[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
___________________________________________________________________________
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              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:]
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    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:]
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    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:]
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    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:]
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    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:]
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    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:]
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    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:]
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    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:]
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    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:]
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    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:]
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    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:]
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    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.]

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