, and accountable way.
The IRS emphasizes the need to maintain taxpayers' faith in
the voluntary compliance system. That faith is undermined by
stories of refund fraud and of translators helping illegal
aliens to get refunds. We need to know that the IRS has
adequate control over refund fraud. We need to know that the
information provided in their financial statements is reliable.
We need to know that the IRS gives good information to
taxpayers in response to their telephone queries. We need to
know that the IRS treats all taxpayers fairly and
appropriately, and we need to know that the IRS is collecting
the proper amount of taxes at the lowest possible cost to the
public. These are the measures of success.
We welcome our guests today who will be testifying on a
number of these questions. We will be hearing first from Lynda
Willis of the General Accounting Office. She is Director for
Tax Policy and Administration, and will discuss the progress
the IRS has made in acting on recommendations submitted by GAO
to improve IRS operations.
Robert Tobias, of the National Treasury Employees Union,
will represent the IRS employees' views on how to restore
public and congressional confidence in the IRS.
Sheldon Cohen, former IRS Commissioner during the Johnson
administration and now a fellow of the National Academy of
Public Administration, will tell the subcommittee how the
situation looks from his vantage point. He was Commissioner
when IRS first started to computerize its operation.
Also testifying will be Shelley Davis, the former IRS
Historian, the only one it has ever had. She will present her
views on why the IRS is in trouble and what they can do to get
back on the track.
The IRS will have an opportunity to tell us about its own
plan. Deputy Commissioner Michael Dolan will provide us with
testimony on the IRS approach to modernization. Originally Rob
Portman, Representative from Ohio, co-chairman of the
congressionally appointed National Commission on Restructuring
IRS, and a member of this subcommittee, had planned to give his
perspective on some of the ideas for how we can make sure the
IRS becomes a well-managed agency. Unfortunately, he is
detained back in Ohio. The views of the National Commission
will be given by Jeffrey S. Trinca, the chief of staff of the
commission.
We welcome all of you.
We had also invited Jim Traficant, another Representative
from Ohio, to present his views on changing the burden of proof
in tax disputes from the taxpayer to the IRS, the proposal that
would level the playing field. Unfortunately, Mr. Traficant
cannot be with us today, but he has provided us with a written
statement that will be included in the hearing record at the
end of the opening statements, without objection.
This subcommittee does not like to be unduly pessimistic.
For every problem, there are opportunities, not only to solve
the problem, but to make things better than they were before.
I have gone on record as advising the President that he
should be judicious in his choice of the new IRS Commissioner.
It should not be someone who is simply a very bright and
outstanding CPA tax accountant. It should not be someone who is
simply a very bright and outstanding tax lawyer. It should be
someone who has demonstrable management expertise in providing
leadership to large, complex organizations.
As we know, the IRS has 106,000 or so employees. Next to
the Pentagon, it is really the second largest Federal service,
excluding the Postal Service, that is now largely independent.
At this point I would like to yield to Mr. Sununu, the
gentleman from New Hampshire, for any opening statement that he
has to make.
[The prepared statement of Hon. Stephen Horn follows:]
[GRAPHIC] [TIFF OMITTED] 43913.001
[GRAPHIC] [TIFF OMITTED] 43913.002
[GRAPHIC] [TIFF OMITTED] 43913.003
Mr. Sununu. Mr. Chairman, I don't have a full opening
statement this morning, but I certainly want to thank the
witnesses that are going to be providing testimony today.
Certainly your appearance here before the committee is
extremely timely. As we move forward toward the 21st century,
toward the century change, and look at the technological issues
that are facing all of Government's areas of administration,
but in particular the Internal Revenue Service and their
attempts to improve their operations in such a way as to not
just promote efficiency and capability within the organization,
but hopefully to restore some public confidence in the
integrity of the operations of Government's financial systems.
I think there is a tremendous amount of opportunity to bring
modern management techniques, information systems, and the kind
of changes that will make a difference, as I say, in both, in
terms of how we operate Government and also in restoring public
confidence to the operations of one of the most important
agencies in Government.
I look forward to the testimony today and hope we will have
the opportunity to ask some questions that might shed
additional light on to where the opportunities for improvement
might exist. Thank you.
Mr. Horn. I thank the gentleman.
[The prepared statements of Hon. Carolyn B. Maloney, Hon.
Bernard Sanders, and Hon. James A. Traficant, Jr., follow:]
[GRAPHIC] [TIFF OMITTED] 43913.004
[GRAPHIC] [TIFF OMITTED] 43913.005
[GRAPHIC] [TIFF OMITTED] 43913.006
[GRAPHIC] [TIFF OMITTED] 43913.007
[GRAPHIC] [TIFF OMITTED] 43913.008
[GRAPHIC] [TIFF OMITTED] 43913.009
[GRAPHIC] [TIFF OMITTED] 43913.010
[GRAPHIC] [TIFF OMITTED] 43913.011
[GRAPHIC] [TIFF OMITTED] 43913.012
[GRAPHIC] [TIFF OMITTED] 43913.013
[GRAPHIC] [TIFF OMITTED] 43913.014
[GRAPHIC] [TIFF OMITTED] 43913.015
[GRAPHIC] [TIFF OMITTED] 43913.016
[GRAPHIC] [TIFF OMITTED] 43913.017
[GRAPHIC] [TIFF OMITTED] 43913.018
[GRAPHIC] [TIFF OMITTED] 43913.019
[GRAPHIC] [TIFF OMITTED] 43913.020
[GRAPHIC] [TIFF OMITTED] 43913.021
[GRAPHIC] [TIFF OMITTED] 43913.022
Mr. Horn. Now we will swear in the panel witnesses, Lynda
D. Willis, Director of Tax Policy and Administration, General
Government Division, U.S. General Accounting Office. She is
accompanied by Rona B. Stillman, the Chief Scientist for
Computers and Telecommunications, U.S. General Accounting
Office.
[Witnesses sworn.]
Mr. Horn. Both witnesses have affirmed, the clerk will
note.
Please proceed, Ms. Willis. As you know, the routine is we
would like you to summarize your statement. We all have the
statement, and had it in advance, but this is an important
subject. If you go over 10 minutes in summary, I am not going
to be offended, because I would like you to get out your key
points on the record.
STATEMENT OF LYNDA D. WILLIS, DIRECTOR, TAX POLICY AND
ADMINISTRATION, GENERAL GOVERNMENT DIVISION, U.S. GENERAL
ACCOUNTING OFFICE, ACCOMPANIED BY RONA B. STILLMAN, CHIEF
SCIENTIST FOR COMPUTERS AND TELECOMMUNICATIONS, U.S. GENERAL
ACCOUNTING OFFICE
Ms. Willis. Thank you, Mr. Chairman. We will submit our
written statement for the record.
We are very pleased to be here today to testify before this
subcommittee on GAO's high-risk work. A key factor in
understanding IRS' ongoing difficulties in the high-risk areas
is the realization that its major processes and systems were
developed and implemented decades ago and were not designed to
address the critical needs and vulnerabilities that confront
IRS in the 1990's.
In addition, the problems IRS faces in eliminating its
high-risk vulnerabilities are compounded by their
interdependencies. IRS' success in addressing the weaknesses in
its program areas is clearly linked to the successful
modernization of its systems. However, this understanding does
not mitigate our concern over IRS' progress in developing a
comprehensive strategy or detailed business plan for
modernizing its outdated processes and systems.
For years, we have chronicled IRS' struggle to manage its
operations and have made scores of recommendations to improve
IRS systems, processes, and procedures. In order to achieve its
stated goals of reducing the volume of paper tax returns,
providing better customer service, and improving compliance
with the Nation's tax laws, IRS needs to develop a
comprehensive business strategy to ensure that new and revised
business processes drives systems development and acquisition.
Solving the problems in the high-risk areas is not an
insurmountable task, but it requires sustained management
commitment, accurate information systems, and reliable
performance measures to track IRS' progress and provide the
data necessary to make informed management and oversight
decisions. There are four long-standing high-risk areas at IRS:
tax systems modernization, financial management, accounts
receivable, and filing fraud. In addition, two of the new
governmentwide high-risk areas also directly affect IRS'
operations: information security and the year 2000 problem or
century date change.
Turning to each of these, I would like to briefly discuss
the progress IRS has made and the measures IRS must take to
resolve the issues.
In July 1995, we reported that IRS, one, did not have a
comprehensive business strategy to cost effectively reduce
paper tax return filings; two, had not yet fully developed and
put in place the requisite management, software development,
and technical infrastructure necessary to successfully
implement its ambitious world-class modernization; and, three,
lacked an overall systems architecture, or blueprint, to guide
the modernization development and evolution. At that time, we
made over a dozen recommendations to the IRS Commissioner to
address these weaknesses.
In 1996, we reported that IRS had initiated many activities
to improve its modernization efforts, but had not yet fully
implemented any of our recommendations.
Since then, IRS has taken additional steps. For example, a
new Chief Information Officer has been hired, as well as
additional technical expertise. IRS also created an investment
review board that has re-evaluated and terminated several
modernization development projects that were found to be not
cost effective. IRS has also updated its systems development
life-cycle methodology, and is developing a systems
architecture and project sequencing plan for the modernization.
While we recognize IRS' actions, we remain concerned
because much remains to be done to fully implement essential
improvements. It will take both management commitment and
technical discipline for IRS to accomplish these tasks.
Furthermore, despite persisting weaknesses in both software
development and acquisition capabilities, IRS continues to
request hundreds of millions of dollars for systems
modernization efforts. In its fiscal year 1998 budget request,
IRS and the administration are seeking $131 million for systems
development initiatives, and $500 million in each of the next
two fiscal years for yet to be specified modernization efforts.
However, the requests do not include credible justifications
for the spending and are not based on analytical data or
derived using formal cost estimating techniques. Accordingly,
we believe that Congress should consider not funding either
request.
Turning to financial management, our audits of IRS'
financial statements have outlined the substantial improvements
needed in IRS' accounting and reporting in order to fully
comply with the requirements of the CFO Act. The audits for
fiscal years 1992 to 1995 have described IRS' difficulties in,
one, properly accounting for its tax revenues, in total and by
reported type of tax; two, reliably determining the amount of
accounts receivable owed for unpaid taxes; three, regularly
reconciling its fund balance with Treasury accounts; and, four,
either routinely providing support for the receipt of goods and
services it purchases, or, where supported, accurately
recording the purchased item in the proper period.
IRS has made progress in addressing problems in these areas
and has developed an action plan, with specific timetables and
deliverables, to address the issues our financial statement
audits have identified.
IRS has been working to position itself to have more
reliable financial statements for fiscal year 1997 and
thereafter. To accomplish this, especially in accounting for
revenue and related accounts receivable, IRS will need to
institute long-term solutions involving reprogramming software
for its antiquated systems and developing new systems as
required.
Follow-through is essential to complete corrective measures
if IRS is to solve its financial management problems. IRS'
ability to effectively address its accounts receivable problems
is seriously hampered by its outdated equipment and processes,
incomplete information needed to better target collection
efforts, and the absence of a comprehensive strategy and
detailed plan to address the systemic nature of the underlying
problems.
IRS' collection efforts have also been hampered by the age
of the delinquent tax accounts. In the past 2 years, IRS has
undertaken several initiatives to overcome its deficiencies.
Specifically, it has efforts under way to correct errors in its
master file records of tax receivables, develop profiles of
delinquent taxpayers, and study the effectiveness of various
collection techniques. It has also streamlined its collection
process, placed additional emphasis on contacting repeat
delinquents, made its collection notices more readable, and
targeted compliance-generated delinquencies for earlier
intervention.
In part due to these efforts, IRS reported collecting more
in delinquent taxes in fiscal year 1996 than it ever has,
almost $30 billion. Despite these positive results, IRS needs
to continue the development of information data bases and
performance measures to afford its managers the data needed to
determine which action or improvements generate the desired
changes in IRS' programs and operations.
Mr. Chairman, this is not a short-term commitment. It will
take some time before the full results of the new initiatives
are realized. IRS must take deliberate action to ensure that
its problem-solving efforts are on the right track. It needs to
implement a comprehensive strategy that involves all aspects of
IRS' operations and that sets priorities, accelerates the
modernization of outdated equipment and processes, and
establishes realistic goals, specific timetables, and a system
to measure progress.
Turning to filing fraud, when we first identified filing
fraud as a high-risk area in 1995, the amount of filing fraud
being detected by IRS was on an upward spiral. Since then, IRS
has introduced new controls and expanded existing controls in
an attempt to reduce its exposure. These controls are directed
toward either preventing the filing of fraudulent returns or
identifying questionable returns after they have been filed.
IRS' efforts have produced some positive results. For
example, IRS' efforts to validate Social Security numbers on
paper returns produced over $800 million in reduced refunds or
additional taxes.
IRS was less successful in identifying fraudulent returns,
identifying over 65 percent fewer fraudulent returns in 1996
than during a comparable period in 1995. IRS believes this
decrease is attributable to a 31 percent reduction in its fraud
detection staff and the resulting underutilization of its
electronic fraud detection system, which enhances the
identification of fraudulent returns. However, IRS does not
have the information it needs to verify that the decline was
the result of staff reductions or by a general decline in the
incidence of fraud. Given the decrease in the fraud detection
staff, it is critically important for the IRS to optimize the
electronic controls that are intended to prevent the filing of
fraudulent returns and maximize the effectiveness of available
staff. Modernization is key to achieving both of these
objectives.
Turning now to the two new governmentwide, high-risk areas,
IRS is vulnerable to problems in both. Related to information
security, as the result of our work at IRS, we believe that the
vulnerabilities of IRS' computer systems may affect the
confidentiality and accuracy of taxpayer data and may allow
unauthorized access, modification, or destruction of taxpayer
information.
IRS does not have a pro-active, independent information
security group, that systematically reviews the adequacy and
consistency of security over IRS' computer operations. In
addition, computer security management has not completed a
formal risk assessment of its systems to determine system
sensitivity and vulnerability. As a result, IRS cannot
effectively prevent or detect unauthorized browsing of taxpayer
information by its employees and cannot ensure that taxpayer
data is not being improperly manipulated for personal gain. IRS
needs to address its information security weaknesses on a
continuing basis, impressing upon its senior managers the need
to conduct regular, systematic security reviews.
The year 2000 problem at IRS is such that it could create a
disruption of functions and services that could jeopardize all
of IRS' tax processing systems. It could effectively halt the
processing of tax returns and return-related information, the
maintenance of taxpayer accounts, the assessment and collection
of taxes, the recording of obligations and expenditures, and
the disbursement of funds.
To avoid the crippling effects of a multitude of computer
systems simultaneously producing inaccurate and unreliable
information, IRS must assign management and oversight
responsibility within its senior executive corps to define the
potential impact of such systems failure and develop
appropriate renovation strategies and contingency plans for its
critical systems.
Mr. Chairman, IRS and Congress face many challenges in
moving the Nation's tax system into the next millennium. The
funding limits and program tradeoffs faced by IRS in fiscal
year 1997, and anticipated for fiscal year 1998, are likely to
continue for the foreseeable future. The administration's out
year projections actually reflect a decline in IRS funding when
inflation is considered. At the same time, IRS is faced with
competing demands and pressures from external stakeholders,
including Congress, to improve its operations and resolve long-
standing concerns.
In recent years, Congress, including a big role played by
this committee, has put in place a statutory framework for
helping Congress and the executive branch make the difficult
tradeoffs that the current budget environment demands. This
framework includes the Chief Financial Officers Act, the
Clinger-Cohen Act, and GPRA.
GPRA requires each agency to develop a strategic plan that
lays out its mission, long-term goals and strategies for
achieving those goals. GPRA requires agencies to consult with
Congress, as you noted, as they develop their strategic plans.
For IRS, these consultations provide an important opportunity
for Congress, IRS and the Treasury to work together to ensure
that IRS' mission is focused, goals are specific and results
oriented, and its strategies and funding expectations are
appropriate and reasonable.
The consultations may prove difficult as they are likely to
underscore the competing and conflicting goals of IRS programs,
as well as the sometimes different expectations of the numerous
parties involved.
In summary, Mr. Chairman, for years IRS has struggled to
collect the Nation's tax revenues, using outdated processes and
technology. To address these high-risk problem areas, IRS needs
an implementation strategy for modernizing its systems that
includes developing cost-benefit analyses and reasonable
estimates of the timeframes and resources required. Above all,
IRS management needs to sustain an agency-wide commitment to
solving the agency's high-risk problems.
That concludes my statement. We would be happy to answer
any questions you may have.
Mr. Horn. Well, I thank you for that excellent statement
and the really fine work that your staff has done over the
years. It certainly is reflected in your statement, which is
put in the record the minute we introduce you.
[The prepared statement of Ms. Willis follows:]
[GRAPHIC] [TIFF OMITTED] 43913.023
[GRAPHIC] [TIFF OMITTED] 43913.024
[GRAPHIC] [TIFF OMITTED] 43913.025
[GRAPHIC] [TIFF OMITTED] 43913.026
[GRAPHIC] [TIFF OMITTED] 43913.027
[GRAPHIC] [TIFF OMITTED] 43913.028
[GRAPHIC] [TIFF OMITTED] 43913.029
[GRAPHIC] [TIFF OMITTED] 43913.030
[GRAPHIC] [TIFF OMITTED] 43913.031
[GRAPHIC] [TIFF OMITTED] 43913.032
[GRAPHIC] [TIFF OMITTED] 43913.033
[GRAPHIC] [TIFF OMITTED] 43913.034
[GRAPHIC] [TIFF OMITTED] 43913.035
[GRAPHIC] [TIFF OMITTED] 43913.036
[GRAPHIC] [TIFF OMITTED] 43913.037
[GRAPHIC] [TIFF OMITTED] 43913.038
[GRAPHIC] [TIFF OMITTED] 43913.039
[GRAPHIC] [TIFF OMITTED] 43913.040
[GRAPHIC] [TIFF OMITTED] 43913.041
[GRAPHIC] [TIFF OMITTED] 43913.042
Mr. Horn. Dr. Stillman, any comment you want to make?
Ms. Stillman. No separate comments, sir.
Mr. Horn. We thank you.
I am now going to yield 10 minutes to the gentleman from
New Hampshire, Mr. Sununu, to question the witnesses.
Mr. Sununu. Thank you, Mr. Chairman.
I thank you very much for your testimony. I don't know
quite where to begin, given the litany or the length of the
issues that you have raised and that were originally raised
with the high-risk series in which you have done such a fine
job of following the implementation of some of the original
recommendations and some of the newer recommendations as well.
It is a source of frustration to me that a number of the
problems that you cite, particularly those in important areas
of fraud detection and recovering collectibles, are areas where
given the reputation and, in fact, the implementation of what
many feel are intrusive and aggressive attitudes on the part of
people at the IRS. Despite that intrusiveness, it seems that
the area of collections and of fraud detection and of ensuring
high rates of compliance have not been very successful.
You raised a number of obviously very important and
critical areas. What I would like to do is try and focus on
just a couple of those areas, specifically the collections and
the fraud detection. I apologize for any repetition that might
occur here, but I think there are certain areas that are worth
emphasizing and that I would like you to go into a little bit
more detail, if at all possible.
Speaking about the receivables backlog and the collection
of overdue receivables, could you talk a little bit more about
the scope of the backlog and what its age characteristics are?
Specifically, would you speak about the collections of
delinquent receivables?
Your report shows that delinquent collections have
increased somewhat from 1995 to 1996 by 15 or 20 percent. I
would like to know why, if there is any reason for optimism for
the increase in collection of overdue receivables, and how the
collection rate compares to what historic success rates have
been?
Ms. Willis. Congressman Sununu, the accounts receivable
problem at IRS is one we have been concerned about since we
initially issued the high-risk series early in the 1990's.
There are a multitude of things that contribute to the problem.
Right now IRS is sitting with just over $200 billion in gross
accounts receivable. But that number reflects not only the
amount that are what we call financial receivables or
receivables that we acknowledge are due the Government, but
also compliance receivables which are in our nomenclature,
placemakers for actions IRS has taken regarding moneys that may
or may not be owed the Government. When you get down to the
amount of money that IRS believes or estimates is actually
collectible out of that, we are talking under $50 billion. It
is still a substantial amount of funds.
Problems that IRS has faced in addressing the receivables
problems run across the full gambit of its operations, from
inaccurate data that is entered when a return is processed,
which then turns into a receivable that is inaccurate on the
record, to having problems with the age of the receivables,
which is a big issue in terms of their collectibility.
Right now it can take IRS 2 to 5 years after the filing
date of a return before an additional assessment because of its
enforcement programs is actually posted to its books. In our
society, as mobile as it is today, 2 to 5 years is a very long
time in terms of finding the taxpayer, having a corporation
that may now be defunct, and being able to actually collect
that money. That is one of the reasons why we believe very
firmly that IRS needs to modernize the systems that support the
collection of its receivables, one, so that we know more about
how effective specific programs are.
We don't collect very good data right now on what works in
particular cases, and we also need to understand more about how
we can get these receivables on the books earlier when the
accounts are newer, when the private debt collectors tell us
the success rate for actually getting the money in the bank is
much higher.
But all of that takes a comprehensive look at the causes
and the underlying problems behind the receivables and the
development of a strategy to both modernize the systems and the
processes that support receivables, and bring in new ways of
doing business to collect the money that is truly due the
Government.
Mr. Sununu. Do you mean to suggest that the IRS doesn't
actually know why the collection of delinquent receivables
increased from 1995 to 1996?
Ms. Willis. We have some general ideas, the IRS has some
general ideas in terms of specific programs that took place.
But they are more estimates than numbers that can be readily
validated. So while we have a sense of what is bringing money
in, for example, sending notices out earlier and being able to
contact the taxpayer more quickly, it is hard to be precise
about how effective that particular effort is and how that
effort would compare to other alternatives in terms of picking
the most efficient way to increase collections.
Mr. Sununu. Explain for me what the difference is between
the $50 billion that you earmarked as collectible receivables
and the $200 billion figure that the IRS currently has logged
in as accounts receivable?
Ms. Willis. The number is actually under $50 billion. I
can't recall right off the top of my head what this year's
number is, but the difference between the two numbers is--the
$200 billion is the gross receivables, and that includes
everything that is in there that may be a compliance
assessment, like I said, as well as a financial assessment.
Mr. Sununu. Is that a euphemism for a fine?
Ms. Willis. No. Compliance assessment, for example, is if
you did not file a tax return and I did a substitute for a
return and I determined based on information that was available
that you owed a certain amount of money and I could not contact
you or you did not respond, IRS has the ability to go ahead and
seize that money while pursuing the taxpayer to determine how
much is actually due.
When the return is actually filed, that number may be
reduced to zero or the taxpayer may even need a refund. But
based on the information IRS has available to it at the time,
it appears to be a receivable. Once you take the compliance
receivables out of there, then you get down to the financial
receivables, only a portion of which are actually perceived to
be collectible, and noncollectible receivables could be from
defunct corporations, deceased taxpayers, hardship cases, but
money that right now we don't believe is within the purview of
the collection efforts to actually go after.
Mr. Sununu. On the issue of older receivables, to what
extent is it realistic to keep the older receivables on the
books, and in answering the same question, could you talk a
little bit about the success or lack of success that the
agency, the IRS, has received or seen in the use of
subcontractors to handle some of the debt collection?
Ms. Willis. The question of how long we keep the
receivables on the books is one that has been discussed
extensively. Right now, IRS keeps the receivables on the books
until the expiration of the 10-year statute of limitations.
I think it is less important whether they keep the number
on the book. It is more important that we understand how much
of the money is affected by the 10-year statute of limitations,
how much of the money is actually collectible. That is why the
financial accounting systems become so important, because those
systems, properly done, would allow us to know how much of this
money ages into different categories, so we would be able to
determine in terms of reporting those numbers out to the
Congress and the public, what boxes they fall into and which
ones are reasonable to collect.
Mr. Sununu. And how about the effectiveness of some of the
trial programs, using subcontractors? What are the privacy
issues there? How can we be sure to the extent the IRS relies
on private debt collection organizations that the privacy of
taxpayers is respected?
Ms. Willis. IRS is moving now into the second phase of the
private debt collection initiative, the first years. Basically,
what we have discovered so far is not surprising, that private
debt collectors are running into the same problems collecting
IRS accounts, they are old, the people are difficult to find,
that IRS employees are having.
Improving the quality of the information in the accounts
would not only enhance the ability of private collectors or
subcontractors to collect the money, but would also help IRS
employees be more productive.
In terms of privacy, the same taxpayer privacy requirements
are imposed upon private debt collectors as are imposed upon
IRS employees. The taxpayer data is treated with the same level
of confidentiality.
One of the things that IRS is tracking and is very
interested in, as is the Congress, is whether there are any
problems that evolve because of the use of subcontractors or
private debt collectors in this experiment. I think that is a
very critical policy issue that is before the Congress, is how
far do we want to go in making taxpayer data available to
individual contractors doing a variety of different tasks.
Mr. Sununu. Thank you very much. Thank you, Mr. Chairman.
Mr. Horn. You are quite welcome.
I now recognize the ranking Democrat on the committee, Mrs.
Maloney of New York. I might add, the quorum was established
before Mr. Sununu spoke. We are delighted to have the
gentlewoman from New York.
Mrs. Maloney. On my flight here from New York this morning,
several constituents mentioned a program that was on television
last night, I didn't see it, that talked about United States
taxpayers using tax havens as a means of hiding their income,
Grand Cayman accounts. It also noted that the IRS was cutting
back its overseas unit that tracks moneys that may be moving
overseas that should be taxed in the United States.
I would like your comments on that. The Grand Cayman
accounts, what are you doing to track these accounts? Could you
talk briefly about your overseas unit and operation in tracking
moneys that should be coming to the U.S. Treasury?
Ms. Willis. Congresswoman Maloney, Deputy Commissioner
Dolan, who is going to be testifying shortly, would be in a
better position to talk about any shifts that IRS is making in
terms of the resources addressing issues associated with
taxpayers moving money overseas.
What I can say is that the movement of money out of this
country into tax havens in other parts of the world is not a
new phenomenon, but it is one that we have increasing concern
about because of the use of the Internet and the difficulties
that cyberspace present us in terms of audit trails and being
able to track where the money was actually generated or the
revenue was generated and where it should properly be taxed.
I know IRS is aware of these issues, but I am not familiar
right now with either the program that you spoke of or
specifically what is happening with them in terms of the
staffing of those operations.
Mrs. Maloney. In terms of staffing, you have been cut, you
testified, 10,000 employees; is that correct?
Ms. Willis. IRS has been cut about 10,000 employees over
the past 2 years.
Mrs. Maloney. What is that impact on your ability to
collect delinquent taxes and collect taxes owed the public, the
Treasury of the United States?
Ms. Willis. When we, GAO, have looked at the IRS budget
cuts, one of the things that we have been very concerned about,
as I alluded to in my formal statement, is the cut in the
resources that have gone to things such as the questionable
refund program, the program that is designed to identify filing
fraud. We believe, or IRS reports, that part of the reason that
the number of fraudulent returns that have been identified is
down is because of staffing cuts in that program.
I think both of these areas, both the international issues,
as well as the filing fraud issues and the staffing cuts that
have taken place, identify some of the very marked challenges
that IRS is going to be facing over the next years as we move
beyond the year 2000 in providing not only the compliance
resources that are needed to effectively implement the programs
but also to increase the quality of customer service that is
provided to the taxpayer.
Mrs. Maloney. There has been a considerable discussion
about the appropriateness of the IRS using random audits to
update its audit programs. What is GAO's position on these
audits? Will or have you looked at it?
Ms. Willis. We have looked at IRS random audits in terms of
the research audits to identify taxpayer noncompliance, and we
believe that IRS needs a tool to identify noncompliance that
may be occurring in places that we are not expecting it. We
have not found a comprehensive replacement for the taxpayer
compliance measurement program, which was supposed to take
place in 1994, but which has been indefinitely delayed.
One of the concerns that we have is, unless we come up with
a new way of measuring compliance and measuring compliance in
such a fashion that we can identify it in places where we are
not expecting it, that we will undermine the total compliance
of the tax system. I know that IRS is working on this and
recently has accepted a report from Price Waterhouse on the
measuring of taxpayer compliance, and where random audits will
fit into that entire program in the future, I am not sure.
Mrs. Maloney. There have been a number of proposals on
restructuring the rules and the GAO in a series of your own
audits have pointed out failures in management. Some people
have argued moving the IRS out of the Treasury, and some have
argued that Treasury should have more of an oversight of the
IRS. The IRS has always been sort of a completely independent
unit, and when you talk to Treasury, they say they are totally
separate.
What is your feeling on the structure of the IRS? Should
there be more of an oversight by Treasury? Should it be moved
to someplace else? What are your feelings about correcting some
of the faults actually that your agency, GAO, has pointed out
in the failure to meet management goals?
Ms. Willis. Congresswoman Maloney, there are a variety of
public policy issues that have to be addressed when we look at
the structure of the IRS, and there is attention between the
independence that we want in this country for the Nation's tax
collector to have, to be free from political intrusion or
political persuasion, and the need for proper agency management
and oversight.
We believe that Treasury's new role or more enhanced role
in terms of providing oversight of IRS is necessary right now
in light of the management difficulties and the long-standing
problems and their magnitude. However, providing proper
management oversight while remaining outside and keeping the
independence of the IRS is a critical dilemma that the Congress
faces and would need to be considered regardless of what the
structure is. But, regardless of what the structure is, key to
making improvements at the IRS is using the tools that we have
to hold IRS accountable for the moneys that it spends and the
effectiveness of its programs. And we think that the three acts
that Congress has passed over the past few years, Clinger-
Cohen, GPRA, and the CFO Act----
Mr. Horn. I want to interrupt, some people don't know what
GPRA is.
Ms. Willis. Government Performance and Results Act.
Mr. Horn. Probably one of the most significant acts passed
by Congress.
Ms. Willis. Absolutely. Absolutely. An act which if
properly implemented will give us the ability to track the
effectiveness of various programs within the IRS and in
achieving efficient mission goals and determine which ones work
the best. So I think all of those things need to remain in
place and be applicable to whatever structure is used to
collect the Nation's taxes.
Mrs. Maloney. In your testimony you recommended that
Congress should consider not funding either the $131 million
for system development or the $1 billion capital account. At
the same time, Mr. Tobias testified about an experiment in
compliance funding that returned considerably more than
projected.
Would you recommend that the system development and capital
fund money be invested in compliance efforts?
Ms. Willis. I think those are basically two different
decisions. Our concerns with the system development request is
that the money has not been properly justified, that the
methodology used to develop the numbers is not adequate, and we
have no guarantee that this money will be spent any better than
the money that has been spent in the past in terms of systems
development. That is basically why we recommended that Congress
consider not funding that money.
In terms of the compliance initiative money that was funded
in 1995, there are a couple of concerns that we would have
about future appropriations. One is that the money be fenced.
By that I mean that IRS be required to spend the money for the
specific compliance initiative programs that the Congress
charters. In the past, before 1995, when it was not fenced, we
found that the money generally was not spent on improving
compliance.
In 1995, that was not the case. We are currently looking at
the numbers and the methodology used to derive those numbers in
terms of the return on that investment. And it appears that IRS
did bring in more money than they expected to in the first year
of that compliance, or first and only year of that compliance
program. We need assurances that the money, if properly spent,
we will also be able to account, however, for the additional
revenues that come in. That has been a problem from a data
perspective historically.
Mrs. Maloney. One of your earlier audits criticized the $3
billion spent by the IRS supposedly on modernizing its
computers. Your report showed that they had virtually nothing
to show for it.
Do you have any other comments on their efforts to
modernize and update their computer technology and the specific
audit that I mentioned that came out, I believe, last year from
GAO?
Ms. Willis. Let me turn that question to Dr. Stillman, our
Chief Scientist for Computers at GAO.
Ms. Stillman. The basic problem with the $3 or $3\1/2\
billion expended on TSM is that IRS cannot demonstrate benefits
or return on investment exceeding the $3.5 billion. We have
reported that they cannot do that, and that in investments in
the future, they should be much more careful to analyze their
investments consistent with GPRA and Clinger-Cohen to avoid
repetition of that kind of thing.
Mrs. Maloney. In other words, you are saying they wasted
the $3.5 billion?
Ms. Stillman. Wasted in general is a poorly defined term.
IRS has testified it feels what it would call waste is
somewhere in the area of $400 to $500 million. The key
question, I think, is can it demonstrate benefit in excess of
the $3.5 billion expended, and in fact it cannot come close to
demonstrating benefit anywhere near $3.5 billion expended.
Mrs. Maloney. So they cannot run their own computer system?
Ms. Stillman. They have done a poor job developing new
computer systems.
Mrs. Maloney. What would you suggest we do? Do we have
another agency come in and develop their computer system? What
are your suggestions?
Ms. Stillman. Actually, we have made well over a dozen
specific recommendations detailing what IRS can do better in
the future. Among the things they can do better in the future,
first, they can formulate a comprehensive business strategy so
that they know how they want to do business better in the
future, relying more on electronic submissions of returns and
less on paper. First, they have to know what they are doing.
Second, they have to correct the underlying infrastructure
weaknesses. They do not now have disciplined processes in place
for developing software and systems or for acquiring software
and systems. Until they do, they should not be in the business
of doing either to any major degree.
They should also be careful to measure progress on an
incremental basis so that we don't have the big bang theory
that Mike Dolan has testified in the past has not worked for
him, and in all fairness has not worked for any agency and not
worked in private industry.
Mrs. Maloney. Well, that is a very heavy criticism of the
IRS.
One area where they appear to have made some progress is an
area where the chairman and I have worked very hard in the last
year, and that is in collecting delinquent taxes, that which is
owed the American people, and apparently their collection is up
17 percent from last year. They had $30 billion delinquent; now
they are $25 billion delinquent.
Why do you think they have improved that collection?
Ms. Willis. It is hard to say specifically what actions led
to what level of improvement, but there are a number of things
that IRS has done over the past year, including earlier
intervention in the collection of accounts that appears to have
enhanced the collections, changes, making notices more readily
so when people get them they understand better what the
Government needs from them and expects from them, moving
different people and people into different, more productive
types of positions within IRS, so that the taxpayers can be
contacted in the most efficient fashion. All of those things
have provided incremental levels of improvement to the
collection of tax debts. But they have not solved the
underlying problems.
Mrs. Maloney. Thank you.
Mr. Horn. I thank the gentlewoman from New York.
Let me just pursue a few closing questions here.
One, I am curious, in the degree to which GAO is the
Congress' program and financial auditor, you have looked at the
pilot programs that were issued by IRS in terms of the
collection of debt. The Debt Collection Act that I and Mrs.
Maloney authored last session applies to everybody but IRS. We
are awaiting the Ways and Means Committee action in this area.
But it was IRS that got me into this when I saw they had
written off, in quotes, over $100 billion beginning first under
the Bush administration, accelerating greatly under the Clinton
administration. Then they said, well, we have another $64
billion that we think we can collect.
What I am curious about is, what is your assessment of the
pilot projects, some of which I hear offered, 5-year-old debt
to collect? Now, what that meant to me as I heard about that,
if that is correct, and I wonder if you could verify it, is
that IRS doesn't want the private debt collectors to succeed,
because 5-year-old debt is almost impossible for everybody in
the world to collect. People are dead, they have forgotten
there is a debt and so forth. So what is the reading of GAO in
looking at those pilot programs?
Ms. Willis. We are kind of in the middle of looking at the
pilot programs. IRS did face some difficulty initially in
getting the cases out to the debt collectors that were selected
as the subcontractors for that program. When the cases were
sent out, they were old. Some of them were 5 years old, there
is no question about that.
I would hesitate to say that was because IRS didn't want
the pilot to succeed, in part because those are the same cases
being sent out to IRS collectors. The other thing with the
pilot program is that it is limited to the private collectors
contacting or attempting to locate the taxpayer, attempting to
explain their obligations to them, and asking them to contact
IRS. So there are a variety of ongoing things. We expect to be
finished early in the summer, in terms of what we are doing for
Ways and Means, and to have a better sense of where we need to
go on the second phase, the second $13 million part of the
private debt collection program.
Again, my understanding is that IRS is beginning to look at
what sort of mid-course corrections need to be made to get a
better sense from the program on whether private debt
collectors can be effectively used and what we can learn from
them.
Mr. Horn. I gather from your testimony that they seem to
have solved the problem of confidentiality when they put these
pilots together. Is that correct?
Ms. Willis. I think that is an open issue. The same
requirements that face IRS employees are imposed upon the
private collectors. There have been fire walls built around the
information, et cetera. But one of the things that is being
tracked is whether there are difficulties with maintaining the
privacy.
Mr. Horn. I would think--and I told this to the
Commissioner when I listened to all the confidentiality
nonsense, which I thought was just a red herring to avoid
collecting debt--what seems to me is you give them the amount
owed and the address and say, go to it. That is what I had not
seen in the IRS' own collection efforts. It seems to me if they
want to collect in the IRS, they ought to be moving on these
debts within 30 days of the delinquency, when it is discovered,
because pretty soon people forget it is a debt. Students
certainly do. They think the loan has become a grant, and it
seems to me the sensitivity of this is simply to let them have
the address, let them have the amount. If they have to quibble,
let them quibble with IRS, not the debt collector.
But the debt collector ought to work out a deal to get
something they are not getting. When they let it run up to $100
billion, that is a national scandal, as far as I am concerned,
and they are not organized. Do you detect any way now that
these pilots will make some sense in terms of getting them to
organize, to collect debt, and work cooperatively with private
debt collectors as the indication may be?
Ms. Willis. I think we, IRS, will learn a variety of things
from the pilot in terms of how to use more modern processes and
operations in order to track down and find taxpayers who owe
the Government money. The pilot will not, however, address the
underlying problems that lead to it being 3 to 5 years after
the date of the tax return being filed before the additional
assessment is imposed. So even if IRS were to move out within
30 days of the delinquency being assessed, even at that point
we are 3 to 5 years beyond the time when the taxpayer incurred
the liability.
Mr. Horn. So it is 5 years at the start of all this.
Ms. Willis. In some cases, yes. At that point we have also
had interest building up on the amount owed, but the private
debt collection pilot will not address those issues beyond, I
suspect, confirming our sense already that the older the debt,
the more difficult it is to collect.
Mr. Horn. Has the IRS got any way of tracking people that
declare bankruptcy to avoid payment of taxes? Has GAO ever
looked at that?
Ms. Willis. It has been a number of years since we have
looked at IRS' efforts to track people that are in bankruptcy,
and that would have been long before the surge that we have
seen in bankruptcies through the 1980's and into the early
1990's. It is an area of concern for any debt collector, for
any person who is owed money, the number of bankruptcies that
are out there, but I can't testify at this point on the current
effectiveness of IRS programs in that area.
Mr. Horn. Let me move to the year 2000 issue which you
brought up. As you know, this committee started the interest in
it. Has GAO looked at the degree to which IRS is trying to
solve this, and in looking at IRS, are they behind most other
agencies in this regard? We know that Social Security started
in 1989, on its own initiative without congressional prodding,
and we know that a lot of agencies, such as Energy and
Transportation, in the case of Transportation, everyone but the
Federal Highway Administration didn't really know it was a
problem. They had started also in 1987, but their management
system didn't get that information to the top, so the Secretary
knew it and knew it was a department-wide problem.
So do you have any reading as to the degree which IRS
stands in marching toward the solution before there is a lot of
chaos on midnight of the year 2000?
Ms. Willis. Mr. Chairman, I am not in a position to tell
you where IRS stands as it compares to other Federal agencies
in dealing with the year 2000 problem.
We are looking at IRS' efforts, and I am in a position to
tell you that the problem is serious. IRS is in the assessment
phase of looking at its systems. It has divided its various
systems into the tiers, with the tier one being the largest,
biggest systems, and I think they are well aware of the
magnitude, the challenge that they face in bringing very large,
very fragile, very old systems into compliance by the year
2000.
They have laid out an aggressive schedule for bringing the
tier one or the major tax processing systems into compliance,
and we would expect that they would begin testing that sometime
in the year 1999, in order to determine whether we are going to
be successful. But I don't think it is an issue that anybody
can relax their vigilance on until we know the systems have
been made compliant.
IRS also faces a problem in having systems that cannot be
made compliant, that are so old they are going to have to be
replaced. In dealing with some of the issues that Dr. Stillman
discussed with systems acquisition-systems development, they
are going to have to be addressed in the year 2000 process as
well as any modernization effort.
Mr. Horn. As you look across the Federal Government in
terms of how automation is effectively implemented, to what
extent have you found the tradeoff of personnel positions to
incremental moves toward automation, and is IRS ahead or behind
in that issue? Do they simply come up and want more money,
isolated solely for automation, or do they do what the rest of
us have done when we head large organizations, and that was
simply try to work an incremental tradeoff and make some
progress in that area? What is your sense of that?
Ms. Willis. Successful modernization of the IRS systems
will allow it to do more with fewer people. The tradeoffs that
have been made so far have been limited in part because we have
not successfully modernized the systems, in terms of being able
to deliver the additional capability that will make IRS
employees more productive, have better access to information,
and do things more electronically as opposed to by paper.
This year's IRS budget request included both additional
money for systems modernization as well as additional funds for
new positions and terms processing. While there have been
tradeoffs made, obviously there have been requests for
additional funds in both areas.
Mr. Horn. One last question. I will pursue the rest with
IRS, and we will also send you some questions.
But in testimony before this committee in its March 1996
hearing, a witness reported that the Internal Revenue Service
is not logging, tracking or able to report the number, location
or dollar value of the liens they have placed; and they are not
redeeming those properties with IRS liens against them when
they are foreclosed on by a bank, a savings and loan or an
investor. It has been estimated that over $100 billion in these
liens has been written off, and another $60 billion is ready to
be abandoned.
The witness said that in her experience, the IRS has failed
to redeem approximately 99 percent of these properties and,
therefore, to recover billions of dollars in Treasury tax
dollars. Instead, the IRS property tax liens are simply allowed
to expire and disappear. What do you suggest should be done to
restore confidence in the IRS' ability to effectively manage
the program and has that come within GAO's review?
Ms. Willis. Mr. Chairman, we are currently in the process
of looking at the issue of liens for the Senate Finance
Committee. We have just begun this work, and I can tell you
there are problems in identifying all of the liens that IRS has
either imposed or has standing in the courts against taxpayers.
Some of the questions that were raised by the statement by
the witness have been raised by others, especially as it
relates to downsizing restructuring of IRS activities and
whether this will impact on their ability to release liens, et
cetera. These are issues that we will be looking at over the
next few months for Senate Finance. Right now, I am not
prepared to comment on that particular statement.
Mr. Horn. I understand the IRS has no nationwide data base
of liens, is that correct?
Ms. Willis. That is my understanding as well.
Mr. Horn. Well, I thank you. We will have a number of
questions, if you don't mind answering, that we will put in.
Ms. Willis. I will be happy to.
Mr. Horn. We welcome to the committee a member of the full
committee, Mr. Sanders of Vermont, who has asked to sit with us
and without objection we will permit Mr. Sanders to ask
questions.
Mr. Sanders. Thank you, Mr. Chairman.
The major concern I have is to try to understand the impact
of the new organization under New England and specifically
under Vermont, because we are hearing a whole lot of concerns
about that.
Before we get to that, I would like to ask Ms. Willis and
Dr. Stillman a question and see if they can give us a response
from GAO's perspective.
Yesterday, there was an article in the Boston Globe, and
let me just quote from it, and I would appreciate it if you
might comment. This is what the globe writes: ``Because of the
shift in IRS priorities, audit rates for high-income taxpayers
have plummeted in recent years while the rate for people
earning less than $25,000 has more than doubled.''
Later on they say, ``Only a few years ago, wealthy
taxpayers in any part of the country were far more likely to be
audited than they are today. In 1988, the IRS audited better
than 11 percent of returns filed by people with $100,000 or
more in income. By 1995, the audit rate had fallen sharply to
less than 3 percent. Meanwhile, the audit rate doubled for
people with income under $25,000, going from about 1 percent of
returns in 1988 to 2 percent in 1995.''
My understanding is that, in terms of higher income people
and corporate America, there are tens and tens of billions of
dollars of unpaid taxes out there. So my question from the GAO
perspective--and I wonder if you have done any research on
this--why is it there seems to be a tremendous interest in
going after and auditing people making less than $25,000 but
not quite that interest in going after billionaires and large
corporations?
Ms. Willis. Congressman Sanders, we issued a report last
year that looked at IRS audit rates and coverage; and it is
true that IRS audit rates have fallen; and we did find some of
the same trend lines that you mentioned. But I'd like to
explain a couple of things we found that affect those lines.
Because the reduced resources, the audit rate overall declined
and continues to decline.
But IRS has also been doing a variety of audits as relates
to the earned income credit which are typically people under
the $25,000 threshold that you're talking about. And those
audits have been put in place because of concerns of the
Congress, GAO and others regarding the high level of reported
noncompliance within that credit. And so, as those programs
have taken off, as IRS has attempted to identify where the
noncompliance and the level of noncompliance within the earned
income credit is, that has put additional resources and
additional emphasis on taxpayers in the under $25,000 income
range.
So I think when you combine the cut in resource that
reduces the overall audit rate and add to that the increases in
the earned income credit, you see that trend lines where higher
income are audited less often, lower income are audited more
often.
Mr. Sanders. So, basically, you are confirming what the
article indicated, that there is more of an emphasis on going
after lower income people who might take advantage of the EITC
and less interest in going after upper income people.
If the argument is there are simply not resources
available? One might ask if, as I have heard--you might want to
correct me if I am wrong--I've heard there is an estimate of
over $100 billion a year in unpaid taxes from corporate America
and wealthy individuals. Some may want to know why there is not
an emphasis in going after those folks but we are going after
folks making less than $25,000.
Ms. Willis. Well, there is an emphasis in terms of the
corporate side. The numbers that you typically see cited
address corporate rates as opposed to individual audit rates,
and IRS has an ongoing corporate audit program for the largest
corporations in this country, the 1,700 largest. So the numbers
that I'm talking about are for individual taxpayers. And I
would suggest that our work shows that IRS has an interest in
going after low income more than high income, but rather
because of different drivers behind the compliance programs as
well as the resources that are available, that when you look at
the numbers, the trends on one are down and the trends on the
other are up.
Mr. Sanders. Thank you for your response.
But, Mr. Chairman, I would suggest that at a time when over
the last 15 or 20 years this country has given huge tax breaks,
lower taxes for upper income people and large corporations,
there is something wrong in the priorities of the IRS that they
seem to be focusing on low-income people and ignoring tens of
billions of dollars of potential tax revenue we could bring in
from upper income people and large corporations.
Thank you very much, Mr. Chairman.
Mr. Horn. Thank you. You have raised an interesting
question and I think we will pursue it with the IRS management.
But as I read your full testimony and GAO's work in this
area, does it mean essentially there is a greater percentage of
fraud in the earned income tax credit program based on what we
know? Or is that level of fraud--as I saw it, it seemed to be
just dependents added to the form to get more money under the
income tax credit. Is that about the same level of fraud as you
find in the upper income?
And I say that for this reason. It seems to me the people
that pay the taxes in this country are the middle class in the
aggregate, because there's more of the middle class than there
is of the so-called corporate barons. And when you get an
earned income tax credit which has millions of people eligible,
that aggregate is going to add up to quite a bit of money if
there's substantial fraud. Has GAO looked at the relative fraud
potential of these various programs?
Ms. Willis. Yes, we have; and we reported in 1994 and 1995
to the Senate Finance Committee, I think, a couple of
interesting statistics. When you look at the amount of
noncompliance--and I say noncompliance because we don't always
know when there's a problem with a return, especially an earned
income credit return, whether it's intentional fraud or
unintentional noncompliance. The earned income credit can be an
extremely complicated credit, especially for the group of
taxpayers that it's targeted toward.
But when you look at the noncompliance rate for the earned
income credit, it is not higher than the reported noncompliance
rate, for example, for sole proprietors; and it is much lower
than if you look at the noncompliance rate for people that we
call informal suppliers or the people who sell wood in your
neighborhood who essentially work the cash economy. So, from a
tax program perspective, there are other programs that have
equally concerning areas of noncompliance.
Part of the problem with the earned income credit in terms
of compliance is that it is a refundable credit, and so it is
not covered by money that is withheld or is simply not paid to
the Government. It is money that actually flows out of the
Government Treasury as a supplement to the income of these
families. And so we are concerned about the noncompliance and
also concerned about how we can efficiently reduce that
noncompliance; and IRS has done a number things that have been
effective, especially as it relates to the electronically filed
returns and moving more into the paper returns and identifying
people with dependents or who don't have the proper filing
status.
I think it's important that we focus across the board in
all the areas of noncompliance and ways that either IRS
administratively or Congress statutorily can improve
compliance.
Mr. Horn. Well, I thank you very much for that statement;
and we'll followup with some more specific questions. You've
done a fine job, and we thank you very much for appearing.
Ms. Willis. Thank you very much.
[Followup questions and responses follow:]
[GRAPHIC] [TIFF OMITTED] 43913.043
[GRAPHIC] [TIFF OMITTED] 43913.044
[GRAPHIC] [TIFF OMITTED] 43913.045
[GRAPHIC] [TIFF OMITTED] 43913.046
Mr. Horn. Next panel, panel two will please come forward.
We have Shelley Davis, former IRS Historian; Sheldon Cohen, IRS
Commissioner during the Johnson administration, fellow of the
National Academy of Public Administration; and Robert Tobias,
the president of the National Treasury Employees Union.
[Witnesses sworn.]
Mr. Horn. All right. All three have affirmed.
We welcome you, and we will start just the way it is on the
roster.
Shelley Davis, Ms. Davis, the former IRS Historian, if you
would summarize your statement in about 10 minutes. We won't
hold you completely to it, but as you know your full text goes
in at this point in the record. We'd like to hear the basic
thrust of it for about 10 minutes.
STATEMENTS OF SHELLEY DAVIS, FORMER IRS HISTORIAN; SHELDON
COHEN, IRS COMMISSIONER DURING THE JOHNSON ADMINISTRATION,
FELLOW, NATIONAL ACADEMY OF PUBLIC ADMINISTRATION; AND ROBERT
TOBIAS, PRESIDENT, NATIONAL TREASURY EMPLOYEES UNION
Ms. Davis. Sure, thank you Mr. Chairman, members of the
committee. I'm pleased to be here before you today as you
attempt to understand and ultimately improve the IRS.
As the only person to ever serve as the Historian for the
IRS, I would like to focus my testimony on the subject with
which I am most familiar, the evolution and history of the IRS.
As a Historian, I have to admit to a professional bias to the
need to understand the past in order to move intelligently into
the future.
My testimony before you will consist primarily of two
parts, and I will give you your history lesson as quickly as
possible. The first part, I will discuss what I call flash
points of IRS history, those events which had a defining
influence on the tax collector, and I will briefly outline the
congressional response to some of these flash points.
The first flash point in IRS recent history is 1952.
Thirty-five years ago, on March 15, 1952, the IRS was
officially reorganized into the structure with which we are
familiar today. This was not a reorganization dreamed up by the
IRS. Rather, the 1952 reorganization was forced upon a
reluctant IRS by President Truman and a Congress fed up after
years of reports of problems with the tax collector, pledges
from the IRS to clean up its act, and a glaring failure of the
agency to be able to implement change by itself.
Recent cries from current Commissioner Margaret Milner
Richardson that the IRS is undergoing some of the greatest
attacks in its history today, in my opinion, demonstrate the
lack of awareness of its own history that the IRS reflects,
because compared to the outcry that faced the IRS in 1952, the
IRS today is really having a picnic in the park, at least so
far.
Moving to the second flash point requires a jump of 20
years, to 1973. That was the year, in June 1973, when White
House Counsel John Dean revealed that the White House had
developed what he called an ``enemies list''. He also revealed
that the IRS had set up a small secret staff to collect
information on dissidents and malcontents in American society.
In the media frenzy that followed these revelations, these two
references became forever jumbled in the American psyche; and
the enemies list became forever linked with the IRS, with the
general assumption being that the IRS was guilty of auditing
and chasing after President Nixon's enemies.
The problem was that the IRS wasn't guilty. At least they
weren't guilty of auditing Nixon's enemies. The bigger problem
though, for the IRS at least, was that the IRS was guilty of
assembling its own enemies list, far more substantial and far
more dangerous than anything President Nixon ever dreamed of.
So in mid-1973, the IRS knew that it had a big problem. It
knew it hadn't audited President Nixon's enemies, but it
couldn't very well go out waving a flag with this pronouncement
because it knew its own internal actions were far more
dangerous and its own list was far more extensive than Nixon's.
Just as a matter of perspective, the IRS list had over 11,000
taxpayer names on it. All the various compilations of Nixon's
enemies list had around maybe 600, at the most, names. So what
did the IRS do in 1973? It remained mute. The IRS learned that
by simply keeping its mouth shut, by biding its time, that
events would eventually calm down and normalcy would resume.
The third flash point of recent IRS history jumps forward a
decade to 1985, the year of the great IRS meltdown of which we
have all heard so much recently. This was the year the IRS
installed new computer hardware and software in its 10
processing centers around the country. When the new systems had
trouble keeping up with the sheer workload of tax processing,
the IRS workload became quickly overwhelmed and the service
flooded with stories of IRS employees stuffing tax returns down
toilets and into ceiling tiles and into wastebaskets just to
get them off their desks in front of them.
The final flash point I want to address is actually more of
a fizzle than a flash, but it's important nonetheless. The
final example demonstrates how the lessons the IRS took from
these earlier flash points have succeeded, that its best
defense is often silence, that the waiting game is usually the
winning strategy for the IRS.
The flash point fizzle that I refer to happened between
1989 and 1992, and involves the investigations launched by
former Congressman Doug Barnard into allegations of misconduct
by senior IRS executives. In all, during those 3 years of
hearings, Barnard revealed some serious abuses on the part of
at least 25 top-level IRS executives. But of these 25 cases,
only one individual received even a modicum of punishment, that
being a 10-day suspension. The pain of that suspension, though,
lessened when this man's fellow executives took up a collection
to reimburse him for his lost pay for that period of
suspension.
The value of the lessons learned from the previous flash
points became immutable truths for the IRS after the Barnard
hearings. By verbally pledging to clean up its act, by shifting
the players to avoid accountability, by remaining mute, the IRS
emerged from the most painful public hearings into its
integrity since the 1952 hearings with nary a scratch.
And now, just for a moment, about the congressional
response to these various flash points. As I already pointed
out, in 1952 Congress acted by reforming and restructuring the
IRS. This is the only time in the recent history of the IRS
that Congress has taken decisive action which resulted in
significant change inside the tax collector.
And what of the Watergate years? Well, because the IRS was
successful in hiding the real story of what was going on,
Congress fixed the wrong problem. In 1976, asserting that the
IRS had become what was called a ``lending library'' of tax
returns to the White House, Congress moved to tighten the
privacy restrictions on tax return information, enacting the
most restrictive provisions in the history of the Tax Code to
access to tax information.
The result of this was that Congress actually handed the
IRS the best defensive weapon it has ever had. By continually
citing restrictions on access to taxpayer information, the IRS
has perfected the art of blunting criticism and deflecting
blame. Rather than putting real restraints on the IRS, Congress
inadvertently gave the IRS even more power to operate without
accountability.
And what of 1985, the great tax meltdown? Well, there's
nothing like cries from constituents to bring about change.
After the dust settled, Congress essentially gave the IRS a
blank checkbook in 1985 and told the agency to fix its
computers forthwith. We have all heard the results of that.
What about the flash point fizzle of Congressman Barnard's
hearings, which finally concluded in 1992? Nothing. Congress
did not enact a single reform or take any action at all at the
end of 3 years of very painful investigations by Congressman
Barnard. Fizzle.
So the circle begun in 1952 was now complete 40 years
later. From an era when Congress was appalled with ethical
problems inside the IRS and took decisive action to an era when
Congress was deaf and dumb to revelations of unethical behavior
and mismanagement inside the tax collector, the IRS completed
its learning curve that the best defense is to promise that
studies will be made, pledge to fix existing problems and
convince Congress to leave it untouched.
The IRS executive cadre of today is filled with employees
who are steeped in the culture of secrecy, who believe that
running the tax system is too important a job to be left in the
hands of anyone but a member of their private club, who have
learned to wait out every storm, rearranging the deck chairs
after every public revelation of mismanagement or financial
bungling.
I will digress for a minute and talk about the IRS news
story of the week, which is browsing by IRS employees, which
shows that, once again, I believe Congress is attacking the
wrong problem. Rather than focusing on low-level, poorly
trained, in many cases not very highly educated IRS employees,
the more important question is what is being done about the IRS
executives who promised, who pledged to Congress 4 years ago
that they would implement a no-tolerance policy for browsing
when this issue was raised.
Accountability on the part of IRS executives is where
Congress needs to be looking. The browsing story ultimately
plays directly into the hands of the IRS, which wants to be
able to proudly stand tall and claim they are protecting
taxpayers, all the while skirting the more important issue of
accountability.
The IRS simply doesn't hold the members of its own
executive club accountable for their actions. By drumming out
an occasional low-level employee, by protecting its top-level
bureaucrats, the IRS has once again succeeded in duping
Congress and the American taxpaying public.
So what can be done? Well, I believe that we and you,
Members of Congress, can no longer wait for the IRS to fix its
own problems. With historical parallels to 1952, IRS' plans and
reorganizations of recent years have not corrected the problems
that we all know are there.
I believe that Congress should look to 1952 for suggestions
on where to go from here. The problem today, like that of 1952,
is one of leadership; and not just leadership at the very top
of the IRS in the position of the Commissioner, but leadership
throughout the entrenched secret society of IRS executives.
Congress excised the problem 45 years ago by replacing both
the Commissioner and the entire top tier of IRS executives.
Today, I believe that same type of action is necessary to
recreate the IRS into the premier organization that it has been
and that it can be again in the future.
Thank you.
Mr. Horn. We thank you for that marvelous statement, and in
the question period we will get into it more and your own
experiences with IRS as Historian.
Is your book out yet?
Ms. Davis. Yes. Sure. It should be in any bookstore.
Mr. Horn. OK. What's the title of it?
Ms. Davis. ``Unbridled Power: Inside the Secret Culture of
the IRS.''
Mr. Horn. You and I have a similar title. I had a book
called ``Unused Power: The Work of the Senate Committee on
Appropriations.'' Unused and unbridled.
OK, Bernie, what is yours? Is yours out?
Mr. Sanders. Oh, it is coming up.
Mr. Horn. OK. That's very fine.
[The prepared statement of Ms. Davis follows:]
[GRAPHIC] [TIFF OMITTED] 43913.047
[GRAPHIC] [TIFF OMITTED] 43913.048
[GRAPHIC] [TIFF OMITTED] 43913.049
[GRAPHIC] [TIFF OMITTED] 43913.050
[GRAPHIC] [TIFF OMITTED] 43913.051
[GRAPHIC] [TIFF OMITTED] 43913.052
[GRAPHIC] [TIFF OMITTED] 43913.053
[GRAPHIC] [TIFF OMITTED] 43913.054
[GRAPHIC] [TIFF OMITTED] 43913.055
[GRAPHIC] [TIFF OMITTED] 43913.056
[GRAPHIC] [TIFF OMITTED] 43913.057
[GRAPHIC] [TIFF OMITTED] 43913.058
Mr. Horn. Let me go to former Commissioner Sheldon Cohen,
who was Commissioner of the IRS during the Johnson
administration, now a fellow of that distinguished body known
as the National Academy of Public Administration. Thank you for
coming.
Mr. Cohen. Thank you, sir.
I should start by saying the views I express today are my
own. They are not attributable to my law firm nor the National
Academy, which did send me here but did not review what I was
going to say. I will try to summarize.
I am somewhat familiar with the King and Kean hearings
because I was there. I was recruited to the IRS in the fall of
1952, just as the reorganization was in full swing. So I do
subscribe to some of what Ms. Davis has said but not all.
I would admonish the committee that a page of history is
worth a volume of logic, so you need to look to where you have
been to see where you are going. There are some suggestions I
have heard recently that we should repoliticalize the IRS. That
is, we need more political responsiveness. That's the lesson we
learned in 1952, that we don't want.
So I would go through this by saying that when I came to
the tax law, the Internal Revenue Code was as thick as my
thumb; and the regulations were somewhat smaller than that. I
measured them on my desk the other day when I prepared my
statement, and the Internal Revenue Code is now about 4\1/2\
inches thick, and the regulations are now in six volumes rather
than one, and they measure something over 9\1/2\ inches wide.
That's not the choosing of the Internal Revenue Service.
That's the choosing of the complexity of the society and the
feeling of the Congress, that it has to respond to that
complexity in some way or another. And so the complexity of the
rules does create many of the problems, not all, but many of
the problems that we're dealing with.
You have alluded to the fact that earlier in its history,
back in the late 1950's, early 1960's, through the 1970's, the
Internal Revenue Service was thought of as one of the best
administrative agencies in the Government, and that is so. I
should say that, as a preface or a footnote to that, that the
cost of collection in the United States is still the lowest
cost in the developed world.
So we are doing some things right. There are many things
we're doing wrong, but we're doing some things right.
One of the problems that we find, and I think the
restructuring commission has alluded to this publicly a number
of times, is that the Congress never saw a problem which it
couldn't address with a tax solution.
My first job was as a legislative draftsman. I can draft
any appropriations bill as a tax law, and you have done it in
spades over the years. Not just this group, of course, but the
Congress, over the last 35 or 40 years that I have been
watching it, has put in the earned income tax credit that we
were talking about 10 minutes ago. That credit is a welfare
provision that happens to be in the Internal Revenue Code. It
doesn't belong there, and so the Internal Revenue Service
catches the heat for administering a provision that should be
in the welfare system.
And we could go on. I could spend the rest of the day
discussing chapter and verse of other illustrations of that.
Change itself is complex. One of the simplest things I can
advise you--and I've seen other tax experts up here try to say
the same thing--is leave the tax law alone for 3 to 5 years and
we would all get used to it. At least we will learn the rules.
We wouldn't be dealing with a constant change of rules which
makes it very difficult.
Last year, as I say in the statement, I was delivered 700
pages of explanation and law, and it was a quiet year. I am
presumed--I did read it all, but I don't think you want to
impose on the Revenue Service the jobs of collecting school
loans, of finding wayward parents or fathers or mothers or
going out and dealing with organized crime. Each one of these
issues is probably meritorious, but each one adds to the
complexity of the management of the job.
And I don't think anybody up here, including the oversight
committees, has taken the time to say what is the overall
effect of each of these piling on of layers of work. And of
course we see now that result. We're looking at that result
right now. We are looking at the result of a deteriorating
system come about by the layering on of additional
responsibilities.
Stability of work force. You can't give them 5,000 or
10,000 people today so you can score it for budgetary purposes,
take it away next year and not have a deleterious effect. That
is a negative, not a positive effect on the organization. You
have geared up to hiring them, you've trained them, and then
they are gone, and that's just demoralizing.
The cuts that come, when you say cut the Internal Revenue
Service, well, you can't cut producing returns, you can't cut
processing returns, you can't cut depositing checks. Well,
where does a cut come from? It comes from training. Well, that
makes the work force less responsive. It comes from auditing,
comes from collection, comes from answering telephones. I mean,
somebody--the Commissioner and the staff have to decide what
are we going to cut, and what you cut really is the most
productive work you do. And so it is that you will see the
deleterious effects when you have these kinds of cuts.
I was lucky. We were living in different times, and I
didn't have to face many of those problems, although I did face
some of them. There were some freezes and those kinds of things
when I was there.
One of the things just alluded to was the audit rate. The
audit rate was something on the order of between 4 and 5
percent when I was Commissioner. The audit rate is presently
they say between 1.5 percent and 1.6 percent but really it's
less than 1 percent because they have redefined what an audit
is in order to get the numbers up.
Well, you all drive as I drive out on the suburban
highways. If we see a policeman once in a while, we tend to
stay close to the speed limit. If we don't ever see a traffic
policeman, we all bear a little heavily on the accelerator. And
so it is with taxpayers. I think everyone who has ever worked
in this business knows that, and so the deteriorating audit
rate is just not acceptable, I don't think, in this kind of a
system.
Now, I talked about the fact that we put in the computer
system. We were lucky. The Congress didn't know what we were
doing; and by the time anybody looked at it, it worked. It took
a long time.
The system that I put in in the middle 1960's was designed
in 1959, 1960 and 1961 by my predecessor. What happens is the
Commissioner puts in the program that's designed by his or her
predecessor and is responsible for planning for the programs
that are going to be put in by the next one.
One of the things that has attrited in the last 10 or 15
years and attrited seriously is the IRS planning staff. The IRS
had a premier research and planning staff. And of course when
you start cutting back on their resources, they start cutting
back; and somebody says, that's fat, well, it goes. And then
goes your capability of producing the good plan, as Ms. Willis
said, for your computer system--that computer system that was
put in in the mid-1960's was designed mostly in-house, although
some out-house work, but mostly in-house by a small group of 8
or 10 people.
One of the problems we have, of course, is I lived in a
period of can-do Government. Today, we have Government being
dumped on. And one of the problems I see is you would never see
a commercial company--General Motors' chairman would never say,
``we make lousy cars,'' although a few years ago they did. He
would say, ``we make great cars. We're going to make better
ones if we all work together.''
Unfortunately, we have had dumping on Government.
Government is the source of every problem in the world. The
Government has a lot of problems, but it also has a lot of
solutions. And the revenue system, as I said in my paper, does
produce more revenue at a lower cost than any system in the
world and is a model for most of the rest of the world. It can
be improved dramatically, but we have got to recognize that.
Ms. Davis is right, the revenue service was not responsive
to the enemies list. I represented a taxpayer who was audited
under TCMP during Watergate. He was one of the top 10 persons
on the enemies list. And there were no problems. He never had a
serious problem.
TCMP is an essential ingredient. Ms. Willis avoided
answering your question, but there is no substitute at the
moment. If there is no substitute, then we need a sample
program. If nobody has got a better one, it would be a shame to
let this one die; and as the data that is used to develop that
program withers because of age, it becomes useless.
The program actually is designed to help taxpayers, not to
harm them. Because when we started TCMP, about 50 percent of
individual audits resulted in no change. By the time we
finished, I think last year I saw the data for it, it was about
15 or 16 percent no change. That is, the computer selected a
return, it looked like it had an error, it didn't. That's a big
change from 50 percent down to 15 percent. Without that kind of
data, you are just by guess and by God; and when you go into
individual selection techniques, it uses up the most important
resource you've got, people.
I am going to skip a lot of this, because you will I am
sure read it, if you like. I will talk about a couple of the
ideas that have been suggested. They are not new.
The idea of separating the IRS from Treasury has been
suggested as long ago as 30, 35 years. I think it's a bad idea.
If I were Secretary of Treasury, I would find it abhorrent that
the most important revenue function of the Government does not
report to me. That's not to say that the Secretary of the
Treasury ought to have much in terms of management control. The
Commissioner is the equivalent of an Under Secretary and ought
to be left alone and ought to be responsible for doing the job.
But there are tax policy issues and there are monetary and
fiscal issues involved in the creation and the operation of a
tax system, and the Secretary should have a voice in those, if
need be.
The idea of a board of directors doesn't sit well with me;
and, Mr. Chairman, you indicated that you want a manager for
the Commissioner of IRS. Yes, you do. You want a good manager.
But whether that manager is a CPA or a lawyer or a businessman
is a hard question to answer.
Because, as I say in the statement, I wrote speeches when I
was a kid for the last Commissioner of Internal Revenue, who
was a nontechnician. He happened to be a CPA, but he happened
to be a manager. He knew nothing about the tax system. He was a
nontechnician. And he would come out congressional committees
or he would go out and make a speech, and he would answer a
question, and he would answer it logically. Well, the tax
system isn't necessarily logic. The tax system is what the
Congress says it is.
Then we would have to explain why he was wrong. Well, we
would never admit he was wrong--why he was misquoted or similar
problems. If you have a nontechnician sitting here today and
you ask him a technical question, he or she has got to have
enough nerve to say, ``I don't know the answer to that
question. Ms. Jones or Mr. Brown will answer it.'' It is a
little hard in this context. So you may get what you wish for
in this world, and that's kind of tough.
I think that's a pretty good summary. I'd say that, as I
indicated to you, if you had a perfect tax plan right now, if
you had a system that you thought was perfect in the Internal
Revenue Service and you began to put it in today, it would take
you 6 or 7 years to get it in.
So don't have an illusion that somebody is going to come up
in the next 6 months with a magic bullet to make this thing
work and work beautifully. It's going to take a lot of people
and a lot of money and a lot of planning.
And one of the notes I handed Ms. Willis is she ducked your
question. You asked her what kind of a system she would put in,
and she doesn't know. Well, they don't know either. They ought
to know, but they need enough money to think about it. And you
want to hold them closely and make them produce the thing, but
you have got to give them enough money to plan it. Because it
isn't going to produce itself; and nobody outside the Revenue
Service, without the cooperation of the Revenue Service, can
produce that plan, because nobody knows what they need to do
except themselves.
Mr. Horn. We thank you very much for that statement. I am
sure we're going to be pursuing a number of questions with you.
[The prepared statement of Mr. Cohen follows:]
[GRAPHIC] [TIFF OMITTED] 43913.059
[GRAPHIC] [TIFF OMITTED] 43913.060
[GRAPHIC] [TIFF OMITTED] 43913.061
[GRAPHIC] [TIFF OMITTED] 43913.062
[GRAPHIC] [TIFF OMITTED] 43913.063
[GRAPHIC] [TIFF OMITTED] 43913.064
[GRAPHIC] [TIFF OMITTED] 43913.065
[GRAPHIC] [TIFF OMITTED] 43913.066
[GRAPHIC] [TIFF OMITTED] 43913.067
[GRAPHIC] [TIFF OMITTED] 43913.068
[GRAPHIC] [TIFF OMITTED] 43913.069
[GRAPHIC] [TIFF OMITTED] 43913.070
[GRAPHIC] [TIFF OMITTED] 43913.071
[GRAPHIC] [TIFF OMITTED] 43913.072
[GRAPHIC] [TIFF OMITTED] 43913.073
[GRAPHIC] [TIFF OMITTED] 43913.074
Mr. Horn. The last witness on this particular panel is
Robert Tobias, president of the National Treasury Employees
Union. Mr. Tobias.
Mr. Tobias. Good morning, Mr. Chairman. Thank you very much
for allowing me to testify.
As all of us in this room know, the IRS has been bashed and
battered by some Members of Congress, by the press and the
public. Now, some of that criticism is justified. But much of
the criticism ignores the IRS successes, and there are many.
IRS collected $1.36 trillion in revenues in fiscal year
1996. It is projected to collect $1.47 trillion in fiscal 1997
and projects it will collect $1.57 trillion in fiscal year
1998. In addition, in fiscal year 1996 IRS collected $38
billion through its enforcement efforts, revenue voluntarily
paid and revenue from enforcement actions headed up through
fiscal year 1996.
And in response to some of the questions Congressman Sununu
raised, the IRS knows why those enforcement dollars are up.
They are up because of the compliance initiative that was
initiated by Congress in 1995, which allowed for more people to
be involved in collecting taxes and in auditing taxes. The
audit rate went up from 1.02 percent to 1.6 percent. And the
number of people actively engaged in reducing the accounts
receivable led to collecting in the first year of the
compliance effort $800 million, notwithstanding the fact that
the IRS promised $300 million in the first. Now, Congress
killed that initiative in 1996, and I believe you are going to
see a reduction in the enforcement revenue as a result.
Now, in contrast, the cost of collecting revenue is headed
down. In fiscal year 1997, the cost to collect $100 of
revenue--excuse me, in 1992, was 60 cents, 50 cents in 1997 and
it's projected to be 47 cents in 1998, or an 18 percent drop in
4 years. Most democracies spend $1.25 to $1.70 per $100 of
revenue collected. No tax collection agency anywhere comes
close, much less matches the IRS cost per dollar of revenue
raised.
While costs are declining, work is increasing. More returns
are processed, more refunds distributed and more telephone
calls answered. In the 1996 filing season, the IRS answered
only 9 million calls of the 42.3 million made. Using roughly
the same period, January 1 through February 24, 1997, the IRS
answered 11.3 million calls or 2.3 million more of the 21.6
million calls attempted.
It's also important to note that fewer calls are being made
this year, primarily because of IRS attempts to reduce
unnecessary notices which, in turn, stimulate telephone calls.
More revenue, more work performed and decreased costs should be
the basis for at least mild applause from those who would
evaluate the Internal Revenue Service based on a comparison to
the private sector.
Despite these successes, the conflicting pressures imposed
by Congress, the administration and the Federal deficit
threaten to exert too costly a burden to the IRS and, in turn,
the compliant taxpayer. Left unresolved, these pressures will
result in lower levels of compliance, greater costs per unit of
revenues collected and an erosion of the public confidence in
the fairness of our tax administration system. As such, the
Congress and the administration must immediately forge a new
consensus on the mission of the Internal Revenue Service.
I believe that the IRS must make it a priority to provide
the taxpayers who already comply or those who are seeking to
comply with the services they need. At the same time, the IRS
must increase enforcement activity upon the noncompliant to
restore the confidence of the already compliant taxpayers in
the system. The noncompliant have the right to be treated with
respect, but the compliant taxpayers have a right to expect the
IRS to enforce the law against the noncompliant. The compliant
have a right not to expect to subsidize the noncompliant
taxpayers in this country.
Now, the IRS management's proposed field reduction in force
is a prime example of its moving away from its obligation to
provide customer services to compliant taxpayers. The RIF plan
will reduce customer service to those trying to comply, reduce
net revenues and cause several hundred low-paid, mostly female
employees to lose their jobs.
As the subcommittee is aware, the IRS scrapped the plans
jointly developed to implement the field reorganization. The
regional and IRS field offices had approved these carefully
drafted plans but unilaterally rejected them and directed that
a RIF of 2,371 employees would occur and 1,312 employees would
be hired doing the same work in new locations.
The IRS continues to assert that the proposed RIF ``has not
and will not adversely impact service to taxpayers.'' I
emphatically disagree with that. From May 1996, to April 14,
1997, the IRS failed to complete a plan to perform work with
1,059 fewer employees; and no new working processes has been
created; and no new technology has been introduced. There is no
question that taxpayers will have less service under the plan
the IRS is proposing to implement.
The IRS has no data and no plan to refute the logical
inference that 1,012 new inexperienced employees cannot provide
the same level of customer service as 2,371 experienced
employees. There can be no question that taxpayers, compliant
taxpayers and those seeking to be compliant, will not receive
the service they need and deserve; and the IRS cannot absorb
the downsizing by detailing experienced employees or creating
dual-position descriptions to solve the problem.
As was pointed out, the Internal Revenue Service has lost
some 10,000 employees over the last 2 years. I identify in my
testimony the specific kinds of actions that taxpayers will
suffer as a result of this: delays in the release of tax liens;
increased interest costs to taxpayers from delays in processing
liens; late case closure, resulting in an increased notice of
unwarranted notices of deficiencies; increased errors by
inexperienced replacements; reduced problem resolution service;
reduced taxpayer education programs to help targeted groups;
reduced information systems personnel to maintain computer and
telephone systems; and fewer individuals to help taxpayers
interested in electronic filing.
And to bring this home, Mr. Chairman, consider what would
happen to those who cannot get timely assistance from the IRS.
Your constituent may be an elderly and infirmed widow who has
just discovered she has a tax lien to her house. She needs to
sell her home to move into a nursing home. Her health is
failing rapidly. She promptly satisfies the lien, but she
cannot complete the sale until the IRS clears the lien.
Instead of clearing the lien in 3 days, as is the current
practice, there are IRS locations today where 30 days will pass
before her lien is released. Her buyer will lose patience. The
sale will fall through. She will, without doubt, be damaged.
While this story is fictional, it illustrates what will
happen to countless real people, real taxpayers. Each person
affected could needlessly suffer personal hardship and monetary
damages resulting directly from the failure of the IRS to
provide prompt and accurate customer service.
Mr. Chairman, NTEU fully supported the IRS announcement
that it would reduce the number of districts from 63 to 33 and
the number of regions from 7 to 4. However, we cannot support
the proposed RIF of these employees. NTEU urges Congress to
prevent the IRS current proposed method of implementing its
reorganization plan.
If the ultimate goal of the field reorganization, as stated
in the IRS congressional testimony presented on March 18, 1997,
is to ensure, ``that salary dollars can be spent instead on
front-line operations,'' NTEU asserts that Congress should
transfer the $97 million in fiscal year fiscal 1997
appropriations, which will not be spent as planned on
information services' downsizing and several tax systems
modernization programs that have been canceled, and use that
money to provide more front-line compliance and customer
service positions.
In addition, Congress could get the IRS back on the right
track and enhance confidence in the tax system by restoring
funding for more rigorous compliance activity. While wage
earners are 95 percent compliant and 75 percent of taxpayers
take a standard deduction, the latest calculation in 1992 of
the compliance gap showed $129 billion in taxes went unpaid,
$22 billion more than the Federal deficit of $107 billion last
year.
Congress conducted an experiment in 1995 which proved the
IRS could reduce the noncompliant population and increase
revenue for deficit reduction. The IRS geared up, hired and
trained people. The IRS promised, as I mentioned, $300 million
in marginal revenues and produced $833 million in marginal
revenue. Congress withdrew its support for the initiative to
save money for other purposes, and the administration has since
not renewed its funding request.
NTEU believes it is penny wise and pound foolish to forgo
the added revenues which can be collected through investment in
compliance activity. Congress could use the added revenue to
further realize customers' objectives and reduce the Federal
deficit.
Last, NTEU believes that Congress must consider alternative
funding mechanisms to provide the IRS with adequate and stable
funding resources. Current budget rules do not provide
sufficient reliability to allow the IRS to function at its most
efficient state.
For example, when Congress decided to end the 1995
compliance initiative, the budget rules scored the $400 million
cut in salaries and expenses as a savings and ignored the $9
billion in revenue that the initiative would have brought in
over the next 5 years. These rules presumably are intended to
conserve our resources, yet our common sense tells us they do
just the opposite. NTEU urges Congress to rethink these rules
as they apply to the IRS.
Thank you again, Chairman Horn, for the opportunity to
express NTEU's views on the management issues confronting the
IRS today. I will be very happy to answer any questions you
might have.
Mr. Cohen. Mr. Horn, if I may----
Mr. Horn. I thank you very much for your testimony.
[The prepared statement of Mr. Tobias follows:]
[GRAPHIC] [TIFF OMITTED] 43913.075
[GRAPHIC] [TIFF OMITTED] 43913.076
[GRAPHIC] [TIFF OMITTED] 43913.077
[GRAPHIC] [TIFF OMITTED] 43913.078
[GRAPHIC] [TIFF OMITTED] 43913.079
[GRAPHIC] [TIFF OMITTED] 43913.080
[GRAPHIC] [TIFF OMITTED] 43913.081
[GRAPHIC] [TIFF OMITTED] 43913.082
[GRAPHIC] [TIFF OMITTED] 43913.083
Mr. Cohen. I left one thing out. Ms. Davis mentioned 6103;
and I need to tell the committee, 6103 was amended in 1976 at
the request of the Senate Government Operations Committee.
Mr. Horn. Do you want to translate 6103?
Mr. Cohen. 6103 is the privacy section of the Code. It
requires confidentiality. And the Administrative Conference of
the United States was requested to make a study. The chairman
of the Administrative Conference at that time was Nino Scalia--
excuse me, Antonin Scalia, the Supreme Court Justice; and I was
the co-chair. So it was done for a valid purpose. It may not
have been done right, since one can argue about public policy,
but it was done carefully by a careful committee.
Mr. Horn. Let me make another translation for those who
read this transcript. We heard a lot about the TCMP. What it
translates to in day-to-day English is the Taxpayer Compliant
Measurement Program, in case anyone is wondering about that.
I now yield 5 minutes to Mr. Davis, the gentleman from
Virginia.
Mr. Davis of Virginia. Thank you very much.
Mr. Tobias, what is the morale like among the rank and
file? There has been a lot of bashing against the IRS. Has it
filtered down to the employee level and--with the planned RIFs?
Could you give us a reading on that?
Mr. Tobias. The morale of the Internal Revenue Service
employee is very low, certainly in connection with the planned
RIF and certainly in connection the bashing they have taken
over the last 2 years primarily; and that translates not only
into problems in the workplace, but also I think a lack of
respect by taxpayers toward the IRS and the legitimate actions
that IRS takes. I mean, all too often, the Internal Revenue
Service employees are blamed for the laws that you all create.
Mr. Davis of Virginia. That's so often the case.
I was interested in your comments on the RIF. The IRS
thinks that it won't adversely impact services, taxpayers. You
obviously take a different view on this. Do any of you have any
evidence that women and minorities aren't going to be
disproportionately treated?
Mr. Tobias. We have been trying to get that information
from the IRS since May of last year, and we still haven't been
able to get the information. The anecdotal evidence is, yes,
they will be adversely impacted and perhaps illegally so. But
the kinds of jobs that are adversely impacted are, primarily,
based on the anecdotal evidence and my travels around the
country, are women and minorities.
Mr. Davis of Virginia. Anybody else on the panel have
anything about that?
Let me ask, why do you think that walking into a local
office and making a local telephone call is preferable to
calling a 1-800 number? Is it more productive, do you think, in
terms of customer satisfaction or comfort in terms of the
calling up? Any studies on this?
Mr. Tobias. Certainly, the Internal Revenue Service can't
supply enough people in every office to satisfy walk-ins, and a
1-800 number is critically important. But it's also critically
important to have someone in a location to release a lien, or
to answer a question, or take a check when someone does walk in
an office. So both are necessary. One can't be advanced to the
exclusion of the other.
The Internal Revenue Service has attempted to characterize
this dispute in terms of taxpayer service, traditional 1-800
taxpayer service. I believe the issue is whether or not
customer service, service to taxpayers in general, will decline
with this proposed RIF. And I don't think there's any question,
there can be no doubt that this will occur.
Senator Kerrey did some hearings out in Nebraska just last
week where practitioners, IRS employees and the public all came
and testified that they were not receiving the service that
they had received 3 months, 6 months, 9 months ago. And I think
you will find that to be true across the country.
Mr. Davis of Virginia. You talked at length about the
release of liens and the widow who may need to release a lien
and how difficult that may become. We heard from a witness in a
prior hearing that the IRS didn't do a very good job of working
on taxpayer liens anyway. Do you have a different impression or
are you saying if it didn't before it's going to be worse under
this?
Mr. Tobias. It's going to be worse. It's going to be worse
in those districts, in those noncontinuing districts, the
districts who have been identified as noncontinuing districts.
There used to be 63, now there are 33. There are 30
noncontinuing districts, and in those districts, there will be
problems.
Mr. Davis of Virginia. OK. Thank you very much.
Ms. Davis, let me ask you. In your opinion, if the IRS
contracted out for a new state-of-the-art computerized
information system with bells and whistles such as access and
other security controls, had it installed and saw it was
working perfectly, would that mean that Congress, GAO, the
Treasury, the IG and all the other IRS stakeholders could rely
on the IRS information from then on? Would the current staff be
capable of taking it from there and running with it?
Ms. Davis. I'm not sure I understand the question.
Mr. Davis of Virginia. If you had a system that was up and
working perfectly, could we then rely on the IRS information
from then on or are there other inherent problems?
Ms. Davis. Well, it's a hard theoretical question to
answer. I guess one thing, as far as contracting out a computer
system--I know this isn't really what your question is getting
at--I don't think the confidentiality flags that get waved in
the air every time something is talked about getting contracted
out are really a severe problem to be concerned about. So you
could potentially even contract out the entire computer system
as well as the operation of the computer system, and that may
be where the best answer lies.
I think that if the IRS had a completely wonderful new
computer system placed in its hands--I think the vast majority
of IRS employees who are out there across the country in the
field offices running the computer systems, processing the tax
returns are doing the best job they possibly can. I think that
would be fine.
As I said in my statement, I really believe that already
every problem that the IRS is saddled with today emanates from
the headquarters of the IRS, from the executives. So I think if
you put a new computer system in the hands of the IRS employee
around the country, I think you might very well have a much
smoother running system.
Mr. Davis of Virginia. That's a very good endorsement. I am
sure Mr. Tobias would agree the problems here aren't generated
from the rank and file employee.
Mr. Tobias. They are not.
Mr. Davis of Virginia. Mr. Cohen, any observations on that?
Mr. Cohen. That's a little too simplistic. If you had a
perfect computer system--and you wouldn't ever have it, because
the moment it's perfect, it's out of date as soon as you put it
in. So you can't stop. You can't stop planning for tomorrow
because you have got--things are going right today, because
that's a recipe for disaster.
We're entitled to a fair trial in the United States. We're
not entitled to a perfect trial. We are entitled to a fair tax
system, not a perfect tax system. And so we have got a very
good one.
We have got a lot of defects. There has been some
managerial fall-down, not to the extent Ms. Davis says, and so
you can't design this system with the thought that this is the
last time you are going to design a system. That's the problem.
We designed the system 30 years ago, which was a fine system.
It is not a fine system today.
Mr. Davis of Virginia. Thank you, my time is up. I
appreciate that.
Mr. Horn. Thank you. Five minutes to the ranking Democrat,
Mrs. Maloney of New York.
Mrs. Maloney. Thank you. Mr. Cohen, you indicated in your
testimony, the changing laws, Tax Code laws, are a problem.
What do you suggest we do about it?
Do you suggest we have a 2-year moratorium on changes in
the Tax Code?
Mr. Cohen. I do that, really, as a joke. I think the
Congress is like every other body in the United States. It
needs an internal discipline also. You need an internal
discipline here, and you need someone who is going to say--
well, I will give you an illustration.
I used to say for the Assistant Secretary for Tax Policy--
he was a close friend, a premiere tax attorney in the United
States, a professor--I said, Stanley, you understand it; I
almost understand it. How in the world do I explain it to the
rest of the people? Someone here has to say the same thing;
that this is a good rule. It may be better than the existing
rule, but it is--for example, the alternative minimum tax is a
rule that was enacted up here. Now, it seems to be the current
kicking boy. Everybody is kicking the alternative minimum taxes
being the most complex rule in the Internal Revenue Code.
What was it designed to do? It was designed to help a
Congress avoid facing limitations on individual deductions,
which, when put together, gave some taxpayers unusually large
deductions, and, therefore, they paid no tax. So, instead of
addressing the problem directly, as it should have, Congress
said let's take this pill. This pill is called the alternative
minimum tax, and that tax has been in here since 1968 or 1969,
and you diddled with it, but after you diddled with it, you
made it worse, not better.
Mrs. Maloney. What do you suggest we do about it? Do you
suggest that possibly we informally have a collaboration with
IRS professionals on what the consequences of certain tax
changes have in the implementation?
Mr. Cohen. It is a nice idea, I kind of like that.
Mrs. Maloney. It is a serious suggestion that you have on
the constantly shifting tax policy, which is problematic not
only for the IRS, but certainly for the American businesses,
and certainly the trade of the world that we are involved in,
and the constant--you know, we now have a certain budget cycle.
Maybe we should have a tax cycle of 2 years so that people have
a chance to sort of understand the ramifications, and that you
are not constantly going into situations, which you pointed
out, the IRS goes into.
One day they have a certain set of employees, the next day
they have a certain set of employees. It is hard to plan and
implement. With all the cutbacks, maybe we should have the same
type of planning restrictions not only on personnel in the job,
but also on changes of policy, so that the business community,
the trade community and the IRS professionals themselves could
catch up with it.
And, also, I want to very quickly throw in another question
with response to your testimony. You mentioned, we train them,
we spend time with them and then they leave. Why are they
leaving? You were talking about the personnel.
Mr. Cohen. Let me answer in the order that you asked them.
The chairman of the Ways and Means Committee many years ago was
a fellow by the name of Wilbur Mills, who was a Harvard Law
School graduate and a first grade technician. And he had an
interest in the technical aspects of the tax law.
Most Congress people don't have that. They, you know, they
are interested in the policy, but they are not interested in
technical aspects. Somebody here has to ask the question once
in a while, what does this do to the tax law?
Wilbur had a plan at one time. It was never implemented
because he couldn't get anybody to go along with it. He would
divide the Code into sections and he would study over a period
of 4 to 5 to 6 years. Each year he would study different
elements and try to improve them.
Now, that would take up the full power of the Ways and
Means Committee and it wouldn't be able to do all the other
things it does, but at the end of a 4 or 5-year period, you
would have a much better law. That is why it never got done,
because it would have diverted them from doing the little
diddles that help each one of the Members of Congress do what
they would like to do.
One of the things I have suggested, and I have heard other
people suggest on occasion, is each time somebody suggests an
improvement or change in the Internal Revenue Code, they be
required to submit to you how that be reflected on a tax return
because that would be very telling. Where is the space on the
return? What would the instructions look like?
Mrs. Maloney. Also, Mr. Cohen, you could add to that
thought having the IRS comment on how they would implement it.
Mr. Cohen. You don't ever ask them. Again, I used to be a
staff person, so I drafted legislation, and it was rare to come
up here. Now, Mr. Mills would invite me in private. I would
come in and tell him what I thought, but it would be rare that
I testified in public hearings because I wasn't invited. Policy
wasn't my bag, so I mean, it can be done because Mr. Mills used
to do it, but both of those ideas withheld.
Now, why do people leave? Government is unattractive now.
When I was Commissioner, and it didn't have anything to do with
me being Commissioner, President Johnson passed a Comparability
Act and Government salaries were within about 85 percent of
going rate in the area. The work was good, so good people came
and they enjoyed it.
As I indicated to you, I had the 15 top people on my staff
and only 2 of those people changed in a 5-year period of time.
You got a 50 percent turnover in less than that right now. That
is because the pay isn't up to snuff and because they get beat
around the head fairly often.
Mrs. Maloney. Well, as you know, our Nation was founded on
a tax revolt, and certainly no one wants a meddlesome ``Big
Brother'' approach in our taxes, but we should at least demand,
from an important Government agency, that they be competent and
efficient. They should certainly be as competent and efficient
as American Express, or Citicorp. Yet, by all accounts, they
are not.
Mr. Cohen. Citicorp picks its clients. The IRS doesn't pick
its clients.
Mrs. Maloney. Well, that is true. But, certainly, the
management, not just the clients, the management----
Mr. Cohen. See, the client is involuntarily dealing. If I
go to the bank to borrow money or to have a credit card
arrangement, it is benefiting me. If I go to the IRS to pay
them taxes, it is hurting me. The definition of a tax is that
it's an enforced exaction of a State. That is the definition of
a tax.
Mrs. Maloney. Yet by all accounts, the GAO reports,
repeatedly, your testimony and others, there has been, shall we
say, not especially efficient or consistent management, or
effective management at the IRS, and I would like to come back
to your testimony. I am out of time, he is telling me.
Mr. Horn. I thank the gentlelady from New York. The
gentleman from New Hampshire, Mr. Sununu.
Mr. Sununu. Thank you.
Mr. Tobias, we have all read by now a number of accounts
about information systems, numbers in the computers, what has
been spent and how effective it has been. But my perspective is
that while a computer is a good information system and is
important, technology is a poor substitute for good people and
good training.
But having said that, I would like to hear your perspective
on what opportunity there is to improve the tools and equipment
that is in the hands of the people on the front lines? What
kind of changes or modifications and opportunity for
improvement is there, that certainly the members of your
employment group would like to see, as we go about trying to
repair and amend some of the technology implementation plans
that we have.
Mr. Tobias. I would start at the most basic tool and that
is the human resource tool. The amount of dollars spent on
basic training and advanced training of the IRS, I believe, was
cut $21 million from--in 1996. So continuing education was not
part of the 1996 IRS effort because Congress cut funds and
training was cut. So I think basic training is critically
important.
For the customer service representative Congresswoman
Maloney was speaking of just a moment ago, they need the tool
to be able to have the return come up on their screen so that
they can provide an instantaneous response to the question that
the taxpayer asks, and the tax system's modernization effort
was to provide that kind of information, to integrate the data
bases so that questions could be answered and adjustments made
at the time the first telephone call was made.
Those kinds of tools, to customer service representatives,
would, in my view, significantly enhance the credibility of the
IRS and provide the information compliant taxpayers need to
remain compliant.
Mr. Sununu. Where, in your mind, have the shortcomings
been, though, in trying to implement the modernization
programs? I mean, there have been clearly shortcomings, clearly
failures, and I don't know if it is a question of setting
expectations that are too high with regard to what technology
can do, or failure at the management level or failure in not
being inclusive enough in taking into consideration people at
the customer service level and design of the systems. Where, in
your mind, has the failure been?
Mr. Tobias. I think the IRS bit off more than it could
chew. I think that the IRS recognized that the technologies of
the sixties and seventies wasn't going to be good enough for
the technology of the nineties. It had tried, like private
sector corporations, on several occasions, to introduce new
technology.
It would get up to the brink of implementation, Congress
pulled the plug on the funding, and so there came to be a
consensus that the IRS had to have new technology and the IRS',
I believe, mentality was we have to go for broke because we
don't know how long this funding will last.
There was no idea of stable funding, so I believe the IRS
tried to do too much. It did not integrate the 23 separate
programs. And the several millions of dollars, hundreds of
millions of dollars it was projected to spend, it didn't have
infrastructure. It didn't have architecture, and as a result,
it was not managed properly.
Mr. Sununu. Mr. Cohen, maintaining the line of inquiry on
technology, you talked about the system designed in 1960, 1961,
and then put into place when you were Commissioner. To what
extent is that venerable computer system still utilized in the
activity today?
Mr. Cohen. Unfortunately, much of it is still utilized.
Some of the hardware has changed, but, basically, the basic
thrust of the program is the same in technology, of course. We
had no random access. If we wanted to find Sheldon Cohen's tax
return, we had to go through a roll of tape and run it until it
got to my Social Security number and it would stop and produce
my information. But no random access.
I mean, my little personal computer has more random access
than their big computer down at Marksberg. We put in three IBM
360's and 370's, which were state-of-the-art in the mid 1960's,
absolutely top line. I doubt if Congress would have let us do
it if they had known what we were doing. We were going for
broke because we knew we had one shot to put it in there.
And Mr. Tobias is absolutely right. You have this instant
gratification mentality. This is a long program, as I say, if
you knew what you wanted. I talked to Mr. Gross. We had lunch a
few weeks ago, and if you had a program today that was as good
as you could get, close to perfect, you were talking about 6 or
7 years to put it in, and you are talking about 2 or 3 years at
least to design it, so you are talking about a 7 or 8-year
program. Life was simpler then. It was designed in 1959. We
began installation in 1964 or 1965, so, you know, the machines
were simpler, the context was simpler.
And, by the way, the first thing we had to learn, then, was
that we had to have our paper system working as good as it
could possibly work before we went into computers. You can't
leapfrog. So you need to take the present system and make it
work as perfectly as you can make it and move into the new
system. You can't leapfrog, and they are trying to leapfrog two
or three generations. That is awfully hard.
Mr. Sununu. Thank you. Thank you, Mr. Chairman.
Mr. Horn. Thank you very much, Mr. Sununu. Let me pursue a
few questions with each of you.
Mr. Cohen, I noticed in your remarks that citizens are
entitled to a fair trial. You are a lawyer by background. A lot
of citizens and a lot of Members of Congress say if that is
true, why don't we switch the burden of proof to the client,
the taxpayer, and away from the IRS, right? Right now the IRS
does not have to prove its case. The taxpayer has to prove the
case. Why hasn't that changed?
Mr. Cohen. Because you would make the IRS more intrusive if
you did. If you think about the system as it exists, we are
dealing in the civil system, not a criminal system. In a
criminal system, the IRS has the burden of proof. The plaintiff
in a civil trial, he is proposing the idea, he has the burden
of proof. Why, because he has all the information. If I have to
prove my medical deductions, I have them. I have all the doctor
bills. I have all my checks, I can do it. The IRS doesn't have
it.
All they can say is we don't see from your return that your
medical deductions look right, please show them to us. That is
why I have the burden of proof, so it is with business records
or anything else. If we want to make audits more intrusive,
then the IRS will have to demand all the records. They will
become much more intrusive. They will be less productive, but
everybody forgets that I have the tax records, they are in my
possession. I ought to produce them if I am making an
assertion. There are problems that come up around the edges.
I am not saying there aren't taxpayers who don't feel
abused, and a few of them are right, but the question is, which
of those techniques will burden more of the taxpayers, and
clearly the burden of proof on the Government will burden more
taxpayers because the Government is then in a position of
saying produce all your records. You will have to subpoena them
or summon them or use some technique to make you bring them in,
in order to see if they have a case or not.
Mr. Horn. Mr. Tobias, do you have any comment on that
question?
Mr. Tobias. Only that we have a voluntary tax system.
People say what it is they owe and what deductions they are
going to claim, and I would just mirror what Mr. Cohen said. If
I am a taxpayer, I have the information, and, therefore, I
should have the burden, in a voluntary tax system, of showing
why I owe $10 instead of $20.
Mr. Horn. Ms. Davis, do you have any comment on this part,
based on your review of IRS?
Ms. Davis. Just very quickly, I wasn't involved in personal
audits, but I had conversations with IRS employees. Believe it
or not, many of them talk to me openly. One of the things a
recently retired IRS executive pointed out to me was that he
believed that the IRS approaches virtually every taxpayer as
though they are cheating on their taxes, you know, if they can
cheat, they will, or if they can scam, they will. They are
going to go into an audit situation with that kind of negative
attitude, rather than approaching taxpayers as though they are
doing everything they can to comply with this outrageously
complex system we have all been saddled with.
So I think it is probably more of an attitude question than
anything, and if you change, even that cultural perspective on
the part of the IRS, I suppose you could even accomplish what
you want to accomplish by changing the burden of proof, by
changing the way in which taxpayers are approached on the
initial instance by the IRS, that we are trying to comply. I
filed my tax return as a self-employed person for the first
time this year, and I have never seen such a mind-boggling mess
of paperwork in contrast to the simple returns I used to have.
Mr. Horn. I did suggest about 3 or 4 years ago when I first
came here that we ought to pass a resolution in the Congress.
We all as Members have to sit on the floor of the House on
April 15, no tax attorneys, no tax accountants with us and we
have to fill out our own form. I suspect there would be great
reform that followed that immediately, but we have now turned
it over for $750 or $1,000 to an accountant and we don't worry.
We just sign and then you worry and hope it's right. But let me
ask you, Mr. Tobias. You are familiar with the Debt Collection
Act we authored last year?
Mr. Tobias. Yes, I am.
Mr. Horn. Elements of that are now before the special
subcommittee of Ways and Means. As to apply in that act, to
IRS, it is the only part of the Federal Government that it's
not been applied to, because we have the interest of Ways and
Means, which I certainly can thoroughly understand, who have
jurisdiction over that.
On the other hand, we have lost a year. Now, does the union
that you were president of have any feelings on that
legislation one way or the other?
Mr. Tobias. I believe, Mr. Chairman, that contracting out
the collection of taxes to the private sector is unwise for a
number of reasons. First and foremost, I believe the IRS
employees can and do and will be proven that they collect
dollars owed, faster, better, and cheaper than the private
sector, and that the answer to reducing the accounts receivable
inventory is to provide the IRS the resources they need to
collect more taxes, not contract it out to the private sector.
I believe collecting taxes is an inherent governmental
function, not to be contracted out. Second, I think there are
issues of privacy about providing information to the private
sector. As you were speaking this morning, those who are
involved in this experiment receive only a name and the amount
owed, but what the IRS is finding is that these people can't
find taxpayers any easier than the IRS can, and that in some
substantial number of cases, the amount owed is disputed, which
means they have to hand it back to the IRS to close the case,
or to do a part pay agreement. So I think there is inherent
inefficiency, and I believe, based on that 1995 tax compliance
initiative, the IRS proved it could collect money if it were
given resources. I don't think the private sector is the answer
in this case.
Mr. Horn. When you have 100,000 plus employees and you let
the debts run up to $100 billion plus, why can't 100,000
employees be so organized that they reduce that debt? That is a
scandal of the IRS, to let $100 billion accumulate in lost
revenue.
Mr. Tobias. I think perhaps it is a scandal for the IRS,
but I think Congress shares some of that responsibility. When
the IRS proves that with more resources, it can decrease those
accounts receivable and then Congress says, sorry, I am not
going to fund it in 1996. Even though you are successful in
1995, I think Congress bears some of that responsibility. And
it is easy to say, well, there are 100,000 people and why can't
they collect the money, but those 100,000 people are also
processing 200 million returns, issuing, I don't know, I think
it is $190 billion in tax refunds. So they are not all in fault
in accounts receivable. If the IRS had 5,000 more people
focused on that issue, it could maybe produce more.
Mr. Horn. Well, I am willing to give the first 30 days, but
if they can't produce, I think it ought to be turned over to
somebody who can produce.
Mr. Tobias. I will take that 30 days with the resources and
whatever test you want to create. I think we will beat whoever
is at the starting line.
Mr. Horn. I think the fact is, with 100,000 people, and I
don't blame you, I blame management for not organizing
themselves so they can make that 30-day call. They haven't been
making the 30-day calls and pretty soon, people forget, as I
said earlier, that it's a debt. They think, gee, it is a grant,
it is my money, they have forgotten me.
Mr. Tobias. One of the problems the IRS had to decide just
this year was, well, we don't have enough money to do audits of
small businesses, and so--and at the same time, increase the
level of access for compliant taxpayers, so we are going to
move people who otherwise do audits to answering telephones.
Well, as a result, my prediction is, there is going to be
less revenue in fiscal year 1997 than projected. There will be
more happy compliant taxpayers, who everyone speculates, but no
one can prove will pay more taxes because they know what it is
they owe and will pay that money. But in the meantime, I
project that there will be a hearing next year about why the
IRS has less enforcement revenue in 1997 than they did in 1996
and when the answer is, well, we answered more phones, Congress
won't be satisfied with that.
Mr. Horn. Well, no one is talking about moving trained
auditors. What we are talking about is training people who are
not auditors to followup on the results of the audit.
Mrs. Maloney, 5 minutes.
Mrs. Maloney. Thank you very much. Following up on your
questions, Mr. Chairman, I would like Mr. Tobias to get back to
the committee and write a projected pilot project that we could
put forth with IRS employees, where they are given the
resources to get off the phones, to do the collections, what
resources would you need, and I would like it to be a pilot
project that we could possibly compare to the pilot project we
are having now with contracting out to private sources. I don't
want to use my time with your explanation. I would like to get
it back in writing and we will look at it. We have a strong
working relationship together productively.
I would like to ask a question of Mr. Cohen that follows up
on the exchange of what we just heard about confidentiality.
Mr. Tobias raised a concern, and one that I share, on
confidentiality. I truly believe that tax collection is one of
the most sensitive and important jobs of Government, and it has
to be done fairly and well, or the trust between people and
their Government will not be there, and I am very concerned
about confidentiality, not only within the IRS on individual
tax returns, but I am very troubled about the idea of
contracting out to private firms and on the confidentiality
situation.
Also what troubles me, what if a private firm acts in a way
that is irresponsible? Then that reflects back on Government
and may undermine the confidence that people have in their
Government. And as a followup on it, you talked about section
6103, which you helped write, and, again, I would like to
request that possibly you may get your comments back to me in
writing of any changes that you think should take place in
section 6103 to protect confidentiality of American citizens,
while helping Government be more efficient and effective in
doing their job.
Mr. Cohen. One of the problems that was discussed earlier
in the hearing was the browsing. Now, in the early sixties
before we had the computer system, because everything was on
paper, so if you locked the cage, only people who had
authorization to go look for returns could look for returns.
Now, that is not to say there wasn't browsing.
If Sheldon Cohen's return was next to President Clinton's
return--it doesn't happen to be--it happens to be filed in the
Commissioners office, but they could look at the returns, but
it was much more difficult. However, with a computer, it is
easier, and that is a problem that is going to exist every day
of every year, no matter what your rules are.
You have to impose strong management controls and you do
have to enforce them. You do have to make people suffer when
they break those rules because they shouldn't be rummaging
through returns. They will, and then you will have to
discipline them again. The more people that have access, the
more difficult it will be, so if you introduce private
contractors to this, it will be, and it will be more difficult.
You will also find the private contractor does work that is
at conflict with the Government work, so they will have to
build fire walls, but they won't build fire walls. Someone,
somewhere on a private contract will use the information he got
from the IRS information to help his boss do something else and
then there will be a scandal, and then the IRS will be blamed
for leakage of the information from one side of the collection
system to the other side, it will happen. I mean, that is why
erasers are on the end of pencils, because errors do occur. So
you do need to know, no matter how careful you are, errors will
occur. You have to build a system that corrects as many of them
as possible.
Mrs. Maloney. I would like all the panelists to either
comment or get back to me in writing. I am particularly
interested in your comments, Mr. Cohen, with your experience as
a tax lawyer and your former experience in Government, on
Friday, 20/20 ran a special on United States citizens evading
their taxes, and 20/20 infiltrated a tax seminar in Cancun,
Mexico, that taught 300 individuals, American citizens, on how
to set up, ``personal sham banks'' offshore. The banks only
need to have a mailing address, since international banks do
not have to pay taxes in the United States. These citizens
could possibly evade billions in taxes.
What could we do to the IRS code or to Government laws to
make sure that this does not take place? It obviously is taking
place, and they ran an entire special of it, I have a film on
it. I would be glad to get it to any of you, and then I have
one other brief question and my time is almost up.
Mr. Cohen. My comments on the banks, I get this literature
all the time in my office, do this, do that, your clients will
avoid this or that, and what I do is I send them to Mr. Dolan.
I take them and stick them in another envelope and write Mr.
Dolan on a memo and say turn this over to the appropriate
people.
There are lots of silly, illegal ideas out there. It is a
free country. You can say any screwy thing you want to say.
Unfortunately, some people fall into these patterns and I am
sure the IRS can tell you what techniques they design and they
do design, they clip the newspapers, they watch the television,
they pick up the stories and set up programs to try to pick
them up. Now, most of the time it works, but not always.
Mrs. Maloney. Any other comment? Over the weekend, Speaker
Gingrich stated that he felt that Americans that have overdue
taxes, that they should be given a 1-year amnesty to pay up
without penalties, and he says it's an idea that would bring in
billions of dollars in extra revenue, and I would like to ask
the panelists if they would like to comment on the idea. Do you
believe it would bring in extra revenue, and do you think it
would work?
Mr. Tobias. I am not so sure that it would work. I think
there has been some success with tax amnesty efforts in State
governments, but it was primarily related to States where there
wasn't real active tax enforcement.
At the Federal level, there is no question that there has
been knowledge and enforcement, so the idea that somebody could
go years without paying and then suddenly be relieved of all of
that liability, and be relieved of all of that liability
through a tax amnesty period, I think would punish those who
have tried to be compliant over the years, and force them, once
again, to subsidize the noncompliant. I don't think it is a
good idea.
Mr. Cohen. The worst thing that could happen to you is you
would be successful, and the reason I say that is you would
then be tempted to do it a second time and then you would ruin
the whole tax system. It would absolutely ruin your discipline,
so I go along with Mr. Tobias' comments. That is, in any State
where it has had any degree of success, it has been associated
with a markedly increased enforcement effort. They announced we
are going to do it today, and as of tomorrow, we are going to
have this new and impressive enforcement effort. You have a
reasonably good enforcement effort in the United States right
now.
Also, Congress is cutting the IRS' budget. Is the IRS going
to get a 10 percent increase next year because they are going
to have an increased effort? No. So you don't have any
credibility on that side. And you have more downside than
upside. You stay home--as my grandmother used to say, ``when in
doubt, stay home.''
Mr. Horn. Thank you very much. I just have two questions to
round out the panel. I might ask on the last question, that it
seems to work with overdue books at libraries, and it sounds a
little--your remarks, Mr. Cohen, and I think you might be right
about that, much like the amnesty for illegal immigrants, and
it doesn't solve the problem.
I have one question for Ms. Davis, which is, you have heard
a lot this morning. The GAO, your colleagues on this panel, is
there anything you would like to say based on your experience,
being from on the inside of the IRS?
Ms. Davis. I think it is a reiteration of what I said in my
testimony. I think if we are going to bring any significant
change, we have to forget this broken record of GAO reports,
congressional hearings, the litany, on and on and on of
bringing out this broad array of significant problems with the
IRS, and actually begin to take significant action.
One of the things that I did, as the historian for the IRS,
was I looked at a long view of GAO reports. I didn't just look
at last year's GAO reports, the most recent, even the last 5
years, but I looked at a 20-year span.
One of the first projects I took on that was squelched by
IRS management very quickly when they learned what I was
planning to do was to do an overview of the history of how the
IRS implemented its initial computer system Mr. Cohen had
spoken of back in the early 1960's, and its plans to modernize
that system over the history of the years.
One of the things I also did, in addition to pulling every
GAO report that had been written over this 20 to 25-year span,
was I tried to collect all IRS internal audit reports because
that function of the IRS, which is supposed to evaluate
internal progress for their own programs, has done report after
report about the modernization program also.
The first problem I encountered was when I asked for this
broad range of internal audit reports of a 20-year span, they
looked at me like I was crazy. This was early in my tenure of
the IRS when I realized they had no systematic way to keep the
reports. We went all around the country with a request, and we
managed to come up with 60 percent of the audit reports. But
the point being, when I reviewed those 20 years of internal
audit reports by the IRS; and 20 years of GAO audit reports,
the same problems were repeated over and over and over again,
so we are facing another 20 years of more GAO reports, more
hearings, more internal audit reports without any significant
change, unless someone in Congress gets serious about really
getting to the heart of this issue.
Mr. Horn. Well, we thank you.
That leads to my next question. Besides getting serious by
some in Congress, I think we have enough that want to be
serious this time. A Dear Colleague letter from our colleague
from northern Virginia, Frank Wolf, talks about his
legislation, H.R. 1224. And this is a question I want to direct
to Mr. Cohen and Mr. Tobias, it will just summarize what it's
about.
H.R. 1224 does two important things. First, it establishes
a set 6-year term for the Commissioner, thereby providing an
important degree of independence from the President. Second, it
establishes a new objective selection process for the
Commissioner. Prior to the expiration of the Commissioner's
term or when a vacancy occurs, a special election is considered
to elect potential candidates. The commission then submits to
the President a slate of qualified candidates, and the
President selects the nominee from that slate.
H.R. 1224 insures that strong, qualified candidates are
selected for IRS Commissioner, further insures the Commissioner
is afforded necessary insulation and distance from an attempt
to make the IRS a tool for the party in power at the White
House.
I believe that legislation is greatly needed to ensure
integrity and objectivity of the IRS. How do you feel about
that, Mr. Cohen?
Mr. Cohen. I do spell out a little bit of my views for the
Commissioners in my written statement, but I haven't addressed
all of these issues.
There is no involuntary servitude in the United States.
That was abolished in the 13th and 14th amendments. I see all
the commissions around town with 4-year terms, 5-year terms,
15-year terms, whatever they happen to be. I rarely see anybody
serve that period of time.
I mean, I served over 4 years as Commissioner of the IRS, a
few years as chief counsel, 5 years in the one agency. That is
a long time. The reports, as I have seen them, say about 2,
2\1/2\ years is probably more normal. I think that more years
is important. It was important for me, because I could get
something done. It was important for the agency, because it had
some continuity.
Mr. Horn. Mr. Cohen, I might remind you, we have a 10-year
tenure for the Director of the Federal Bureau of
Investigations.
Mr. Cohen. And no one has ever served it.
Mr. Horn. There is hope they will.
Mr. Cohen. I will bet you $5 that will not happen.
Mr. Horn. We also have the Comptroller General of the
United States, and I think you will agree most Comptroller
Generals, unless they have died in office, have served out that
term.
Mr. Cohen. You have only had two serve under that term, and
I have served on the advisory committee for both of them. And
the Comptroller General is in a completely different spot
because the Comptroller General is a quasi-legislative
employee. He really is a legislative employee. He is not an
executive branch employee.
I am not a constitutional scholar, so I won't regale you
now with the constitutional problem of having the chief revenue
official of the United States, who is part of the executive
branch of the United States, chosen without regard to the
President of the United States. I don't want to get into that
right now because that is a long discussion.
Mr. Horn. Mr. Wolf provides that that nominee would come
from the President of the United States, but there would be a
list of very qualified people, and for those of us----
Mr. Cohen. Can he send the list back and say I want more?
Mr. Horn. Well, he perhaps can. But if you are saying let
us get some people in there that know something about
management and are not simply tax technicians, with all due
respect to all the fine people that have been Commissioners,
the fact is, that agency of over 100,000 people needs somebody
like a Jim Webb.
Mr. Cohen. I knew him very well.
Mr. Horn. Administrator of NASA.
Mr. Cohen. And he was chosen by the President of the United
States.
Mr. Horn. Fine. But we have had numerous Presidents not
choose somebody that could run an agency. We have a long list
of them. And the failures of the agency I would blame partly on
the fact we don't have a management structure and somebody that
knows how to run a large organization.
Mr. Cohen. I am not going to differ with that assessment.
As I have said in my testimony, the IRS is like running a large
spaghetti factory. It is more important that the person run the
spaghetti factory have management know-how than it is that he
or she know how to make spaghetti. On the other hand, they
better know how to taste spaghetti. Otherwise, they are going
to produce something like a Soviet factory that will put out a
blah product that nobody will ever eat.
So you can't make this a little narrow point, because there
is a whole variety of talent that is needed. And I am not sure,
it may be your selection technique will produce the only two
people that are introduced--that have those kinds of terms.
The FBI Director has those terms, although he is chosen by
the President. He is not chosen by slate. The GAO has it where
the Congress sends a panel of names, but that is because it is
an officer of the Congress that is being chosen, not an officer
of the executive department.
Mr. Horn. And we are not talking about officers of Congress
in this.
Mr. Cohen. This is an officer of the executive department
that is nominated by people who are not of the executive
department. I should say, I am a lawyer, but I am not a
constitutional lawyer. I will leave that to your friends on the
Judiciary to argue out. I wouldn't want to be selected under
such a technique.
If a Commissioner of the IRS doesn't have sufficient
internal--intestinal fortitude--my statement used to be, people
would ask me, and I said, if you don't threaten to resign at
least twice a year over an important issue, you oughtn't be in
the job.
There are times you say, no, I will not do that. I did that
to the Secretary. I did that to the President. I didn't do it
very often. If you do it too often, you wouldn't be there
either. But if you are going to have independence, you are
going to have independence. If you are not, this technique is
not going to help.
Because if you are there when there is a Secretary of
Treasury of a different persuasion and a President of a
different persuasion, your life is going to be impossible. You
are never going to get a budget through. You will never get
your personnel through the Office of Personnel Management.
There are a million other problems that will come up every day
to make your life miserable.
Mr. Horn. Mr. Tobias.
Mr. Tobias. Mr. Chairman, I think one of the key problems
with the IRS is the fact Commissioners turn over too
frequently. I like the idea of a 5-year or a 6-year term, but I
do not believe hiring a Commissioner with a 5-year term,
however that person is nominated or selected, is the silver
bullet.
I think that no matter how well a person with a 6-year term
planned, if there isn't a steady stream of funds from the
Congress in order to allow a plan to be created, implemented
and evaluated along the way without the circumstances changing,
it won't matter, really, who is in charge of the IRS. It will
be great public relations, but if we don't have appropriate
funding, you know--second, I think the Internal Revenue
Service, both in terms of its ability to obtain more
credibility and its ability to plan long-term, needs some help.
The Commission To Restructure the IRS is considering several
different options. One is strengthening the role of getting
information, and the other is to create a more independent IRS.
The board of directors and those members would be from--the
people from outside with managerial expertise.
That report would be due on July 1st. But, clearly, the IRS
has to be thinking more long-term than just 1 year to the next.
Mr. Horn. We thank you all, Ms. Davis, gentlemen. We
appreciate the time you have taken here and having the
perspective you provide, based on your experience. Thank you
for coming.
[Followup questions and responses follow:]
[GRAPHIC] [TIFF OMITTED] 43913.084
[GRAPHIC] [TIFF OMITTED] 43913.085
[GRAPHIC] [TIFF OMITTED] 43913.086
Mr. Horn. The next panel is panel three: Michael Dolan, the
Deputy Commissioner, primarily for management of the Internal
Revenue Service; accompanied by Jim Donelson, the Chief
Compliance Officer; Tony Musick, Chief Financial Officer;
Arthur Gross, Chief Information Officer; and David Mader,
Chief, Management and Administration.
[Witnesses sworn.]
Mr. Horn. All five witnesses affirmed the oath; and we will
start with Michael Dolan, Deputy Commissioner of the IRS.
STATEMENTS OF MICHAEL DOLAN, DEPUTY COMMISSIONER, INTERNAL
REVENUE SERVICE, ACCOMPANIED BY JIM DONELSON, CHIEF COMPLIANCE
OFFICER; TONY MUSICK, CHIEF FINANCIAL OFFICER; ARTHUR A. GROSS,
CHIEF INFORMATION OFFICER; AND DAVID MADER, CHIEF, MANAGEMENT
AND ADMINISTRATION
Mr. Dolan. Good morning.
Mr. Horn. Thank you very much for coming, Mr. Dolan.
Mr. Dolan. Thank you very much for having us.
I was sitting out here thinking about batting cleanup on
April 14th with the people who preceded us was kind of a tough
spot to be in, until I heard you talk about what might have
been a tougher spot on April 15th in the well of the Congress
doing tax returns. So, I will assume we got the better of the
deal.
And what I would do, with your permission, Mr. Chairman, I
prepared a longer statement that I know you will accept into
the record. What I would like to do in the interest of time and
getting to your questions is to briefly make some of the
points.
Mr. Horn. Feel free for a 10-minute summary. In your case,
if you would like 15 minutes, please feel free. Because you
have heard a lot here, and you obviously have the experience to
know a tremendous number of the basic questions that have been
asked.
Mr. Dolan. Thank you.
I would say, for starters, that one of the things I think
we all feel is important is the opportunity to talk about and
respond to some of your questions in several of the areas
raised this morning. Because, to say the least, some of the
observations were interesting. To say it a little more
aggressively, there are some places where that we would like
very much to be able to correct some misperceptions. And I
start with conceding your basic point. We are here talking at
your invitation about high-risk areas.
Mr. Horn. Right.
Mr. Dolan. Risk by definition means that there are
opportunities and requirements to improve. And so I stipulate
to that. Not for a minute do we shrink or shirk from that.
But the second thing I wish my colleagues at the GAO might
have made a little stronger point in their testimony that would
accompany the point they made in the documents is, in each of
the four areas we identified as high-risk, there has been
considerable progress. So I would like to believe we are
sitting before you today not with some set of promises about
what we are going to do in the future, but with some
established track record in each of the four areas where we
have tried very hard and with some success to make progress
against each of the four areas.
Third, and you made the point, Mr. Chairman, several times,
in the context of looking at the IRS and looking at its
management challenge, clearly, it strikes me that any
enterprise our size or the size of any large corporation is, by
definition, going to have some risk. And so I assume what you
want from us is not a guarantee that we will never run a risk,
but I assume what you want from us is what you would want from
any major enterprise--some conviction that we are capable of
mitigating risk and capable of creating systems, that in the
first instance, identify the risk and then that we do our level
best to manage that risk. Not in some theoretical context, but
in the context of our business.
And one thing I was particularly appreciative of in Mr.
Tobias' testimony, is that we found ourselves in pretty much of
a chorus of commentary here in the last 2 years. Some of that
commentary is very well informed, very much on the mark and
very much with an aspiration, I think, of improving tax
administration.
There is another part of that chorus that you no doubt have
heard some of yourself, where you are less sure the chorus is
well-informed and you are less sure that the outcome of the
rhetoric is designed to improve the system, as opposed to
making some rhetorical points or trying to play with a
different kind of agenda.
So, one of the things I think Mr. Tobias did, that my
longer statement does at some length, is make the point that,
notwithstanding being here to talk about four risk areas, if
you look at the four risk areas in the context of the operation
of the organization, there are a tremendous number of things
that are going well, not only at the level that Mr. Tobias
talked about, in terms of some macro measure of how much it
costs to collect $100, but today is April 14th, most people
relate that to April 15th, which most people relate to a filing
season.
This is a filing season, and I think by any measures people
impose on us today is a filing season of good news for the
taxpayer and good news for the system; and most people's
encounter with us is during this 4-month period. Most people
think a filing season is January to April. As you well know,
Mr. Chairman, it started last fall.
As Mr. Cohen said, there was no tax legislation at the end
of the last session of Congress. However, we got 700 pages of
tax instructions about those three bills that passed at the end
of the year. Hundreds of changes at the end of August and
September went on line. About the time we reach August 15th's
peak of this year's extension, we will be back through the
cycle again. So, in practical terms, a filing season is a year-
long business.
And, this year, I think there are things, if you look at
from a standpoint of the taxpayer, and you yourself gave a
litany and others gave litanies about programs, that aren't
what we would like them to be and some programs that were
underleveraged. But, as Mr. Tobias said, we are going to
process 211 million individual and business returns this year.
From the period of 1993 to 1996, we did that and we were almost
11 percent more effective and more efficient with fewer staff
years than we did in the 1993 timeframe. TeleFile which, for my
money, is one of the most significant retail technological
options offered to assist in this country. It's the opportunity
for a taxpayer, in an 8- to 10-minute telephone call, to
completely satisfy a tax obligation.
I have heard a lot of ballyhoo about people who can apply
for this or apply for that or get a piece of information
downloaded, but in terms of accomplishing your entire
transaction with your Government on something as sensitive as
meeting your tax obligation, 25 million Americans this year are
capable of doing that in an 8- to 10-minute telephone call.
At this point in the year, over 4 million have done it.
Over 17 million at this point of the year have filed in a
variety of electronic forms. Those, I think, are evidences of
things that are working well.
Last month, we made available to some small businesses in
14 States the opportunity to file their 941, a quarterly tax
return, by TeleFile. That historically was a very convoluted
process for big or small businesses because it represented
sending us a coupon and hoping that the coupon and the dollars
got posted correctly to their account.
Now again, in those 14 States, a million employers are
capable--whether I'm a pizza shop with 7 people and I don't
want to go to the bank or I am a bigger enterprise, I can pick
up and use the touchtone phone, and in the course of a few
minutes, make my quarterly tax obligation.
Assisting taxpayers better--several people talked about
this conflict in our mission or balance in our mission.
Clearly, Mr. Chairman, you have made it real clear from the
outset, accounts receivable is a passion with you. It is with
us as well, but it's just one of the pieces of our mosaic that
we try to balance each year.
This year, we came into the year fully aware that for the
last 2 years, one of the metaphors of our performance has been
can we answer our phones? Because it didn't make any difference
if when we were answering our phone, we were answering at 94 to
95 percent quality. The fact that half our customers couldn't
get to us was too easy a metaphor for the entire organization.
So we went to huge efforts this year to try to beg, borrow and
steal and try to tip that balance, if you will, to the service
side, with the outcome that, this year, rather than half the
people being served, nearly three quarters of the people are
being served.
If I am running a business, I am not bragging about only
three quarters of my customers being served; so we know we have
a long way to go. But I think, as measured in the context of
actual operations, it is a fairly significant commentary on the
organization's ability to respond to its customers in a way
that is important.
People talk about the GAO, sort of rolls off their tongue,
that we are using old systems, and the implication left is that
we are nonmodernized and still in the knuckle-dragging ways of
the past. I dare say that anybody who has decided to take its
information from us on the Web site in the last couple of years
find that to be a remarkable way to do something that you only
used to be able to do at the IRS office, the bank, or the post
office, and that would have people consistently scrambling this
week. Instead, 100 million times this year, multimillion forms
and publication have been drawn down.
I don't know about you. I can't go to a soccer field or
church over the weekend without somebody saying, I was looking
for my extension form or this arcane past form and I pulled it
down on your Web site. Is that the whole ball game? Not by any
means. It is that plus the CD-ROM that we now put in the hands
of practitioners, and for anybody that wants it, the fax
capability to come to us any hour of the day and get a form
back by fax. Those, to me, are not commentaries of an
organization, it is trying to do its business like it did in
the 1960's and insulate from its customers' expectations.
You heard a little bit this morning about some of the rest
of our business. I would like for there not to be 200 plus
billion dollars in accounts receivable. I think, upon
questioning, we will probably realize it is a number that is
clearly able to create a couple different impressions--several
of them not exactly on the money.
But I will tell you, one of our key compliance requirements
is to collect the amount of money, not only because it is there
to collect but because, as several of the witnesses said, that
is a common element of fairness of the entire system--that you
pay yours and I pay mine. If the people to the left and right
of us see that, they are confident in the system. If they see
the people to the left and right of them not paying, then there
is an unfairness, and that's in addition to the obvious
financial interest the Government has in collecting its
receivables.
Last year was the single most successful year we've had in
our history of collecting the dollars in accounts receivable.
One part of it was a function of still being able to capitalize
on the revenue initiative that came in 1995, but another part
of it again was a function of looking at many, many aspects of
our processes, not being content to use 1960's, 1970's, 1980's
processes but looking at the whole notice stream and
eliminating notices that: were confusing the taxpayers, were in
of producing the outcome; changing our bills to look like a
bill that comes from a credit card; accentuating our telephone
operations; accentuating business taxpayers who we can get; not
always in the 30-day timeframe you mentioned, but while they
are in business and while they are still capable of resolving
their issues instead of downstream.
We have done things that, by traditional standards, would
have been viewed as lax on enforcement. We have substantially
utilized both the installment agreement process and the offer
and compromise process as a way to take taxpayers, who might
not be able to pay fully, but are trying to get in or stay in
the system. And I think you could go up and down a variety of
other initiatives that would reflect on the way we have
attempted to improve our collection processes.
The four risk areas GAO talked about this morning, they
clearly are not all equal. I think you point out, Mr. Chairman,
quite aptly, really, that technology, the ability of us to
modernize our technology infrastructure is--I think it was
Senator Thompson said the other day, over on the other side,
it's the long pole and tent--clearly the most significant of
the risks. If we are capable of mitigating that in a way I
think we are well-positioned to do, then the concerns we have
with respect to the accounts receivable, the concerns we have
with respect to data security, the concerns we have with
respect to getting a clean audit opinion, will indeed be
buttressed by our ability to modernize our infrastructure.
My statement goes to some length and I guess at this hour
of the day you probably would prefer that I not go into much
length on the modernization punch list, but there really are a
tremendous number of things that have happened since the last
time the IRS was before you.
At my left is Art Gross. You will get an opportunity in
questioning to speak a little more directly to some of those
that you are interested in. Suffice it to say, we have tried to
include in our long statement the road map, as we see it, for
addressing not only the latest round of General Accounting
Office issues, but as we can best determine, the set of outside
feedback and commentary from the National Research Council,
from within Treasury, and from the various bodies of Congress
that have looked at modernization over the 20-plus years that
you detailed in your statement.
We do believe that we have positioned ourselves at a point
in time now to do what is the long pull, to do what won't
happen overnight and be a silver bullet, but to do the kind of
improvement in the technology infrastructure that not only the
system, but our customers require.
I also included in my longer statement a fair amount of
information about the so-called browsing. I think none of us
sits at this table at all happy that the condition prevails. It
is a circumstance that is unacceptable to us, as it should be
to the American taxpayer. People who have access to tax
information and work for the IRS have access for one purpose
and one purpose alone, and that is to pursue their job
responsibilities. Any use beyond that is unacceptable.
The difficulty we have is in the computer infrastructure we
have today, it is much more difficult on the front end of those
systems, identifying exactly who has a work unit that involves
access to a particular piece of taxpayer information. As a
consequence, we find ourselves doing after-the-fact running of
audit trails and developing scenarios that will detect abuse
and then dealing with that abuse as it is detected.
Our modernized infrastructure will deal with that
fundamentally. It is not only possible, but a goal of us on the
front end of the modernized systems, to be able to move and
work precisely and specifically with a particular employee,
based on a particular assignment, and not, as is done today,
based on a range of assignments and based on a range of
authorities.
In the interim, we know it is our responsibility to step up
the even more redoubled effort to train, educate, communicate,
and to discipline, and to make the discipline be severe and
make the discipline be consequential when abuses continue.
What I would offer for your observation is, there is a
whole lot more I could talk about here, and probably I would
serve your needs and mine both better by letting you go in the
areas that you would like to question us. I got off the track
here in a kind of rude way and didn't introduce my colleagues.
So if you wouldn't mind, if I could spend a minute
recognizing on my far left Tony Musick, who I know has been
before you before. He is our CFO. To my immediate left is Art
Gross, our Associate Commissioner and CIO. Dave Mader is our
Chief, Management and Administration. On Dave's right is John
Dalrymple, who is our deputy in our essential operations
function.
With that, I will close and instead invite your questions,
and hopefully we can be responsive to those.
[The prepared statement of Mr. Dolan follows:]
[GRAPHIC] [TIFF OMITTED] 43913.087
[GRAPHIC] [TIFF OMITTED] 43913.088
[GRAPHIC] [TIFF OMITTED] 43913.089
[GRAPHIC] [TIFF OMITTED] 43913.090
[GRAPHIC] [TIFF OMITTED] 43913.091
[GRAPHIC] [TIFF OMITTED] 43913.092
[GRAPHIC] [TIFF OMITTED] 43913.093
[GRAPHIC] [TIFF OMITTED] 43913.094
[GRAPHIC] [TIFF OMITTED] 43913.095
[GRAPHIC] [TIFF OMITTED] 43913.096
[GRAPHIC] [TIFF OMITTED] 43913.097
[GRAPHIC] [TIFF OMITTED] 43913.098
[GRAPHIC] [TIFF OMITTED] 43913.099
[GRAPHIC] [TIFF OMITTED] 43913.100
[GRAPHIC] [TIFF OMITTED] 43913.101
[GRAPHIC] [TIFF OMITTED] 43913.102
[GRAPHIC] [TIFF OMITTED] 43913.103
[GRAPHIC] [TIFF OMITTED] 43913.104
[GRAPHIC] [TIFF OMITTED] 43913.105
[GRAPHIC] [TIFF OMITTED] 43913.106
[GRAPHIC] [TIFF OMITTED] 43913.107
[GRAPHIC] [TIFF OMITTED] 43913.108
[GRAPHIC] [TIFF OMITTED] 43913.109
[GRAPHIC] [TIFF OMITTED] 43913.110
[GRAPHIC] [TIFF OMITTED] 43913.111
[GRAPHIC] [TIFF OMITTED] 43913.112
[GRAPHIC] [TIFF OMITTED] 43913.113
[GRAPHIC] [TIFF OMITTED] 43913.114
[GRAPHIC] [TIFF OMITTED] 43913.115
[GRAPHIC] [TIFF OMITTED] 43913.116
[GRAPHIC] [TIFF OMITTED] 43913.117
[GRAPHIC] [TIFF OMITTED] 43913.118
[GRAPHIC] [TIFF OMITTED] 43913.119
[GRAPHIC] [TIFF OMITTED] 43913.120
[GRAPHIC] [TIFF OMITTED] 43913.121
[GRAPHIC] [TIFF OMITTED] 43913.122
[GRAPHIC] [TIFF OMITTED] 43913.123
[GRAPHIC] [TIFF OMITTED] 43913.124
[GRAPHIC] [TIFF OMITTED] 43913.125
[GRAPHIC] [TIFF OMITTED] 43913.126
[GRAPHIC] [TIFF OMITTED] 43913.127
[GRAPHIC] [TIFF OMITTED] 43913.128
[GRAPHIC] [TIFF OMITTED] 43913.129
[GRAPHIC] [TIFF OMITTED] 43913.130
[GRAPHIC] [TIFF OMITTED] 43913.131
[GRAPHIC] [TIFF OMITTED] 43913.132
[GRAPHIC] [TIFF OMITTED] 43913.133
[GRAPHIC] [TIFF OMITTED] 43913.134
[GRAPHIC] [TIFF OMITTED] 43913.135
[GRAPHIC] [TIFF OMITTED] 43913.136
[GRAPHIC] [TIFF OMITTED] 43913.137
[GRAPHIC] [TIFF OMITTED] 43913.138
[GRAPHIC] [TIFF OMITTED] 43913.139
[GRAPHIC] [TIFF OMITTED] 43913.140
[GRAPHIC] [TIFF OMITTED] 43913.141
Mr. Horn. Well, since I am half Irish, I can sympathize
with you. I enjoyed what you had to say.
Let me pursue a few of the points you made, and then we
will go down the line on another area.
One of the things that really concerns people is the
browsing, snooping issue, if you will. I was assured by the
Commissioner a year or so ago that IRS had taken action to
reduce browsing, and there were several people under indictment
for violating the statute. I am just curious, what happened to
them? Were any people ever indicted? Were they fired? What?
Mr. Dolan. The answer is yes to all of the above. If you
permit me to roll it back maybe just a frame or two before
that, when the Commissioner was before you, as she has before
others, she said unequivocally that browsing was not acceptable
and not to be condoned. And what she and the rest of the senior
management team have tried to do is drive that down in the
organization in all of the ways you would expect in a large
organization.
We have taken and adjusted the tables of penalties that
apply to disciplinary action. We have instructed those who are
responsible for taking discipline that abuses or unauthorized
accesses were to be treated very seriously in the discipline
process. We have created basically a system we call the
electronic access research log, which gives us an opportunity
to take, in a much more creative way, these audit trails and
determine where there are potential abuses.
We have developed case processing procedures and the
personnel and inspection and line management process to ensure
that not only detection of abuses takes place, but that
discipline be appropriate and be consistent.
We have taken a variety of steps. We have actually
prosecuted a number of cases, some of which we have found
bouncing back on us, because while we had a standard that we
thought was clear, the courts have in some instances
distinguished between those instances where somebody uses
information for some purpose and in other instances where they
do what they have dubbed ``self-disclosure,'' so if that person
has accessed information and made no further use of it, some of
our prosecution and disciplines have failed because people have
looked at that and said the standard of conduct is not explicit
enough to have put the employee on notice--that is
unacceptable.
A couple of things have happened in the meantime. We have
made it administratively explicit that it doesn't make any
difference whether you use the information or not. If it is an
unauthorized access, it is offensive and actionable with
respect to a disciplinary action.
On the automated access side, as I think you know, the
changes last year in title 18 have now substantially improved
the ability to take the criminal prosecution where the access
is one that occurs through automation. Both Chairman Archer and
Senator Glenn have bills working in the House and Senate that
take that same provision and overlay it on paper accesses.
So we are hopeful that those additional attributes will
help us continue to try to make this less and less the type of
risk that an individual employee takes and more and more the
kind of protection we can sit here in front of you and say we
have greater confidence that it is not going to go on.
Mr. Horn. Well, I don't want to create 106,000 pieces of
paper in the agency, but it seems to me you could get employees
to sign a statement that I am aware of this policy, and I will
not violate it. Do we have something like that?
Mr. Mader. Mr. Chairman, we do have a policy when employees
first come into the Internal Revenue Service. As part of our
orientation program we talk about the rules of conduct. As Mr.
Dolan mentioned, safeguarding taxpayer information is in those
rules of conduct. When employees are trained and profiled to
access our computer systems, they sign the very kind of form
that you mentioned, advising that they have been told what the
rules and regulations are and what the ramifications are for
violating them.
Every time an IRS employee accesses one of our main
systems, a warning screen comes on and reminds them another
time about unauthorized access.
Mr. Horn. Approximately how many thousand employees have
access to this information?
Mr. Dolan. I think Bill told me the exact number, but
somewhere in the neighborhood of 55,000 people would have
responsibilities that would take them into what is our
principal, one of our principal on-line systems, our integrated
on-line retrieval system.
Mr. Horn. So over half the agency personnel have access?
Mr. Dolan. In having the access, they all have different
kinds of access, depending upon the nature of the job. I may
have access that allows me research, or I may have access that
allows me to adjust. I may have some combination. Specific
authorities comes with the passwords and the specific
accreditations that are akin to my job.
About 1.5 billion transactions take place in that one
integrated data retrieval system in the course of a year by
these 55,000-some people. We are talking about an incredibly
fractional number of instances in which there is any
unauthorized access. One is too many, but in the context of the
50,000-some people being asked to do the key responsibilities
across the data point, it is only a fractional number.
Mr. Horn. At what point have we found a weakness in the
system in the sense that they could make the claim that, gee,
this employee didn't really know it was a problem? Has that
come at the internal IRS, or Treasury level, where discipline
was administered, that claim was made and they haven't been
able to make it stick? Where has it happened? Or is it
happening in court?
Mr. Dolan. We talked a little bit about the court, and the
administrative action, it goes something like this: the EARL
system will produce a lead. The lead will go to some
combination, typically of a line person, personnel person,
maybe an inspection person. They will develop the lead, go back
into the person's assignments. They will make some judgment as
to whether it appears that this is a good lead, a good lead
meaning a lead that looks like it----
Mr. Horn. Is this lead a tip?
Mr. Dolan. It is a tip, but it comes as a result of
massaging these thousands of audit trails. Without getting into
a lot of explicit detail here, it takes characteristics. There
have been a series of scenarios developed that are high
likelihoods of abuse scenarios. Not every one of them reflects
abuse, but they will narrow a set of leads. Those leads will
then subsequently have to go back to the individual employee's
precise work assignments, precise fact patterns, and determine,
yes, this lead turns out to be an instance of abuse.
When it is, that instance of abuse, that allegation of
abuse, will go to the head of an office. The head of that
office will end up having their personnel people develop an
adverse action or disciplinary action. It will be taken. It may
or may not be appealed.
One of the things we found upon appeal is, again, we are
operating within a system that the Federal disciplinary system
assumes a couple of things. It assumes for the most part
discipline is progressive. What that means in a code word is,
typically a person is disciplined for a first offense and given
some opportunity to remediate their performance or to improve
on the job.
Mr. Horn. In other words, nothing happens if they don't do
it again?
Mr. Dolan. No.
Mr. Horn. You could get one crack at a rock star,
celebrity, or politician?
Mr. Dolan. I knew I was going down the wrong road giving
you that explanation. That is not the rule.
Mr. Horn. I am trying to get the process.
Mr. Dolan. There are no one cracks. You do it once, it is
wrong. I was trying to explain in the context of the precedents
built up in the Merit Systems Protection Board, the courts and
everywhere else. There are some rules about how you do
discipline in the Government. I can sit here and say it is
wrong one time, it ought to be a firing and nobody ought to
have any recompense on that. That is not the real world.
The real world we have taken the disciplines into, is a
world surrounded by the practice of precedents of the general
disciplinary system. What we tried to do, as I mentioned at the
outset, is tried to make our penalty provisions be explicit
about ranges. We tried to say to our directors--propose on the
high end and make it very difficult to mitigate from the high
end, meaning removal. So principally our reaction is going to
be removal when it is a willful access.
When it is some trainee in the first week who bounces up
there and comes back and says, wait a minute, I did it and
didn't mean to, that person is not going to be removed
probably. But the willful access is something we would be
pursuing removal as a first resort.
Mr. Horn. Willful is very hard to prove; is it not?
Mr. Dolan. It is. Our systems today, Mr. Chairman, lock you
out of your own account. Everybody knows they lock you out of
your own account. Notwithstanding that, we will have on the
audit trail evidence that somebody tried to go to their own
account. When you go to that person, you get one of two
answers. You can find somebody who was brand new, didn't
understand or whatever, went up and bounced, and that will come
up as a transgression. Or you can find some of your best
employees who will tell you--when they have been on the system
all day long, bringing up Social Security numbers to resolve
them, they will on occasion bring up their own Social Security
number. You will have that pop. They will not get into their
own account because they are frozen, but it will show up. When
you go back to that person, if indeed there is no history of
anything else, you can say, OK, I take that explanation of what
it was for and it is not some attempt to gain the system.
Mr. Horn. Well, how many people have you had any effective
discipline with, and what penalties have you given and how many
are involved? How many were brought up to the disciplinary
system and what happened as a result of that disciplinary
system?
Mr. Mader. I would like to submit for the record, Mr.
Chairman, a summary of those actions from fiscal year 1994
through the year-to-date. But let me, if I could, just talk
about 1996.
There were a total of, and this goes back to what Mr. Dolan
said, of 1,374 instances where the computer system kicked out
there may be something here, you need to investigate it
further. Of that 1,374, 797 of them were confirmed as an
unauthorized access. Of those cases, 93 employees were
separated, either involuntarily or they resigned before we
could separate them. There were 476 cases where upon further
investigation there was no unauthorized access.
What I would like to do is submit this for the record. I
know there have been a lot of numbers in the press in the last
week and I think it is important.
Mr. Horn. It will be in the record, without objection.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] 43913.142
Mr. Horn. Could you just give me the summary again of how
many cases, how many didn't result in cases once it was
explored, how many went into the disciplinary system beyond the
first or second stages, and what happened and what were the
penalties?
Mr. Mader. Of the total 1,374 cases, 411 of them were not
cases in which there was abuse.
Mr. Horn. What were they? What is the typical one, the 411
were?
Mr. Mader. As Mr. Dolan mentioned, when we actually pulled
the work of the employee, we determined that the kind of access
they had to a particular account was justified. As Mr. Dolan
said, we have several scenarios built on the front end of this
system that pull together certain transactions.
Mr. Dolan. The system looks for multiple accesses to the
same account. On the face of it that might look like somebody
has got either an interest in browsing or it might, in fact, be
someone who has had repeated conversations or repeated
telephone calls from the same taxpayer, and gone into the
account several times to either look at a refund or look at
some other transaction.
Mr. Horn. Of the 963 left, what happened?
Mr. Mader. Of the remaining cases, there were 797 cases in
which we confirmed there was an unauthorized access. Twenty of
those resulted in a caution letter to the employee.
Mr. Horn. I am sorry, 20 what?
Mr. Mader. Twenty resulted in a caution letter to the
employee.
Mr. Horn. Don't do it again?
Mr. Mader. Don't do it again; 326 resulted in oral or
written counseling, which is more severe in our disciplinary
system than just a caution letter.
Again, Mr. Dolan had mentioned----
Mr. Horn. Excuse me, the caution order doesn't go into
their personnel file?
Mr. Mader. No, it does not, sir.
Mr. Horn. How do you have any trail that this person keeps
doing these things if you don't put something in the personnel
file?
Mr. Mader. They are given a letter. The next instance would
result in more severe discipline, and that would go in their
personnel file.
Mr. Horn. You have 326 you tell me you did put in out of
the 963 that was made after you got rid of 411 by not really
being abusive?
Mr. Mader. Right.
Mr. Horn. But was justified. So I am just trying to find
out how the system works. So we get down to 326 where you have
got oral and written. Now, is it both?
Mr. Mader. It is either/or.
Mr. Horn. So how many actually had something put in their
personnel files?
Mr. Mader. Counseling is a step above the caution. The
counseling is formal discipline, and a notation would be made
in their personnel file. Sixty-two employees received an
admonishment.
Mr. Horn. What does that do? Does that get into the
personnel file?
Mr. Mader. Yes, it does, sir.
Mr. Horn. Is that the first level that goes into the
personnel file?
Mr. Mader. Yes, sir.
Mr. Horn. And 62 admonishments.
Mr. Mader. Eighty-seven reprimands, which are more severe
than admonishments.
Mr. Horn. Eighty-seven reprimands.
Mr. Mader. One hundred forty-seven suspensions of 14 days
or less.
Mr. Horn. And that is without pay?
Mr. Mader. That is without pay, sir. Thirty-eight
suspensions greater than 14 days without pay, one reduction in
pay, and 93 separations from the service.
Mr. Horn. Ninety-three separations as a result of this
incident or did they have other reasons?
Mr. Mader. As a result of this incident.
Mr. Horn. OK. So 93 were asked to leave and did.
Now, did you lose any of those on appeal?
Mr. Mader. I don't know, sir. I would have to check the
record.
Mr. Horn. Would you mind? Check it, because where did the
union stand in all this? Did they back you on a no browsing, no
tolerance, as the Commissioner told me, policy?
Mr. Dolan. I think for the most part, yes. Bob Tobias is a
cosignatory on a series of memorandums that have been put out
on this. I think they would clearly have an interest in making
sure that whatever disciplinary process works, gives people an
opportunity to explain themselves and defend themselves, but
they have not condoned it, either.
Mr. Horn. Any other data relevant to this?
Mr. Dolan. Dave has all 4 years there, actually 4 years,
and we will provide all 4 to you, Mr. Chairman.
[The information referred to follows:]
We are providing a status report on the number of cases of
unauthorized access, or browsing, that were appealed by
employees either to arbitration or to the Merit Systems
Protection Board (MSPB). These figures are from October 1993 to
the present. There were six cases appealed to arbitration: five
were sustained and one was mitigated to a suspension in excess
of one year. There were seven cases referred to the MSPB: six
were sustained and the seventh is the Czubinski case, which was
recently overturned by the courts.
Mr. Horn. Does it show a trend line in any way? Is there
more browsing now than there was 4 years ago?
Mr. Mader. No, it shows, Mr. Chairman, as Mr. Dolan
testified, that 1995 and 1996 are about the same. So far, the
trend in 1997 is upwards a little bit.
Mr. Dolan. That is a classic dilemma. Is the trend a
function of better detection or a function of more instances?
As I sit here, I can't tell you, but I can tell you we improved
our detection, but I can't tell you in absolute terms what it
reflects.
Mr. Horn. What we are talking about here is in 1/13th of
the cases that start there is an actual separation and a notice
put in their personnel file, a note on a separation? Is it
simply a separation or does it state why the separation
occurred?
Mr. Dolan. Within the personnel parlance, it would be a
permanent record that would be reflected upon anybody, any
other Federal employer pulling their Federal jacket. It would
be reflected in there.
Mr. Horn. In other words, when they go to another agency
the next day and they phone back, presumably they are told this
person was separated for cause.
Mr. Dolan. Don't let me mislead you. There will be some
instances in that 93, whereupon realizing that we were going to
fire them, the person might have left. When you leave before
the actual discipline is accomplished, then your record would
not reflect that.
Mr. Horn. In other words, you can't fire me, I quit?
Mr. Dolan. Correct.
Mr. Horn. OK. Do you think that is sufficient action or
should there have been any criminal action?
Mr. Dolan. I don't think any action----
Mr. Horn. What was the biggest number of voyeur cases you
had in terms of one person accessing 200 files, 500 files?
Mr. Dolan. I don't have those specifics in front of me. I
would tell you that if you ask is it sufficient--to the extent
it exists at all, it has not been sufficient. So I think we
have still got a task ahead of us to eradicate it.
Mr. Horn. Now, did any of these cases, were they ever taken
to the U.S. attorney, asked for an indictment?
Mr. Dolan. Some have. We could get you more detail.
Mr. Horn. What did the U.S. attorney say? Didn't want to
deal with it?
Mr. Dolan. On several occasions, U.S. attorneys have taken
the cases. We talk in our testimony about a couple that have
not been successful, but there are others that have been
successful. The U.S. attorneys are not reluctant to help us
pursue the prosecution, and particularly in the grievance
cases.
Mr. Horn. Are they primarily here in Washington or out in
the field?
Mr. Dolan. Principally in the field.
Mr. Horn. Principally in the field. In terms of the U.S.
attorney's actions, could you give us a statement for the
record of how many times you went to a U.S. attorney, wherever,
separate field and Washington, and the times they took it and
times they rejected it, and, if so, what was the reason for
rejection. Just they are overworked and have more serious
things like murders or whatever, and I understand that, but I
am not happy about it. And what went on to a court and what did
those courts rule on this. Did they give you any further
instructions from the court as to clarity of policy or what?
Mr. Dolan. In response to your invitation, why don't you
let us give you the whole spectrum.
Mr. Horn. The whole works. I want to know why this policy
isn't working and it keeps occurring.
[The information referred to follows:]
We are providing a chart which provides a breakdown on the
U.S. Attorney's actions concerning unauthorized access
(browsing) cases from October 1, 1994, through March 31, 1997.
[Note.--The chart can be found on p. 202.]
Mr. Dolan. The other thing, that I think will be implicit
in anything we give you about this part of it, is one place
that I suspect you would be at anyway. This is something today
you are not going to prosecute out of existence. Because with
the most cooperative U.S. attorneys in the world, what you want
to do is you want to eradicate this on the front end. You don't
want to depend on prosecution. You want the deterrence of
people knowing that not only will you prosecute but upon
prosecution, it will be a successful prosecution. But at the
end of the day our objective has been to eradicate this sort of
prosecution by the training, by the systems, by the front end
proactive stuff to the maximum extent possible.
Mr. Horn. In the early 1970's, the Nixon White House, one
Presidential assistant went to Federal prison for looking at
one FBI file. We now have cases in the White House, we still
don't know their reason for looking at 600 to 1,100 FBI
filings, and nothing has happened.
Is this just we change our sense of morality in three or
four decades or are we just incompetent in terms of our
processes for dealing with discipline or what?
Mr. Dolan. Well, I don't believe----
Mr. Horn. What would you do to change this process and make
it very clear that this is serious business?
Mr. Dolan. A couple of things. One is at the front end, I
would like to be able to prevent more of it so I don't have to
explain it in any context of it being unacceptable. But it is
plain flat out impossible to occur.
Mr. Chairman, you have been involved in big organizations,
and I believe you know it is repetition, repetition,
repetition. It is finding every possible way, every medium
available to you, training, information, communication, to
continue to reinforce up and down the line with everybody to
the point of people being tired of hearing you reinforce it.
Mr. Horn. That is why I want them to sign a piece of paper
and get it in the file.
Mr. Dolan. They need to sign it and need to sign it and
sign it. Because, again, the repetition, one time doesn't do it
on that score, either.
Mr. Horn. Maybe they shouldn't be working for your agency
if they are that dumb.
Mr. Dolan. I don't think people who are making unauthorized
access should be working for the agency.
Mr. Horn. Let me move to the results bit. We talked earlier
in some of the testimony about the Government Performance and
Results Act. In testimony to the appropriations subcommittee on
the IRS fiscal year 1988 budget, the Commissioner stated that
the IRS has outcome-oriented performance indicators. I assume
that is in the 1998 budget, right? Yes, 1998 budget. Here it
says 1988. Thank you. It is 1998, as I thought.
The appendix to the fiscal year 1998 included several
measures. Now, I found them rather interesting, and I would
like to put it in the record, without objection.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] 43913.143
Mr. Horn. This is the chart where it says fiscal year 1998
Performance Measures and Targets. It starts in with the mission
effectiveness indicator, total net revenue of budget minus
burden, divided by total true tax liability, is roughly 80
percent, 79.9, and goes down with a series of indicators on
collection, where we are on compliance, improved customer
service. You mentioned some of that, increase in productivity,
and then various budget activity code measures such as
processing accuracy, processing accuracy rate, and so forth.
I guess I would ask why is refund timeliness used? Does it
serve the American people well if you send out refunds in a
timely manner, but they are for the wrong amount to the wrong
people, and how do we get at that problem?
Mr. Dolan. Well, in the first instance, in the very largest
percentage, in almost every instance, the right refund is going
out to the right person in what we have identified within our
customer service standard, which is 40 days.
In point of fact, if you are using both electronic input
and taking your refund to the bank, you are going to get it out
considerably quicker than that. We do believe, Mr. Chairman, if
I am following your question correctly, that this is a measure
our customers have told us is important to them. It doesn't
have to be overnight, but it has to be predictable, and it has
to be consistent.
Mr. Horn. Are we looking at the wrong refunds and working
that in?
Mr. Dolan. Maybe your point is to refund fraud. Is that
your point?
Mr. Horn. Let me just read you a little bit, a paragraph
from the IRS Management Report, High Risk Series, U.S. General
Accounting Office, February 1997.
``When we first identified filing fraud as a high-risk area
in February 1995, the amount of filing fraud being detected by
IRS was on an upward spiral. From 1991 to 1994, the number of
fraudulent returns that IRS detected rose from 11,168 to
77,781, and the total amount of fraudulent refunds detected
rose from $42.9 million to $160.5 million. In 1995, after being
urged to take immediate action by us, Congress and the Treasury
task force, IRS introduced new controls and expanded existing
controls in an attempt to reduce its exposure to filing fraud.
Those controls were directed toward either, one, deterring the
filing of fraudulent returns; or, two, identifying questionable
returns after they had been filed.''
Then it notes that ``To deter the filing of fraudulent
returns, IRS took several steps that were focused on electronic
filers. As a result of these steps, IRS, one, expanded the
number of upfront filters in the electronic filing system
designed to screen electronic submissions for problems, such as
the missing, or incorrect Social Security numbers, to prevent
returns with these problems being filed electronically, and
strengthened the process for checking the suitability of
persons applying to participate in the electronic filing
program as return preparers or transmitters by requiring
fingerprint and credit checks,'' all of which are good moves.
``To better identify fraudulent returns once they have been
filed, IRS placed an increased emphasis in 1995 on validating
the Social Security numbers on filed paper returns and delayed
any related refunds to allow time to do these validations and
to check for possible fraud. IRS also improved its Questionable
Refund Program by, one, revising the computerized formulas used
to score all tax returns as to their fraud potential, and, two,
upgrading the electronic Fraud Detection System to give staff
better research capabilities.''
I will put the rest in the record. I will not bore you with
reading it. You are probably well familiar with it.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] 43913.144
[GRAPHIC] [TIFF OMITTED] 43913.145
[GRAPHIC] [TIFF OMITTED] 43913.146
[GRAPHIC] [TIFF OMITTED] 43913.147
[GRAPHIC] [TIFF OMITTED] 43913.148
[GRAPHIC] [TIFF OMITTED] 43913.149
Mr. Horn. But, again, are we treating the electronic forms
on refunds differently and permitting more errors to get
through simply because they haven't filed in paper? Filing in
paper, programs you have more time to deal with that. So where
are we between those two filings?
Mr. Dolan. It is a great question because it is actually
just the reverse. Part of what gets lost in the GAO narrative
is, there is a little bit of apples and oranges between the
kinds of returns that are being detected because not when the
GAO first discovered this, but when we discovered it and the
GAO then began writing reports on it, part of what we
understood about both the paper and the electronic side were
there were insufficient filters.
What was happening on the electronic side was you had, my
term, some ``bozo criminals'' out there putting together
various scheme and trying to game the electronic system. What
we have done over the past several years, particularly with the
filters, is make it far less possible--it is impossible, I
never want to say impossible--highly unlikely today that a
bogus Social Security number is going to get through the
electronic processes because of the way the electronic screens
are able to look at all that data and basically pull any of the
mismatches out. So what happens today, what used to show up as
a casework further downstream, is those cases which are
rejected up front.
Now, in the instance where it is not anybody with
fraudulent intent, but somebody who transposed their daughter's
Social Security number or forgot their spouse's or didn't make
an adjustment of maiden to married name, those things reject,
but don't ever get in the system. They reject, but are able to
be corrected and, when corrected, they process through. In the
early years we were relying almost exclusively on catching
those on the back end, particularly on the electronic side. We
are able to detect much, if not all, of that on the front end.
Mr. Horn. Let me move to another indicator here and that is
the number of calls that are taken. I think, wouldn't you
agree, that it isn't the fact that you talk to the people over
the telephone, but isn't the real measure a measure of the
outcome--such as the call is correctly answered. I know from
time to time we have all seen stories where they have checked
the same question at different regional offices and gotten
different answers. I have forgotten if you have an internal
review like that. So could you tell me a little about it? Why
don't we have as one of the results indicators the accuracy of
the response rather than simply the fact that, yes, I talked to
a taxpayer.
Mr. Dolan. We do, Mr. Chairman. We actually have two other
metrics that I think make your point. One is the actual
accuracy rate. You are quite correct that in years past it was
quite a celebrated cause, what the quality rate of the IRS was,
and a lot of pundits had a lot of fun with that. For the last
several years, the GAO and IRS have actually had their acts
pretty well together. We have had a protocol for doing test
calls and evaluating quality. It is posted weekly. It is
tracked very carefully. At least on the appendix I have, which
if it is the same one you are looking at, toward the bottom,
maybe a third of the way to the bottom of that, it is something
called ``Taxpayer Service Tax Law Accuracy Rate,'' 92 percent,
that would be one of the metrics we would use.
The other one, up toward the top of that page, under
something called ``Objective--Improve Customer Service,'' you
see something called ``Initial Contact Resolution Rate.'' That
is another metric that we think is very important, because we
want the person to call, ask their question, and we want a
person capable of resolving that issue then, not having to
write us, or call us back.
So those three things would work in concert as a function
of how well we are doing our customer service.
Mr. Horn. How is that 92 percent arrived at? Is that simply
a random sample check of your people or do you know what they
have said on each call? How can you, unless you tune in and tap
them, how do you know?
Mr. Dolan. It is actually a very precise formula, agreed
upon by the GAO before the start of the filing season, where
you take a specific category of calls, numbers, and you place a
specific set of test calls that will give you statistical
reliability of the result. You take that at the front of the
season, you agree with GAO, and you have test calls made
throughout the season. We report site-by-site so that every
site is able to track week-to-week not only their gross quality
rate, but know where they are falling below on a particular set
of answers. So it is a fairly elaborate process designed to
give us that kind of feedback.
Mr. Horn. What else do you think needs to be done in that
area to improve accuracy?
Mr. Dolan. Well, we have got a significant number of
automated systems that I think at the end of the day will take
what I would call some of the more easy traffic off of the
system, so that somebody who really has a relatively routine
question, and is comfortable with the automated systems, that
you can move that traffic off into those systems, thereby
giving not only greater access, but knowing that the human
beings that you have working on the phones are ones that you
could continue to specialize. So at least arguably you wouldn't
have to spend as much time answering, where is my refund or can
I claim this dependent, and maybe somebody becomes more skilled
in some of the more technical areas. So being able to provide
depth of training to a greater range of our employees, I think
that is the next best thing we can do.
Mr. Horn. What do you think of the rest of the appendix,
what do you think the best outcome measure is? If you as a
manager had to look at one thing, what would be the one that
meant the most to you as to how the agency is doing?
Mr. Dolan. As a manager, the first thing I would want to do
is make sure that I knew where my board of directors was going
to come with that answer; because I would probably tell you at
any given time, I am trying to balance a success in both access
and accuracy of my customer service; as well as my ability to
collect my accounts receivable; and as well as my ability to
place the rest of my compliance resource across those parts of
the tax gap that are most significant.
So I think we are always in a balancing exercise. And then
overlaid on that, I would say I would hope I am seeing
productivity out of all corners. That is kind of the horse race
we find ourselves in, not always with a board of directors that
sees it the same way.
Mr. Horn. You might want to file this for the record, if
you are not prepared to deal with it now, but the last point I
have on that appendix is which of those indicators do you
regard as outcome oriented? Do they meet the definition of an
outcome indicator envisaged in the Government Performance and
Results Act? I don't know if you had a chance to review all
these.
Mr. Dolan. I will be happy to take your invitation of
giving you something for the record.
Mr. Horn. Just file it in the record then and we will take
a look at it.
[The information referred to follows:]
The IRS considers the following measures to be outcome
oriented:
Mission Effectiveness;
Total Collection Percentage;
Total Net Revenue Collected;
Servicewide Enforcement Revenue Collected;
Servicewide Enforcement Revenue Protected;
Taxpayer Burden Cost for IRS to Collect $100;
Initial Contact Resolution Rate;
Budget Cost to Collect $100;
Percent of Returns Filed Electronically;
Field Examination Dollars Recommended; and
Field Collection Dollars Collected.
The General Accounting Office recently completed a review
of the results orientation of selected federal regulatory
agencies and generally agreed that the IRS Objective Level
Measures were outcome oriented. In addition, most of the
measures in the President's Budget Submission for IRS were
intended to fulfill the GPRA Annual Performance Plan
requirements.
Mr. Horn. Let me ask you now on the lien problem, that has
come up before, and we have some horror stories of course that
often occur.
All of us have district offices, as you know, where we have
a staff that operates, as the Swedes would call it, in an
ombudsman role, where if they have problems with any Federal
agency, we try to be helpful with them.
I must say your congressional relations people at Laguna
Niguel have been outstanding. When we needed help, they have
done a very fine job and have been very receptive.
I noticed this article in the Washington Post, Albert B.
Crenshaw wrote called ``A Struggling IRS Collects Its Fair
Share of Problems.'' They have this one case, and I am sure you
are knowledgeable of it: Betty and Gerald Wesley of Annapolis.
The difficulties for the Wesley's began after they missed a
payment in November, when Gerald Wesley became sick. The
Internal Revenue Service sent a notice that unless the couple
caught up in 30 days, the installment agreement would be
canceled and the full amount would be due. So the Wesleys
quickly arranged a personal loan and paid up 4 days later. They
made their next payment as scheduled and were confident the
issue was behind them.
On February 7th, however, the IRS seized the checking
account, leaving them with 23 cents in cash. The matter was
straightened out. The lien on their account was lifted the
following Tuesday. The Wesleys, meanwhile, were left shocked
and mystified at their experience. ``Nobody at the IRS can
explain why this happened. They honestly do not know,'' Betty
Wesley said.
The reason that case interests me, I had a case exactly
like that about a year ago where one part of the IRS was moving
with a lien, the other part of the IRS was settling with the
individual. When the individual got back, he found all his
accounts tied up, and the fact was that he couldn't pay his
workers and he couldn't pay his tax bill.
So how many of these do we have floating around where the
right and left hand don't know what each other is doing?
Mr. Dolan. If you will permit me, what I would like to do
is ask John Dalrymple to talk a little bit about the core issue
you identified in the lien issue. That will shed some general
light. John?
Mr. Dalrymple. The issue around filing Federal tax liens
that you mentioned earlier--those are generally filed by our
field personnel. And once that lien would have been filed on
the taxpayer, when we went to execute on it, the taxpayer sent
a payment in, in a particular case the Wesleys, it is possible
that the payment showed up after the lien or levy had been
effectuated at the bank.
The process is that the bank is to generally hold the
funds, notify the taxpayer they are going to be held for a
period of time, and then the taxpayer has an opportunity to
deal with the service before those funds are actually taken and
given back to the taxpayer.
I can't really talk about this case specifically, but that
is what generally is supposed to happen.
Mr. Horn. Well, if you could, since it has appeared in the
papers, let's get a little analysis of the case, put it at this
point in the record as to what happened and what went wrong. Is
it communication and have we got some management process by
which that can be checked? Because, let's face it, that is a
real shock when you go home and you can't get anything because
the lien is placed on your property, on your bank account, and
all the rest.
How are you going to even make the payment if you haven't
got the money?
[The information referred to follows:]
Section 6103 of the Internal Revenue Code prohibits the
disclosure of any taxpayer's tax return or return information.
This prohibition includes providing an analysis of the Wesley's
case.
Mr. Dalrymple. I should make an explanation between lien
and levy, because they are two different things. I think what
is described in the newspaper article is a levy, which
generally arises out of a lien. A lien, of course, attaches to
property. But until you actually effectuate some action, such
as a levy, then it just has the effect of notifying other
creditors that the IRS, in fact, is a creditor itself,
protecting the Government's interest.
Mr. Horn. Let me pursue the year 2000 problem for a little
while. This subcommittee started that discussion back in April
1996 with the executive branch, and just perhaps, Mr. Gross, I
read a lot about you in Time Magazine here. I want to put the
Time's story in the record. It says Arthur Gross, the Assistant
IRS Commissioner who is ``the agency's first world-class
information systems officer,'' so I am looking for a lot out of
you with the endorsement of Time.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] 43913.150
[GRAPHIC] [TIFF OMITTED] 43913.151
[GRAPHIC] [TIFF OMITTED] 43913.152
[GRAPHIC] [TIFF OMITTED] 43913.153
[GRAPHIC] [TIFF OMITTED] 43913.154
Mr. Horn. I remember the words of the late George Murphy
who, when he was in the Senate, when one day I questioned some
article he was going to read as a Senate staff person, he put
his arm around me and said, Steve, it is in print, it has got
to be true.
I assume, Mr. Gross, it is all true and you are going to
solve the problem. So how are you solving it?
Mr. Gross. The century date problem for the IRS is a world-
class problem. We have more than, potentially more than 100
million lines of computer code that are embedded in our core
business systems and a variety of our field systems. Since
April, we have made a very aggressive, as GAO reported, a very
aggressive effort to gain command and control of the core
business systems, the systems that process the 200 million tax
returns, and the hundreds of millions of payment records that
account for $1.4 trillion in tax payments each year.
I would say at this point we have reasonable command and
control of the century date conversion for those core business
systems, and it is far more complex than simply the application
systems. There are major infrastructure problems. What I mean
by that is that we have more than 50 mainframe computers that
have to interact with each other that support these core
business systems across our 10 service centers and 2 computing
centers. The century date conversion plan that we have
developed and are in the midst of executing provides,
therefore, not just for the application code analysis and
conversion, but also the upgrade, where applicable, of the
infrastructure, the mainframe platforms, the
telecommunications, that support those systems.
The second part of the century date challenge for the IRS
are our field systems. While those systems do not provide for
the core business support processing tax returns, issuing
refunds, processing tax payments, they are, nevertheless,
important to the business of the Internal Revenue Service. And
for those systems we are in the midst of an inventory of both
the application code and the infrastructure upon which that
application code functions.
We do not know what we do not know. What I mean by that is
until we complete that inventory of those field systems, we are
not going to be in a position to assess the extent of the
problem or to execute a plan. Our projection is we should have
most of that inventory completed by June 1997, this June, and
once that inventory is completed we will be able to provide a
much more detailed decomposition of both the problem, the
resources to correct it, and the plan for executing.
Mr. Horn. I should say for the record that what we are
talking about here is back in the 1960's, when you got your
present computer system, we didn't have very much capacity in
computers in those days, and somebody had the bright idea, why
use a 4-digit year, let's just put in ``66'' instead of
``1966.'' They knew it would be a problem, but they figured
technology would take care of it somehow.
I take it, then, your computers from the 1960's have
essentially used the 2-digit year; is that correct? Or was
there a point where you have changed to the 4-digit year?
Mr. Gross. Your first statement is correct. Not only our
computer systems of the 1960's, but like many corporations and
other Government agencies, even computer systems developed in
the 1970's, 1980's, and even early 1990's, typically have the
2-digit date field. That means that the application code
analysis and conversion covers more than simply the legacy
systems built in the 1960's. It also covers a variety of
applications built in the 1980's and 1990's, and, interestingly
enough, the commercial products that are purchased even as late
as the mid 1990's are not necessarily century date compliant.
What that means is that we need to also evaluate each and every
one of our commercial off-the-shelf products to assess
compliance.
We have initiated procurement and acquisition guidance to
our procurement office so that since December 1996, we are not
acquiring any commercial products until and unless they are
validated and certified as century date compliant.
Mr. Horn. In brief, what happens when you get to the year
2000 with a ``66'' in there and it becomes suddenly ``00'' for
the year 2000, the computer doesn't know what to do, and you
get some misinformation. Someone mentioned the other day, I
don't know if it is true, that various delinquencies were
issued, it was primarily in the Pentagon, I didn't know if that
had happened at IRS, but I think they got a 1997 year
delinquency, because something flipped over into the year 2000
and just sent the notice out. So that it had to be corrected.
Have you had any problems at this point?
Mr. Gross. Mr. Chairman, we have identified those
application systems that do project out in the current year,
and we have already converted more than 200 systems that have
future year 2000 or beyond implications. So, to date, we have
been able to avoid that kind of a problem in the IRS.
Mr. Horn. Now, presumably the figure that the Gartner Group
gave us way back in April was that it would be a $30 billion
Federal problem, a $600 billion worldwide problem on private
and public computers, and the U.S. share would be half that,
because we have half the computers in the world.
The administration when it sent up its budget for fiscal
year 1998 said it is a $2.3 billion problem. When we listened
to Assistant Secretary Paige in the Pentagon, who is in charge
of that area, said we have just started trying to figure out
what we are facing in the year 2000. And we had submitted $1
billion of that $2.2 or $2.3 billion, I guess I would ask, how
are you analyzing the code? Can you put a price on it in terms
of the human resource help or technical help that you have to
get to solve the problem? What are some of the problems that
you are dealing with?
Mr. Gross. Of the 100 million lines of codes that we are
estimating, 62 million lines of code are in our core business
systems for which we have identified a plan of conversion. Our
projections are that we will be spending approximately $2.50
per line of code for that conversion. That is based on an
estimated 1,780 work years of effort from the date that
conversion began to the date it is projected to be completed.
We have not yet identified the total all in costs for the
infrastructure upgrades necessary to support the core business
systems, nor have we estimated the cost of the conversation for
the field applications, and we will not be able to do so until
we complete that inventory.
Mr. Horn. That is very helpful.
Well, gentlemen, I know we have kept you a long time. We
have some other questions. If you don't mind following our
usual procedure, we will submit them to IRS. If you would give
us a reply, we will put it in at this point in the record.
[Folowup questions and responses follow:]
[GRAPHIC] [TIFF OMITTED] 43913.155
[GRAPHIC] [TIFF OMITTED] 43913.156
Mr. Horn. I thank you all for coming, and I wish you well,
because you have a tough job. But the key part I think, before
you get computer systems or anything else, is to think through
what you are doing from a management standpoint and try to get
some integration of those numerous computer systems you have
got right now, which I guess you are trying to figure out, Mr.
Gross, how to get them to talk to each other effectively. And
hopefully you field the equipment off the shelf without sitting
around doing what FAA and your predecessors did, getting the
last ultimate system. You are never going to get it. You just
need to take it off the shelf, I would think. Is there anything
on the shelf that makes sense for use with IRS? Or does
everything have to be redesigned from ground zero?
Mr. Gross. There are systems in the commercial market, for
example, financial reporting systems that have applicability to
our environment. Part of our modernization plan for the future
is to identify the application of commercial products in lieu
of custom development, to the extent possible.
Mr. Horn. Good. I think that is a sensible way to go. Thank
you all for coming.
We have one more panel, one witness, Mr. Trinca, the Chief
of Staff of the National Commission on Restructuring the
Internal Revenue Service. Please come up. If you would stand
and raise your right hand.
[Witness sworn.]
Mr. Horn. Let the clerk note Mr. Trinca has affirmed that
oath.
Jeffery S. Trinca has been Chief of Staff of the National
Commission on Restructuring the Internal Revenue Service for
how many months now?
Mr. Trinca. Ten months, sir.
Mr. Horn. About a year. And the Commission reports when?
Mr. Trinca. The end of June.
Mr. Horn. The end of June. Could you tell us a little bit
about the interim thinking of the Commission in terms of the
IRS?
Mr. Trinca. Yes, sir.
STATEMENT OF JEFFERY S. TRINCA, CHIEF OF STAFF, NATIONAL
COMMISSION ON RESTRUCTURING THE INTERNAL REVENUE SERVICE
Mr. Trinca. Thank you, Mr. Chairman. Thank you for allowing
me on behalf of Congressman Portman to provide an update on the
work of the National Commission on Restructuring the IRS.
Mr. Portman, who I believe is the newest member of this
subcommittee----
Mr. Horn. That is correct.
Mr. Trinca [continuing]. Sends his regrets and apologizes
that he could not make it here this morning.
Let me begin by telling you a bit about the Commission's
work to date. The Commission has 17 members; 4 from Congress, 2
from the administration, and 11 from the private sector or
State government.
Our congressional members are Senators Bob Kerrey and
Charles Grassley, Congressmen Rob Portman and Bill Coyne. So
this Commission is both bipartisan and bicameral.
The staff is made up of professionals with backgrounds in
law, accounting, business management, and computer systems
development.
The Commission has a 1-year life, and the final report will
be completed in June, as I said. Over the last 10 months, our
members and the staff have been digging through a mountain of
reports, studies, and data from the IRS. We are also conducting
a number of our own studies, including interviews of over 275
front line IRS employees, most of the top IRS executives here
in Washington, discussions with business groups, tax preparers,
and many other stakeholders.
Additionally, we have been very active in soliciting input
from the most important experts on the IRS, ordinary American
taxpayers. We have communicated with many folks on our home
page and through town meetings. We also intend to conduct a
survey of taxpayers later this month.
We have learned a great deal about the IRS and the
challenges it faces. Let me briefly describe what we have found
to date. Many of the problems of the IRS can be traced to three
main areas: management and governance at the top of the tax
administration system; inability to deliver quality customer
service to taxpayers; and the complexity of the tax code.
First, in the area of management and governance, the
Commission has found an agency that is unable to set long-term
strategies and priorities and stick with them. I would like to
stress that this phenomenon is historical in nature and not a
product of a particular administration.
The current IRS management and governance structure, which
includes Congress, the Department of Treasury, and senior IRS
management, does not ensure, one, that a shared vision for the
agency can be developed and maintained over time; two, that
priorities and strategic direction can be set and maintained;
three, that accountability is imposed on senior management and
a knowledgeable governing body; four, that appropriate measures
of success can be developed and used; five, that budget and
technology can be aligned with these priorities and strategic
direction; and, finally, that continuity and coordination of
oversight is achieved so problems can be caught at an early
stage.
Of these, the most crucial elements necessary for a turn
around at the agency are continuity, knowledge and expertise at
the top, and accountability. In the Commission's view, the
major technology and cultural changes that the IRS needs will
require a governing structure that is capable of setting,
implementing, and achieving long-term goals. Many of our
Commissioners have discussed publicly the possibility of
creating a private sector style board of directors of the
agency, with outside expertise that is accountable to the
President and Congress and has the authority to hold top level
managers at the IRS equally accountable. A majority of our
Commissioners strongly believe that any structure put in place
at the IRS must fulfill the six criteria cited above if it is
to have any likelihood of success.
Let me briefly address another area on which the
Commission's findings have focused to date, customer service.
The Commission has found an IRS that has not successfully made
high-quality customer service a top organizational priority.
While the private sector has rewritten customer service
standards over the last 25 years, IRS taxpayer service has
remained essentially static or actually declined. Billing
notices are confusing. Taxpayers have a hard time getting
through on the phone. Taxpayers must contact the agency too
many times to resolve even the simplest problems. IRS computer
systems are not readily accessible for personnel to solve these
problems once they do get through. Indeed, an IRS employee may
have to access as many as nine different computer systems to
resolve a taxpayer's problem.
Taxpayers have become accustomed to increasingly high
performance standards from their banks, credit card companies,
airlines, and other service organizations. They have come to
expect timely, accurate, and respectful service from both
private companies and public agencies. The IRS must move
aggressively to close this customer service gap. Among other
things, this involves improved technology, better training, and
enhanced coordination between all elements of IRS customer
service.
Finally, the Commission has increasingly focused between
the length of and the complexity of the tax code and the
shortcomings of the IRS. Mr. Chairman, I realize that the tax
code is a matter for another committee, but I would like to
point out that the complexity of the code has a direct impact
on the problems for tax administration. Even the best run IRS
would have a great difficulty administrating the complex and
ever-changing tax laws presently forced upon it.
Congress and the administration often act well-intentioned
but impose overly complex tax laws without understanding the
downstream problems they impose on the IRS and the average
taxpayer. One reason is that the IRS does not have an
independent voice in the tax writing process to make Congress
and the administration aware of the necessary administrative
changes and tax form revisions required to implement new tax
laws.
Another reason is there is no incentive in place to
encourage simplicity in the legislative process, and, of
course, there are some tax provisions that create such tax
administration and compliance nightmares they need to be
repealed. The Commission will address each of these issues.
Mr. Chairman, let me conclude by saying that the Commission
study to date has given us a good sense of where the IRS stands
today. More importantly, though, it has helped the Commission
create a vision of where the agency needs to be 5, 10, and 15
years from now.
The Commission's vision of the IRS for the next century is
a service-oriented organization that will collect the proper
amount of revenue by relying more on modern customer service
practices and less on enforcement mechanisms. Its highly
trained customer service representatives will be able to
resolve taxpayer problems on the first phone call. It is an IRS
that operates under a simplified tax code, and not on reducing
inadvertent noncompliance. This summer the Commission will
challenge the President and Congress to create an agency that
responds to the needs of taxpayers by fulfilling this vision.
The Commission report will be comprehensive, outlining
changes needed in Congressional oversight, Treasury governance,
IRS management, IRS operations and culture, computer systems,
taxpayer rights and measures to simplify the tax code. This
will be the first opportunity since 1952 for Congress to create
such sweeping changes at the IRS. We look forward to working
with the subcommittee.
[The prepared statement of Mr. Trinca follows:]
[GRAPHIC] [TIFF OMITTED] 43913.157
[GRAPHIC] [TIFF OMITTED] 43913.158
[GRAPHIC] [TIFF OMITTED] 43913.159
Mr. Horn. We thank you for testifying, Mr. Trinca. In your
review of IRS operations and activities and their goals and
their role within our Government, has the Commission come to
any conclusion as to the attributes a new Commissioner ought to
have to be an effective executive in charge of that
organization?
Mr. Trinca. Well, we are just now reaching our
recommendation stage of process, so it is difficult to predict
totally. But I think going back to the points about continuity,
knowledge and expertise, and accountability, those can be
directed at the Commissioner as well as the----
Mr. Horn. Well, to what does knowledge apply? Is it simply
knowledge of the tax laws and the code, or is it knowledge of
how to run an organization?
Mr. Trinca. It's knowledge of how to run an organization,
how to reengineer processes, how to bring very large, very
complex computer systems and integrate them into those new
processes and the tax laws.
Mr. Horn. I'd like to ask the gentleman from Vermont, Mr.
Sanders, who has rejoined us, if he has some questions.
Mr. Sanders. Thank you, Mr. Chairman. I really want to
congratulate you on conducting a very important hearing.
Mr. Trinca, you are familiar, perhaps, with the recent
reorganization plans of the IRS?
Mr. Trinca. Yes, sir.
Mr. Sanders. I can't tell you what impact they are having
around the country, but I know that there are a lot of concerns
about them in New England and the State of Vermont. In
Burlington, VT, which is our largest city, we were one of the
district offices that was centralized. As you know, Vermont,
Maine, New Hampshire, and Massachusetts now form one district.
Mr. Trinca. Yes, sir.
Mr. Sanders. And my impression is that is not working in
terms of improving the IRS's relationship to consumers. We have
seen a layoff of workers in Burlington, many of whom have been
frontline people, people able to respond to the day-to-day
needs of Vermont taxpayers. Third, we have seen the very
successful volunteer income tax assistance and tax counseling
of the elderly programs now being coordinated out of the Boston
office rather than out of Vermont, which has not been a good
thing. And fourth, we are seeing that IRS has instructed its
taxpayer services personnel to route most telephonic inquiries
by Vermont taxpayers to toll-free numbers in Boston, and from
what we are hearing, people are not making the connection, not
all of those people are getting in, they are getting kept on
hold for a long point, being shifted around and so on and so
forth. It seems to me from what I have been hearing, we have
talked to many tax preparation people who are also concerned
about the lower quality of service. What's your judgment on the
recent reorganization?
Mr. Trinca. Recently, we held two town meetings; we're
going to hold two more, one in Ohio, one in Nebraska. And I
have to say, the disturbing information received in those town
meetings was not necessarily from the unions or from the IRS
employees on the reorganization, but from practitioners,
enrolled agents, very much concerned that there seems to be a
sense of rolling back customer service in rural areas into more
urban areas. One practitioner pointed out that this potentially
could be analogous to the State, the Federal parks closing the
Washington Monument to point out what happens when you cut
their budgets.
The Commission is still chewing on this issue right now,
but there were a lot of concerns raised, and it seemed to be
pretty uniform across; lawyers, accountants, enrolled agents,
everyone.
Mr. Sanders. So this is not just a New England or Vermont
concern?
Mr. Trinca. No, that's right.
Mr. Sanders. It seems to me that if you cut back on
employees who service people in a given region in a rural area,
if you have a 1-800 number that is not particularly effective,
in is enormously frustrating. Here are taxpayers up against a
wall. They have an April 15th deadline. They are put on hold,
shifted all over the place. That does not do anybody any good,
and I think it just engenders more antagonism toward the IRS.
So what you are saying is even in the Midwest this
reorganization is not working particularly well?
Mr. Trinca. Yes, sir.
Mr. Sanders. Do you have any thoughts on how those of us in
Congress might want to respond to that?
Mr. Trinca. I think it's best to wait for our report from
our perspective than me to get out in front of our
Commissioners.
Mr. Sanders. Thank you very much.
Mr. Horn. I thank the gentleman. Let me just ask one
concluding question. Has the Commission and the Commission
staff had an opportunity to review the Treasury plan with
regard to any reorganization of the Internal Revenue Service?
Mr. Trinca. Yes, sir, we have.
Mr. Horn. Is there a reaction the Commission has at this
point?
Mr. Trinca. I think there's some concern among some of the
Commissioners that it deals with just pieces of the big
picture. We hope to deal with the big picture. I think we go
back to those three tests again on accountability, expertise
and continuity.
Mr. Horn. I take it your report then will have a critique
of the Treasury's proposal?
Mr. Trinca. Not specifically. I think it will--I think that
basically the critique that's done overall will probably stand,
even with the Treasury.
Mr. Horn. Well, in other words, you are going to make your
own report, but there won't be a closure as to detail of where
the Commission feels the Treasury ought to either expand its
proposals or think again about integration of the various
functions? I mean, how are you going to approach that?
Mr. Trinca. Well, I think our report in a sense will stand
on its own. The Treasury report in some sense will take steps
toward some of those directions they might head in, but I
believe that the Commissioners are interested in making much
more comprehensive and dramatic steps than were taken by the
Treasury Department.
Mr. Horn. As you know, in the legislative body the clash of
ideas is what counts, and if the clash isn't clear, a lot of
people are going to go hunting, fishing, misinterpreting, so
forth, and I would think when we have a group of experts such
as you have on the staff in the Commission on both parties, it
would be helpful to us in Congress if the Treasury's plan was
reviewed and very pertinent points were made. You could
reference other sections of your Commission report. But there's
got to be closure here for what did you think, what did they
think, ultimately that we will use to make some decisions.
Mr. Trinca. We have experienced quite a bit of clash on
this, and I believe there will be a sharp contrast, sir.
Mr. Horn. That's the problem with too much business around
here. We compromise it down, and then we gripe when the
executive branch issues regulations under it, when, frankly, we
haven't given them specific direction so they know what they
are doing. And they say, what are those people saying; what do
they mean?
So I'd like to see something that has a real sharpness to
it, and I think it would be helpful in the Ways and Means
Committee, the Appropriations Subcommittee, and to the
Committee on Government Reform and Oversight, and this
subcommittee in particular.
Mr. Trinca. Yes, sir. Thank you.
Mr. Horn. We thank you for coming. I want to thank the
staff that developed this hearing, J. Russell George, the staff
director of the Government Management, Information, and
Technology Subcommittee; and Anna Miller, who is on my
immediate left, professional staff member that prepared the
hearing; John Hynes, professional staff member who has been a
lot of help in letting the world know this hearing has existed;
Andrea Miller, our clerk, faithful, helpful; and David
McMillian, professional staff member for the minority; Mark
Stephenson, professional staff member for the minority; Jean
Gosa, the clerk for the minority. And we thank our court
reporters for whom we have put a little test this morning, Bob
Cochran and Tracy Petty and Katrina Wright. Thank you all.
With that, this hearing is adjourned----
Mr. Sanders. Could I introduce this into the record,
please?
Mr. Horn. Yes. This is the statement of Mr. Sanders. We
will also introduce the statement of Mrs. Maloney, and they
will be put after the opening statements made by myself and
others.
Mr. Sanders. Thank you very much.
Mr. Horn. Thank you very much. Without objection, we're
adjourned.
[Whereupon, at 2:07 p.m., the subcommittee was adjourned.]
-