[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]
REPORT OF THE NATIONAL COMMISSION ON RESTRUCTURING THE INTERNAL REVENUE
SERVICE
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FIRST SESSION
__________
JULY 24, 1997
__________
Serial 105-30
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
49-307 CC WASHINGTON : 1998
------------------------------------------------------------------------------
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Oversight
NANCY L. JOHNSON, Connecticut, Chairman
ROB PORTMAN, Ohio WILLIAM J. COYNE, Pennsylvania
JIM RAMSTAD, Minnesota GERALD D. KLECZKA, Wisconsin
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
PHILIP S. ENGLISH, Pennsylvania JOHN S. TANNER, Tennessee
WES WATKINS, Oklahoma KAREN L. THURMAN, Florida
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
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unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
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C O N T E N T S
__________
Page
Advisory of July 15, 1997, announcing the hearing................ 2
WITNESSES
U.S. Department of the Treasury, Hon. Lawrence H. Summers, Deputy
Secretary...................................................... 19
U.S. Department of Commerce, Hon. Larry Irving, Assistant
Secretary of Commerce for Communications and Information;
Administrator, National Telecommunications and Information
Administration; and National Commission on Restructuring the
Internal Revenue Service....................................... 66
______
Automatic Data Processing, Inc., Josh Weston..................... 47
Electronic Data Systems, Corp., George C. Newstrom............... 70
Goldberg, Hon. Fred T., Jr., National Commission on Restructuring
the Internal Revenue Service................................... 55
Grassley, Hon. Charles, a U.S. Senator from the State of Iowa.... 9
Keating, David L., National Commission on Restructuring the
Internal Revenue Service, and National Taxpayers Union......... 73
Kerrey, Hon. Bob, a U.S. Senator from the State of Nebraska...... 4
National Commission on Restructuring the Internal Revenue
Service:
Hon. Larry Irving............................................ 66
Hon. Fred T. Goldberg, Jr.................................... 55
David L. Keating............................................. 73
George C. Newstrom........................................... 70
Robert M. Tobias............................................. 60
Josh Weston.................................................. 47
National Taxpayers Union, David L. Keating....................... 73
National Treasury Employees Union, Robert M. Tobias.............. 60
Newstrom, George C., National Commission on Restructuring the
Internal Revenue Service, and Electronic Data Systems, Corp.... 70
Tobias, Robert M., National Commission on Restructuring the
Internal Revenue Service, and National Treasury Employees Union 60
Weston, Josh, National Commission on Restructuring the Internal
Revenue Service, and Automatic Data Processing, Inc............ 47
SUBMISSIONS FOR THE RECORD
National Society of Accountants, Alexandria, VA, Leroy A.
Strubberg, letter.............................................. 93
National Tax Consultants, Inc., Merrick, NY, William Stevenson,
letter......................................................... 95
REPORT OF THE NATIONAL COMMISSION ON RESTRUCTURING THE INTERNAL REVENUE
SERVICE
----------
THURSDAY, JULY 24, 1997
House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:55 a.m., in
room 1100, Longworth House Office Building, Hon. Nancy L.
Johnson (Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT
FOR IMMEDIATE RELEASE CONTACT: (202) 225-7601
July 15, 1997
No. OV-6
Johnson Announces Hearing on the
Report of the National Commission on
Restructuring the Internal Revenue Service
Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the
Subcommittee will hold the first of a series of hearing to examine the
June 25, 1997 report of the National Commission on Restructuring the
Internal Revenue Service (IRS) entitled, ``A New Vision for the IRS.''
The hearing will take place on Thursday, July 24, 1997, in the main
Committee hearing room, 1100 Longworth House Office Building, beginning
at 10:00 a.m.
Oral testimony at this hearing will be from invited witnesses only.
Witnesses will include members of the Commission and officials from the
U.S. Department of the Treasury. However, any individual or
organization not scheduled for an oral appearance may submit a written
statement for consideration by the Committee and for inclusion in the
printed record of the hearing.
BACKGROUND:
The National Commission on Restructuring the Internal Revenue
Service was established by Public Law 104-52. Its purpose was to review
the present practices of the IRS and to make recommendations for
modernizing and improving its efficiency and taxpayer services. The 17-
member panel was comprised of Members of Congress, Administration
officials, representatives from various private sector firms, taxpayer
organizations, and the National Treasury Employees Union, a former IRS
Commissioner, and a State tax administrator. The Commission was co-
chaired by Senator Robert Kerry (D-NE) and Representative Rob Portman
(R-OH). Senator Charles Grassley (R-IA) and Representative William
Coyne (D-PA), the Ranking Democrat on the Subcommittee on Oversight,
also served on the Commission.
Over the past year, the Commission held 12 days of public hearings,
3 field hearings, and numerous private sessions with public and private
sector experts, academics and citizen's groups to examine IRS
operations and services. It also reviewed thousands of reports on IRS
operations, management, governance, and oversight. The Commission's
report, which was endorsed by 12 of its 17 members, contains
recommendations relating to Congressional oversight and Executive
Branch governance; IRS management and budget; IRS workforce and
culture; IRS customer service and compliance; technology modernization;
electronic filing; tax law simplification; taxpayer rights; and
financial accountability.
Its most notable recommendation is that responsibility for
Executive Branch governance of the IRS should be placed with a new
Board of Directors appointed by the President for staggered five-year
terms, and comprised of one representative each from the Treasury
Department and from the National Treasury Employees Union, and five
private sector individuals with expertise in managing a large service
organization. The Board's role would be to guide long-term strategic
planning at the IRS, appoint and remove senior IRS leadership
(including the Commissioner), approve the development of IRS's budget
and allocation of the agency's resources, and hold IRS management
accountable for success. The Commission also recommends that the IRS
Commissioner should be appointed for a five-year term and should be
given greater flexibility in hiring, firing, and salary decisions.
The Administration has formulated its own plan, entitled the
``Five-Point Plan for IRS governance,'' which includes the
establishment of an IRS Management Board (comprised of 20 high-level
Federal officials) to improve management and operation of the IRS, and
an IRS Advisory Board (comprised of 14 private-sector professionals) to
provide advice to the Treasury Secretary, and a National Performance
Review to address customer service problems at the IRS.
In announcing the hearing, Chairman Johnson stated: ``On a daily
basis, the IRS touches the lives of millions of hard-working Americans
who provide the very lifeblood of the Federal Government through the
taxes they pay. In return, the nation's taxpayers deserve high-quality
service and fair treatment. Regrettably, the near-universal view is
that the quality of IRS's interaction with the taxpayers has
deteriorated over the past two decades. The IRS Restructuring
Commission has performed a valuable service to nation by identifying
the complex problems facing the IRS and offering constructive
recommendations for changing it into an agency which provides world
class service and citizen satisfaction.''
FOCUS OF THE HEARING:
The purpose of hearing will be to provide Subcommittee Members with
a general overview of the Commission's findings and recommendations, as
well as the Administration's position on the Commission's
recommendations and its five-point plan for improving the IRS.
Additional Subcommittee hearings will be scheduled later in the year to
examine specific proposals in the Commission Report within the
jurisdiction of the Committee on Ways and Means.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit at least six (6)
single-space legal-size copies of their statement, along with an IBM
compatible 3.5-inch diskette in ASCII DOS Text format only, with their
name, address, and hearing date noted on a label, by the close of
business, Thursday, August 7, 1997, to A.L. Singleton, Chief of Staff,
Committee on Ways and Means, U.S. House of Representatives, 1102
Longworth House Office Building, Washington, D.C. 20515. If those
filing written statements wish to have their statements distributed to
the press and interested public at the hearing, they may deliver 200
additional copies for this purpose to the Subcommittee on Oversight
office, room 1136 Longworth House Office Building, at least one hour
before the hearing begins.
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their statements on an IBM compatible 3.5-inch diskette in ASCII DOS
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3. A witness appearing at a public hearing, or submitting a
statement for the record of a public hearing, or submitting written
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The above restrictions and limitations apply only to material being
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and the public during the course of a public hearing may be submitted
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Note: All Committee advisories and news releases are available on
the World Wide Web at ``HTTP://WWW.HOUSE.GOV/WAYS__MEANS/''.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.
Chairman Johnson. Good morning, and welcome to this
important hearing on the report of the National Commission on
Restructuring the Internal Revenue Service. Today's hearing is
the first of several hearings by the Subcommittee, and we are
honored to have with us this morning Hon. Senator Kerrey and
Senator Grassley to speak on this report.
I'm going to delay my opening statement--until after the
Senators have had a chance to testify, because they do have
votes coming up in the Senate.
With that, Senator Kerrey, who was the Senate Chair of this
Commission, it's a pleasure to have you with us today. I know
that my colleague, Mr. Coyne, would like to welcome you as
well.
STATEMENT OF HON. BOB KERREY, A U.S. SENATOR FROM THE STATE OF
NEBRASKA
Senator Kerrey. Thank you very much, Madam Chair and
Representative Coyne. I appreciate very much the chance to
present our testimony and to give you our views on what we
believe needs to occur with the law in order to bring the
Internal Revenue Service to the standards of the American
people.
We started the National Commission on Restructuring the
Internal Revenue Service well over a year ago, and next week we
will introduce legislation drafted to conform with the report
of this Commission. The goal of the legislation is to make the
IRS work for the American people.
Let me begin by explaining why I think this legislation is
so important. First, there are twice as many people who pay
taxes as vote. Citizens' faith that their government can be
fair and efficient is dependent on a well-functioning IRS.
Second, the days of the old-fashioned tax collector are
over. The core of the Commission's report and the legislation
is based on a vision for a new IRS. We believe, Madam Chair, in
today's world, the job of the IRS is to operate as an efficient
financial management organization.
It is simply a myth that the bulk of the Federal revenue is
generated through heavy enforcement. While the IRS must
maintain a strong enforcement presence, its core and the core
of the Federal revenue stream lie in a revamped, modern
organization that can assist taxpayers promptly and
efficiently, track account information, and send out clear
notices. There is a breathtaking gap between the service levels
of the IRS and those of the private sector.
Madam Chair, I would ask consent to include my entire
remarks in the record. I'm going to try to summarize them in
order that Senator Grassley can get his testimony in before we
have to go over and vote.
Chairman Johnson. Certainly, Senator Kerrey.
Senator Kerrey. Madam Chair, our Commission met, as I said,
for well over a year, taking testimony from the private sector,
taking testimony from IRS employees, both current and former,
taking testimony, most importantly, in the field from citizens
who deal with the IRS constantly.
With very rare exception did we hear a witness come forward
and bash the Internal Revenue Service. On a very rare occasion
did we hear somebody come forward in a disrespectful fashion.
This testimony was offered with great respect for the burdens
placed upon Internal Revenue Service employees, but with an
intense interest in trying, as I said earlier, to close the gap
between what they find themselves being able to get, in terms
of service in the private sector, and what the Internal Revenue
Service is able to do.
Madam Chair, we focused on six main areas in our
deliberations and in our legislation. The first is executive
branch governance and management; second, work force and civil
service flexibilities; third, incentives for electronic filing;
fourth is taxpayer rights; fifth, coordination of congressional
oversight; and sixth, complexity of the Tax Code itself.
Senator Grassley and my fellow Commission members will each
address different areas. My intent today is to focus on the
governance, management, and congressional oversight.
Madam Chair, there is one operative paragraph in here, in
my testimony, that describes the status quo. We heard it
repeatedly from all sources, from current and former employees,
stakeholders, both the taxpayer as well as the practitioners.
We heard consistently, over and over and over, the following
problem identified:
A key problem identified by the Commission was a lack of a
coherent accountable structure to implement a long-term vision
and goals. We found that we in Congress often send conflicting
signals to the agency. We found that Treasury has basically
left the IRS to its own devices, leaving a vacuum in the
executive branch oversight of the agency. We found executives
unable to maintain focus and gain traction with Congress on IRS
strategy.
In short, at the top levels of the IRS and Treasury, there
are murky lines of accountability, a lack of necessary
expertise to operate in the new information age, and no people
of authority with significant tenure to get the job done.
We recommend in our legislation, in terms of governance, to
create first a Board of Governors, appointed by the President,
with staggered 5-year terms. Second, the Commissioner will be
appointed for a 5-year term, so he or she will be around long
enough to accomplish real change. Third, the Commissioner will
be given greater flexibility to hire or fire his or her own
team of executives. Fourth, congressional oversight will be
coordinated among the authorizing Subcommittees.
Madam Chair, there's a competing proposal, which you will
hear later today from the Treasury Secretary and the Deputy
Secretary, who disagree with our plan. They have developed an
alternative proposal that creates two advisory boards which
attempt to strengthen Treasury's governance of the IRS. The
first has 20 political appointees, the second has 14, advisors
with no real responsibilities.
The Commission considered this proposal seriously but in
the end rejected it. We rejected it because Treasury's plan
further blurs accountability instead of answering the urgent
need for clear lines of accountability. It does nothing to
alleviate the continuity problem with political appointees, who
traditionally serve for a short period of time. Third, it
endangers politicizing the IRS. What the IRS needs is
accountability without politicization.
The Treasury's proposal to create an oversight board of
officials from Office of Management and Budget, OMB, Office of
Personnel Management, OPM, and the Vice President's office
could undermine the credibility of the IRS as an apolitical
organization.
We continue to work, by the way, with Secretary Rubin and
with Deputy Secretary Summers, trying to reach a compromise.
But I must, with respect to the diligence of these two
individuals, point out some things that have been said, with
all due respect, that are simply inaccurate.
They have said that private people should not control law
enforcement, and that our Nation's revenue stream will be at
risk under our proposal. Madam Chair, those accusations are
simply not true. First, we propose that the Board of Governors
be presidentially appointed, Senate confirmed, and removable at
the will of the President. While members serve on the board,
they will be government employees serving in a government
function, much like the Postal Board of Governors, who have
vast control over the Postal Service. Additionally, the board
will not have any role in tax policy. The IRS Commission's
proposal would draw clear lines of accountability between tax
policy and tax administration.
In addition, Madam Chair, the Secretary of the Treasury
will be a member of the new board, subjecting it to scrutiny,
were there to be any appearance of impropriety.
Again, we continue to try to work with Treasury, hoping to
reach some accommodation, but we believe our legislation, if
enacted, will over time narrow the gap between what people get
from the private sector and what they get from our Internal
Revenue Service.
I thank you very much, Madam Chair, and Members of the
Subcommittee. I see that my Cochair is here now, and I will now
yield to the senior Senator from Iowa.
[The prepared statement follows:]
Statement of Hon. Bob Kerrey, U.S. Senator from the State of Nebraska
Madame Chairwoman and members of the Committee, it is a
distinct honor to share with you the findings and
recommendations of the National Commission on Restructuring the
Internal Revenue Service. Next week we will introduce
legislation drafted to conform with the report. The goal is to
make the IRS work for the American taxpayer.
Let me begin by explaining why I think this legislation is
so important. First, there are twice as many people who pay
taxes as vote. Citizens' faith that their government can be
fair and efficient is dependent on a well functioning IRS.
Second, the days of the old-fashioned tax collector are over-
the core of the Commission's report and legislation is based on
a vision for a new IRS. We believe, in today's world, the job
of the IRS is to operate as an efficient financial management
organization. It is a myth that the bulk of the federal revenue
is generated through heavy enforcement. While the IRS must
maintain a strong enforcement presence, its core and the core
of the federal revenue stream lie in a revamped, modern
organization that can assist taxpayers promptly and
efficiently, track account information, and send out clear
notices. There is a breathtaking gap between the service levels
of the IRS and those of the private sector.
The IRS has a 20 percent error rate for processing paper
returns and expends an incredible amount of resources and focus
to correct these errors. It captures only 40 percent of the
data from returns and is still drowning in a sea of paper It is
typically 18 months before a return can be matched against
1099s. A private sector business that took on average 18 months
to send someone a bill, certainly wouldn't stay in business
very long.
The Commission's report and accompanying legislation offer
both a realistic goal for those who will take charge of the
agency and a credible plan for reaching that goal.
We spent the last year studying the problems and solutions
for the IRS. Clearly, our access to the IRS's operations and
employees was unprecedented. We spent 12 days in public
hearings, interviewed 300 IRS employees in field offices, and
interviewed over 500 current and former officials from the IRS,
the Treasury Department, congressional committees that oversee
the IRS, and other IRS experts. We also commissioned consulting
reports and internal reviews of IRS management, governance,
workforce, compliance, and customer service. Finally, we heard
directly from citizens through town meetings and surveys. The
job of the Commission was to provide a reasoned, thoughtful
look at how to make the IRS serve the American people.
Our legislation focuses on six main areas:
Executive branch governance and management
Workforce and civil service flexibilities
Incentives for electronic filing, which holds
great potential for cost savings
Taxpayer protection and rights provisions
Coordinating congressional oversight of the IRS
Implementing procedures that require analysis of
the complexity of new tax legislation
Senator Grassley and my fellow Commission members will each
address important areas. I will focus on Governance,
Management, and Congressional Oversight.
Commission Recommendations
A key problem identified by the Commission was a lack of a
coherent, accountable structure to implement a long term vision
and goals. We found that we in Congress often send conflicting
signals to the agency. We found that Treasury has basically
left the IRS to its own devices, leaving a vacuum in the
Executive Branch oversight of the agency. We found executives
unable to maintain focus and gain traction with Congress on IRS
strategy.
In short, at the top levels of the IRS and at Treasury
there are murky lines of accountability, a lack of necessary
expertise to operate in the new information age, and no people
of authority with significant tenure to get the job done. The
officials at the Treasury Department have expertise in tax law,
but do not have the expertise in areas of customer service,
technology, and management to oversee the IRS. Worse, they are
not around long enough to ensure focus on multi-year projects
like the Tax System Modernization (TSM) or changing the culture
of the agency to be more responsive to taxpayers.
Additionally, Treasury does not coordinate its own
oversight: The Commissioner of the IRS must deal with various
assistant secretaries on budget, operations, computers, and
others. At the end of the day, the IRS Commissioner really
reports to the Deputy Secretary who also manages eleven other
agencies-not to mention the economy. The recently retired
Commissioner of the IRS, Margaret Richardson, told us that she
reported to three different Deputy Secretarys during her four-
year tenure as IRS Commissioner. Aware of these glaring
problems, the Restructuring Commission began developing ideas
for a new governance structure. Our criteria for success were:
(1) clear accountability, (2) expertise in running a modern
customer-oriented organization, and (3) continuity.
To provide for accountability, expertise and continuity the
legislation we will introduce will include:
First, a board of governors, appointed by the President for
staggered five year terms. The board will: approve the mission,
objectives, and annual strategic plans of the IRS; oversee the
IRS management; have significant tenure to force change
throughout the organization; and have unique public and private
sector expertise in managing large service organizations.
Second, the Commissioner will be appointed for a five-year
term, so he or she will be around long enough to achieve real
change.
Third, the Commissioner will be given greater flexibility
to hire or fire his own team of executives, who will bring new
expertise into the IRS. While the Board will keep an eye on
long-range strategic issues, the Commissioner will run the
organization and be given greater authority to do so.
Fourth, congressional oversight will be coordinated among
the authorizing committees, the appropriating committees, and
the government oversight committees. Our legislation codifies
coordinated oversight, stating that committee leaders, majority
and minority, meet regularly to ensure that the IRS receives
clear guidance from Congress, and that Congress is given the
proper information to oversee the IRS.
Competing Proposal
As you may know, the Secretary of the Treasury Bob Rubin
and Deputy Secretary Larry Summers disagree with our plan for a
board of governors to oversee the IRS. They have developed an
alternate proposal, that would create two advisory boards which
attempt to strengthen Treasury's governance of the IRS. The
first would consist of 20 political appointees from the
Administration and the second would be composed of 14 advisors
with no real responsibility. While we seriously considered
their proposal, in the end the Commission rejected their
approach.
Our opinions are, first, that Treasury's plan further blurs
accountability when there is an urgent need for clearer lines
of accountability. Second, it does nothing to alleviate the
continuity problem-political appointees, who traditionally
serve for a short time, will continue to oversee IRS
operations. Third, it endangers politicizing the IRS. What the
IRS needs is accountability without politicization. The
Treasury's proposal to create an oversight board of officials
from OMB, OPM, and the Vice Presidents Office could undermine
the credibility of the IRS as an apolitical institution. The
White House has always, in our judgment wisely, tried to keep
an arms length distance from the IRS. Finally, it does not
guarantee that the people with proper expertise in computers,
technology, and service will oversee IRS operations.
Secretary Rubin and Deputy Secretary Summers have been
diligent, but with all due respect, inaccurate in their attacks
of our proposal. They have said that private people should not
control law enforcement, and that our nation's revenue stream
will be at risk under our proposal. Those accusations are
simply not true. First, we propose that the Board of Governors
be Presidentially appointed, Senate confirmed, and removable at
the will of the President. While members serve on the Board,
they will be government employees serving in a government
function, much like the Postal Board of Governors who have vast
control over the postal service, including the postal
inspectors-their enforcement arm. Additionally, this board will
not have any role in tax policy, which will stay with the
Secretary of the Treasury.
The Restructuring Commission's proposal will draw clear
lines of accountability between tax policy and tax
administration. Also, the Secretary of the Treasury will be a
member of this new board, subjecting it to scrutiny were there
to be any appearance of impropriety. Lastly, the Secretary of
the Treasury would continue to have final say over the IRS
budget before it is sent to Congress. Under our proposal, the
board would send Congress a copy of their budget at the same
time they send it to the Secretary, allowing Congress to make
the decision of how much money to appropriate.
Congressman Portman and I sent Mr. Rubin a letter two weeks
ago addressing his concerns, which is available for the record.
We did move significantly to accommodate concerns raised by
Treasury. In fact, many of us thought that the IRS should be an
independent agency. The only reason we did not go that far was
to display to the Treasury Department our willingness to work
with them to fix the IRS--an objective we still hold.
Conclusion
Madame Chairwoman and Members of the Committee, Congress,
the Administration and the American people know that the status
quo is no longer tolerable and that the IRS needs fixing. $3.4
billion was wasted on a failed modernization project. Its
operations are antiquated and outdated, and taxpayers (close to
90% of whom voluntarily pay their taxes) are generally, and
unfairly, treated as if they are guilty of something when they
contact the IRS.
The IRS's problems are rooted in the lack of strategic
vision and focus, measures that do not encourage employees to
treat taxpayers well, operational units that do not communicate
with each other, and a systemic lack of expertise and
continuity in management and governance. The Commission worked
in a bipartisan, bicameral manner to come up with a reasoned,
comprehensive approach to fixing these problems. We hope you
will work with us over the coming months to strengthen our
legislation and implement it into law so that the American
people have the IRS they expect and deserve.
Our work to restructure the IRS will go a long way toward
restoring taxpayers' faith not only in our tax system, but in
our government, as well.
Chairman Johnson. Thank you, Senator Kerrey.
Senator Grassley.
STATEMENT OF HON. CHARLES GRASSLEY, A U.S. SENATOR FROM THE
STATE OF IOWA
Senator Grassley. Thank you, Madam Chairwoman. Thank you
first of all for your leadership. You have demonstrated through
this Subcommittee on a taxpayers' bill of rights in the past,
because that is also a part of the work--the extension of that
is part of the recommendations of our Commission.
Also let me up front say that the product of this
Commission would not be as perfect of a document as it is
without the hard work and leadership of Congressman Portman and
Senator Kerrey, not only because of their ability but because
they gave this job over the last 12 months the necessary
attention that it needed to get to the bottom of this. So let's
all say thank you to their leadership.
Congress is on the verge of a major shift in power from the
Federal Government to the people. The recommendations of the
Commission are a blueprint for that transfer of power.
Understandably, there is much anxiety within the Federal
bureaucracy at this moment. It is in anticipation of this loss
of power. The anxiety is at the highest levels of the executive
branch.
The American taxpayers have waited a long time for this.
They have suffered through decades of encounters with an agency
that has been unaccountable, unresponsive, misleading,
arrogant, and abusive. The IRS has been granted enormous powers
that at times seemed to disrespect, even undermine, civil
liberties. The responsibility to our citizens that goes along
with such governmental power was not exercised.
Furthermore, IRS management seemed to have taken a
vacation. Billions of dollars have been wasted. Performance
failures were not met with discipline. Questionable activity
was covered up by secrecy, by abusing the authority of section
6103. Congressional oversight of the IRS has been rendered all
but impotent because of absurd 6103 restrictions. These 6103
restrictions make the Pentagon's highly secret and highly
restrictive Joint Chiefs of Staff ``vault'' seem like a Freedom
of Information office, I might say.
I appear before this Subcommittee asking you, Madam
Chairwoman, and the constitutional responsibilities of the Ways
and Means Committee, to seize the moment. IRS reform is overdue
and vital.
Congress has never had a chance at reform as we have today,
thanks to the effective leadership that I have already alluded
to.
To restore accountability to the taxpayer, the Commission
has made several recommendations. The one attracting the
greatest attention has been the Commission's proposal for an
independent board to oversee the Service. The Commission's
belief is that an independent board will provide an infusion of
talent from the private sector to set appropriate performance
measures and reward or discipline managers who either meet or
fail to meet these performance measures.
In private meetings, the administration appears to be
divided on the proposal of a board. But it is unfortunate that
some who oppose this proposal are doing so only because it
signifies a monumental power struggle that they stand to lose.
Treasury officials, who 2 years ago couldn't find the IRS if
they were standing at the corner of 11th and Constitution, are
suddenly in fits about losing some control over part of their
budget and bureaucracy.
They must be reminded that the IRS is one of the few
governmental agencies that has a significant impact on almost
every American. The American taxpayer deserves a modern IRS
that provides taxpayers customer service on a level equal to
that provided by private financial institutions throughout the
country.
We have seen a lot of promises of reform coming from the
Treasury of late, but wholly in response to the work of this
Commission. Treasury assures us that the IRS reform is their
top priority and their best people are on top of it. But if
Congress turns its back now on reforming the IRS and listens to
the ``siren song'' of Treasury, I predict that 1 year from now
Congress will face the justified wrath of angry American
taxpayers.
Treasury officials who are locked in this power struggle,
trying to preserve their bureaucratic empire, would do well to
remember the quote of the first Secretary of the Treasury,
Alexander Hamilton, who said, ``Here, sir, the people govern.''
That is the essence of what this Commission would do: Return
power from the Federal Government to the people of this
country.
I am also pleased that the Commission did not call for easy
solutions, simply that more money is what is needed to perfect
the IRS. One Treasury official privately admitted recently that
the IRS never would be serious about embracing reform as long
as Congress kept throwing more money at the agency.
The Commission made several findings and recommendations
about protecting taxpayers and strengthening taxpayer rights. I
know that you, because of your leadership, will be working on
that. I would note that in the past the Congress has focused
its energies on giving rights to taxpayers who are in dispute
with the IRS. The Commission builds on these taxpayer bills of
rights.
I'm going to have to stop because we have only 6 minutes
remaining in this vote, and I would ask permission to put the
remainder of my statement in the record. But it parallels what
Senator Kerrey has already said, that it's a matter of emphasis
for all these parts and the work of the Commission.
Thank you very much.
[The prepared statement follows:]
Statement of Hon. Charles Grassley, U.S. Senator from the State of Iowa
Madam Chairwoman, members of the Subcommittee, thank you
for the invitation to share my views with you. As a member of
the National Commission on Restructuring the IRS, as the former
Chairman of the IRS Oversight Subcommittee on the Finance
Committee, as a current senior member of that subcommittee, as
the chief Senate Republican sponsor of the Taxpayers Bill of
Rights and Taxpayers Bill of Rights II, and as a taxpayer
myself, I have been involved for many years in an effort to
finally reach this point.
Congress is on the verge of a major shift in power from the
federal government to the people. The recommendations of the
Commission are a blueprint for the transfer of power.
Understandably, there is much anxiety within the federal
government at this moment. It is in anticipation of this loss
of power. The anxiety is at the highest levels of the executive
branch.
The American taxpayers have waited a long time for this.
They have suffered through decades of encounters with an agency
that has been unaccountable; unresponsive; misleading;
arrogant; abusive. The IRS has been granted enormous powers
that at times seemed to disrespect, even undermine civil
liberties. The responsibility to our citizens that goes along
with such powers was not exercised.
Furthermore, IRS management seemed to have taken a
vacation. Billions of dollars have been wasted. Performance
failures were not met with discipline. Questionable activity
was covered up by secrecy--by abusing the authority of Section
6103. Congressional oversight of the IRS has been rendered all
but impotent because of absurd 6103 restrictions. These
restrictions make the Pentagon's highly secret and highly
restrictive JCS ``Vault'' seem like a Freedom of Information
office.
I appear before this subcommittee Madam Chairwoman, to urge
you to seize the moment. IRS reform is overdue and vital.
Congress has never had a chance at reform as we have today,
thanks to the effective leadership of the co-chairmen of the
Commission, Senator Bob Kerrey of Nebraska, and Congressman Rob
Portman of Ohio. I would also like to recognize the important
work and contribution you have made to this effort, Madam
Chairwoman, especially ensuring passage of the Taxpayers Bill
of Rights II. And I would like to pay tribute to my friend and
former colleague, Senator David Pryor, with whom I teamed in
the Senate in these efforts for many years.
I would like to highlight just a few important issues
recommended by the Commission.
To restore accountability to the taxpayer, the Commission
has made several recommendations. The one attracting the
greatest attention has been the Commission's proposal for an
independent board to oversee the IRS. The Commission's belief
is that an independent board will provide an infusion of talent
from the private sector to set appropriate performance
measurements and reward or discipline managers who either meet
or fail to meet these performance measures.
In private meetings, the administration appears to be
divided on the proposal of a board. But it appears unfortunate
that some who oppose this proposal are doing so only because it
signifies a monumental power struggle that they stand to lose.
Treasury officials who two years ago couldn't find the IRS if
they were standing at 11th and Constitution are suddenly in
fits about losing some control over part of their budget and
bureaucracy.
They must be reminded that the IRS is one of the few
government agencies that has a significant impact on almost
every American. The American taxpayer deserves a modern IRS
that provides taxpayers customer service on a level equal to
that provided by private financial institutions throughout this
country.
We have seen a lot of promises of reform coming from the
Treasury of late, wholly in response to the work of this
Commission. Treasury assures us that IRS reform is their top
priority and their best people are on it. But if Congress turns
its back now on reforming the IRS and listens to the siren song
of Treasury, I predict that a year from now Congress will face
the justified wrath of angry American taxpayers.
Treasury officials who are locked in this power struggle,
trying to preserve their bureaucratic empire, would do well to
remember the quote of the first Secretary of the Treasury,
Alexander Hamilton, ``Here, Sir, the people govern.'' That is
the essence of what this Commission would do--return power from
the federal government to the people of this country.
I am also pleased that the Commission did not call for the
easy solution--that more money is what is needed at the IRS.
One Treasury official privately admitted recently that the IRS
never would be serious about embracing reform as long as
Congress kept throwing more money at them. Until two years ago,
the IRS had seen continual increases in its budget for 40
years. This Commission uncovered that hundreds of millions of
taxpayer dollars were being wasted. Clearly, the problem at the
IRS is management, NOT money.
The Commission made several findings and recommendations
about protecting taxpayers and strengthening taxpayer rights.
Let me say that many of the recommendations build on the work
of this subcommittee and that the Commission greatly benefited
from the assistance you provided, Madam Chairwoman, as well as
from discussions with your staff director. I would note that in
the past, the Congress has focused its energies on giving
rights to taxpayers who are in a dispute with the IRS. The
Commission builds on this. We recommend a strengthening of
taxpayers' rights in a number of areas. But I think of equal
importance is the emphasis the Commission has placed on
protecting taxpayers; that is, preventing problems before they
even happen by emphasizing quality of work and customer
service.
We all know the story of the small business owner who gets
the notice from the IRS that he or she owes $2,000. The
business owner goes to his accountant who says that he doesn't
owe the IRS $2,000, but its going to cost $5,000 to fight it.
So the business owner forks over the $2,000.
Why does this happen? Because the IRS puts such little
emphasis on quality control and taxpayer rights. The IRS still
measures its managers on dollars assessed, whether or not it is
the proper tax owed. Is it any surprise, then, that when a
taxpayer does appeal, the IRS loses 72 cents on the dollar. It
is wrong that many taxpayers have to spend millions of dollars
fighting the IRS because there is no quality control. I know
your subcommittee has had the General Accounting Office examine
the lack of quality control, Madam Chairwoman, and I look
forward to working with you to address this matter.
I am pleased that the Commission also emphasized the need
for customer service. We recommend that taxpayers who are
subject to examination or collection efforts, or who simply try
to contact the IRS to resolve a problem, are provided a chance
to comment on the service given. While revolutionary to the
IRS, this is old hat for many state tax collection agencies as
well as, of course, the private sector. By measuring managers
on customer service, we hope to begin to change the culture of
the IRS and its employees.
Emphasizing quality service and customer service are ways
to protect taxpayers in the first place. It is also a way to
measure performance in an appropriate manner that will hold
managers and employees at the IRS accountable for their action.
I would suggest that the emphasis on quality service and
customer service is in keeping with what many saw as the
mandate given to the Congress in 1994--moving power from
government to the people. The reforms suggested by the
Commission certainly emphasize that it is the taxpayer who
comes first, and it is serving the taxpayer as a customer that
must be the top priority for the IRS.
Madam Chairwoman, let me just touch briefly on a third
point--the need for greater openness at the IRS. The Commission
found that the IRS was a very closed and insular organization.
The Commission put forward a first step to make the IRS more
open to Congress and the press. If we are going to be at all
successful in changing the culture of the IRS, a key ingredient
is greater openness. I think Senator Kerrey was absolutely
right when he noted at one of our hearings that the media is
one of the key ways in which Congress finds out what is going
on at government agencies.
To encourage openness and also ensure accountability, there
are three areas:
The IRS must be timely in responding to Freedom of
Information Act (FOIA) requests.
The IRS should not abuse its authority under
section 6103 to cover up embarrassing information about
management mistakes. For example, this Commission highlighted
that the IRS had abused its 6103 authority to hide from the
press the fact that IRS had provided Congress false
information.
The IRS must maintain and preserve documents. The
Commission itself discovered first-hand several times that the
former IRS historian Shelly Davis is right--that the IRS
doesn't preserve records. Many requests by the Commission for
documents and data were met with the response that the data no
longer existed or the documents could not be found.
Addressing these three areas of openness may not be
headline grabbing, but my experience has shown me that they
will go far in bringing accountability at the IRS and changing
its culture.
My final point is to speak for the co-chairman of our
Commission, Congressman Portman. I know if he were at the table
with us, he would also emphasize the Commission's findings on
the need to simplify the tax code. It is to Congressman
Portman's credit that the Commission focused on this matter. We
heard from countless witnesses, as well as hundreds of IRS
employees and thousands of taxpayers that the complexity of the
code is crippling to IRS management.
While I've spent a lot of my time here criticizing IRS, let
me make clear that the complex code is not the fault of the
IRS, it is a burden placed on IRS management by Congress and
the White House. It is clear that if we wish to see
improvements at the IRS in customer service and relations with
taxpayers, steps must be taken to simplify the code.
Thank you for allowing me the opportunity to speak present
my views. The Commission's proposals are not just paper for the
shelves. As you know, Senator Kerrey and I both serve on the
Finance Committee. We will be introducing next week in the
Senate and Congressman Portman in the House a comprehensive
legislative proposal to restructure the IRS in accordance with
the findings and recommendations of the Commission. I have
talked to Chairman Roth and Majority Leader Lott, they are very
supportive of trying to pass comprehensive reform of the IRS
this year. I look forward to working with you, Madam
Chairwoman, and all of the Members of this subcommittee to make
that possible.
Chairman Johnson. Gentlemen, you're now down to 5 minutes
left in your vote, so we are not going to ask you any
questions. But I do want to tell you, thank you very much for
your testimony. The report that you have brought before us,
along with my colleague here, Mr. Portman, and all the
Commissioners, is a very serious document. You have made very
important recommendations.
I agree with you that this is a moment of opportunity, and
your vision of a modern, responsive, customer-oriented IRS, one
that serves the people that for the most part voluntarily pay
their taxes, is one we share. This is a time when we must make
good on the promise that change offers.
So I look forward to working with you in greater detail as
we move through this, and certainly with the administration,
and thank you very much for your excellent testimony today.
Mr. Portman, would you like to say a word?
Mr. Portman. Just that I had an opening statement where I
extensively praised both of you, and since you're leaving, I'm
not going to have an opportunity to have you hear it.
Godspeed on your vote, and thank you for all your work.
[The opening statement follows:]
Opening Statement of Hon. Bob Portman, a Representative in Congress
from the State of Ohio
I thank our Chair, Mrs. Johnson, for holding this hearing
today on the report of the National Commission on Restructuring
the IRS. And, I would like to say a special word of thanks to
Donna Steele and Beth Vance for their assistance throughout the
Restructuring Commission's work.
During the last year, I have been pleased to serve as Co-
Chairman of the Commission along with Senator Bob Kerrey, who
is with us today. And I would like to extend my appreciation to
each of the seventeen members of the Commission for the
bipartisan and, indeed, nonpartisan manner in which the
Commission conducted its business. Many of the Commission
members are with us today, like Senator Grassley, Fred
Goldberg, Josh Weston, Bob Tobias, David Keating, George
Newstrom and Larry Irving. And, I would like to thank the
Treasury Department--including Deputy Secretary Summers who is
here with us today--for their service on the Commission and
their ongoing input in our work.
The Commission's report is the first comprehensive
Congressional blueprint for reforming the IRS in my lifetime--
we have not seen fundamental changes to the IRS since 1952. Our
conclusions highlight the need for a serious, bipartisan
dialogue to simplify our nation's tax system to make the IRS
work better for the taxpayer. Our report is truly a roadmap for
transforming the IRS into a responsive service organization for
the 21st Century--one that makes customer service and customer
satisfaction a priority. And, taken as a whole, I believe our
proposals will allow the Congress to do something truly
remarkable--make the IRS a model for the rest of government.
I am pleased to note that a number of leading organizations
that deal with IRS concerns on a daily basis have endorsed our
recommendations--including the National Treasury Employees
Union (which represents IRS employees), National Taxpayers
Union, Americans for Tax Reform, the American Bankers
Association, the American Payroll Association, the American
Society of Payroll Managers, the American Institute of
Certified Public Accountants, the National Association of
Computerized Tax Processors, the National Association of
Enrolled Agents, the National Association of Tax Practitioners,
and the National Society of Accountants.
We will be introducing legislation to implement the
Commission's recommendations next week. I look forward to
hearing from today's witnesses and to our ongoing efforts to
make the IRS work the for the American taxpayer.
Senator Kerrey. Thanks.
Chairman Johnson. As we await the arrival of Deputy
Secretary Lawrence Summers, who is our next witness, let me say
that it is a pleasure to welcome the Commissioners here this
morning, as well as the administration, to discuss what I
consider to be an extremely important report.
Too often work is done in this body and disregarded. This
report will not be disregarded. It is my intention, it is my
belief that it is the Chairman's intention, that we move
forward on this document, that we work through the policy
changes that it proposes, and in this Congress help the IRS
move into the next millennium.
Our goal today is to provide the Subcommittee with a
general overview of the Commission's findings and
recommendations, as well as the administration's concerns. We
will hear from members of the Commission and the
administration, and at future hearings, after the August break,
we will go into greater detail on the Commission's specific
recommendations and receive input from taxpayers and other
stakeholders.
The National Commission on Restructuring the IRS was
established in 1996 in response to mounting public concern
about performance problems and the lack of accountability at
the IRS. It's 17 Commissioners were comprised of Members of
Congress, administration officials, members of the private
sector, taxpayer organizations, the National Treasury Employees
Union, a former IRS Commissioner, and estate tax administrator.
The Commission was Cochaired by Senator Robert Kerrey and
my colleague, Representative Rob Portman. I must say, the
Cochairmen did an outstanding job of leading a very fine
Commission. On that Commission in second position, working
closely, was Senator Grassley and my Ranking Member, Bill
Coyne. I thank them for the many, many hours that they put in.
This was an unusually hard working Commission, with the members
very involved, and that always lays a solid foundation for
sound action.
The Commission's report was endorsed by 12 of the 17
members, and contains recommendations for reforms in
congressional oversight and the executive branch's governance
of the IRS, stability of the IRS' budget, and financial
accountability on IRS' part for the way it allocates and spends
its resources. The report also speaks to the need to modernize
IRS' technology base and make real progress toward electronic
filing to simplify the tax system and to protect taxpayers
rights.
Obviously, not everyone agrees with all of the Commission's
recommendations. The administration has concerns about some of
them, particularly the independent board of directors, and in
response has developed its own plan for institutionalizing
executive branch oversight and management of the IRS. My
colleagues in the Congress and I will, I'm sure, develop our
views about the Commission's recommendations relating to both
executive branch oversight and congressional oversight.
Yet, as we begin this second phase of the process of
reforming the IRS, the legislative phase, we must remember that
we all share the common goal of transforming the IRS into a
modern, high-quality service organization where taxpayers can
call and resolve problems and get accurate information. We
share the vision of the Commissioners, and it is our
responsibility to make good on that vision, working with the
Commissioners and the IRS.
On a daily basis, the IRS touches the lives of millions of
hard working Americans who provide the life blood of the
Federal Government through the taxes they pay. In return, the
Nation's taxpayers deserve both respect and efficiency.
Regrettably, the near universal perception is that both of
these qualities have been in short supply in recent weeks.
For the first time since 1952, Congress and the
administration are both embarking on a serious effort to reform
the IRS. While there are divergent views about some of the
individual steps that should be taken, there are many elements
of the Commission's recommendations that are strongly supported
by everyone here today. As the Subcommittee begins the process
of examining the Commission's recommendations and developing
our own recommendations to the Full Committee for legislative
actions, I hope we can remain focused on the end goal.
I would also like to commend the Commission for its
discussion and exploration of the relationship between the
increasing complexity of the Tax Code as a result of
congressional action and the problems of the IRS, because some
of the problems can only be solved by Congress taking
responsibility for writing clearer, simpler tax law, and that,
too, is a challenge we must be capable of meeting.
I would now like to recognize my Ranking Member, Bill
Coyne, one of the Chairs of the Commission and a gentleman who
put in many, many hours. I thank you, Bill.
Mr. Coyne. Thank you, Madam Chairwoman.
I want to say that today the Oversight Subcommittee will
have an opportunity to discuss proposals to reform the
operation and governance of the Internal Revenue Service.
Specifically, we will debate the proposals recommended by the
National Commission on Restructuring the IRS in its June 1997
report and the proposals recommended by the administration in
its 5-point plan to reform the IRS.
As a Member of this Subcommittee and as a Commissioner on
the Restructuring Commission, I believe it is timely for the
Ways and Means Oversight Subcommittee to conduct a series of
hearings on proposals for changing the governance and operation
of the IRS. Debate over the successes, failures, and future of
the IRS is an oversight responsibility and a fundamental part
of our ongoing review of how our tax laws are to be
administered.
There is much agreement about how the IRS could be
improved. The IRS should improve its customer service, its
training of employees, and the development of new technology
and technology to grapple with the problems within the agency.
Oversight of the IRS needs to be enhanced and institutionalized
with significant input from the private sector. Mechanisms
should be established to provide direction of long-term
strategy at the IRS and IRS management should be held
accountable for its decisions.
The IRS Commissioner should run the IRS for a meaningful
period of time, and be able to hire expert senior level
managers. The Congress could do a better job of coordinating
its oversight and funding of the IRS operations. There is
fundamental disagreement, however, on how the IRS should be
governed in the future and who should be in charge at that
important agency.
I object to turning the IRS over to individuals who are not
directly accountable to the American people. I believe that the
President or the Treasury Secretary should have the power to
appoint and dismiss the IRS Commissioner. I suggest that the
Congress carefully review the current administration's plan for
establishing an IRS management board and an IRS advisory board,
and for giving the IRS Commissioner authority to hire a top
notch management team to govern the agency.
To ensure long-term IRS reform, I believe that we should
amend the Tax Code to make the administration's proposal on
governance structure permanent in the Code.
Some of the other recommendations in the Commission's
report seem to me to be extraneous to the Commission's
statutory mandate and require much more analysis, particularly
the sections relating to Taxpayer Bill of Rights,
simplification, and creation of a new congressional entity.
Also, some of the recommendations in the Commission's report,
in my opinion, would have a negative effect on the IRS'
interactions with the public and raise tax policy issues of
great significance.
I do not agree, for example, with the Commission's
conclusion that the child support tax refund offset program is
a diversion of IRS resources or creates a risk of undermining
the IRS' core responsibilities and capabilities.
Also, I object when the earned income tax credit, EITC, is
indirectly characterized in the Commission's report as a credit
added to the Internal Revenue Code to target a specific
population already served by other Federal agencies. The EITC
is a program for the working poor in this country. It is not,
as recently characterized by some Members of Congress, a form
of welfare.
In conclusion, I want to thank Congressman Portman for his
commitment to reforming the IRS, and I also want to thank my
colleagues from the National Commission on Restructuring the
IRS who are with us here today, and others from the Commission,
for appearing as witnesses at this hearing. Without a doubt,
our mutual goal is to make the IRS the first-class tax
collection agency the public expects and deserves. I intend to
work closely with Chairwoman Johnson and others on these
issues, and look forward to the Oversight Subcommittee's future
hearings on IRS reform, to be held later this year and beyond.
Thank you very much, Madam Chairwoman.
Chairman Johnson. Thank you, Bill.
Now I would like to give my colleague, Rob Portman, the
opportunity for an opening statement. He was my designee on the
Commission, Cochaired the Commission, put in many, many hours,
did a very thorough job, and Rob, you have been a coleader in
bringing to this Subcommittee a really outstanding, thoughtful,
and important report.
Mr. Portman. Thank you, Nancy, and thank you for holding
this hearing.
This is a busy time in Congress, as all of us know, and
there are plenty of excuses, frankly, for postponing these
proceedings today because of all the other activity going on.
It's a tribute to you that you were willing to move forward
with it, and I think, as Bill Coyne just said, it is a very
important and timely hearing on the issues of IRS reform that
came up in the Commission's work.
I just want to thank Donna Steele and Beth Vance of the
Subcommittee staff for their help in putting this hearing
together, but more importantly, for their work over the past
year with regard to the Commission's work. They were very
involved and active and without them we would not have been
able to put together the product that we have before us today.
Mrs. Johnson mentioned that I'm Cochair of the IRS
Commission. She didn't really mention the fact that I'm in this
position because she designated me. In fact, at the time I
wondered how much of an honor that was. A year later, I can
say, without any regrets, that I'm very pleased that she chose
me to represent her on that Commission, and then becoming
Cochair was an honor and it was an honor to work with Senator
Kerrey, with whom we worked very closely. You heard from him
earlier with regard to his strong views on the final report.
All 17 members of the Commission put an enormous amount of
time and effort into this. I see a number of them here. Josh
Weston, Fred Goldberg I see here. I know Bob Tobias, David
Keating, George Newstrom, and Larry Irving are coming. Jeff
Trinca is here, who was Executive Director of the Commission.
All of them deserve a great deal of credit for this final
product as well.
It was an unusual experience. In a nonpartisan way, not
even a bipartisan way, I would say we really rolled up our
sleeves and tried to do what was right for the IRS and for the
American taxpayer. I think again, as we look at the results
today, through the testimony you will hear, that many of you
will agree that this was a thorough, comprehensive effort that
will result in real change and will really help not only the
Service but the taxpayer.
I also want to commend Treasury for its work on this. Ed
Knight, who is General Counsel at Treasury, was on the
Commission, and that needs to be noted. Treasury's input was
very much a part of this. Ed has just arrived, as well as Larry
Summers, who is now here with us. I want to thank them for
their service and input and work.
Finally Bill Coyne, who was a gentleman throughout this
whole process. I will say, to show you how unusual this work
product is in the Washington context, almost every one of the
concerns that Congressman Coyne mentioned he had input in, and
actually changed and moved his way, even though in the end he
was not able to sign the report. I think it's fair to say that
his input was significant, as was Treasury's, and that in the
end Bill Coyne and I agree on about 80 to 90 percent of the
final work product, because this really was in many respects a
consensus product, with the exception of a few tough issues
that we'll get into later today.
This is the first comprehensive blueprint for reform of the
IRS in my lifetime. Not since 1952 have we suggested these
kinds of fundamental changes. I think it is truly a road map
for transforming the IRS into a 21st century taxpayer service
and customer service entity. Nancy Johnson forcefully made the
comments that we need to do this, it needs to be dramatic
reform, if we are indeed to respond to the concerns of
taxpayers expressed to us as Members of Congress, and as
expressed through various other surveys and evidence that the
Commission was able to discover.
I am pleased that a number of organizations, Madam Chair,
worked with us on a daily basis in putting together this
report, and have now endorsed the recommendations. This
includes the National Treasury Employees Union, which as most
of you know represents the bulk of the IRS employees. It also
includes the National Taxpayers Union, again to show you how
unusual this product is. The Americans for Tax Reform, the
American Bankers Association, the American Payroll Association,
the American Society of Payroll Managers, the American
Institute of Certified Public Accountants, the National
Association of Computerized Tax Processors, the National
Association of Enrolled Agents, the National Association of Tax
Practitioners, and the National Society of Accountants all
endorse this report.
These stakeholders endorse this product because again they
had significant input in it. We listened to them as we listened
to the American taxpayer, and I think it is a tribute to them
that they were willing, as the Commissioners were, to roll up
their sleeves and dig into this issue and come up with a good
product, and then in the end to stand behind it.
I would also like to announce that next week we will be
introducing legislation to implement the Commission's
recommendations. Senator Kerrey, Senator Grassley, and myself
and other Members of the House and Senate will be doing so some
time probably mid-week.
Madam Chair, I look forward to hearing from today's
witnesses, and again I want to thank you for giving us this
opportunity today.
Chairman Johnson. Thank you, Rob.
It is my pleasure now to welcome Hon. Lawrence Summers,
Deputy Secretary of the U.S. Treasury.
STATEMENT OF HON. LAWRENCE H. SUMMERS, DEPUTY SECRETARY, U.S.
DEPARTMENT OF THE TREASURY
Mr. Summers. Thank you very much, Madam Chairman. Let me
apologize to the Subcommittee for the delay in traffic that I
experienced on my way up here. I have a longer statement which
I submit for the record.
I am pleased to be here today to talk with you about the
report of the Commission on Restructuring the IRS and
Treasury's plans to implement solutions to the difficulties
facing the IRS.
Before saying anything else, I would like to thank the
Chairman, the Ranking Member, and other Members of the
Subcommittee for their leadership on this critical issue.
Over the last year we have been involved in an important
and historic debate about how best to improve the operations of
the IRS. The National Commission on Restructuring the IRS,
under the leadership of Senator Kerrey and Congressman Portman,
has done a great deal to illuminate this debate and to advance
thinking as to possible solutions.
We in the administration and the Commission have in many
ways traveled similar paths in the search for better IRS. We
agree on the need for change for the 21st century. We agree on
what needs fixing: More effective oversight, increased
continuity, more private sector input, a more flexible and
responsive institution that can provide far better customer
service. The question is how best to achieve that change.
Last year, in testimony before this body, Secretary Rubin
and I recognized the severity of the problems that the IRS
faces. We highlighted the importance of improved customer
service and noted the serious management problems that have
arisen with respect to the modernization program. It was, as we
put it at that time, ``off track.'' We called for a sharp turn
and made clear our determination to bring about change.
I think there has been change. Under the direction of our
new Chief Information Officer, the IRS has released a blueprint
for technology modernization, the first attempt to form a
strategic partnership on information technology with the
private sector.
Outsourcing has increased dramatically, with more than 60
percent of IRS information technology work now carried out by
private contractors. The IRS has increased electronic filing
and filing by telephone by more than 50 percent, and it has
doubled the number of taxpayer calls answered.
There is a lot of debate about just what the right
statistics are, but on one set of statistics, the fraction of
calls for taxpayers assistance, was increased by a factor of
2\1/2\ during 1996. We're still not doing what we should be
doing, but real progress is being made.
I think we've made a good start toward building the modern,
efficient and accountable IRS that the American people deserve,
but we must do more. The administration believes that we should
make change on a broad range of fronts. Today I want to focus
on legislation that will soon be introduced to improve
governance and to improve management flexibility.
As I emphasized, we share with the Commission the view that
current governance arrangements are flawed, in not providing
adequately for continuity, for accountability, and for
increased outside input. That's why we have proposed to appoint
the IRS Commissioner for a fixed 5-year term. That's why we've
proposed to make permanent the current Modernization Management
Board, comprised of senior government officials, to review high
level management issues and to require the Secretary and the
Deputy Secretary to report to Congress on the IRS in person
twice each year.
That's why we have proposed to bring outside expertise to
bear on the problems of the IRS by establishing an Internal
Revenue Service Advisory Board reporting directly to the
Secretary of the Treasury, a board made up of private sector
individuals selected to represent a wide range of relevant
experience, including information technology and customer
service.
In order to ensure that that advisory board functions in a
strong and effective way, and in order to ensure that the
Treasury maintains its oversight responsibilities, we will ask
the requirement be embodied in legislation that that advisory
board make a report to the American people on the performance
of the IRS and on the performance of Treasury oversight of the
IRS each year.
But, however successful we are in improving our oversight,
ultimately it is what the IRS does that will be what American
taxpayers see. That's why we have focused very intensively on
leadership and have identified a candidate now going through
the vetting process to be Commissioner of the IRS, with an
outstanding private sector management background and extensive
experience in the information technology area.
But another crucial piece of this effort has to be to give
the IRS much needed flexibility. Our legislation will contain a
range of measures to enhance the IRS' capacity to do what we
and the Commission both recognize is necessary--to recruit and
retain people with critical skills and to streamline
procurement procedures.
We also believe that stability and certainty are needed for
the IRS' technology and capital investment budgets. The
President's fiscal year 1998 budget proposes multiyear
investments for technology in order to ensure this stability.
We look forward to working with the Congress to implement the
Commission's budgeting recommendations.
Finally, Madam Chairman, I would like to comment briefly on
the Commission's proposal that an outside board of private
citizens take on the governance function at the IRS. We believe
this proposal raises grave concerns and subjects 95 percent of
our Nation's Federal revenues collected by the IRS to
unacceptable risks.
First, we doubt the efficacy of such a proposal. The
challenges the IRS faces in its size and complexity demand more
than the part time and sporadic attention that such a board
could provide. Urgent and complicated decisions, which can now
be taken by Treasury officials, might be delayed a month or
more. The board of directors model has some successes in the
private sector, but experience suggests that it has been
notoriously problematic in government.
Second, we believe granting decisionmaking powers to high
stature individuals from the business world would expose the
Service to dangerous and unacceptable risks of conflicts of
interest. Under the Commission's proposal, on at least one
interpretation, for example, corporate executives whose
companies might automatically be subject to yearly audits would
have no recourse at all to their own corporate situation but
could have a crucial role in determining the audit budget for
the IRS and its strategic approach to enforcement.
Third, we are concerned that a new layer of management
would create bureaucratic confusion by dividing core IRS
functions into disparate elements. Today, for example, the IRS
is able to give Secretary Rubin and me its analysis of the
impact of proposed tax changes on tax administrations. Under
the Commission's proposal, while there still would be the
possibility of communication, we believe that the synergy would
be lost.
Fourth, and particularly troubling to us, the Commission's
proposal would grant private citizens control over one of the
largest law enforcement agencies in our Nation. This is only
one of many areas which could expose the new board to
constitutional and legal challenges and risk paralyzing the
IRS.
Fifth, the proposal would undermine accountability. Right
now, accountability for the performance of the IRS rests with
the President and rests with the Secretary of the Treasury, one
of the most senior members of his cabinet. The Treasury
Secretary is accountable to the President, and the President is
accountable to the people. Resting accountability with a group
of part-time participants, who inevitably would have primary
loyalty elsewhere and who would not be subject to the kind of
discipline that shareholders provide in the private sector,
seems to us to be very, very problematic.
In sum, Madam Chairman, I think there is no disagreement
about ends. We all want an IRS that is ready for the 21st
century, that can provide the kind of customer service that the
American people expect. We all believe that it needs to become
a more flexible, more aggressively and effectively managed
institution, that harnesses information technology far more
effectively than in the past, to achieve those objectives. What
we need to do, working together, is find the most effective
means of achieving that end.
Thank you very much, Madam Chairman.
[The prepared statement follows:]
Statement of Hon. Lawrence H. Summers, Deputy Secretary, U.S.
Department of the Treasury
I am pleased to be here today to talk with you about
Treasury's plan to achieve lasting improvements in the
performance of the IRS and to discuss the report of the
National Commission on Restructuring the IRS on this same
subject. Before I begin, I would like to thank the Chairman,
the Ranking Member and the other members of this Committee for
their leadership on the matter of IRS reform. In addition, I
hope you will join me in recognizing and thanking the more than
100,000 loyal and dedicated IRS employees who carry on the
unpopular but vitally important task of collecting 95% of our
government's revenue.
Madame Chairman, over the last year, we have been involved
in an important and historic debate about how to improve the
operations of the IRS. The National Commission on Restructuring
the IRS, under the joint chairmanship of Senator Kerrey and
Congressman Portman, has done much to illuminate that debate
and drive it forward. Everyone involved in the Commission has
worked hard to understand the complex problems facing the IRS,
and the Report contains many constructive suggestions for
change.
In fact the Administration and the Commission have traveled
very similar paths in their search for a better IRS. We agree
on the need for change at the IRS: on the need for more
effective oversight, increased continuity, and greater access
to outside expertise. This finds us making many of the same
recommendations in important areas. However, as Secretary Rubin
has said, we part company with the Commission on the crucial
question of how the IRS should be governed. Today I will be
focusing my remarks particularly on this issue.
First, however, I would like to briefly describe some of
the progress we've made on improving the IRS and how we intend
to push things forward in our forthcoming legislation. Our aim,
Madame Chairman, as always, is to build a modern, efficient and
accountable IRS to serve the American taxpayer into the 21st
century. As you will see, we believe that objective is getting
closer every day. I will then go on to explain why, for all the
many areas of agreement between us, the Administration believes
that the Commission's proposals for IRS governance are
fundamentally flawed; indeed, they would be more likely to
aggravate its problems than solve them.
Management Reform
Madame Chairman, for some time now we have been engaged in
a many-sided effort to improve the IRS. Longstanding problems
in modernizing the computer systems of the IRS initially
focused attention on the shortfalls of the information
technology of the Service. At the same time, improvements in
customer service in the private sector have led the American
people to want interaction with the IRS to be as efficient and
straightforward as with credit card companies and other
private-sector financial institutions. This has occurred at a
time when the IRS is also coping with an increased workload. In
1997, the IRS processed over 200 million returns.
Over the last few years, the Treasury Department has
focused intense efforts on improving the IRS. We are committed
to change and real change is underway. Our goal is to create a
more efficient, modernized and taxpayer-friendly Internal
Revenue Service. This Committee and others in the Congress have
held extensive hearings on the matter. These efforts and the
work of the Commission have helped forged a consensus among a
wide group of stakeholders, from business executives to Members
of Congress to leaders of the IRS and the National Treasury
Employees Union, on the need for change.
I believe that in the next year, we have the opportunity
and the obligation to bring about the most far-reaching changes
in decades in how the IRS is managed and how it does business.
Indicators of Progress
Last year, in testimony before this body, Secretary Rubin
and I recognized that the IRS's modernization program was, as
we put it at the time, ``off track''. We called for a ``sharp
turn'' and made clear our determination to bring about change
in the way the IRS uses information technology and provides
customer service. And there has been change. The results, while
still in their early stages, are already producing benefits and
give the IRS a solid foundation on which to build.
Some examples of the steps we have taken include the following:
Our new Chief Information Officer, Art Gross, has
cut and collapsed the number of tax systems modernization
projects from 26 to nine.
In May 1997, after many months of intense
preparation, Mr. Gross released the IRS's Blueprint for
Technology Modernization, which was well-received in the
professional information technology (IT) communities both
inside and outside the government. This Blueprint represents
the first comprehensive attempt to form a strategic partnership
on IT with the private sector.
The IRS has also increased outsourcing. The
percentage of work performed by contractors has increased from
40 to 64 percent over the past two years. The number of IRS
staff working on tax systems modernization has decreased from
524 to 136.
The IRS is now working with a top marketing firm
on an electronic filing marketing strategy to bolster taxpayer
participation in the entire line of IRS electronic filing
products, including Telefile, On-line filing, 1040-PC filing,
and traditional electronic filing. The bureau is also putting
forth a Request for Information (RFI) that will produce
opportunities for partnering with the private sector to
increase electronic filing.
The IRS has taken many steps to improve customer service. For
example:
A joint Treasury, IRS, National Performance Review
(NPR) task force is concluding a 90-day study of customer
service. The study has drawn on the experience of front-line
employees and has focused on the issues that touch customers
most deeply. Among other tasks it will identify ways to improve
notices sent to taxpayers, the quality of walk-in center
assistance, and training.
Our efforts are paying off. For example:
The GAO found that 50.9% of calls by taxpayers to
IRS taxpayer assistance were answered in 1997. Although this
percentage remains far too low, it has more than doubled from
only 20.1% in 1996.
In fiscal year 1996, the IRS redesigned, combined
and eliminated notices to taxpayers, cutting the number of
different notices by 12 which resulted in 18 million fewer
taxpayer notices being issued and mailed. In 1997, it
eliminated another 20 types of notices, resulting in 3 million
fewer notices being mailed.
As of July 4, the number of returns filed
electronically by paid preparers rose from 12.1 million in 1996
to 14.4 million in 1997. Meanwhile, filing over the telephone
through the IRS' Telefile program has risen from 2.8 million in
1996 to 4.7 million this year. As a result, the percentage of
individual tax returns filed electronically has risen from
13.1% in 1996 to 16.5 % in 1997, or about one in six taxpayer
returns.
These improvements, while far from sufficient, are
meaningful. Looking ahead, we are committed to raising the
standards of IRS performance even higher.
As part of the Government Performance Review Act
process, we have established tougher targets for a variety of
performance measures including improvements in telephone
service, to which I alluded above, reductions in the cost of
collecting revenue and increases in the percentage of revenue
collected electronically. For example, in fiscal year 1997, we
have set a target of collecting 24.7% of revenues
electronically. In 1998, we will increase that target to 48.4%.
In short, we have made a good start toward building the
modern, efficient and accountable IRS the American people
deserve. But everyone involved in the process--at Treasury, the
IRS, Congress and the union--recognizes that problems that have
been building for decades do not get solved overnight, or even
over a couple of filing seasons. Further structural changes
will be needed to propel the reform process forward and build
an IRS for the 21st century. Let me turn now to the
Administration's plans to make these changes come about.
Our Approach to Reform
In March of this year, the Administration unveiled a five-
point plan outlining our approach to achieving long-term
improvements in IRS performance. Our approach includes measures
to strengthen oversight, improve leadership, increase
flexibility, improve budgeting procedures and simplify the tax
code that the IRS administers. As you know, we have begun to
make progress in all these areas. Today, I want to focus on our
forthcoming legislative proposals to bring our vision of a
modern and responsive IRS even closer. These will guarantee
lasting improvements in oversight and accountability at the IRS
while giving it greater access to outside expertise and more
internal flexibility.
Improving Governance
Oversight and Accountability
First, to improve oversight and accountability, we will
build on the success of the Modernization Management Board by
making it permanent and extending its mandate. The IRS
Management Board (as it will be called) will be made up of
senior career and non-career officials from Treasury, IRS, OMB,
and the Office of Personnel Management. In addition, one board
member will be the Taxpayer Advocate, whose presence will give
taxpayers a stronger voice in IRS governance.
The board will function much like a corporate board of
directors, meeting once a month to assist the Secretary on
high-level IRS management issues such as operations,
modernization and taxpayer assistance and services. As now, the
Board will be chaired by the Deputy Secretary of the Treasury.
It will also prepare semiannual reports to the President
and the Congress. An Executive Committee will review strategic
decisions, including significant reorganizations, performance
measures, budgetary issues, major capital investments and
compensation matters.
With greater oversight will come greater responsibility.
Our legislation will require the Secretary and Deputy Secretary
to come to Congress twice a year to report on the operations of
the IRS. This will ensure that future occupants of these
positions are required to demonstrate the same full-time
commitment to the IRS that Secretary Rubin and I have shown
over the past year.
Access to private-sector expertise
Second, the administration's proposals recognize the
undoubted need for the IRS to have greater access to private-
sector expertise. To achieve this we intend to establish an
Internal Revenue Service Advisory Board that reports directly
to the Secretary of the Treasury. This Board will include up to
14 individuals, each appointed by the Secretary and serving a
staggered 3-year term. Members will be selected so as to
represent the broadest range of outside interest and expertise,
including taxpayer groups, small and large-scale businesses,
nonprofit or educational organizations and tax professionals as
well as state tax administrators, technology leaders, and
experts in customer service.
The Internal Revenue Service Advisory Board will meet
quarterly to help the Secretary find ways to improve the
management and operations of the IRS and will provide
recommendations about IRS policies, programs and plans. The
public will receive a yearly account of the board's
contribution in the form of an Annual Report to Taxpayers.
Greater continuity
Finally, like the Commission, we want to provide for
increased continuity at the IRS within a framework of clear
accountability to the Executive by appointing the IRS
Commissioner on the basis of a fixed, five-year term. We have
identified a potential candidate for Commissioner of the IRS
with a background in management of information technology. The
Commissioner, as now, will be appointed by the President with
the advice and consent of the Senate and will be removable at
will.
To sum up, I am confident that the four steps I have
outlined--creating a permanent management board, requiring the
Secretary and Deputy Secretary to report to Congress semi-
annually, creating an advisory board comprised of outside
experts, and appointing the Commissioner to a fixed five-year
term--will strike the proper balance between helping the IRS
operate more effectively and making it more accountable and
responsive to private-sector expertise.
Flexibility
We are all agreed that the IRS needs to have greater
flexibility in both selecting and managing personnel and in
procurement.
We are exploring options in the area of recruiting and
retaining needed technical and professional staff with critical
skills. For instance, we intend to seek flexibility to set the
pay for a limited number of critical positions at higher than
usual salary rates. We will ask for legislation to liberalize
the pay limits for outside experts and consultants. In
addition, to give the Commissioner greater flexibility to
address short-term staffing needs at the most senior levels,
the bill will provide greater authority to appoint limited-term
and emergency Senior Executive Service staff.
We will also be seeking authority to enable the IRS to work
with the Union and the Office of Personnel Management (OPM) to
develop and implement personnel management demonstration
projects. This authority--a streamlined version of provisions
that have been in the law for many years--will support IRS
efforts to try out new ways of doing business.
In addition, our legislation will contain a range of
mechanisms to make it easier for the IRS to make strategic
long-term purchases, streamline the procurement cycle for major
acquisitions and encourage the development of long-term
strategic partnerships with reliable, competitive contractors.
These mechanisms include a two-phase competitive acquisition
process that promotes efficient and effective communication to
identify the best fit between government needs and marketplace
capabilities and allows limited recompetitions for continuing
requirements. The legislation would further enhance the
bureau's ability to buy information technology in more
manageable, modular increments.
Stable budgeting
Finally, let me add briefly that the Administration has not
lost sight of the need to obtain more stable and predictable
funding for the IRS. The report of the National Commission on
Restructuring the IRS was clear on this point. It recommends
that ``the IRS should receive stable funding for the next three
years so that its leaders can undertake the proper planning to
rebuild its foundation.'' This recommendation pertains to the
budgets for tax law enforcement and processing, assistance and
management.
Similarly, the Commission believes that stability and
certainty are needed for IRS' technology and capital investment
budgets. The President's FY 1998 budget proposes multi-year
investments for technology in order to ensure this stability.
We are glad that both the House and Senate appropriations
subcommittees have acknowledged this need and that they have
proposed funding for FY 1998.
The Right Reform Mix
I come now to my more detailed comments on the IRS
Commission's Report. At bottom, the Commission's and the
Administration's diagnoses of the IRS's problems are strikingly
similar. Like the Commission, we believe that more effective
governance, flexible management practices, and stable budgeting
hold the key to an IRS that can meet the needs and expectations
of American taxpayers into the next century. We further agree
with the Commission that efforts to improve governance ought to
focus on injecting greater accountability, continuity and
outside expertise.
As I have shown, the common ground between us and the
Commission does not stop at diagnosis. We have also found
ourselves coming up with many of the same prescriptions in
drawing up our legislation. In our view, however, the
Commission's proposal would fail to achieve the objectives we
share. What is more, it would endanger the service's ability to
serve the public with the efficiency and integrity we demand of
such a core part of our government.
The Commission has proposed that the IRS be governed by an
outside board of private citizens who serve on a part-time
basis. This, on the grounds that it ``will bring
accountability, continuity and expertise to executive branch
governance and oversight of the IRS''. While perhaps
superficially attractive, we believe the proposal will deliver
none of these benefits. Far from increasing oversight and
continuity, the change would subject the IRS to a grand and
uncertain experiment, fraught with legal and administrative
uncertainties. The service, in such a setting, could find it
difficult to function at all, let alone do so more effectively.
Meanwhile part-time outsiders with neither the time nor the
insulation from special interests of full-time public officials
would be running a core government agency, with possibly grave
implications for public confidence in the IRS and the Service's
confidence in itself.
Unacceptable Risks
Instead of enhancing oversight, the insertion of the board
into IRS governance arrangements would actually alter the
present clear line of accountability between the IRS leadership
and the American people as embodied in their elected President.
The Commission has pointed out, correctly, that the
Treasury has not always met the IRS's need for consistent
strategic oversight and guidance. But to respond to these past
failings by inserting a new private-sector management board,
would, in our view, be a large step in the wrong direction.
The division of authority between the Secretary and the
Board would not only create internal confusion, but would
significantly increase the likelihood of litigation;
disgruntled taxpayers might well challenge the authority of the
entity that had made a decision with which they disagreed. In
addition, the Commissioner's authority would be vulnerable to
Constitutional challenge on the grounds that his appointment by
the Board violates the Appointments Clause.
The Appointments Clause of the Constitution states that
principal federal officers must be appointed by the President
with the advice and consent of the Senate, but that Congress
may provide that inferior officers may be appointed either by
the President alone or by ``Heads of Department'' or ``Courts
of Law.''
It might by considered ironic that a Commission that has
done so much to highlight the importance of the IRS to American
life should apparently see the IRS Commissioner as an inferior
office. At any event, it is clear that the proposed board would
constitute a ``head of department.'' Thus, the Commission's
proposal does not comply with the mandates laid down in the
Appointments Clause.
These and the other structural concerns would leave the
IRS' actions open to serious legal challenges that could impede
the flow of 95% percent of our nation's revenue. It would be
the height of irresponsibility, at a time when we are trying to
balance the Federal budget for the first time in a generation
and facing difficult decisions about our spending priorities,
to create a legally suspect regime that could threaten funding
for everything from national defense to the education of our
children.
Although the Commission's proposal purports to leave
Treasury in charge of developing tax policy and performing the
IRS' law enforcement function, it contravenes that notion by
giving the board broad authority over the budget-sector CEOs
would control the purse strings and hiring practices at one of
the most powerful government agencies.
At best, the proposal would split tax policy and law
enforcement between Treasury and the Board; at worst, it
establishes the Board as a de facto policy voice. Rather than
fragmenting accountability, the legislation I have outlined
here today will strengthen it.
Our day to day involvement with the IRS' management
direction serves a critical purpose that would be undermined by
the Commission's proposals. This is the capacity to treat tax
policy and tax administration as they should be treated: as two
sides of the same, public, coin. It is no accident that close
and institutionalized coordination between the IRS and
Treasury's Office of Tax Policy has been maintained without
interruption for well over 50 years.
Even if the many concerns I have mentioned were to be
overcome, I do not believe that a private-sector board would
meet frequently enough to address the critical and complicated
decisions facing the Service over the next decade. Urgent
matters requiring the board's immediate attention and input
might have to wait a month or more until the next board
meeting, by which time these busy executives would somehow have
to have fully prepared themselves to deal with the issue--if,
that is, it were not by then too late to act.
The challenges the IRS faces and the size and complexity of
the institution demand more than the part-time and sporadic
attention that the Commission's proposed board would provide.
Clearly, the problems of the IRS show that Treasury in the past
failed to exercise appropriate oversight. But things are
different now. And the measures we are proposing will make sure
they stay different, not merely in this Administration, but in
the many to come. Today, Secretary Rubin and I, as well as
other Treasury officials, are always available to discuss
pressing issues with the IRS--and frequently do so.
The IRS's relationship with Treasury provides an effective
mechanism for presenting to senior Administration officials the
IRS's analysis of the impact of proposed tax changes on tax
administration. Secretary Rubin and I raise such concerns
frequently in tax policy discussions in the White House and
elsewhere throughout the Administration. Furthermore, Treasury
oversight allows the IRS to draw upon Treasury resources for
critical projects, as demonstrated by our current cooperation
on the Year 2000 conversion. Under the Commission's proposed
governance structure, this much-needed synergy between the IRS
and the Treasury would be lost.
Outsider control, outsider interests
The Commission's desire to import private citizens to
oversee the IRS's operations raises another major worry. Once
again, the stated objective is the same as the
Administration's--namely to open the IRS to wider sources of
outside expertise. But, in our view, attempting to achieve this
by granting decision-making powers to ``high-stature''
individuals from the business world would expose the service to
dangerous and unacceptable risks of conflicts of interest. The
IRS needs to be managed by officials whose full-time, sworn
responsibility is to uphold and enforce the law. Anything else
risks creating the appearance, if not the reality, of serious
conflicts of interest in the management and oversight of the
IRS's activities.
In our view, creating a new management board to run the
IRS, comprised mainly of individuals who spend the bulk of
their days in private business, would run precisely this risk.
The Report states that board members would be subject to the
same ethics laws as the individuals now associated with the
governance of the IRS, but the Commission failed to recognize
that those laws impose significantly diminished restrictions on
outside financial interests and conflicting activities of part-
time employees.
In any event, it is clear that individual board members--
who will continue to draw private-sector salaries--will face an
uphill struggle ensuring that their private interests and their
newly acquired, part-time public duties do not conflict with
one another. Under the Commission's proposal, for example,
corporate executives whose companies may be automatically
subject to yearly audits could end up determining the audit
budget for the IRS and its strategic enforcement activities.
At best, the need for board members to recuse themselves
from a wide range of matters facing the IRS to avoid conflicts
will reduce their ability to provide effective input, even on a
part-time basis. At worst, the new structure could fatally
weaken the public's confidence that the IRS administers and
enforces the nation's tax system fairly and even-handedly.
In both the report and subsequent correspondence, defenders
of the Commission's proposals have denied that such conflicts
will arise, on the grounds that the new board would not be
involved in specific law enforcement matters. Yet the board's
sweeping control over budget and personnel would put it knee
deep in law enforcement issues. In fact, decades of experience
suggest that, just as tax policy questions cannot be separated
from tax administration, tax enforcement and administration are
so intertwined as to be, at times, indistinguishable.
The Report claims that the job of the IRS is solely to be
an ``efficient financial management organization''. This claim
is both improper and incorrect. The IRS is, rather, an
essential governmental agency charged, under the supervision
and authority of the Secretary, to enforce the internal revenue
laws enacted by Congress and the President.
As Acting Deputy Attorney General Waxman has noted, this
legal mandate means that the IRS can be duty-bound to pursue
enforcement activities that, while fully justified in terms of
the broader public good of protecting society from crime, may
not be justifiable on narrow financial grounds. One does not
have to go back to Al Capone to find examples of's the IRS was
second only to the Drug Enforcement Administration in its
participation in Organized Crime Drug Enforcement Task Force
investigations.
We share the concerns of the Attorney General's office that
a private board along the lines proposed by the Commission
might tend to focus solely on generating revenue. This, at the
cost of undermining the IRS's longstanding contribution to
important law enforcement missions such as combating domestic
and international organized crime and money laundering. The
long-term social benefits of an active and long-term commitment
of IRS personnel and resources to such missions are hard to
translate into dollars and cents. The worry must be that they
would not be given due weight by private, part-time ``special
government employees'' whose remit is to serve the public purse
and not, more broadly, the public good.
Finally, let me add that in the public sector, management
by a board is notoriously difficult. In the private sector,
financial markets, shareholder voting rights and a well
established body of law around corporate governance as well as
the imperative of profit, provide checks on the actions of a
board of directors. In the public sphere, no such checks exist.
For these reasons alone, the GAO counseled against vesting
oversight of an agency like the IRS in a separate board.
To sum up, I believe the management board proposed by the
Commission will do little to enhance effective oversight or
boost continuity within the IRS. Put simply, the collection of
the revenues that underpin this nation's government is too
important to subject to this degree of risk--particularly in
return for such uncertain benefits.
Conclusion
In conclusion, this morning I have discussed some of the
specific steps we are taking to modernize the IRS. We have
already made considerable progress. But we have far more to do.
The legislation that I have described is necessary to continue
the job of building the IRS of the future. Its key elements--
reforming governance and improving management flexibility--will
give us the tools we need to improve our tax administration
system, not just this year but for years to come.
The subject of governance, in particular, is one where I
believe we must exercise extreme care. This morning I have
described our approach to this critical issue. I have also
highlighted areas where we agree and where we disagree with the
proposals of the Commission on Restructuring the IRS. In coming
weeks and months, I look forward to working with members of the
Commission, with members of this committee, with the union and
with other interested groups in building on the many areas of
agreement that exist among us, many of which will be reflected
in the Administration's legislation.
We have made tremendous progress over the past year in
identifying the need for change in the IRS and we are starting
to make that change a reality. The task for the years ahead
will be to keep this process of renewal moving forward. Between
us we can build an IRS that meets the high standards the
American people set for it--and the demands of a new century. I
hope we can all share a commitment to doing this without at the
same time jeopardizing the ethos of dedicated public service
that has, rightly, made the US system of tax collection and
enforcement the envy of the world.
Thank you, Madame Chairman and members of the Committee. I
would welcome any questions.
Chairman Johnson. Thank you, Secretary Summers.
We have a vote called and we only have a few minutes now
left to vote, so we're going to go vote and recess for about 7
or 8 minutes.
[Recess.]
Chairman Johnson. Mr. Secretary, thank you for your
testimony. It is a pleasure to look at how much of this work,
that consumed a year of dedicated effort on the part of many
thoughtful and knowledgeable people, you all agree on. On the
issue of governance, however, you do have significant
disagreements.
I would like to invite you to discuss in a little bit
greater depth why you think that your current board, that
includes appointees from the Vice President's office, OMB, OPM,
and Treasury, can exercise oversight that brings to the table
the level of knowledge and consistency that we all agree we
need. Because, in my estimation, the appointee from the Vice
President's office raises questions of political influence, and
I don't see the expertise specific to the IRS challenge as
coming or being there in either OMB or OPM.
I would like to hear you talk about this management board
as an alternative, because right off the top it doesn't make
it, in my mind.
Mr. Summers. I think you raise a very important set of
questions. Let me just clarify one point.
It's really the National Performance Review staff that is
represented on the board, not the Vice President's personal
staff and----
Chairman Johnson. But to that point, if I may, that's a
creature of this Vice President. Will the next Vice President
have such a board? In the future, will Vice Presidents' offices
be dependent----
Mr. Summers. No. I think probably not, so I think what's
important is that I would expect any administration would have
a locus of people who were concerned with maximizing efficiency
in government, and I would expect that group of people to be
represented on that board.
In this administration, the National Performance Review has
been under the Vice President's responsibilities, but that's
why our proposal allows for the possibility of modification of
the composition of the board precisely to reflect the fact that
where the focus on efficiency in government is will change, or
may change a bit, from administration to administration.
Chairman Johnson. Mr. Summers, just to stay on this one
point, and then move on to the others, first of all, we would
have to be very careful about how we wrote that statute, so
that we got the right person.
Mr. Summers. I agree with that.
Chairman Johnson. But whoever we got--because remember,
Vice President Dan Quayle had the first sort of modernization
efficiency--I've forgotten what he called his, the National
Competitiveness Council--that had the same goal and looked at
similar kinds of issues. Those councils always make a
contribution. They made a contribution under Vice President
Quayle, and Vice President Gore is certainly making a
contribution through this council.
But they are, after all, political entities. They are seen
by the rest of the world as part of an administration and,
therefore, part of a political platform and set of goals.
Do you think it's really wise to bring that kind of entity
into, in a sense, a permanent relationship with the IRS, given
some of the problems that we've had historically between
elected officials and the IRS in those areas?
Mr. Summers. I think it's appropriate for the President and
the senior people that the President appoints to be members of
his administration, to take on the responsibility for oversight
of the IRS. I think that they should take that responsibility
on in a way that is directed at overseeing policy and
management, and obviously with no connection to specific cases.
I think it is helpful to the Treasury Department, where
that responsibility is centered, to be able to draw on
expertise from other parts of the administration. In our
administration, we have people with extensive knowledge and
experience in the procurement area, in the information
technology area, in the labor relations and personnel area, who
are located at OMB, who are located at the OPM, and who have in
this administration function as part of the National
Performance Review staff.
I certainly agree with you that it would be inappropriate
to include in IRS governance persons whose primary concerns
were political or communications oriented. But just as
Congress, by statute, many years ago set up the National
Security Council as a grouping of senior officials reporting to
the President, charged that grouping with certain
responsibilities, just as I think this administration has
innovated effectively with the National Economic Council, which
is a group of executive branch officials, given an important
responsibility.
I believe the same thing can work, and has worked, at the
IRS. So that's the reason for going and getting the expertise
outside of Treasury.
We have found that, in terms of holding the IRS
accountable, having a monthly board meeting and requiring
decisions to be presented to a group of senior government
officials, is an effective device for achieving IRS
accountability. I think that, working through the board, we
have been successful in levering a great deal of change,
particularly in the management of the information technology
program, over the past year. So I believe that this is the
right and is an effective approach.
But I would want to stress that we share the Commission's
concerns about the issues of continuity, of accountability, and
of outside input. As far as continuity is concerned, that's why
we have come to believe that the IRS Commissioner should be
given a 5-year term, so that you won't get into situations
where a Commissioner is appointed right toward the end of a
presidential term and is a lame duck, so that there will be a
further degree of insulation from the political process. So
that's why we have supported the 5-year term.
We believe that outside input is very, very important.
That's why we've proposed an advisory board with teeth, an
advisory board that just doesn't report to the IRS but reports
directly to the Secretary of the Treasury, who is really the
person who is going to be on the hook and accountable to the
people for the performance of the IRS, and that is asked and,
indeed, required to prepare an annual report to taxpayers, so
that if that outside input is not being taken, it will be clear
to all and the Congress will know who, the Secretary of the
Treasury, to hold responsible.
We have emphasized the importance of accountability. I
believe that having the Secretary of the Treasury and the
Deputy Secretary of the Treasury accountable is an integral
portion of their job for the performance of the IRS,
accountable to the President, accountable to the Congress, for
the performance of the IRS, offers a better prospect for
improvement than the appointment of a committee of outsiders
whose primary loyalty will lie to their other pursuits and no
one of whom will feel that responsibility and will feel that it
is their responsibility to have this work.
I think that collective responsibility among people whose
primary loyalty is elsewhere is a mechanism that's less likely
to achieve the objective of accountability. So we are for major
change in governance, but we believe that the approach we've
laid out offers the best prospect for continuity, outside
input, and accountability.
Chairman Johnson. Thank you, Mr. Summers. I know other
Members have a lot of questions, so I will not ask more. But I
do think that this is a very important issue.
I'm glad to hear that working with people from OMB and OPM
and through the process of presenting decisions to them on a
regular basis, that you feel you have improved the quality of
management of the IRS. Nonetheless, I think one has to be
conscious that appointments to a board, like this outside
advisory board, on average, those appointees have served about
a year and a half on average, if you look across those kinds of
boards. That's not encouraging in terms of longevity and
expertise and so on.
And then, when you have this as an added responsibility for
someone from OMB, who has many other responsibilities, in the
long term, in the short term of making change--and we have an
agency in trouble here, that's one kind of action. What I will
be concerned with in thinking this through is, is the kind of
action that you can do under triage something that you can do
on a regular, ongoing basis, that doesn't bring the expertise
to the table that we need.
Mr. Coyne.
Mr. Coyne. Thank you, Madam Chairwoman. Welcome, Mr.
Secretary, and thank you for your testimony.
You didn't have the opportunity to be here earlier when
Senator Grassley testified, and I want to read you part of his
testimony and have you respond to it. It says, ``In private
meetings, the administration appears to be divided on the
proposal of a board. But it appears unfortunate that some who
oppose this proposal are doing so only because it signifies a
monumental power struggle that they stand to lose. Treasury
officials, who 2 years ago couldn't find the IRS if they were
standing at 11th and Constitution, are suddenly in fits about
losing some control over part of their budget and
bureaucracy.''
I wonder if you could respond to that.
Mr. Summers. Let me just say, Congressman, Secretary Rubin
has said many times that the easiest thing for him, the easiest
thing for us, would be to turn the IRS over to a board and to
concentrate on our tasks of financial policy, concentrate on
the tax bill, concentrate on what's happening in Thailand and
Malaysia, concentrate on the future of the banking system. The
easy thing would be to turn away from this and not to be
prepared to accept responsibility for what happens in terms of
change in a very large organization. That would be much the
easier thing.
Secretary Rubin and I have made a judgment that it is
profoundly important to this country that this be fixed, that
this get better, and that the best way for it to get better is
for us to take on a major involvement in overseeing management
at the IRS and to put in place a set of procedures that will
institutionalize that involvement, so that our successors will
feel the same kind of obligation.
I think the objection that for some time Treasury
officials, in both parties, in both administrations, have not
watched over the IRS with adequate vigor is probably right.
Certainly, since the moment I became Deputy Secretary, and the
moment Secretary Rubin became Secretary, it was a small number
of months from the moment I was appointed until the moment I
was up here testifying that this was way off track and that
major change had to be put in place, and that the board was
underway. Similarly, Secretary Rubin, since he became
Secretary, has made this a major responsibility.
But I do think we have a real concern that at some point in
the future it might drift back to the way it was, with
inadequate oversight. I think we've proposed a set of mechanism
that very, very substantially contain that risk, a group of
outside advisors of prominent people who will make a report
every year to the Congress, which will represent a standard to
which the Secretary of the Treasury and the Deputy Secretary of
the Treasury will be measured against, a requirement that the
Secretary and the Deputy Secretary testify on the progress of
their oversight to the Congress every 6 months.
We are building a career staff in the Treasury that has, I
think, the potential to be a legacy that we will leave to our
successors, in terms of capacity to maintain effective
oversight at the IRS.
If I might make just one final observation, Congressman, I
think one has to make a comparison, and I think it's probably
fair to say that, particularly past moments of crisis, the
record of committees appointed by the President, each of whom
is going to be serving on a part-time basis, in terms of their
effectiveness and responsiveness in addressing various
problems, is something that is not totally encouraging.
Certainly the GAO looking at experience with boards in the
private sector--in the public sector--did not find that they
were an effective governance mechanism.
Mr. Coyne. Thank you.
Chairman Johnson. Mr. Portman--I'm sorry.
Mr. Coyne. I had one other question.
I wonder if you could respond to the constitutional
problems, that have been raised, by having private citizens
rather than the President and the Treasury Secretary appoint,
hire and fire the IRS Commissioner.
Mr. Summers. I will furnish you with a learned written
answer. Let me just say now--learned as prepared by the staff,
because I'm not capable of giving a learned one. But the
essence of it is that the appointments clause basically
provides for the President, or his direct members of the
cabinet, to make appointments to the government, not for
appointments to Federal Government positions to be made by
outside committees of people who are not members of the
President's cabinet or heads of departments. So I think that
would be a real constitutional question to be posed.
I think that there are other constitutional questions.
There's a letter from the Attorney General's office expressing
quite serious concerns about the Commission's proposal. I think
part of what we have to recognize is that even if there is
constitutional uncertainty and questions, you're looking at
doubts about the process by which we're raising 95 percent of
the revenue. So even taking risks in that area with respect to
constitutionality seems to me a problematic course.
Mr. Coyne. Thank you, Mr. Secretary.
Thank you, Madam Chairwoman.
Chairman Johnson. Thank you.
Mr. Portman.
Mr. Portman. Thank you, Madam Chair.
I heard Chuck Grassley's comments earlier about 11th and
Constitution. I would like to attest that Larry Summers was not
in this job 2 years ago today--I don't think, is that correct?
Mr. Summers. Not quite. That's right.
Mr. Portman. And you're the third Deputy Secretary in this
administration; is that right?
Mr. Summers. It is.
Mr. Portman. But I have been at 11th and Constitution with
Larry Summers. He knows where it is now, so although he wasn't
around 2 years ago, per Mr. Grassley's comment, I happen to
know from personal experience that he knows where it is and
knows how to find his way there.
Secretary Summers, thank you again for all the interaction
we've had over the last year. We've had a healthy give and
take, I think, but disagreed on one of the fundamental
recommendations. But do you think it's fair to say--and I think
this is already stated, at least indirectly, in your
testimony--that the majority of the recommendations you and the
Treasury Department support?
Mr. Summers. Certainly there are many, many
recommendations--I haven't done a count, but certainly there
are many, many----
Mr. Portman. I think there are 52 recommendations. I would
guess the vast majority of them, the Treasury Department would
support. Let's put aside governance recommendation at this
point.
Mr. Summers. I think, outside of the governance area, I
think we're certainly going in the same direction. I think
there are a number of very interesting proposals, such as
what's said about staggered filing and the like, that in our
view are interesting proposals that would require further study
before we would be prepared--before certainly we would be
comfortable in endorsing those proposals.
The Commission has a fairly wide range of tax policy
proposals within its simplification section, many of which
would be things we could support, but I think some of which
are----
Mr. Portman. Half of which were taken from you, and they
aren't part of the recommendation, as you know.
Mr. Summers. No, as I say, many, many which we could----
Mr. Portman. It would be a shock to me if I were to hear
you say that you do not support a majority of the
recommendations, but maybe you don't now. But that would be a
shock, given how closely we worked with you.
You mentioned the simplification proposals, which are not a
recommendation but simply suggestions that Congress look at
them, and half were taken from Treasury specifically.
Would you agree also that the status quo is simply not
acceptable--again, I'm just sort of paraphrasing your own
testimony--and that major structural change is needed?
Mr. Summers. I think there's no question that we need to
make major changes.
Mr. Portman. Let me say, as you know, at every public
occasion, I have made the point this is not about the Clinton
administration. This goes back to the Bush administration,
where I served; it goes back to the Reagan administration and
before. My view, and the view clearly of a majority of the
Commissioners, is that there's an inherent flaw in the system
and it needs to be changed. But this is not about Larry Summers
or Bob Rubin or the Clinton administration.
Would you say that the Commission report has resulted in
Treasury making some of the changes that you have outlined
today?
Mr. Summers. Oh, I don't know. I think we've certainly
valued the dialog that's taken place with the Commission, but
certainly the kinds of pressures that led to the setting of the
Commission, and the kind of concerns that led to the setting of
the Commission, were concerns that we very much felt in the
Treasury--and we've been moving along on a whole set of
changes, outsourcing to a much greater extent, the information
technology management, converting the management partnership
that existed previously to a management board.
But certainly I think the interaction we've had with the
Commission, and the sense of the seriousness of this problem,
which I think the Commission has done very much in bringing to
public attention, has certainly been----
Mr. Portman. That sounds like a ``No.'' OK. Which is also a
shock to me, given the interaction we've had and the previous
testimony and so on. But I just wanted to kind of see where you
all were fitting in.
I'm going to have a chance later to talk to you more about
the management board. You talked about continuity, expertise,
and accountability, and I would like to go over that with you.
Madam Chair, can I have some time now, or would you prefer
me to come back on a second round?
Chairman Johnson. Yes, go right ahead, Mr. Portman.
Mr. Portman. The first question I guess I would have is
along the lines of what Nancy Johnson talked about, which is
the political aspect of the board. If you're going to put this
in legislation, which you announced today you are going to do,
then you're going to have the Office of the Vice President in
there, OPM and OMB and so on, Executive Office of the
President.
Clearly, we don't want to politicize the IRS. I assume you
agree with that. We don't want political appointees involved in
the day-to-day management of the IRS from the White House; is
that correct, and are you going to change that proposal? I was
a little unclear about your earlier response.
Mr. Summers. Anyone who is appointed by the President,
whether it's the current Commissioner of the IRS, whether it's
myself----
Mr. Portman. So having the White House----
Mr. Summers [continuing]. Whether it's members of the
proposed board, is----
Mr. Portman. Having members of the White House, the
Executive Office of the President involved, doesn't bother you?
I took it from your earlier comments that you had some
concerns.
Mr. Summers. I do not anticipate--I do not anticipate that
members of the White House, political members of the White
House staff----
Mr. Portman. Is the Vice President's Office not part of the
White House?
Mr. Summers [continuing]. Would have a role in IRS
governance.
Mr. Portman. So you will probably change the legislation--
--
Mr. Summers. Just to make clear that it's the National
Performance Review staff, rather than----
Mr. Portman. Of the 20 members of your board, I question
them with regard to qualifications. Let's start with number
one, expertise. What expertise do they bring? Arguably, your
advisory commission brings some expertise. They're from the
outside world. But then you have two boards. You said they're
going to have teeth. I guess they're going to have teeth
because they don't report to the Commission, as the current
Commissioner Advisory Group, CAG, does. Rather, they report to
the Secretary, and that gives them teeth.
Is that the difference?
Mr. Summers. That, and the fact that they make an annual
report to the public on the performance of the IRS, which will
form a basis for holding----
Mr. Portman. Will they have any authority with regard to
the IRS--if their recommendations to the Secretary are not
accepted, do they have any recourse? It's an advisory group,
right?
Mr. Summers. Their recourse is to make their
recommendations and their evaluation of IRS' performance and
the Secretary's performance public. That is their recourse.
Mr. Portman. With regard to your board, again, there are 20
board members, including--we talked about the Office of Vice
President, OPM, OMB. Do you think they bring that kind of
expertise to bear that is needed? Do you think they bring
information technology expertise, the private sector customer
service orientation that we've talked about throughout the
course of the last year, and as I think you said earlier,
Treasury agrees needs to be part of the IRS?
Mr. Summers. I think they provide an effective mechanism
for oversight. I think people like John Koskinen who served on
our board, who's had extensive experience in turning around
private sector companies, people like Ray Kelly, who have
enormous experience in the law enforcement area, do bring to
bear very valuable perspective.
Mr. Portman. Some of the private sector expertise that we
all acknowledge is needed?
Mr. Summers. They do bring to bear expertise. But I would
not want to tell you that the principal source of outside input
to the IRS is envisioned to be this management board. That's
why----
Mr. Portman. So you wouldn't get the expertise--OK, that's
fine. So let's forget expertise then. We need expertise, but we
don't get it through your board.
Continuity, is another point that I think we agree on. We
need more continuity. We mentioned earlier that you're the
third Deputy Secretary, and you have focused on the IRS, in my
view, more than any Deputy Secretary in history, particularly
in the last 6 months, from what I can tell historically. Maybe
some of the IRS historians in the room here can correct us on
that.
But continuity we agree is a very big part of the problem.
It's a management issue. As I look at it--and I just looked at
this again this morning--only 2 of the 15 of the specifically
designated proposed members of this advisory group have been on
the job for the last 5 years. Only 2 of the 15.
What kind of continuity is that? Seven of the positions
have had three or more occupants in the same period, including
yours, your position. I don't see how the Treasury plan
improves continuity. I think it worsens continuity. You're
going to have an incredible amount of turnover. Just looking at
your very plan, the numbers are very clear.
So expertise we've kind of discounted. In continuity, you
have to look at the facts. And I guess the last issue is
accountability.
Now, do you have a response on the continuity issue? I want
to give you a chance to respond.
Mr. Summers. Thank you. It seems to me there are three
responses on the continuity issue.
First, the most important continuity is in the day-to-day
chief executive leadership of the IRS.
Mr. Portman. I couldn't agree with you more. That's why the
Commission recommended a 5-year term for the Commissioner.
Mr. Summers. That's why I think the 5-year term
recommendation----
Mr. Portman. And you all picked that up. That's great.
Although you don't agree with most of the recommendations,
apparently, and we didn't affect your proceedings or your
thinking on it, a few months ago you decided that that was a
good idea, after we recommended it--which is great. That does
help in terms of continuity.
But does your board provide continuity?
Mr. Summers. Congressman, if I could just----
Mr. Portman. Does the board provide continuity?
Mr. Summers. If I could just return to the earlier--I want
to be very clear. I think the Commission has made an enormous
contribution. There are a very large number of recommendations
that the Commission has made that we share. I just haven't done
a numerical count to know whether it's a majority or a large
number----
Mr. Portman. Maybe we can do it afterward.
Mr. Summers. There are important recommendations that we
share, and I think it's been an enormous contribution to this
process. Certainly its thinking has helped to guide where we
all are now. So if I was understood as saying something
different, I should not have. I think the Commission has made
an enormous contribution.
Mr. Portman. But your board does not provide any
continuity. It doesn't solve the problem of continuity. In
fact, it exacerbates it.
Mr. Summers. No, I think the 5-year term for the
Commissioner is very effective with respect to continuity. I
think the outside advisers who are making an annual report, who
will serve in terms that are staggered, is a very important
response to continuity.
I think the most important thing that any of us can do is
to build a career staff that will provide the real long-term
continuity and who are there every day, who are involved in the
oversight function. That's something we're very much focused
on.
Mr. Portman. Again, as you know, we have a lot of specific
recommendations in the report, many of which I think you would
agree with, about how to get that senior team additional
expertise----
Mr. Summers. Absolutely.
Mr. Portman [continuing]. Some outside expertise, and more
continuity and more expertise is important. I hope to get back
to you later, but I want to pass along to my other colleagues.
Thank you, Madam Chair.
Chairman Johnson. Thank you.
Since Mr. Portman and Mr. Coyne invested so much time on
the Commission, I thought it appropriate that they have a
chance to expand a little bit on their questions. I appreciate
Mr. Portman passing on now to other Members of the
Subcommittee.
Since there are quite a few Members of the Subcommittee
present, and we have another panel, I would appreciate it if
the rest would stay within the 5 minutes.
Mr. Kleczka.
Mr. Kleczka. Thank you, Madam Chair.
Madam Chair and Members, first of all I want to acknowledge
the work of the National Commission. Here's a group of citizens
who spent a lot of time and effort to come up with some
recommendations, resolving a problem at an agency that I must
say at the outset will never be popular. The IRS could send
everyone of us a Christmas card and we still would not think
nicely of them.
What troubles me about the report, the mainstay of the
report, is that because we don't like the way they operate, we
are going to turn the management over to a citizen board,
knowing full well this is a government function. If, in fact,
other agencies in the future fall into disfavor with the
public, I ask the authors of this proposal whether or not
they're going to come forward and suggest a citizens board for
that agency.
I can see Health and Human Services, HHS, not the most
popular, but they serve the needs of needy people, so there is
some sympathy for them. But they could fall in disfavor and all
of a sudden we come up with the citizens board to run them.
Department of Defense, DOD, a couple of stories on $600 toilet
seats, and there's a proposal before Congress to have a
citizens board run them.
After we have all the agencies run by citizen boards, my
question is, what is the sense of electing a President to
formulate an administration, one who is responsible to all the
voters, to all the residents in all 50 States, I think at that
point you make that job kind of meaningless.
I'll tell you, if you want to talk about disfavor, we can
look at ourselves in Congress. Why not, my colleagues, have a
citizen board to run the day-to-day operations of the Congress?
Clearly, the schedule is not family friendly. Let's get some
housewives on the citizen board running the schedule of
Congress. Let's get a bunch of chief executive officers in and
have them run the Ways and Means Committee, because clearly
there are too many bumps and rough edges when the tax bill is
being put together.
You can see how absurd this keeps going on and on and on,
until all of a sudden we have no government.
I'm not here to defend the IRS. In fact, if I might, I will
relate to you a recent problem I had with the agency, Mr.
Secretary. It involves my campaign account, wherein interest is
taxable, like any other interest for any other tax filer. So I
filed the necessary form and paid my debt, and lo and behold, a
month later, I get a notice saying ``you underpaid by some
$900.'' Well, I pull out the form, looked at the percentage,
looked at the interest income, and said no, these folks are
wrong.
Well, when they sent me the letter, they didn't say,
``Jerry, look this over. You might have a problem.'' They
convicted me and hung me on the first paragraph. Then they
added another two pages indicating to me what the severe
penalties were, based on various amounts and lengths of
deficiency. I thought it's all over. This account is going
bankrupt and I'm going to have to resign my seat. It's all over
for the guy.
So then we write them a letter, and the upshot was that
they were in error, and I received a $15 check for an
overpayment. So no one is here to defend the IRS.
But I think the important thing with this hearing, with the
proposal, is that maybe now we'll have some decent public
discussion on how to change it. Will it be a citizen committee?
Don't know. I'm very leery about it, and I think that's one of
the major issues to be decided by this Subcommittee and by the
Full Committee eventually. Nevertheless, at least we're going
to start giving this the talk and the dialog that it needs.
There are other options that I think we can explore. If, in
fact, we don't like the attachment of the IRS to the Treasury,
let's make it a separate entity of the government, controlled
by a Secretary who will be a Cabinet member. If we're fearful
that that Secretary might be a political crony, let's put some
specifics on who can get that job--10 years in the private
sector, or whatever other criteria you want to make. So there
are other options we can explore.
The bottom line is the importance, Madam Chair, of a public
discussion of the issue, and hopefully we'll put our minds
together and come forth with the best proposals that would
satisfy the public's need to have an agency who will always do
an unsavory thing; i.e., take our money, but I think they can
do it in a friendly manner. It's always easier to pay a bill to
a smiling face than someone who's frowning. So if we can put
the big smile on IRS and some accountable administration, I
think that's the job we should be up to.
As far as the proposal goes, I will be asking the actual
Commissioners who will be appearing next specific questions on
how this operation is going to work, what these folks are going
to be paid.
But nevertheless, we've heard a lot of talk over the last
couple of minutes about conflict of interest, people not being
partial, or impartial, and my question to you, Mr. Secretary,
is--and Mr. Portman criticized some of the proposals that you
are bringing forth and putting online now. But what guarantee
do we have that this 7-member Commission is going to be
impartial? What guarantee do we have that they won't bring with
them any conflict of interest, and what guarantee do we have
that they will serve out their full term and not resign prior
to filling out the term because of a job change or some other
family situation? Could you respond to that, Mr. Secretary?
Mr. Summers. I don't think we have those guarantees with
respect to the Commission's proposal. That's part of why we
find the Commission's proposal so troubling. We think there
will be major appearance issues raised by people whose primary
loyalty is large, private sector organizations, being put in
charge of enforcing the tax law. We think that such people will
serve as long as they will serve and there's no guarantee of
continuity and input.
We think, if you're talking about continuity of input, the
continuity of input that comes from the fact that Secretary
Rubin and myself and our Assistant Secretary of Management, the
people who work with our Assistant Secretary of Management, go
into the Treasury Department every day and are available to
work on IRS issues, respond to IRS questions, every day, is a
kind of continuity of input that is very important.
It would be lost by moving to a proposal where this would
be a side activity for the people who are put in charge of the
Nation's tax system. We think that putting the Nation's tax
system in charge of a committee, for whom it is a side
activity, with real appearance questions, is not the right
thing to do.
Mr. Kleczka. Thank you.
Thank you, Madam Chair.
Chairman Johnson. Thank you.
Mr. Kleczka, this is a core issue, whether or not you're
going to get greater continuity, and minimize conflict of
interest problems through presidential appointees, approved by
the Senate, which is a very serious business, we all know, or
whether you would get greater continuity and fewer conflicts of
interest through appointees to an advisory board that do not go
through that process. This is a core issue that Members of the
Subcommittee will give a good deal of time to.
Congresswoman Dunn.
Ms. Dunn. Thank you very much, Madam Chairman.
Mr. Secretary, I am getting a confusing message from you.
I've been told that you worked closely with the Commission in
their development of recommendations, and yet now, as we start
talking about a core recommendation, the board of directors,
I'm hearing you say it's not necessary and that accountability
should rest with the Secretary of the Treasury and the
President.
I have a real problem with that. I mean, that's who it has
always rested with, and that's who allowed IRS to spend $4
billion of public funds on a computer system that doesn't work.
That's what people at home whom I represent understand. So I
don't see the validity, and you're saying we can continue under
this same system of accountability which has demonstrably
failed.
You said that the board of directors would be exposed, in
your testimony, to dangerous and unacceptable risks of conflict
of interest. As Mr. Portman and our Chairman have said, under
the Commission's recommendations, these would be private sector
members who are special government employees, nominated by the
President, approved by the Senate, subject to the same ethics
and conflict of interest protections that cover all political
appointees. They would have no interest or involvement in tax
policy decisions. It would not be available to receive income
tax information.
I would just like to know what risks are you referring to?
Mr. Summers. Congresswoman, obviously the rules would have
to get drafted if such a board came to pass. As we understand
the rules governing special government employees, who serve on
a temporary basis, the nature of the ethics restrictions are
far less serious and far less binding than the ethics
restrictions that apply to me, for example, as a full-time
government employee.
I would just ask the question, what the inherent conflict
is between someone's service as a chief executive officer of a
Fortune 500 company and their responsibility for the
enforcement of the Nation's tax law. When questions of
strategy, with respect to auditing of corporations comes up,
how would a member of the business roundtable avoid, even with
the best and most totally honorable of intentions, being in a
situation that would create an appearance of conflict, as that
question was faced. When questions relating to the quality of
taxpayer service provided to corporations were to arise, the
similar kinds of conflicts of interest would arise. When
questions with respect to enforcement of laws on cash transfers
came up, how would the head of a large bank be in a position to
provide the appropriate appearance of neutrality.
Of course, one could say, I suppose, that nobody who was in
any of those kinds of situations would be eligible to serve on
the board. But then it seems to me the kind of person that's
being envisioned as a board member would be ruled out.
Ms. Dunn. We're all adults; we're all professionals. Those
of us who come to Congress to represent our constituents have
particular interests. Many of us are small business people.
There could be potential conflicts of interest. A Senate-
confirmed appointee could be expected in some manner to set
aside a potential conflict of interest, or would recuse himself
or herself if that issue came to the table.
It sounds like what you're saying is that there's a
potential for private sector folks to actually influence the
IRS in some way, to affect their own company audits, for
example. I hope that's not what you're saying, Secretary
Summers, because I think that's a really weak position to go at
this very considerably considered and thoughtfully presented
board of directors proposal, that we have recommended and are
very interested in pursuing on a very objective level, because
we think that finally there will be some accountability at the
IRS and, on behalf of my constituents--and I would guess on
every other Members of Congress constituents on this panel--
we've got to recognize the reality that right now there is no
accountability.
That's why you've changed Commissioners of the IRS, and
that's why we want to take a good look at this, and we want to
have oversight that's going to pay attention to the IRS and is
going to shape that agency up.
Now, I hope in the future there will be an opportunity to
completely redo the IRS. You know, there's talk of tax systems
that would replace the income tax system. Many of us favor that
sort of thing. But we want to do it thoughtfully and carefully.
We don't want to leave in place a system that penalizes the
people that we're here to represent.
Thank you, Madam Chairman.
Chairman Johnson. Thank you, Congresswoman.
Congressman English. We do have a vote, but we're going to
go ahead, I hope, with two members, 5 minutes each.
Mr. English. Thank you.
Mr. Summers, I have a couple of questions of my own, but
frankly, I wanted to follow along the line of questioning that
Representative Dunn had pursued, because I find some of your
comments to be, where they are not ambiguous, astonishing.
Under the Commission's recommendations, the private sector
members of the board would be special government employees,
nominated by the President, confirmed by the Senate, and
subject to all the same ethics and conflict of interest
provisions applicable to all other political employees. They
would have no involvement in tax policy decisions, and would
not be eligible to receive tax return information.
So can you clarify what these risks are that you're talking
about?
Mr. Summers. As a full-time government employee, confirmed
by the Senate, I'm not allowed to earn income by working for
any other employer, other than the Federal Government. As I
understand the Commission's proposal, that restriction would
not be a restriction that would apply to members of the board.
That is a very fundamental kind of difference. My primary
loyalty is to the Federal Government. The only person paying
any salary to me is the Federal Government. If I am the head of
a private company serving on the board, I am receiving the bulk
of my income, the bulk of my professional career activity, the
bulk of my professional loyalty is directed to the institution
for which I work. Inevitably, the job I do as a board member,
1\1/2\ days every month or----
Mr. English. Reclaiming my time, my ability as a private
sector board member would be very limited to effect any
specific policies that would affect my company.
I notice also you stated that corporate executives whose
companies may be automatically subject to yearly audits could
end up determining the audit budget for the IRS in its
strategic enforcement activities.
Now, are you seriously suggesting that these private sector
board members would actually cut IRS enforcement resources to
affect their own companies' audits?
Mr. Summers. I'm seriously suggesting that I think people
would be led to ask whether a group of corporate executives,
deciding how much resources were going to be devoted to
corporate auditing, and how much resources were going to be
devoted to other things, might, would develop a view--not with
bad motives at all--would develop a view that was related to
what their primary loyalty was. Yes, I think that's a question
many people would ask.
Mr. English. Mr. Secretary, I'm glad you're conceding the
point on motives.
Let me move on. You say that the independent board would
pose an unacceptable risk to our Nation's revenue stream. That
has been the position of the Treasury. How would it do that
exactly?
Mr. Summers. I think, by undermining the day-to-day
supervision and executive responsibility that the Treasury
Department now exercises, and is exercising with increasing
effectiveness and real results, by undermining all of that, I
think it would put at risk the capacity of the IRS to function
effectively, and that, in turn, would put at risk the Nation's
revenue stream.
Mr. English. Well, then, I'll move to a final question,
because obviously we have a fundamental disagreement on this.
There is a recommendation in this report also having to do
with tax simplification. Do you agree with the comments, with
the recommendations of the Commission on tax simplification?
Specifically, should there be a complexity analysis of every
tax proposal, and would the Treasury be willing to submit its
own proposals to a complexity analysis before they are
submitted to Congress?
Mr. Summers. I think there's no question that an analysis
of their implications for complexity should play a role, should
play a role in every tax bill. Certainly we think
simplification is an important objective. That's why the
Treasury put forth a package of tax simplification measures,
which Congressman Portman and many others have endorsed. We
have been pleased that many of those provisions, which I think
do represent significant simplification, are contained in the
bills that passed the House and the Senate, and we hope and
trust that many of them will survive and make it through the
conference process.
Mr. English. Do you then support the Commission
recommendation on tax simplification?
Mr. Summers. We support the broad approach of focusing on
simplification, yes.
Mr. English. I'll take that as a qualified yes. Thank you
for testifying today.
Chairman Johnson. I'm going to recognize Mr. Tanner. Some
Members have gone over to vote. I do not intend to suspend the
panel, if I can avoid it, out of respect for the time schedules
of the following panel.
Mr. Tanner.
Mr. Tanner. Thank you very much, Madam Chairman.
I appreciate your time, Mr. Secretary. Let me ask one
question conceptually. I have read parts of the Commission
report, and in the report language it seems to try to carve out
tax policy and law enforcement functions as not being a part of
the Commission.
Now, conceptually, I think there ought to be more
discussion about how much of the tax policy of the country
should be turned over to an independent agency not directly
accountable to the people. I don't think that has been fully
communicated in the country, to the citizens. I think we ought
to spend a little time on that, as I said, conceptually.
But could you give us an example or two of how, one, if we
accepted the Commission as presented, how does one carve out
the tax policy and law enforcement function and have that work
as intended or as conceptualized?
Mr. Summers. Honestly, I think one of the reasons why we're
as troubled as we are about the Commission's proposal, and
believe that while completely well intentioned, it would
represent a grave mistake, is that we don't think it's possible
to separate tax policy from tax administration, or to separate
tax policy from law enforcement.
Every several--Very frequently, Secretary Rubin and I are
in the White House, and we have an opportunity to discuss some
tax policy question, and somebody's got some scheme to do
something or other, using the tax system, and we say that can't
work. It just can't work because it's too great a burden on the
IRS and it's not feasible.
Frankly, an independent IRS wouldn't have representatives
at that meeting to make that argument, and if they did have
representatives, they wouldn't get the kind of weight that the
Secretary of the Treasury gets. So I think by lodging this
responsibility for actually administering the taxes and
collecting the revenues with the Secretary of the Treasury, you
internalize much more into the government's decisionmaking that
administration and administrative ability consideration.
I don't think, since so much crime--You know, Al Capone
went to jail for tax evasion--that so much crime is detected
and enforced via tracing the money and tracing the financial
trail through the tax system, and many of those things start as
very routine audits but then something comes up in the tax
audit, discovers and leads to a more serious problem. I don't
see how you can really divorce law enforcement from tax
administration.
I think you can write rules, and I think this is the point
that the Commission emphasizes, and I think they're right. I
think you can write rules that cavern off responsibility and
involvement in specific cases from specific people. Just as I
can't get involved in a specific case, I think you can write a
rule that says that the private board member can't get involved
in specific cases.
But I think the problem is that so many of the strategic
policy decisions that the IRS makes are decisions that
influence private interests. That's where it seems to me you
get into the serious problem.
Mr. Tanner. So am I correct in, I guess, interpreting your
answer to say that, although the Commission report has merit
with respect to some of the changes, some of the modernization
and so forth, that conceptually the idea of turning over tax
policy and law enforcement to unelected, independent members of
this commission or agency is troubling in terms of it being
overbroad with respect to these specific items of tax policy
and law enforcement function?
Is that a fair characterization?
Mr. Summers. That is very fair, Congressman Tanner. I would
just say that we believe that the Commission's governance
proposal would represent a grave mistake that would seriously
threaten law enforcement, tax policy, and effective customer
service.
Mr. Tanner. Maybe we can continue to work on that together
and see if we can reach agreement.
Thank you. I must run and vote.
Mr. Summers. Thank you.
Mr. Portman [presiding]. I didn't hear the beginning of
Congressman Tanner's question, and I will have a chance to
visit with him later when he comes back. But I took it from his
question to you that his supposition is that the board is
involved in tax policy and enforcement, which as you know it is
not. It specifically stated so in the Commission's report, and
there are safeguards in place for that. So I hope we'll have a
chance to go over the report in more detail in the legislation.
But there is a specific bar to that.
In fact, when you look at what Mr. Kleczka said, why not
make it an independent agency--and I would love your comments
on that generally--but the main reason that our Commission, I
think it's fair to say, did not move to the independent agency
model is because we do believe there are some synergies with
Treasury, and one of the synergies, of course, is tax policy.
Treasury would continue to have tax policy under this proposal.
For you to say, in response to questions about the
political appointees, including those of the Executive Office
of the President being involved on your board, that while those
folks, to quote you, would focus on policy and management--this
is what I wrote down from your statement--and they would have
no impact on specific cases, and then for you to turn around
and say, ``but this other board would have strategic
decisionmaking that would have an impact on tax policy'' seems
to me to be entirely inconsistent.
Mr. Summers. No. Could I explain for a moment?
Mr. Portman. I would be happy to have you explain. This is
your worst nightmare. It's you and me. Everybody else is gone.
[Laughter.]
If another Member doesn't come back, we'll have to move to
the next panel because I see a lot of the Commissioners and
other experts are here to testify. But we are going to wait and
see if a couple other Members come back in the next few
minutes, in that case, because I know they wanted to talk to
you, too.
Go ahead.
Mr. Summers. Congressman, I always enjoy discussing these
issues with you.
What I tried to say, in answering Representative Tanner's
question, is that I think it is possible to, whether it's a
government board or whether it's a private board, I think it is
possible to cavern off involvement with cases facing specific
taxpayers. I think we know how to do that and I think that can
be done. I think involvement in specific cases isn't a problem
on either side.
Mr. Portman. But earlier you did raise that as a concern,
specifically with regard to----
Mr. Summers. I think what is a problem, I think----
Mr. Portman. What's the conflict of interest problem if
it's not----
Mr. Summers [continuing]. As one gets to policy questions--
for example, a policy question of the allocation of IRS audit
resources between corporations and individuals----
Mr. Portman. Let's talk about that. Let's talk about that
for just a moment.
Mr. Summers. I think it's questionable to have a member of
the business roundtable have a central role in making that
decision.
Mr. Portman. OK. Let me ask you a specific question about
that. As you know, in the Commission's report the allocation of
resources for enforcement, precisely what you just said would
be the problem, is determined by the budget. Who determines the
budget of the Internal Revenue Service under this report?
Mr. Summers. Well, I'll leave you to be the authority----
Mr. Portman. No, it's very clear. The Department of the
Treasury. The Secretary of the Treasury approves the budget. It
becomes part of the unified budget. It goes through the same
process the budget does now, with OMB, and it comes to the Hill
as part of the President's budget.
Why would that be any different--Secretary Summers, I'll
wait until you finish hearing it from Ed there--but with regard
to the current situation? I don't get it. I see that as one of
many red herrings you're raising.
When you go through and look specifically at the way we
came at this, which was a balanced approach--frankly, as you
know, about half the Commissioners would have loved
independence. But we tried to move toward you, including the
very important issue of allocation of resources for the IRS.
Mr. Summers. Well, I think that when you get into all of
the decisions that your board will shape, how information
technology will be used----
Mr. Portman. So it's not the budget issue. That was----
Mr. Summers [continuing]. Where the focus will be----
Mr. Portman. Hold it. Let's get back to the budget one.
What's your answer?
Mr. Summers. The answer to the budget--even in the case of
the budget ones, the Commission will exercise considerable
leverage over the personnel at the IRS, who will be the people
who provide the information----
Mr. Portman. So it's leverage over the personnel now, not
the budget. It's not allocation of resources.
Mr. Summers [continuing]. To provide the information----
Mr. Portman. Let's just target on what your concerns are
and then we can try to address them. But on the budget side
you're satisfied?
Mr. Summers. I didn't say that. I didn't----
Mr. Portman. What are your concerns?
Mr. Summers. I think I'll have a better chance of
clarifying my concerns if you let me speak for just a----
Mr. Portman. Sure. I just want to stick on one, and then
we'll go to the next one and try to address that one, and kind
of move our way down.
Mr. Summers. The concern about the budget goes to several
levels. First, it is important that the decisionmaking about
the microstructure of the IRS budget, which in turn drives the
IRS employment locations, in turn drives the information
technology, strategy, in turn drives the way in which
taxpayers--there's interaction with taxpayers--it is possible
to envision that all of those decisions are made at the
Treasury level and that all decisions that impact on the budget
are made at the Treasury level.
But once all decisions that are made that impact on the
budget are made at the Treasury level, I would be left to
wonder just what the decisions were that the board is going to
make. That's one point.
Mr. Portman. Wait a minute. Currently are you saying----
Mr. Summers. Second and separately----
Mr. Portman. I'm confused. Let's just clarify what you're
saying.
You said micromanagement decisions about the budget are
made at the Treasury level now? Doesn't the Commissioner put
together the budget?
Mr. Summers. The Commissioner puts together the budget----
Mr. Portman. Which is what the Commission report provides
for as well.
Mr. Summers. Which is reviewed--the Commission puts
together the budget, which is reviewed in very considerable
detail in the Treasury Department, and is responded to in very
considerable detail in the Treasury Department, as a central
tool of oversight helping to set the organizational priorities
for----
Mr. Portman. Why wouldn't Treasury have that ability under
this proposal?
Mr. Summers [continuing]. For the IRS.
Well, if the Treasury has that ability, then if that----
Mr. Portman. Treasury does have that ability under this
report. I would hope that the Secretary of the Treasury is not
making micromanagement decisions about the budget. If he
currently is, I don't know how he has time to do all the other
things he's doing with regard to the domestic and international
economy. That certainly is not our intent, that either the
Secretary or the board would do that. The Commissioner does
that, and her designees or his designees.
I think on the allocation issue of resources we have
determined that that is not a legitimate issue.
What's the----
Mr. Summers. As I understand the Commission's proposal, the
Commission would propose a budget which it would send directly
to the Hill.
Mr. Portman. Yes. There would also be an informational
budget, just as Social Security does now. The Social Security
Administration puts together a budget and sends it to the Hill
for informational purposes, which I think will be very helpful
to know what these overseers think about where the allocation
should be.
Mr. Summers. But, of course, that budget----
Mr. Portman. But it will then become part of the
President's budget. Treasury signs off on it. Treasury has to
approve it.
Mr. Summers. Which the board----
Mr. Portman. And it then becomes part of the unified
budget. That is the President's budget to the Hill for the IRS.
That's the budget that you work from, just as we do with Social
Security. There's a model here.
Mr. Summers. Of course, the budget that is--of course,
Social Security is not run by anyone whose primary loyalty is
to the outside. Of course, in Social Security, there are not
the same prospects for----
Mr. Portman. The board sends its approved budget to us.
It's the same model. It's an advisory board, the Social
Security board. Social Security has a board. They don't have
accountability or teeth because they're advisory, along the
lines of the Commissioner's advisory group, and along the lines
of your proposed outside board.
Mr. Summers. Social Security has trustees.
Mr. Portman. No, not the trustees. The board. They send
forward a budget proposal for information purposes. I'm just
saying there's a model for that, but the budget proposal from
the President is the one that goes through the regular unified
budget process.
Mr. Summers. There's a budget process. The Commission----
Mr. Portman. That's the one that you're going to continue
to have approval authority over at Treasury.
Mr. Summers. I understand that. I also understand, that I
believe it is the intent of the Commission's proposal that the
outside board exercise influence over the allocation of
resources within the IRS. If it is in a position to exercise
influence over the allocation of resources in the IRS, the
question will naturally arise whether they will want to
allocate resources in a way that favors their primary
loyalties. That seems to me to be inherent in the structure
that you pose, unless one took the position that the Commission
wouldn't--that the board would not influence the allocation of
resources within the IRS, in which case it would seem to me to
be difficult to achieve significant improvement without
influencing the allocation of resources.
So I think it is--and I'm sorry that I was not as sharp as
I might have been in addressing the precise details of your
proposal--but I think it is inherent in the proposal that the
Commission exercise authority, or exercise influence, over the
allocation of resources within the IRS. Once you have that, it
seems to me you have the conflicts.
Mr. Portman. Let's just make it clear again that the way
the budget works is that it's going to the Secretary of the
Treasury for approval and become a part of the unified budget,
so that for future reference--and we talk about this in our
letter to Secretary Rubin, Senator Kerrey and I, and that issue
can be addressed on a factual basis.
I'm being told we have to go on to the next panel.
Congressman Coyne has agreed not to ask any further questions,
I guess. Thank you very much, Dr. Summers, for being with us.
Mr. Summers. Thank you very much.
Mr. Portman. We would now like to call forward the next
panel.
Fred T. Goldberg, Commissioner from the National Commission
on Restructuring the IRS, and currently a partner with Skadden,
Arps, Slate, Meagher & Flom, in Washington, DC.
Robert Tobias, also a Commissioner on the Restructuring
Commission, and president of the National Treasury Employees
Union.
Assistant Secretary Larry Irving, who also is a
Commissioner, and is currently Assistant Secretary for
Communications and Information at the U.S. Department of
Commerce.
George Newstrom, another Commissioner, who is the corporate
vice president and group executive of Electronic Data Systems,
EDS, in Herndon, VA.
Josh Weston, another Commissioner, chief executive officer,
Automatic Data Processing, Inc., ADP, Roseland, NJ, former CEO
of ADP.
Finally, David Keating, the executive vice president of the
National Taxpayers Union, and also a member of the Commission.
Gentlemen, welcome. Thank you for your patience. We
understand that Mr. Weston has a flight, so with your
indulgence, we will ask Josh to go first.
Other Members of Congress will be trickling in after these
votes, but I would ask you to proceed, Mr. Weston. I think
we're on the 5-minute rule, is that right. OK. We'll be on a 5-
minute rule, and then we will have time for some dialog back
and forth.
Mr. Weston.
STATEMENT OF JOSH WESTON, COMMISSIONER, NATIONAL COMMISSION ON
RESTRUCTURING THE INTERNAL REVENUE SERVICE; AND CHAIRMAN,
AUTOMATIC DATA PROCESSING, INC.
Mr. Weston. Mr. Chairman, thank you. If it would serve the
convenience of the Subcommittee, I don't mind waiting 5
minutes, if your colleagues are coming back.
Mr. Portman. Well, I would recommend, Mr. Weston, that you
begin, because you never know about these Members of Congress.
They may or may not come back. But your testimony, of course,
will be made a part of the record, and they will have an
opportunity to review it.
Mr. Weston. Thank you, Mr. Chairman, and Members of the
Subcommittee. My name is Josh Weston. I am chairman of
Automatic Data Processing, or ADP for short, where I have been
a senior executive for over 25 years. President Clinton
appointed me as one of the Commissioners on the National
Commission to Restructure IRS.
ADP is a $4-plus billion computer services company, with
over 50 computer centers, over 30,000 employees, and by far the
longest consecutive annual growth record of any American
company--36 consecutive growth years in a row.
We currently pay well over 20 million Americans every
payday, on behalf of some 300,000 employers. And we
electronically interface with over 2,000 U.S. taxing
authorities, from the IRS to the smallest school district in
Ohio.
Our side of the relationship with IRS is paperless, as we
transmit $200 billion per year to the IRS. We also give them 35
million paperless W-2 forms each year, and millions of
electronic tax returns from those employers.
ADP handles over 100 million client phone calls per year,
almost as many as the IRS. And while 40 to 60 percent of the
IRS phone calls get to their intended destinations, well over
90 percent of our calls do so.
We also support 100,000 stock quotation terminals for Wall
Street, where critical response time is measured in
milliseconds. Our computers process 20 percent of all Wall
Street trades, where timing and accuracy are very critical, as
is the case with payrolls.
So I think our company and I both know a lot about service,
efficiency, computerization, and employee motivation.
In addition, I serve on the boards of four other very large
service companies. In each such case, I think I am very well
informed, focused, and an influential part timer. Although
those boards generally pay me $30,000 to $40,000 annually for
my efforts, they do get my dedicated attention. My fellow board
members in the private sector, on average, serve noticeably
longer than appears to be the case in IRS and Treasury
executive positions and advisory boards.
Those companies on whose boards I serve also get free
supplemental help from my ADP colleagues whenever I think it
can be helpful. Those boards neither micromanage nor implement
policy. In fact, they do not manage. But they do maintain clear
focus, oversight, priorities, continuity, and a demand for
measurable results and outcomes.
The President recently identified a very qualified and
capable private sector executive to be the next IRS
Commissioner. Because of my Commission activities and
knowledge, and my private sector activities, it was I, as a
private sector part timer, who was able to identify and
recommend this next likely chief executive officer of the IRS
to both Bob Rubin and Larry Summers.
I give you all this background because it illustrates the
kind of public-minded talent and help that is available for the
type of IRS governance board that our National Commission has
recommended to Congress. And there are many other senior
private sector execs like me. My self-description also
illustrates why I disagree with the Treasury Department's view
that a mostly external IRS board of experienced senior service
execs would not be an appropriate, qualified, or dedicated
governance entity for the operational and service portion of
the IRS.
As a further indicator of the relevance and abilities of
senior, private sector executives to guide IRS on operational
matters, I will tell you that in just 4 months I voluntarily
made five, indepth visits to five different tax centers.
Frankly, I doubt that any or many of the current internal
Treasury Department advisors to IRS have seen and learned from
as many IRS field personnel and tax processes as have I as a
part-time, unpaid outsider. And there are other non-Treasury
Department executives like me who could bring very relevant and
consistent guidance to the IRS if our Commission's
recommendations on a governance board are adopted by Congress.
Incidentally, I am not applying for the job.
By contrast, on the subjects of relevant experience and
consistency, the past 20 years clearly indicate that the
various existing IRS and Treasury Department governance and
oversight processes have suffered from a glaring and continual
lack of relevant executive experience, focus, consistency, and
knowledge on a scale that's necessary for the IRS.
The present, past and prospective consistency and
continuity in IRS oversight by the Treasury Department were and
are flawed because the relevant officials, often political
appointees, generally have low longevity and limited relevant
experience that is necessary to guide the IRS and its chief
executive officer in dealing with better service, better
efficiency, and state-of-the-art electronics that aligns
technology with the business mission.
The recent Treasury proposal of a 14-person advisory board
hardly approaches the prospective value and punch of our
recommended board. The Treasury's large advisory board would
include only four senior executives from the private sector and
would only meet quarterly. It would not have intensity. It
would not have clout. It would not have accountability. It
would be more like a townhall meeting.
The Treasury's proposed 20-percent internal management and
review board consists mostly of interagency, mid-level
department heads who would generally lack the degree and scale
of senior-level experience to truly create and guide a $1.5-
trillion, 100,000-employee, computerized service environment
that handles 1 billion transactions and 150 million phone calls
a year. Nor could such a heterogeneous additional board, as
recommended by Treasury, likely have a shared, sustained
strategic vision with clear authority and accountability.
Some people have characterized our Commission's proposal as
setting up a freestanding, privatized, nonaccountable tax
enforcement agency. Those allegations are not accurate. Each
board member would be selected by the President, who could also
terminate him or her. The Senate would have a say on each
appointee. The Secretary of the Treasury would be on that
board. The board's budget requests would flow through both the
Treasury Secretary and the Congress. This board would have no
say on tax policy and tax enforcement, which would continue to
flow through Treasury.
The bulk of the IRS employees are not in heavy-duty
enforcement. Most IRS employees are in service and operations
because well over 75 percent of revenues come in almost
automatically from employee withholding taxes and employer
payroll taxes, where tax enforcement and tax policy are not
primary issues.
Before concluding, I would like to emphasize to this
Subcommittee some significant, non-governance observations. As
you probably well know, our tax collection system is based on
voluntary self-assessment. It produces $1.5 trillion per year.
The voluntary compliance is around 85-percent accurate, which
is very high by most international comparisons.
Voluntary self-assessment is very sensitive to taxpayer
attitudes and taxpayer treatment. A mere 1-percent compliance
shift in either direction affects Federal proceeds by $15
billion a year.
Current IRS service standards, behavior, and audit
methodology are much below the best private sector standards
and probably cost the government huge shortfalls in revenue
potential and goodwill. Better, more qualified top-level board
governance, not daily management by the board, could make a big
difference.
I thank you for your attention.
[The prepared statement follows:]
Statement of Josh Weston, Commissioner, National Commission on
Restructuring the Internal Revenue Service; and Chairman, Automatic
Data Processing, Inc.
Madam Chair and members of the Committee. My name is Josh
Weston and I am chairman of Automatic Data Processing, Inc., or
ADP, where I have been a senior executive for over 25 years.
President Clinton appointed me as one of the commissioners on
the National Commission to Restructure IRS.
ADP is a $4+ billion computer services company, with over
50 computer centers, over 30,000 employees, and by far the
longest consecutive annual growth record of any U.S. company .
. . 36 years in a row.
We pay well over 20 million Americans every payday, on
behalf of 300,000 employers. We electronically interface with
over 2000 U.S. taxing authorities, from IRS to the smallest
school district in Ohio.
Our side of the relationship with IRS is paperless, as we
transmit $200 billion per year to IRS. We also give them 35
million paperless W-2 forms each year and millions of
electronic tax returns from employers.
ADP handles over 100 million client phone calls per year,
almost as many as IRS. While 40-60% of IRS phone calls get to
their intended destinations, well over 90% of our calls do so.
We support 100,000 stock quote terminals for Wall Street,
where critical response time is measured in milliseconds. Our
computers also process 20% of all Wall Street trades, where
timing and accuracy are critical, as is the case with payrolls.
So, I think our company and I both know a lot about
service, efficiency, computerization, and employee motivation.
In addition, I serve on the boards of four other very large
service companies. In each such case, I think I am a very well
informed, focused, and influential part-timer. Although those
boards generally pay me $30 to $40 thousand annually for my
efforts, they get my dedicated attention. Those companies also
get free supplemental help from my ADP colleagues when I think
it can be helpful. My boards neither micromanage nor implement
policy, but they do maintain clear focus, priorities,
continuity, and a demand for measurable results and outcomes.
The President recently nominated a very qualified and
capable private sector executive to be the next IRS
Commissioner. Because of my Commission activities and
knowledge, it was I, a private sector part-timer, who was able
to identify and recommend this next CEO of the IRS to Bob Rubin
and Larry Summers.
I give you all this background because it illustrates the
kind of public-minded talent and help that is available for the
type of IRS governance board that our National Commission has
recommended to Congress. My self description also illustrates
why I disagree with the Treasury Department's view that a
mostly-external IRS board of experienced senior service
executives would not be an appropriate, qualified, and
dedicated governance entity for the operational and service
portion of the IRS.
As a further indicator of the relevance and abilities of
senior, private sector executives to guide IRS on operational
matters, I will tell you that in just four months, I
voluntarily made five, in-depth visits to five different tax
centers. Frankly, I doubt that any or many of the current
internal Treasury Department advisors to IRS have seen and
learned from as many IRS field personnel and tax processes as
have I as a part-time outsider. And there are other non-
Treasury Department executives like me who could bring very
relevant and consistent guidance to the IRS if our Commission's
recommendations on a governance board are adopted by Congress.
Incidentally, I am not applying for the job.
By contrast, on the subjects of relevant experience and
consistency, the past twenty years clearly indicate that the
various existing IRS and Treasury Department governance and
oversight processes have suffered from a glaring and continual
lack of relevant executive experience, focus, consistency, and
knowledge in large scale service and operations environments.
The past, current, and prospective consistency and continuity
in IRS oversight by the Treasury Department were and are flawed
because the relevant officials, often political appointees,
generally have low longevity and limited relevant experience in
roles that are intended to guide the IRS and its CEO, towards
better service, better efficiency, and state-of-the-art
electronics that aligns technology with business mission.
The recent Treasury proposal of a 14-person advisory board
hardly approaches the prospective value and punch of our
recommended board. The Treasury's large advisory board would
include only four senior executives from the private sector,
and would only meet quarterly. It would not have intensity,
clout, and accountability. It would be more like a town hall
meeting.
The Treasury's proposed internal management and review
board consists mostly of inter-agency, mid-level department
heads who would lack the degree and scale of senior level
experience to truly create and guide a $1.5 trillion, 100,000
employee, computerized service environment that efficiently
handles a billion transactions and 150 million phone calls per
year. Nor would such a heterogeneous additional board likely
have a shared, sustained strategic vision with clear authority
and accountability for achieving objectives.
Some people have characterized our Commission's proposal as
setting up a free-standing, privatized, non-accountable tax
enforcement agency. Those allegations are utter nonsense. Each
board member would be selected by the President, who could also
terminate him or her. The Senate would have a say on each
appointee. The Secretary of the Treasury would be on the board.
The board's budget requests would flow through both the
Treasury Secretary and the Congress. The board would have no
say on tax policy and tax enforcement, which would continue to
flow through Treasury.
The bulk of IRS' employees are not in heavy-duty
enforcement functions. They are in service and operations,
because well over 75% of revenues come in almost automatically
from employee withholding taxes and employer payroll taxes,
where tax enforcement and tax policy are not primary issues.
Before concluding, I would like to emphasize to this
Committee some significant, non-governance observations that
are important to your deliberations.
1. As you know, our tax collection system is based on
voluntary, self-assessment. It produces $1.5 trillion per year.
That voluntary compliance is around 85% accurate, which is very
high by most international comparisons.
2. Voluntary self-assessment is very sensitive to taxpayer
attitudes and treatment. A mere 1% compliance shift in either
direction affects federal proceeds by $15 billion.
3. Current IRS service standards, behavior, and audit
methodology are much below the best private sector standards,
and probably cost the government huge shortfalls in revenue
potential and goodwill. Better, more qualified top-level board
governance (not daily management by the board) could make a big
difference.
4. Congress also needs better coordinate its oversight and
interference with the IRS. In a typical year, at least seven
different committees interrogate and guide the IRS. They
typically hold 20-30 hearings per year. In each of these past
ten years,you have authorized over 40 different GAO
investigations and reports on the IRS, most of which have been
far more burdensome than useful. In a typical IRS year, there
are over 12,000 Congressional calls and letters to IRS
requesting some kind of action. The Congressional process can
be much improved.
5. I strongly recommend, as does our Commission report,
that the House and Senate have one joint, senior body to better
coordinate the direction, focus, and consistency of
Congressional and GAO guidance.
6. Because there are no complexity tests or cost/benefit
analyses applied to each incremental piece of tax policy,
legislation, or IRS regulation, IRS and taxpayers are both very
heavily burdened with unnecessary and unproductive complexities
and inefficiencies. All proposed tax policy and regulatory
changes should require a concurrent complexity analysis.
In addition, the IRS Commissioner should be directed to
annually submit to some joint House/Senate committee a list of
best candidates for further simplification that would have
little effect on either tax policy or tax revenues.
7. Finally, I have a few comments on technology:
a. It is imperative that you fully fund and monitor IRS
progress on fixing the Year 2000 challenge well before December
1999, or chaos will ensue.
b. It is equally imperative that IRS be allowed and
encouraged to build and retain an experienced, capable senior
technology leadership team that is not solely home grown
talent.
c. Electronic filing and other simplifications are critical
to enhanced accuracy, efficiency, and auditing. This project
needs funding, clear targets, and legislative revisions to make
electronic more attractive and simpler.
I thank you for your attention and would be pleased to
further help you.
Chairman Johnson. Thank you, Mr. Weston.
In view of your schedule, we are going to proceed with
questions at this moment, and I am going to recognize Mr.
Portman.
Mr. Portman. Mr. Weston, thank you for your testimony
today. Mostly, though, thanks for your work on the Commission.
You were tough, hardnosed, nonpartisan, sometimes monopolizing
the hearings for us, but honestly, it was a pleasure to work
with you, and I think all of the Commissioners share in that
commendation because you brought that private-sector expertise,
knowledge, and commitment to the task. So thank you for all you
did.
I have one question for you, and it has to do with your
experience on both the ADP board and other boards you have been
on because I think that goes to a lot of the concerns that the
Treasury has raised.
You serve on a couple of major boards now, you said, and
you have been on the ADP boards. Do you all micromanage these
companies? Do you get involved in decisions that would be the
equivalent of an individual taxpayer's decision? Tell us a
little about what you do.
Mr. Weston. I think the polite answer is ``heck no,'' and I
could substitute two other letters if I did not have to be
polite.
Most board members I serve with clearly recognize that a
board does not manage, cannot manage, should not manage, and
will not manage. It just does not happen that way except in
some crazy, freak situation that I do not know about.
Most board members have senior-level executive experience
someplace else, and they clearly understand the difference
between oversight and guidance on the one hand and management
on the other, and I cannot recall in any of the five boards I
am on, all of which are large service organizations, a single
instance of a board zeroing in on micromanagement versus
insisting and getting from the chief executive officer clear
plans, clear accountability, and intermittent updates on status
versus those plans. If the chief executive officer is not
performing according to those plans, then the board holds the
chief executive officer accountable and in some regrettable
situations gets a different chief executive officer, but a
board cannot and does not micromanage, does not manage at all,
and every time I heard the word ``manage'' earlier this
morning, it seemed to me to be a gross misconnect between
reality of boards and theoretical hypotheses.
Mr. Portman. As one follow on, would you say that the IRS
can use some of that oversight and guidance that a board does
supply?
Mr. Weston. Well, let me give you just a few examples.
Every board I am on, once a year, receives a very clear, long-
term plan from the chief executive officer and this plan is
massaged, critiqued, and if necessary, the plan is amended.
Once there is a long-term plan and direction, every board I
am on receives an annual operating plan which is more than just
a budget. It has all other key objectives, key organization
needs, and once approved by the board, it is the chief
executive officer's job, not the board's job, to achieve that
performance, and every board I am on gets a quarterly update at
least on how the company is doing versus those particular
plans. If an issue is not going well, the board asks the chief
executive officer to come back with a clear course of action to
remedy the shortfall as compared to a board trying to manage
around the chief executive officer.
I do not know if I answered your question.
Mr. Portman. You did. Thank you.
Chairman Johnson. Mr. Coyne.
Mr. Coyne. Thank you, Madam Chairwoman, and thank you,
Josh, for your testimony. I appreciate your being here today.
I just wanted to followup on your testimony relative to the
boards that you serve on. You stated that the members of these
boards do not intervene in the day-to-day operations of the
boards. Do you see any circumstances under which someone who
would serve on the proposed IRS board would be asked to act on
behalf of a constituent or taxpayer relative to IRS problems
Mr. Weston. My comment on that, Congressman, is that on any
board I am on, if occasioned by accident some individual board
member appears to be going off on a toot, whether it is self-
serving or just hysterical, the other board members have
sufficient respect and recognition that they will cut off that
board member and say, ``Kindly take that thing offline. We want
to talk to you.''
One of the things that an external board does is monitor
the performance of its individual associated board members, and
if you have people of experience and clout who have served on
boards like that, they are a self-correction device for any
other board member who might by accident be going off on an
inappropriate tangent.
If for some reason the board members did not recognize it
quickly, it is certainly the chief executive officer's
prerogative to call to the attention of the board or the
chairman of the board that this particular item is better
handled in some different way. It can be done, Congressman.
Mr. Coyne. So the potential intervention exists?
Mr. Weston. Well, if it arose, I would think all of the
following would be remedially operative. Within the context of
the 7-member board, including the Secretary of the Treasury,
there would be at least somebody who would say that particular
proposal is off limits. If for some reason the board did not
self-correct, the President, under our proposal, would
literally have the power to fire that particular board member.
So I think the checks and balances are such that if there
by accident arose an inappropriate initial direction, it would
not survive the scrutiny of the fellow board members, the
Secretary of the Treasury, the chairman of the board, and the
President who would have the right to fire such inappropriate
board member.
Mr. Coyne. Thank you.
Chairman Johnson. Mr. Weston, I have had a chance to review
your testimony, and I appreciate your speaking to so many of
the issues that have been discussed here today, but on the
issue of continuity, which I think is one of the most
important, do you think we can get people to serve 5 years on
something that takes this much attention?
Mr. Weston. I have served on one board of a very large
company that pays me somewhere between $30,000 to $40,000 a
year. I have served on that board for 12 years. I think my
inputs to the board far exceeds my income, if you want to
measure it monetarily.
I think, although I have never done the arithmetic, on
every board I am on, the average longevity of the incumbent
board members is greater than 5 years. Some may have 2 years.
Some may have 9, and I think the idea of serving something
outside of your own private company is not strange music to
senior chairmen and senior chief executive officers in the
private sector. They do not do it for money because $30,000 to
$40,000 a year, although to some people it is significant, is
not the driving force in getting board members on large
entities.
Chairman Johnson. Honestly, knowing this sort of
environment in which public issues are discussed at this time
in our country, do you think that we could get the caliber of
people we need willing to go through the Senate confirmation
process?
Mr. Weston. Well, I do not know about the Senate
confirmation process, but I----
Chairman Johnson. Well, they could, at the worst, be
subject to rather ugly conflict-of-interest questions.
Mr. Weston. Well, my comment would be more general in this
proposed board. I think in many important areas of the public
sector, very good private-sector people are discouraged from
participating because of the hearing process, but that is not
an observation particularized to our recommendation. I think it
makes all aspects of public service somewhat handicapped.
Chairman Johnson. I agree with you on that. I also think
the issue of continuity in the kind of board the Treasury is
proposing is a very, very big issue, but I wanted to at least
get your opinion.
Mr. Weston. If I could add a comment, Madam Chairwoman, to
what you just said. Aside from the private boards that I have
already discussed that I serve on, I am involved in several
very well-known pro bono nationwide boards. The board members
on those boards, such as the Committee for Economic
Development, CED,--the board members are generally chief
executive officers and chairmen of wherever they come from.
They get paid zero at CED and other organizations that I serve
in the pro bono sector. They do it for the betterment of our
society. They do it to return to society, thank you for our
good luck, and I do not think that the fact that the pay is not
high or other things really determines how many senior
executives would react.
I can think, although this is the wrong place, of at least
a half-a-dozen people who are equal or better than I am in
qualifications for this kind of a board who I believe, if
invited, would serve.
Chairman Johnson. Thank you.
This is not a question, but I do want to put on the record
a part of your testimony that you skipped over in deference to
the time.
You mentioned that there are seven different committees
that interrogate and ``guide'' the IRS, and one of the things
that this report does do is to recommend that we improve the
quality of oversight in the legislative branch of the IRS and
eliminate some of the duplication and tensions and
contradictory guidance that we give the IRS. I think that is a
very important part of this report that this body is all too
likely to ignore, and I intend to go into that at greater
length in future hearings, and I hope that we will succeed in a
way that will please you in that regard.
Mr. Cardin has joined us, and I am pleased to have him. He
had a very important meeting this morning down at the White
House and was unable to be here earlier.
Would you like to question at this time? Mr. Weston has a
plane to get.
Mr. Cardin. Thank you, Madam Chairman. I appreciate the
courtesy of being included. I have no questions for Mr. Weston.
I look forward to the other witnesses' testimonies.
Chairman Johnson. I thank you, Mr. Weston, for your being
with us this morning. We will move on now to the rest of the
panel.
Mr. Weston. Thank you, Madam Chairwoman.
Chairman Johnson. Mr. Goldberg, it is a pleasure to have
you, friend. You have brought a lot of experience to this
Commission, and we look forward to hearing your comments.
STATEMENT OF HON. FRED T. GOLDBERG, JR., COMMISSIONER, NATIONAL
COMMISSION ON RESTRUCTURING THE INTERNAL REVENUE SERVICE;
PARTNER, SKADDEN, ARPS, SLATE, MEAGHER & FLOM; AND FORMER
COMMISSIONER OF THE INTERNAL REVENUE SERVICE
Mr. Goldberg. Thank you, Madam Chair.
I served as IRS Chief Counsel from 1984 to 1986 under
President Reagan. I served as IRS Commissioner from 1989 to
1991 and as Assistant Secretary for Tax Policy during 1992
under President Bush. I was appointed to the Restructuring
Commission by Senate Minority Leader, Tom Daschle. I am
appearing today as a member of the Commission and not on behalf
of any client interest.
In light of the time constraints and my own view that the
Commission's report pretty much speaks for itself, I would just
like to comment briefly on a couple of matters that I would
urge the Subcommittee to keep in mind as it goes through these
deliberations. Before turning to those points, however, I would
like to thank Congressman Portman and Senator Kerrey for their
work in Chairing the Commission. I think they did an
extraordinary job. I think that Congressman Coyne, Senator
Grassley, and those of you who serve on these elected positions
and have many pulls on your time, I found it, as a citizen, a
very encouraging experience because I think there is a shared
bipartisan commitment to making this thing work better, and I
would like to express my gratitude to each of you.
I think the first point that I would like to make is that
in considering the recommendations, as you go forward, it is
critically important to keep in mind the criteria for the
decisions you are about to make, regardless of the problems we
were looking at, regardless of whether we were talking about
computers or tax gap or telephone service. Every issue we
examined, we came back to the same conclusions, and I believe,
based on Secretary Summers testimony this morning, they have
reached the same conclusion.
Wherever we look, whatever issue we are looking at, what is
missing is an explicit agreement on what the administration and
Congress want from the IRS, and what is missing is the
expertise, accountability, and continuity to deliver on those
expectations. So that, whatever recommendations you move
forward with, I urge you to test them against those standards.
When you apply those standards, I believe that the case for
the Commission's recommendations regarding management,
governance, and oversight is overwhelming. A commissioner for a
5-year term, giving that commissioner the authority and the
tools to build his or her own team, and to hold his or her
colleagues accountable for performance, a Board of Governors
fully accountable to the President of the United States with
the expertise and continuity to focus on strategic and long-
term objectives, and the ability to hold the commissioner
accountable for performance, coordinated congressional
oversight among the seven Committees responsible for all
aspects of the IRS, stable financing over a 3-year period,
these recommendations comprise an integrated package.
Each of these elements is essential to provide for a clear
statement of vision, for the expertise, the accountability, and
the continuity necessary to give the American people what they
have every right to demand and expect from the IRS.
With respect to how you think about the IRS, the
Commission's report contains two recommendations that have not
received a great deal of attention, but I believe are of
critical importance.
First, the IRS should not, should never contact a taxpayer
unless the IRS is prepared to provide that taxpayer with a
prompt, high-quality resolution of the matter in question.
Second, the government should not, should never force a
citizen to deal with an Internal Revenue Service employee who
is not trained to do the job and who does not have the tools to
do the job properly.
These may sound obvious. This is business necessity and, I
believe, a moral imperative in our system of government, but it
is not happening. It has not happened for many years. If you
were to accept this view of how the IRS is to work, it would
transform the agency.
Most of the controversy has focused on the Commission
report's recommendation, creation of a Board of Governors.
Several points. First, I urge you to bear in mind that it is
part of a comprehensive package. Having served as Commissioner
and having served in the Treasury, I can certainly understand
the Treasury's discomfort with this particular recommendation,
but I am absolutely certain that that discomfort is well worth
enduring for the sake of the other reforms being recommended.
In my view, it is not even a close question.
With respect to the concerns that have been raised by
Treasury, it is critically important to be clear on what the
Commission is and is not recommending.
First, the President of the United States remains
ultimately and unambiguously accountable for tax
administration. The President appoints the board members, and
the President has the unfettered power to remove those board
members. Those board members are confirmed by the Senate of the
United States.
Second, by statute, the board would have no involvement in,
much less authority over, tax policy matters, tax law
enforcement, procurement decisions, or day-to-day
administration of the tax laws. These responsibilities are and
these responsibilities should remain vested in the Secretary of
the Treasury, the Commissioner of Internal Revenue and others
to whom authorities have been appropriately delegated. Nothing
would change in this regard.
Third, and this is a point that Josh made far more
eloquently and based on far more experience than I have
personally, but the function of the board is to provide overall
governance and to help hold the commissioner accountable for
delivering strategic and long-term objectives.
In my judgment, one of the primary areas of expertise that
this board would bring to bear is the ability to distinguish
between strategic objectives, long-term objectives, overall
accountability, and the day-to-day management of affairs of the
enterprise. In my judgment and in my experience, the ability to
distinguish between those two types of activity is sorely
lacking in the Federal Government.
Though well aware there is no perfect answer to these
issues, what is important is to keep in mind that we are trying
to achieve a balance. We have to make choices between competing
good and laudable objectives, and I think that the Treasury's
recommendations, management board are instructive in this
process.
Yes, the recommendation avoids an issue that is of concern
to the Treasury Department, but ask yourself about the criteria
against which the recommendation should be attested. Does that
20-person board do anything to provide the kind of expertise
that is required, including the expertise to distinguish
between oversight and day-to-day management? I do not think so.
Does that board bring to bear an ability to impose
accountability? I do not think so.
Does that 20-person board provide for the continuity that
is essential to make the IRS work? Whether you are talking
computers or training or customer service or access or improved
enforcement and compliance, making a 100,000-person
organization get the job done, buy into the kind of change that
has to happen is a process that requires years of energy and
focus and attention. Will you get that kind of energy focus and
attention out of that 20-person board? In my judgment, the
answer is no.
What you are likely to get is more micromanagement, more
diffusion of attention, and while I believe utterly unintended,
absolutely unintended by the administration, if you step back
and you say we are talking 20 political appointees and giving
them monthly contact and monthly responsibility over the
activities of the IRS, with no apparent restrictions on access
to tax return information, no apparent restriction on access to
specific case matters, none of the safeguards that were built
into our recommendations, I believe that you are courting
disaster.
Thank you very much.
[The prepared statement follows:]
Statement of Hon. Fred T. Goldberg, Jr., Commissioner, National
Commission on Restructuring the Internal Revenue Service; Partner,
Skadden, Arps, Slate, Meagher & Flom; and Former Commissioner of the
Internal Revenue Service
Madam Chair and Members of the Committee: My name is Fred
Goldberg. I served as IRS Chief Counsel from 1984-1986, as IRS
Commissioner from 1989-1991, and as Assistant Secretary of the
Treasury for Tax Policy during 1992. I was appointed to the IRS
Restructuring Commission by Senate Minority Leader Tom Daschle.
I am appearing today as a Member of the Commission and not on
behalf of any client interest.
For the most part, I believe the Commission's Report speaks
for itself, and I will limit my comments to several
observations that I urge you to keep in mind as you review our
recommendations.
The Context
The IRS is the one institution of government that directly
affects everyone. It is essential that it meet the demands and
expectations of the American public. It does a very difficult
and important job; that job is made close-to-impossible by a
complicated and unworkable Internal Revenue Code. Most IRS
employees are hard-working and well-meaning, and the IRS still
collects most of the revenue that is due and owing at a lower
cost than its counterparts around the world.
At the same time, however, there is widespread frustration
that something is terribly wrong--from phones that aren't
answered and audits that go on forever to correspondence that
is often incomprehensible; from employees who lack the training
and tools to do the job to employees that view all citizen-
taxpayers as crooks and cheats; from a large and growing tax
gap to legendary computer troubles. Above all, there is one,
incontrovertible fact: the IRS fails to meet the minimum
acceptable standards that citizens have come to expect and
demand from service companies in the private sector. This
failure does not mean that the IRS is doing ``worse''--it means
that the IRS has not kept pace with changes that are
transforming the private sector.
The Causes and Criteria for Change
By and large, the problems result from two causes. First is
the complexity of the tax law. This issue was beyond the scope
of the Commission's charge, but it is important to emphasize
our finding that simplification of the tax law is essential.
Second is the need for fundamental change in the
management, governance and oversight of the IRS. Regardless of
the ``problem'' under review, the same themes kept recurring.
What's missing is agreement on what the Administration and
Congress want from the IRS--and the expertise, accountability,
and continuity to deliver on those expectations.
This is the most important point to bear in mind. All of
our recommendations were focused on these criteria: what do we
want from the IRS, and how can we provide for the expertise,
accountability and continuity to get the job done? I urge you
to test our recommendations--and consider alternatives--against
these standards.
The Commission's Recommendations
When viewed in this light, I believe that the case for the
Commission's recommendations in the areas of management,
governance and oversight is overwhelming:
Appoint the Commissioner for a five-year term
Give the Commissioner authority and tools to build
his or her own senior management team, and hold those
individuals accountable for performance
A Board of Governors--fully accountable to the
President of the United States--with the expertise and
continuity to focus on strategic, long-term objectives, and
hold the Commissioner accountable for performance
Coordinated Congressional oversight among those
responsible for all aspects of the IRS, with a specific focus
on strategic and long-term issues
Stable financing over a three year period and
explicit Congressional authority to provide additional IRS
funding outside the budget caps, subject to the express
understanding that the IRS will use that three year period to
get its house in order, develop appropriate performance
measures and obtain ``clean'' financial audits.
These recommendations comprise an integrated package. Each
of these elements is essential to provide the requisite
expertise, accountability and continuity; no single
recommendation standing alone would be sufficient.
With respect to the question of vision--what's expected of
the IRS--the Commission believes that this is ultimately a
matter for the Administration and Congress to decide, on behalf
of the American people. A primary purpose of the reforms we are
recommending is to create a structure that will force agreement
on this all-important issue.
Nonetheless, most Commission members share the vision laid
out by Senator Kerrey in his statement earlier today. There are
many ways to describe this consensus--for example, customer
service comparable to the best that is available from the
private sector. What needs emphasizing is that this choice has
consequences. For example, we recommend that the IRS adopt two
fundamental principles in its dealings with the American
public:
The IRS should not contact a taxpayer unless the
IRS is prepared to devote the resources necessary to provide
the taxpayer with a prompt, high quality resolution of the
matter in question.
The IRS should not force the taxpayer to deal with
an IRS employee unless that employee is adequately trained and
has the tools to do the job properly. These standards are a
business necessity and a moral imperative in our system of
government. They may sound obvious, but make no mistake about
it: at present, and for all too many years, the IRS has failed
to live up to these standards. I can tell you from personal
experience, if the IRS did adhere to these standards, it would
transform tax administration.
The reasons for this failure go to the essence of our
recommendations: First, there has been no explicit acceptance--
by either Congress or the Executive Branch--that these
standards embody first principles of tax administration.
Second, management, governance and oversight of the IRS does
not provide the expertise, accountability and continuity that
would be necessary to meet these standards.
To prove the point, ask yourselves the following questions:
What if adhering to these standards meant lower audit coverage
and a short-term reduction in revenue? What if adhering to
these standards meant increased funding for the IRS? What
measures are in place to assess whether the IRS is meeting
these standards? How do the Administration's budget request and
Congressional appropriations align themselves with these
standards? How many Congressional oversight hearings have
focused on these standards? Who's accountable for meeting these
standards?
The Board of Governors
Most of the controversy surrounding the Commission's Report
has focused on the recommendation for a Board of Governors. As
a preliminary matter, it is important to reemphasize that this
is only one in a series of integrated recommendations to
provide expertise, accountability and continuity. Having served
as IRS Commissioner and as Treasury Assistant Secretary, I can
understand why this particular proposal makes the Treasury
Department uneasy. But I am absolutely certain that any
discomfort would be well worth enduring for the sake of the
other reforms being recommended by the Commission. In my view,
it's not even a close question.
With respect to the concerns that have been voiced by
Treasury, it is important to be quite clear on what the
Commission is--and is not--recommending.\1\ First, the
President remains ultimately and unambiguously accountable for
tax administration. The President would appoint Board members,
and could remove those members at will. Second, by statute, the
Board would have no involvement in (much less, authority over)
tax policy matters, tax law enforcement, procurement decisions,
and day-to-day administration of the tax laws. These
responsibilities are--and would remain--vested in the Secretary
of the Treasury, the IRS Commissioner or others to whom
appropriate authority has been delegated. Thus, nothing would
change in this regard. Third, the function of the Board is to
provide overall governance, and hold the Commissioner
accountable for delivering strategic and long-term objectives.
One of the primary areas of expertise that Board Members from
the private sector would bring to their job is the ability to
distinguish between legitimate governance and oversight
activities and the type of micromanagement that plagues much of
government.
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\1\ It is worth noting that other, highly regarded tax
administration systems go much further than the Commission's
recommendations. For example, the California tax system is administered
by independent agencies governed by elected officials. Revenue Canada,
which is undergoing its own restructuring, is independent of the
Ministry of Finance.
---------------------------------------------------------------------------
The Commission was well aware that there is no perfect
answer to this (or any other) issue we considered. It requires
a balance among competing concerns and objectives. What's
important to keep in mind is what we are trying to accomplish:
provide IRS with the expertise, accountability and continuity--
while avoiding the pitfalls that accompany any change.
The IRS management board that was created by the
Administration last month illustrates this point. The Executive
Order creates a 20 person group led by political appointees
from throughout Treasury, other Federal agencies, and the
Office of the Vice President. This board will assume some
significant (but ill-defined) responsibility for management and
oversight of the IRS. This approach may avoid some issues, but
it raises others. In particular, this approach may fail to
satisfy the three criteria that should be used to evaluate any
reform proposal. First, there is no reason to believe that this
group will bring to bear the kinds of expertise that the IRS
requires. Second, it may diffuse, not focus accountability.
Finally, constant turnover in the positions identified by the
Executive Order may engender more confusion than continuity. On
the downside, there is nothing in the Executive Order that
precludes the management board from involving itself in tax
policy, law enforcement, procurement decisions, and day-to-day
management of the IRS. To the contrary, the net result may be
less focus on priorities and more micromanagement. It also
appears that these individuals (most of whom are political
appointees, including two from the Office of the Vice
President) would have access to tax return information. While
this may not have been intended, it is a frightening thought,
at least for those who recall why Section 6103 was enacted in
the first place.
Conclusion
I have spent most of my professional life dealing with
taxes and tax administration; I consider myself extremely
fortunate to have served in a number of senior government
positions in the world of taxes. Based on my experience, I am
certain of the following:
Fundamental change in IRS management, governance and
oversight is essential.
That change must result in a shared vision of what we want
from the IRS, and the expertise, accountability and continuity
to deliver that vision.
You and your colleagues, and the Administration, have a
unique opportunity--one that doesn't come along very often. A
well-functioning IRS is not a partisan issue, or a turf issue,
or a question of hidden agendas. The IRS occupies a unique role
in our system of government. It is essential that it meet the
legitimate demands and expectations of the American people.
Chairman Johnson. Thank you, Mr. Goldberg.
Mr. Tobias, thank you for your service on this Commission,
and it is a pleasure to have you as the president of the
National Treasury Employees Union.
STATEMENT OF ROBERT M. TOBIAS, COMMISSIONER, NATIONAL
COMMISSION ON RESTRUCTURING THE INTERNAL REVENUE SERVICE; AND
NATIONAL PRESIDENT, NATIONAL TREASURY EMPLOYEES UNION
Mr. Tobias. Thank you very much. I am very pleased to be
here as the president of NTEU and a member of the Commission to
Restructure the IRS. I am extremely proud to have served as a
member of that Commission.
We all know, everyone in this room knows, that the IRS is
an important government agency because it raises 95 percent of
the revenue funding for the Federal Government, and we know it
is important because it touches the lives of every citizen who
must decide every year, do I owe the government money.
The IRS is in the mind of every citizen every year. The
IRS, however, has, in my view, lost a lot of its credibility
with the public, the press, and Congress, and the Commission
report provides a blueprint for restoring that credibility and
that trust.
The report accurately portrays IRS employees as competent,
hard working, and motivated individuals who want to deliver a
high-quality product to the American taxpayers. It underscores
the need for stable and steady funding levels, improved and
expanded training programs, continuity of leadership and
direction, and it recognizes the importance of the agency's
employees having an active voice in operations beyond that
available now.
It suggests personnel flexibilities, a redesigned salary,
incentive program to reward employees for meeting objectives
and providing quality service. It provides the basis for a
truce, a much needed cease fire in the hostility against the
IRS and its employees.
Now, 85 percent of the IRS employees interviewed by the
Commission requested that Congress stop bashing the IRS. They
rightly stated that broadsiding the institution for
difficulties and controversies surrounding Federal tax policies
makes their job much, much more difficult, and the Commission
wholeheartedly agreed with that assessment.
The guiding principle of the Commission's report was that
IRS customer service and taxpayer satisfaction must be the
primary strategy to fulfill the IRS mission, and I totally
concur with that.
The available research cited in my full statement confirms
what we believe intuitively. The quality of service delivery
lies in the environment created by the organization of the
service deliverer; that the atmosphere that surrounds service
delivery is the key to service quality. Critical policies
include the organization demonstrating concern for the customer
by soliciting and using customer feedback, and providing
staffing and training programs that emphasize service quality.
Equally important is a demonstrated concern for the
employees--Considerate supervision, training, career
development, being proud of the organization and what it stands
for, and facilitating, not inhibiting, work effectiveness.
Their report that I cite in my full testimony continues,
``When these two sets of conditions exist, employees are
surrounded by cues and clues that service quality is not only
appropriate, but expected. The very conditions of the work and
workplace breed an atmosphere in which the delivery of superior
service quality is the norm, and the situation promotes the
message that service quality is valued. This belief on the part
of employees is based on the conditions management creates in
the workplace. The belief is not based on what management says
it believes in.''
The study continues, ``When employees report that such a
climate for service quality exists, customers report they
receive superior service quality. In short, employees know when
they deliver effective customer service, and if asked, they
will tell the employer. Further, the greater the discrepancy
between the customer service employees actually provide and the
amount of services customers demand, the greater the employee
emotional stress in the workplace. Employees know what
customers want, and when they are not allowed to provide the
service, employees' stress levels skyrocket.''
An internal IRS research document shows that decreased
employee satisfaction results in decreased employee
productivity and higher employee satisfaction leads to higher
employee productivity. The direct correlation between employee
job satisfaction and satisfied customers cannot be ignored.
In addition to the correction in strategic direction, the
Commission and NTEU both believe that taxpayers should deal
only with IRS employees who are adequately trained. Training is
key to customer satisfaction. Training must include not only
substantive information, but also the cues and the clues that
service quality is expected.
The IRS has been in a period of great uncertainty regarding
funding, making it impossible to allot resources in a coherent
manner, never mind establish a stable and directed training
program that would provide employees with the skills and tools
to best perform their jobs.
Changing strategic direction requires stability and
funding, the ability to plan expenditures over a period of
time, coupled with stable leadership, leadership that has a
vision and the time to implement a vision. Neither of these
factors are present in the IRS today, but both need to be
present in the IRS of the future.
The key to long-term planning at the IRS, to improve
customer service, to improve taxpayer and employee
satisfaction, to gain continuity and stability in management at
the very highest levels of the agency depends on commitments
being made on at least two important fronts: First, consensus
among public leaders and elected officials on the direction the
agency should pursue; and second, adequate, stable funding
levels to allow the agency to move forward and continue to make
progress. I think the Commission report addresses these areas
quite clearly and quite persuasively.
I would be happy to answer any questions. Thank you very
much.
[The prepared statement follows:]
Statement of Robert M. Tobias, Commissioner, National Commission on
Restructuring the Internal Revenue Service; and National President,
National Treasury Employees Union
Madam Chairwoman, Members of the Subcommittee, thank you
very much for this opportunity to appear before you today to
discuss the Report of the National Commission on Restructuring
the Internal Revenue Service (IRS). As the National President
of the National Treasury Employees Union (NTEU), the exclusive
representative of IRS employees, I was proud to serve on this
panel for more than a year studying IRS operations. I look
forward to participating in the ensuing discussions that I hope
will lead to a better understood, better valued and more
appropriately funded IRS.
The Internal Revenue Service interacts with more citizens
than any other government agency or private sector business.
Twice as many people pay taxes as vote. No one fact better
underscores the importance of restoring both credibility and
stability to the IRS.
The Commission Report provides an avenue for restoring the
IRS' credibility--with Congress, with the press, with the
public and perhaps most importantly, with the majority of
Americans who comply with our Nation's tax laws. The Report
accurately portrays IRS employees as competent, hardworking and
motivated individuals who want to deliver a high quality
product to the American taxpayer. It underscores the need for
stable and steady funding levels, improved and expanded
training programs, continuity of leadership and direction, and
it recognizes the importance of the agency's employees having
an active voice in operations beyond that available now. It
suggests personnel flexibilities and redesigned salary and
incentive programs to reward employees for meeting objectives
and providing quality service. It provides the basis for a
truce, a much needed cease-fire in the hostility against the
IRS--and its employees.
Eighty-five percent of the IRS employees interviewed by the
Commission requested that Congress stop bashing the IRS. They
rightly stated that broadsiding the institution for
difficulties and controversies surrounding federal tax policy
makes their jobs more difficult. The Commission wholeheartedly
agreed with that assessment.
IRS bashing by public figures and some Members of Congress
is unfortunately well documented. Quotes such as we should kill
the IRS, ``drive a stake through its heart, bury it and hope it
never rises again,'' or ``we should blow it up,'' or the IRS
building should be sold ``so the roaches can't come back in''
are irresponsible at best and dangerous at worst.
These comments quite literally endanger the lives of the
men and women of the IRS whose job it is to enforce the laws
Congress creates and collect the accurate amount of taxes owed.
Attacks on IRS Revenue Officers attempting to perform their
duties are well documented. Carole Jones and Stephen Golder,
IRS Revenue Officers from Wilmington, Delaware were forced to
flee from an attempt to seize property when the taxpayer's
daughter threatened that she was going to blow their
(expletive) heads off. She retreated to the house and returned
pointing a gun at the officers, forcing the two to abandon
their efforts.
Sherman Stanley, a Twin Falls, Idaho Revenue Officer, was
threatened by a demolition expert during the seizure of heavy
construction equipment for taxes owed. This particular taxpayer
filed liens against the IRS employee's personal property and
threatened to blow up his home. Mr. Stanley and his family were
forced from their home until police were able to determine the
seriousness of the threat. The taxpayer and his wife were later
convicted and sentenced to prison. They will be released soon.
Wanlyn Burnet, a Revenue Officer from Missoula, Montana was
the victim of a drive by shooting last summer. He was also
intentionally run off the road last September. Mr. Burnet
believes tax protestors were behind both these incidents. In
May of l995, the IRS Office in Denver issued an internal
memorandum warning that l0 Montana individuals associated with
the United Apostolic Brethren, a group with armed militia links
that believes it has sovereign immunity from federal income tax
law, had sworn an oath to kill any IRS agent who attempted to
arrest them.
Incidents such as these occur with increasing frequency in
all areas of our country.
The guiding principle of the Commission's Report was that
IRS customer service and taxpayer satisfaction must become
paramount. I concur. The IRS collects the taxes that run our
government and increased compliance with tax laws will only
occur when Americans find the IRS to be fair and efficient.
But, the employees charged with carrying out the IRS'
mission must stop receiving conflicting messages from Congress,
from the press, and from the public that seem to indicate that
the services they perform have no merit and serve only to
harass the taxpaying public.
A recent study of service quality by University of Maryland
professor Dr. Benjamin Schneider and Dr. Beth Chung, reported
in Trends In Organizational Behavior, presents an interesting
perspective on the conditions that promote quality service.
Their research has shown that the quality of service delivery
lies in the situation created by the organization for the
service deliverer; that the atmosphere that surrounds service
delivery is the key to service quality. Critical policies
include the organization demonstrating concern for the customer
by soliciting and using customer feedback, and providing
staffing and training programs that emphasize service quality.
Equally important, is a demonstrated concern for the
employees--considerate supervision, training and career
development, being proud of the organization and what it stands
for and facilitating, not inhibiting, work effectiveness.
Their report continues, ``When these two sets of conditions
exist, employees are surrounded by cues and clues that service
quality is not only appropriate but expected. The very
conditions of the work and workplace breed an atmosphere in
which the delivery of superior service quality is the norm; the
situation promotes the message that service quality is valued .
. . this belief on the part of employees is based on the
conditions management creates in the workplace; the belief is
not based on what management says it believes in.'' The study
continues, ``when employees report that such a climate for
service quality exists, customers report they receive superior
service quality.''
In short, employees know when they deliver effective
customer service and, if asked, they will tell the employer.
Further, the greater the distance between the customer service
employees actually provide, and the amount of service customers
demand, the greater the employee emotional stress in the
workplace. Employees know what customers want, and when they
are not allowed to provide the service, employee stress levels
skyrocket.
The direct correlation between employee job satisfaction
and satisfied customers cannot be ignored. In addition to the
correction in strategic direction, the Commission and NTEU both
believe that taxpayers should deal only with IRS employees who
are adequately trained--training is key to customer
satisfaction. Training must include not only substantive
information, but also the ``cues and clues'' that service
quality is ``expected.'' Yet, the IRS has been in a period of
great uncertainty regarding its funding, making it impossible
to allot resources in a coherent manner, nevermind establish a
stable and directed training program that would provide
employees with the skills and tools to best perform their jobs.
Moreover, for more than a year now, IRS employees across
the country have lived under a cloud of potential reductions in
force (RIFs). There is little question in my mind that
employees focus less on providing the best customer service and
satisfaction when they are consumed by threats of losing their
jobs.
The field reorganization RIF proposed by the IRS will
result in decreased service to the public by consolidating
offices and eliminating skilled personnel, only to rehire fewer
individuals to perform the same tasks in other locations. It is
especially ironic that under the IRS proposal, skilled problem
resolution office personnel are scheduled to be RIF'd and
replaced in the new locations with employees with presumably no
problem resolution experience. IRS personnel responsible for
taxpayer education and electronic filing coordinators
responsible for providing information and encouragement to
taxpayers and tax preparers to file electronically are
scheduled to be RIF'd. Field information technology employees
who maintain telephone and computer systems are scheduled to be
RIF'd.
All total, fewer employees will be available to answer
taxpayer inquiries. IRS imposed liens on taxpayer properties
will not be released as timely. Interest costs to taxpayers
will increase because their cases will not be processed as
timely. Inexperienced personnel will generate incorrect bills
and there will be fewer experienced personnel to correct the
errors. In addition, this proposed RIF occurs in a context of
an 8 percent reduction in the IRS workforce just since Fiscal
Year l995. Moreover, the IRS has no data and no plan to refute
the logical inference that l3l2 new, inexperienced employees
cannot provide the same level of customer service as the 237l
current experienced employees that the IRS proposes to RIF.
There is little question in my mind that if the IRS proceeds
with this RIF, compliant taxpayers and those seeking to be
compliant will not receive the service they need and deserve.
This threat of further service quality erosion is significant
and should not be ignored by this panel.
If Congress intends to treat the recommendations of the
Report of the National Commission on Restructuring the IRS as a
serious document worthy of careful scrutiny, Congress must
immediately halt the proposed IRS RIF. Congress stopped it once
already, demanding that the IRS show just how customer service
could be maintained with fewer employees and fewer locations.
The IRS has not addressed those concerns. Does the IRS need to
reorganize? I think we all agree that the answer is yes. Does
the IRS need to conduct a RIF in order to reorganize? No. In
fact, the Commission's findings are quite clear on this point:
``Unless the agency is in a fiscal crisis so deep that it
simply cannot afford to do so, the IRS should minimize
reductions in force. Employees did not create the bureaucracies
in which they work, and they should not pay the price of
reinventing those bureaucracies. . . ''
The Report demands that restoring confidence, improving
customer service and taxpayer satisfaction are paramount. The
proposed RIF will have the opposite effect. The Report states
that two of the greatest needs at IRS are stability and
continuity. The proposed RIF will cause the opposite to occur.
The Report understands that tax systems modernization and
increased electronic filing will not only reap financial
rewards, but increase compliance as well. Yet, the IRS RIF
proposal calls for eliminating some of the very employees who
provide electronic filing guidance and technological support.
As further evidence of the havoc the proposed RIF will
cause, taxpayers interviewed by the Commission expressed
mounting frustration with the lengths to which they must go to
obtain IRS materials and information. Many complained that the
number of IRS offices and available hours are decreasing, that
the IRS has closed or reduced functions in many local offices
resulting in either no access or a long drive to the nearest
IRS office. Taxpayers report that they sometimes wait four to
six weeks for IRS forms or publications to come by mail. If
there is one message I wish to share today, it is this. If the
IRS RIF is allowed to go forward, these frustrations expressed
by taxpayers will increase. Confidence will not be restored.
Taxpayer satisfaction will not improve.
Despite its obvious shortcomings, however, the IRS has come
a long way in improving its operations. The IRS and the
employees who make it run perform remarkably well despite its
faults. Some of its achievements, in fact, have been
outstanding.
As of March 7 of this year, the number of electronic
filings by phone and computer had increased by 24 percent over
last year. As of March 2l, the IRS had received more than l2.l
million standard electronic returns. The IRS estimates that
l9.2 million Americans will file electronically in l998, almost
double the number who filed electronically in l995.
Most importantly, while revenues continue to increase, IRS
costs continue to fall. In FY l992, the cost of collecting $l00
in revenue was 60 cents. By FY l996 that cost had dropped to 54
cents and for FY l997, the cost of collecting $l00 in revenue
stood at 50 cents. The IRS has also made significant
improvements in telephone accessibility and accuracy. During
the l996 filing season, the IRS answered only 2l percent of
incoming calls. Yet, between October of l996 and April of l997,
the IRS responded to 5l percent of incoming calls. As the
Commission Report points out, this is still unacceptable
compared to private sector service performance.
However, as the Commission Report also details, Congress,
the General Accounting Office, the press and even the
Department of the Treasury tend to focus only on the IRS'
failures; rarely acknowledging its successes. The IRS has been
the subject of l40 GAO Reports over the last four years. Forty-
three audits of the agency are currently underway. While GAO is
quick to point out problems, rarely do they promote solutions.
What the IRS needs more than anything is stability in its
funding and consistency in its leadership and direction. When
any agency receives mixed messages, its ability to perform at
its best is hampered. The IRS, for example, is told one day
that its most important priority is customer service and that
its customers must be treated with the utmost in politeness. At
the same time, others are stressing that the IRS is not
collecting revenue aggressively enough. Increasingly, the IRS
has been subject to contracting out of tax collection efforts
to the private sector because of the belief by some in Congress
that they are not being aggressive enough in collecting revenue
owed to the Treasury.
The Commission Report underscores my own view that
contracting out IRS functions to the private sector is not the
panacea some think. The Report states: ``The most important
question is not whether to outsource a public activity, but how
to get the most effective and efficient performance for the
taxpayers' dollar.'' The Commission also recognized that
``Deciding which powers of the IRS are so sensitive that
private industry cannot hold them...'' is equally important.
There are some functions that federal agencies should look
to the private sector to perform. And, this applies to the IRS
as well. I would include in this group, particular types of
specialized expertise, such as computer technology. However, I
believe strongly that tax collection does not belong on this
list. The federal government should perform its own tax
collection.
Contracting out tax collection serves only to diminish the
public's confidence in the IRS. Private sector employees--
working on commission--aren't going to care whether their
actions antagonize taxpayers or erode IRS credibility. Private
sector managers are likewise unlikely to invest resources in
ferreting out misdeeds against taxpayers with anywhere near the
same vigilance as the IRS. In fact, IRS employees working the
1-800 service lines have reported taxpayer complaints
concerning how they were treated by contractor employees as
part of a private sector debt collection pilot program. Some of
the reported taxpayer comments that have been shared with me
include, ``I was treated like scum,'' ``I was threatened and
abused,'' and perhaps most telling, ``I want the IRS back, at
least they treat us well.''
There are valid reasons why federal income taxes have been
collected exclusively by federal employees in the past and why
federal income tax information remains so closely guarded.
Privacy. There is no single issue that will more quickly erode
the public's confidence in the IRS than a breach of individual
privacy. And IRS employees are constantly reminded of that fact
not only by the union, but by management and through Congress'
passage of legislation from the Taxpayer Bill of Rights to
imposition of severe penalties for willful browsing.
There is another highlight of the Commission Report on
which I want to specifically comment. There was virtually
unanimous agreement among those who testified before the
Commission that the tax code is overly complex and must be
simplified. The Commission discovered as well that there is a
clear connection between the complexity of the IRS Code and the
difficulty of tax law administration and taxpayer frustration.
The frequency with which the Legislative and Executive branches
change tax law only compounds the problem. Each tax law change
requires the IRS to reprogram computers, retrain employees and
update forms, publications and guidance. Yet, funding
restrictions rarely provide the funding necessary to accomplish
these goals. The temptation is then to blame IRS employees for
the complexity of the law, when in fact they are only the
messengers of that law.
Recognizing this, the Commission recommends a mechanism to
ensure that elected officials understand how proposed tax
legislation will impact the IRS and taxpayers. The Commission
recommends the development of a framework to provide Congress
with a better understanding of the impact of tax proposals on
taxpayers, the IRS and IRS resources before they are
implemented. This approach is long overdue. Constant
incremental changes to the tax law have a significant negative
effect on taxpayers' understanding of the law and the IRS'
ability to enforce that law.
The complexity of the tax law is an area many have used to
further individual tax policy goals. While I continue to
believe that tax policy should always be decided on the merits
of a particular proposal, I want to stress the importance of
providing the IRS with the resources necessary to insure that
the training and implementation procedures necessary to enforce
tax code changes are provided to them.
In conclusion, NTEU takes great pride in its cooperative
relationship with the IRS which dates back to l987. Today, our
partnership efforts are being tested by unprecedented budget
cuts, furloughs, proposed reductions in force and increased
contracting out of IRS work to the private sector. Nonetheless,
NTEU remains committed to this partnership and committed to
working with this Congress to bring about positive changes at
the IRS.
The key to long-term planning at the IRS, to improved
customer service, to taxpayer and employee satisfaction, to
continuity and stability in management at the very highest
levels of the agency depends on commitments being made on at
least two important fronts: First, consensus among public
leaders and elected officials on the direction the agency
should pursue and second, adequate, stable funding levels to
allow the agency to move forward and continue to make progress.
I would be happy to answer any questions. Thank You.
Chairman Johnson. Thank you, Mr. Tobias.
Mr. Larry Irving, Assistant Secretary for Communications
and Information from the U.S. Department of Commerce.
Let me say to the Subcommittee Members, we are going to
hear Mr. Irving. After that, we will break and come back for
the other two. I am anxious for the Members of the Subcommittee
to have a chance to actually hear the testimony, and while that
may cut into the amount of time Members have to stay and ask
questions, I think it is important to hear from you in your
words.
Mr. Irving.
STATEMENT OF HON. LARRY IRVING, COMMISSIONER, NATIONAL
COMMISSION ON RESTRUCTURING THE INTERNAL REVENUE SERVICE;
ASSISTANT SECRETARY OF COMMERCE FOR COMMUNICATIONS AND
INFORMATION; AND ADMINISTRATOR, NATIONAL TELECOMMUNICATIONS AND
INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF COMMERCE
Mr. Irving. Thank you, Madam Chair.
It is a pleasure to be here today to testify concerning the
recommendations of the National Commission on Restructuring the
IRS. It was an honor and a privilege to serve as a member of
the Commission, and I want to commend all of my colleagues, in
particular, Congressman Coyne, Senator Grassley, and our
Chairman, Senator Kerrey, and Congressman Portman. They did
outstanding work, and I believe that we have made an
outstanding report.
Madam Chair, I do agree with the vast majority of the
recommendations in the report, and I feel particularly strongly
about the recommendations regarding electronic filing and
modernization, and consequently, it was with deep regret that I
was not able to join with a majority of the Commission in
endorsing the final Commission report because of my strong
opposition to the recommendations on governance.
The IRS is incredibly important to every person in this
Nation. It collects 95 percent of the revenue, and I think the
recommendations taken as a whole by this Commission will
strengthen the IRS by increasing the agency's focus on customer
service, but ensuring taxpayer compliance, by increasing the
agency's effectiveness and efficiency, and the report's
emphasis on tax implication, taxpayer rights, and financial
management will be an important contribution to this Nation.
The recommendations on modernization are essential to the
ability of the IRS to move effectively into the next century,
the century date change issues, the integration of technology
with strategic objectives, an increasing intellectual capital
resource available to the IRS, strengthen the IRS so that it
can respond quickly and accurately to taxpayer needs.
The Commission's report appropriately emphasizes the
importance of electronic filing. Electronic filing will
facilitate IRS compliance efforts. It will allow the IRS to
receive information in tax returns and match data within the
same calendar year. Electronic filing will improve the speed of
processing returns. It will reduce errors on the part of the
taxpayer. It will be cheaper to process than paper filing.
In sum, electronic filing holds a great potential to
increased cost savings and compliance with only a small
investment by the IRS, but as was noted repeatedly today and
repeatedly during the Commission's deliberations, the
fundamental issue at the heart of the Commission's report is
governance, and I simply cannot and do not support the
majority's recommendations on this issue.
I do not believe that the governance of the IRS should
reside in an outside board of directors composed principally of
part-time, private-sector executive officers who would keep
their private-sector jobs and salaries, and I also do not agree
that the board should not have the level of direct
accountability that the Treasury Secretary presently has to an
elected President.
The report hands the board's responsibilities and
characteristics that I believe blur the lines of accountability
to the IRS. The board would appoint and compensate senior
executives at the IRS, including the Commissioner and the Chief
Counsel. The board would be ``independent,'' and the board
would review and approve the commissioner's recommendations
regarding the budget.
Any entity that has the ability to hire and fire, to make
hiring and firing decisions, to look at a budget, I believe,
has a significant effect, and we will have some problems with
regard to issues such as law enforcement and policy direction.
I do not believe that law enforcement and the tax policy of
this Nation should rest with an outside board. I do believe it
should rest with people directly accountable to the President.
The board, according to the report, would be responsible
for the oversight of the IRS and not be involved in law
enforcement of tax policy or day-to-day management, but I run a
Federal agency every day, and I do not know how a board can do
its job the way it is outlined in this report and not get
involved in those crucial issues.
I see that my time has expired, and I want to conclude by
restating my strong support for the vast majority of the
recommendations put forward in the Commission's report. I
cannot, however, Madam Chair, endorse the recommendation where
the agency that collects 95 percent of the revenue that funds
our government will be subject to the control of a part-time
board composed principally of members from the private sector.
I thank you for your time this afternoon.
[The prepared statement follows:]
Statement of Hon. Larry Irving, Commissioner, National Commission on
Restructuring the Internal Revenue Service; Assistant Secretary of
Commerce for Communications and Information; and Administrator,
National Telecommunications and Information Administration, U.S.
Department of Commerce
It is a pleasure to be here today to talk with you about my
views on the recommendations of the National Commission on
Restructuring the IRS. My name is Larry Irving and I am the
Assistant Secretary of Commerce for Communications and
Information and the Administrator of the National
Telecommunications and Information Administration (NTIA) at the
Department of Commerce.
It was an honor and a privilege to serve as a member of the
Commission. Senator Kerrey and Congressman Portman deserve to
be commended for their hard work over the past year. Their hard
work and dedication to the process served as examples to all of
us on the Commission. I also would like to thank my fellow
Commissioners from whom I learned much in the process. Under
the distinguished leadership of Chairmen Kerrey and Portman,
the members of the Commission have worked hard to understand
the complex problems facing the IRS.
I agree with the vast majority of the recommendations in
the report, and feel particularly strongly about many of the
recommendations regarding electronic filing and modernization.
Consequently, it was with deep regret that I was not able to
join with the Commission's majority in endorsing the Final
Commission Report because of my strong opposition to the
recommendations on governance.
We all realize how important the IRS is to this nation. The
agency collects 95 percent of the revenue of our government.
Most of the Commission's recommendations, taken as a whole,
will strengthen the IRS by increasing the agency's focus on
customer service, ensuring taxpayer compliance and increasing
effectiveness and efficiency. The report's emphasis on tax
simplification, taxpayer rights and financial management also
are important sections.
The recommendations on modernization are essential to the
ability of the IRS to move effectively into the next century.
The century date change, the il capital, all go to the essence
of strengthening the IRS so that it can respond quickly and
accurately to taxpayer needs.
And the Commission's report appropriately emphasizes the
importance of electronic filing. Increased utilization of
electronic filing will facilitate IRS compliance efforts,
allowing the IRS to receive information and tax returns and
match data within the same calendar year. Better data capture
capability also will facilitate customer service. At present,
only 40 percent of the data on individual income tax returns is
entered into IRS computers.
Electronic filing also will improve the speed of processing
returns by the IRS and the burden on taxpayers. Furthermore,
numerous studies indicate that electronic filing greatly
reduces errors on the part of the taxpayer, and is cheaper to
process than paper filing. On the taxpayer side, most tax
practitioners charge for electronic filing today because they
incur additional expenses, including the cost of communications
and third party transmitters. Surveys suggest that the cost of
electronic filing is a disincentive to taxpayers to file
electronically. Yet, as the volume of electronically filed
returns increases, demand in the marketplace will drive down
prices for electronic filing. In sum, electronic filing holds
great potential to increase cost savings and compliance with
only a small investment by the IRS.
Madam Chairwoman, the report deserves commendation for many
of the Commission's recommendations. Nevertheless, as was noted
repeatedly during the Commission's deliberations, the
fundamental issue at the heart of the Commission's report is
governance, and I simply cannot and do not support the
majority's recommendations on this issue. I do not believe that
the governance of the IRS should reside in an outside Board of
Directors composed principally of part-time private sector
chief executive officers who would keep their private sector
jobs and salaries. This Board would be an extremely powerful
body, affecting every American citizen, yet without the level
of direct accountability that the Treasury Secretary has to an
elected President.
The IRS is an essential government agency. I am concerned
about blurring the lines as to who is in charge at the agency--
the outside Board, the IRS Commissioner or the Secretary of the
Treasury. The report hands the Board responsibilities and
characteristics that blur the lines of accountability at the
IRS. For example, (1) the Board would appoint and compensate
all senior executives at the IRS, including two currently
appointed by the President--the IRS Commissioner and the Chief
Counsel; (2) the Board would be ``independent;'' and (3) the
Board would ``[r]eview and approve the Commissioner's
recommendations regarding the IRS budget . . . '' and have the
authority to send its own budget request for the IRS directly
to Congress. It should be clear to the American people that
when something goes wrong at the IRS, it is the IRS
Commissioner and the Treasury Secretary that are responsible,
and not five private-sector CEOs.
Although I share the Treasury Department's concerns
regarding the constitutionality of this proposed Board, my
objection to placing the governance of the IRS with an outside
Board is based primarily on my own experiences over the last
four years running a federal government agency that is subject
to different people with oversight responsibility. My agency,
NTIA, must answer to many layers of authority.
According to the Commission's report, the Board only will
be responsible for the oversight of the IRS and not be involved
in law enforcement, tax policy or day-to-day management issues
within the IRS. It is difficult to draw bright lines between
oversight and tax policy, law enforcement and management and
that the Board's powers will ultimately extend to all of these
areas. I cannot support a governance proposal that relies on
this sort of line-drawing as a justification for its existence
because I know from experience how difficult this line will be
to police and maintain.
Furthermore, a governance proposal that relies upon such
lines for legitimacy ultimately will raise serious
accountability and jurisdictional issues for the both IRS and
the Department of Treasury, inviting challenges to the revenue
collection function of our government. Although the
Commission's report says that the Board members will not be
involved in law enforcement issues, the major corporate
executives who would make up the Board could, through their
budgetary and personnel decisions, redirect IRS resources away
from audits and enforcement actions on corporations' tax
returns and towards the returns of individuals. Even done
openly, such action would be unlikely to violate any provision
of law applicable to the Board, yet I would argue that this
constitutes Board involvement in enforcement issues at the IRS.
In addition to the potential for actual conflict of
interest issue, there also is a strong likelihood of the
appearance of a conflict related to the fact that our tax
collection system depends on voluntary compliance. Voluntary
compliance depends on a sense of fairness, and on a sense that
everyone is paying their fair share. There is a risk of
undermining that sense of fairness if the American people feel
that the law enforcement, auditing, and compliance functions of
the IRS are being directed by a group of private sector chief
executives. For example, under the Commission's proposal,
private sector board members would be able to represent their
employers before the IRS, on audits of their employers'
returns, in seeking contracts for their employers and
otherwise, so long as the Board had not considered that
specific issue or matter. Moreover, Board members would be free
to accept bonuses or partnership distributions earned by
representing private interests before IRS.
I have experienced the complexities of shne between
oversight and management. Based on these experiences, I believe
that responsibility for IRS management must continue to reside
with an IRS that remains fully accountable to the President and
Congress. Change at the IRS must be done in a manner that
minimizes risk to the vital flow of revenues that fund our
government and at the same time allows progress on reforms at
the IRS to continue.
I find it troubling that the members of the Commission's
proposed Board would serve on a part-time basis and yet be
responsible for improving the IRS' current oversight; and that
this responsibility would be in addition to their primary
responsibilities to their private sector jobs. The Treasury
Secretary and Deputy Secretary are in their governmental office
every day, and they have no non-governmental responsibilities.
The only job of the Secretary and Deputy Secretary is to
promote and defend the public interest. Madam Chairman, it is
my experience that heading a federal agency is more than a full
time job, and NTIA is not even one-tenth the size of the IRS. I
meet daily with members of my senior staff to discuss a variety
of policy and managerial issues. Many of these matters require
considerable thought, attention and internal deliberation.
Meetings sometimes must be called with little or no notice on
an emergency basis. Members of the Board would be expected to
provide similar leadership to the IRS, although they will be
physically situated across the county with other non-
governmental responsibilities. The American people rightly
demand an IRS that is responsive to the public and is led by
officials who are held accountable for achieving success.
In conclusion, I want to restate strongly my support for
the vast majority of the recommendations put forward in the
Commission's report. I cannot however, endorse the
recommendation where the agency that collects 95 percent of the
revenue that funds our government is subject to the control of
a part-time Board composed of members primarily from the
private sector.
Thank you Madam Chairwoman and other Members of the
Committee. I welcome any questions.
Chairman Johnson. Thank you, Mr. Irving, and I look forward
to the opportunity to hear your testimony.
We have 4 minutes left. That is not time enough to fully
hear the remarks of Mr. Newstrom. So the Subcommittee will
recess for about 6 or 7 minutes. Let's go over fast and then
come back so we can hear the last two people. Thank you.
[Recess.]
Chairman Johnson. The Subcommittee will reconvene.
We will proceed with the testimony of Mr. Newstrom,
corporate vice president and group executive of the Electronic
Data Systems, Herndon, Virginia, and it is a pleasure to have
you. Thank you for your service on this Commission.
STATEMENT OF GEORGE C. NEWSTROM, COMMISSIONER, NATIONAL
COMMISSION ON RESTRUCTURING THE INTERNAL REVENUE SERVICE; AND
VICE PRESIDENT, ELECTRONIC DATA SYSTEMS, CORP., HERNDON,
VIRGINIA
Mr. Newstrom. Thank you, Madam Chairman and Members of the
Subcommittee.
I appreciate this opportunity to testify before you
concerning the recommendations of the National Commission on
the Restructuring----
Chairman Johnson. Excuse me, Mr. Newstrom. Could you pull
the microphone a little closer?
Mr. Newstrom. Is that better?
Chairman Johnson. Yes. You have to get really quite up on
it.
Mr. Newstrom. How is that?
Chairman Johnson. Thank you. That is much better.
Mr. Newstrom. EDS is one of the Nation's largest
information technology service companies and a leader in
applying information technology to meet the needs of businesses
and governments worldwide. EDS has operations in over 40
countries, employs more than 90,000 employees, many of them who
work in partnership with clients in the government sector.
I, too, am very proud to have worked on the Commission, and
I would also like to thank Congressman Portman and Senator
Kerrey for the leadership that they showed.
Our members represented a broad section of the public/
private sector, and in the end, just like Mr. Irving said, we
were in agreement on the preponderance of the things that will
enable the IRS to provide better, more cost-effective services
to the taxpayer.
I personally supported in excess of 90 percent of what was
included in the final document; even the governance section,
which includes one recommendation that causes me concern,
included important recommendations which I supported.
For example, the governance section recommends that the IRS
Commissioner be appointed for a 5-year term and that the
Commissioner be given greater flexibility in hiring,
terminating, and compensation decisions.
I represent a corporation of 90,000 employees, as I told
you. I know how difficult it is for leadership of large
organizations to chart a clear direction and earn the
commitment of the entire organization. A strong, unified and
stable leadership team is critical to the success of an
organization. The Commissioner needs the flexibility to attract
and retain the best and the brightest for the IRS management
team. This means adequate compensation and bonus packages and
the ability to promote and remove based on performance.
Unfortunately, I am unable to support the Commission's
recommendations of the creation of an independent board, and
underscore the word ``independent.'' After more than two
decades of building partnerships between the public and the
private sector, I am committed to maintaining a clear
distinction between policymaking functions of government and
the use of private sector contractors to make government
operations more effective, and remember, I am a private-sector
contractor.
I know the Commissioners who support these recommendations
intended that the board have no policymaking role. However, it
is difficult for me as well to understand how a body that hires
the executive officer of an organization sets their
compensation, approves their budget proposals and interacts on
a regular basis with Members of Congress, can refrain from
influencing policy. I do not believe that an independent board
should have control over these responsibilities for
implementing the tax law of this Nation.
Moreover, I am convinced that the Treasury Department and
the IRS have already taken steps and continue to take steps
toward implementing an improved governance process. I have been
impressed by the efforts to focus the IRS on its core
competencies and by the commitment to leverage the private
sector to obtain resources such as systems integration and the
capabilities that are not part of their core competencies. I
would like to give these efforts that are at work right now
some time to work.
I would like to talk for a moment about my role as a
technology task force member. Much of the work was focused on
the issues that are critical to the ability of the IRS to
function successfully in the 21st century. Technology is an
enabler and only an enabler, but it will make it possible for
the IRS leadership to provide better service to the taxpayers
and increase compliance.
The technology gap between the IRS and the private sector
financial institutions is widening daily. Taxpayers expect the
same level of efficient and accurate and courteous treatment
from their government as they do from the private sector.
It is essential that the IRS have the technical capability
and the funding to deal with the century date change. However,
it must also press forward with the modernization blueprint and
develop public/private sector partnerships that will enable it
to improve customer service and compliance functions. It must
expedite the use of electronic filing.
My experience on the Commission has convinced me that this
is a unique opportunity to make dramatic improvement in the IRS
technology and taxpayer services. The presence of a committed
leadership team at Treasury and the IRS, coupled with the
release of a high-quality modernization blueprint have added
tremendous momentum to the force of change. The contractor
community is now prepared to make substantial investments in
the procurement and a major financial commitment to ensuring
that this modernization effort is a success.
An extended delay or uncertainty about Congress' commitment
to fund this effort would undermine this effort, and the people
in the government who are willing to take risks for the change.
It would make it more difficult for private contractors to
commit large amounts of money and key people to this resources-
intensive effort.
As this Subcommittee moves forward in its discussions of
the governance issues, I hope they will also be mindful of the
importance of the modernization effort and the need to ensure
the funding is available to implement the blueprint when the
modernization contract is awarded.
I realize that your time is limited, and I will be happy to
answer questions and would be delighted to return, if possible.
Thank you.
[The prepared statement follows:]
Statement of George C. Newstrom, Commissioner, National Commission on
Restructuring the Internal Revenue Service; and Vice President,
Electronic Data Systems, Corp., Herndon, Virginia
Good morning, Madam Chairwoman and members of the
Subcommittee. My name is George Newstrom. I am vice president
of Electronic Data Systems Corporation (EDS).
I appreciate this opportunity to testify before you
concerning the recommendations of the National Commission on
Restructuring the Internal Revenue Service.
I will speak this morning as one who had the opportunity to
serve as a member of the Commission. I will also speak as a
member of the business community.
EDS is one of the nation's largest information technology
services companies, and a leader in applying information
technology to meet the needs of businesses and governments
worldwide. EDS has operations in more than 40 countries and
employs more than 90,000 people many of whom work in
partnership with our clients in the government sector.
I am very proud of the work produced by the Commission, and
I would like to thank Senator Kerrey and Congressman Portman
for their leadership. Our members represented a broad cross
section of the public and private sectors, and, in the end, we
were in agreement on many things that will enable the IRS to
provide better and more cost-effective service to taxpayers.
I personally support more than 95 percent of what was
included in the final document. Even the governance section,
which includes one recommendation that causes me concern,
includes important recommendations that I strongly endorse.
Positive Recommendations
For example, the governance section recommends that the IRS
Commissioner be appointed for a five-year term and that the
Commissioner be given greater flexibility in hiring,
termination, and compensation decisions.
I represent a company with more than 90,000 employees. I
know how difficult it is for the leadership of a large
organization to chart a clear direction and earn the commitment
of the entire organization. A strong, unified, and stable
leadership team is critical to the success of the organization
as a whole.
The Commissioner needs the flexibility to attract and
retain the best and the brightest for the IRS management team.
This means adequate compensation and bonus packages and the
ability to promote and remove based on performance.
Concerns Regarding the Recommendation to Create an Independent Board
Unfortunately, I am unable to support the Commission's
recommendation for the creation of an independent board. After
more than two decades of building partnerships between public
and private sector organizations, I am committed to maintaining
a clear distinction between the policy making functions of
government and the use of private sector contractors to make
government operations more effective.
I know the Commissioners who support this recommendation
intend that the board have no role in policy making. However,
it is difficult for me to understand how a body that hires the
executive officers of an organization, sets their compensation,
approves their budget proposals, and interacts on a regular
basis with members of Congress can refrain from influencing
policy. I do not believe that an independent board should have
control over those responsible for the implementation of the
tax law of this nation.
Moreover, I am convinced that the Treasury Department and
the IRS have already taken and continue to take important steps
toward implementing an improved governance process. I am
impressed by efforts to focus the IRS on its core competencies,
and by the commitment to leverage the private sector to obtain
resources such as systems integration capabilities that are not
part of tencies. I would like to give efforts that are now in
progress the time to work.
Technology Task Force/Business Perspective
In conclusion, I would like to talk for a moment about my
work as a member of the Technology Task Force. Much of this
work was focused on issues that are critical to the ability of
the IRS to function successfully in the 21st century.
Technology is an enabler that will make it possible for IRS
leadership to provide better service to taxpayers and increase
compliance. The technology gap between the IRS and private
sector financial institutions is widening daily. Taxpayers
expect the same level of efficient, accurate, and courteous
treatment from their government as they do from the private
sector.
It is essential that the IRS have the technical capability
and funding to deal with century date change. It must press
forward with its modernization blueprint and develop the public
sector/private sector partnership that will enable it to
improve customer service and compliance functions. It must
expedite the use of electronic filing.
My experience on the Commission has convinced me that there
is a unique opportunity to make dramatic improvement in IRS
technology and taxpayer service.
The presence of a committed leadership team at Treasury and
IRS coupled with the release of a high quality modernization
blueprint have added tremendous momentum to the forces of
change. The contractor community is now prepared to make
substantial investments in the procurement and a major
financial commitment to ensuring that the modernization effort
is a success.
An extended delay or uncertainty about Congress' commitment
to fund the procurement could undermine efforts of people in
government who are willing to take risks for change and make it
difficult for private sector contractors to commit large
amounts of money and key people to such a resource intensive
effort.
As this Committee moves forward in its discussion of
governance issues, I hope that it will also be mindful of the
impodernization effort and the need to ensure that funding is
available to implement the blueprint when the modernization
contract is awarded.
I realize that today's time is limited. I will be happy to
answer any questions and would be delighted to return if
necessary to discuss the technology initiatives with the
Committee in detail.
Chairman Johnson. Thank you very much, Mr. Newstrom.
Mr. Keating, thank you for serving on the Commission. You
certainly also put in a great deal of time, and I appreciate
your being here today as executive vice president for the
National Taxpayers Union.
STATEMENT OF DAVID L. KEATING, COMMISSIONER, NATIONAL
COMMISSION ON RESTRUCTURING THE INTERNAL REVENUE SERVICE; AND
EXECUTIVE VICE PRESIDENT, NATIONAL TAXPAYERS UNION,
ALEXANDRIA, VIRGINIA
Mr. Keating. Thank you for holding these hearings this
morning and this afternoon and for inviting me to testify. I
appreciate it.
The IRS contacts millions of Americans each year. For many
of us, it is the only agency that we deal with so regularly,
and that is why I think it is so important that Congress move
to improve the IRS because it needs improvement.
A poll conducted for our group last month found that 90
percent of those surveyed said that improving the IRS should be
a very high or somewhat high priority for the current Congress,
and now that we have the Commission's report for the Congress,
we have given a road map for discussion and debate about
exactly how to do that.
This report was endorsed by 12 of the 17 Commissioners, and
even those who voted against it endorsed much of the report.
The issue of controversy is on management and governance,
and I want to associate myself with the earlier remarks of Josh
Weston and Fred Goldberg. I agree with what they said, 100
percent, concerning management and governance.
I do want to add some additional observations. First, there
is no proposal that can guarantee sound management, but unlike
the Treasury Department's proposal or what we have today, the
Commission's recommendations will allow for management's
success rather than guarantee bureaucratic failure.
The fact is, if the Treasury Department could improve or
would improve, over the long term, the IRS on its own, it would
have done so already. I have watched the IRS closely for close
to 20 years. Short of tax returns being dropped in the
dumpster, which we saw in the mideighties, we rarely saw much
attention to the IRS from the Treasury Department. The current
Secretary is an exception, but I doubt that he and the
attitudes that he has brought to the IRS will be the rule in
the future.
Look at the management structure of the IRS. Commissioners
typically come and go quickly. The Deputy Treasury Secretary,
to whom the Commissioner reports, has many other
responsibilities, and in fact, some of them have not even
realized that they were in charge of overseeing the IRS until
they arrived on the job. What does that say? I think it says
that the Treasury Department has not typically put a high
priority on good management at the IRS.
That is why I believe the Commission's proposal for an IRS
board of directors is so important, because it will bring
continuity that we rarely see, competence, and focus to the
job. Add to this, better coordinated congressional oversight
and approval of key decisions and I think you will see a better
IRS, which is what we all want.
I also want to reemphasize one of our most important
recommendations that Fred Goldberg touched on earlier. The IRS
should only initiate a contact with a taxpayer if it is
prepared to devote the resources necessary for a proper and
timely resolution of the matter. Think about this for a minute.
When the IRS is contacting a taxpayer, the Government is saying
you have done something wrong. If the taxpayer has not done
something wrong and wants to straighten it out, they should be
able to straighten that out quickly because they are responding
to government's request.
I also want to point out that we recommended that the IRS
use survey techniques, and I am not talking about public
opinion polls here, but surveys of taxpayers who have actually
interacted with the agency. Incredibly, the IRS does not do
this today in any way.
Now, such customer service performance measures are common
in the private sector, and indeed, many State revenue agencies
have formal systems for receiving taxpayer feedback on
individual State agency employee audits and the like, and we
think that is something that the IRS should do as well.
In conclusion, on the topic of management and governance, I
think the Commission's recommendations will make it much more
likely that top management of the IRS will be held accountable
for improving taxpayer service, which should be job one. In
fact, that is part of the name of the Internal Revenue Service.
We refer repeatedly in our report to customer service. Now,
while everyone supports the goal of improving service to
citizens, I am sure that most taxpayers certainly do not feel
like customers. After all, real customers have a choice about
the products and services they buy, but taxes are, of course,
are involuntary payments and no one has a choice about which
IRS to select or which agency employee to deal with. That
brings me to my point of why taxpayer rights issues are so
important.
The IRS has enormous power, and it is very important that
that power be exercised carefully. One of our key
recommendations is the taxpayer advocate needs more
independence and clout. The advocate should be free to function
without concern for career aspirations within the IRS. In fact,
one of our recommendations is that the advocate be appointed
from outside the IRS or, if selected as an IRS employee, not
someone selected for this job as part of a career track to
future promotions. I think a more independent advocate would
give better input to the Congress and to the IRS board about
what needs to be fixed.
When I asked the current taxpayer advocate questions during
our Commission's hearings, he did not seem to feel that he had
any responsibility to give Congress any clear input or
independent input. I found that to be amazing.
I will not go into detail, but we have many solid
recommendations for additional taxpayer rights in the
Commission report, and I hope those will become part of any
product that is reported out of Congress on the issue of IRS
reform.
I do want to make a concluding point, and that is
simplification. It is something that everyone talks about, but
rarely seems to get done. It is very, very important because we
have a law that nobody understands, and we also have given the
IRS powers that we have given to no other government agency.
That is a recipe for a civil liberty catastrophe--vague laws
enforced with draconian enforcement powers. It is a frightening
thought. Fortunately, abuses are rare, but when they occur,
they can be hair raising.
There are some recommendations in the report, including a
quadrennial simplification process because there does not seem
to be much glory in simplification--all the grunt work that
needs to go comb through the Tax Code and find out what can be
tossed aside and what can be simplified. I think a
simplification Commission every 4 years or so might harness
some of the private-sector activity that we saw on the
Commission and then give these people some ownership to help
push it through the congressional process. So I think it is
something that might help there.
Anyway, in conclusion, I urge the Subcommittee to move
forward with the Commission's report, craft it into legislation
and pass it as soon as possible. I very much appreciate the
efforts made in the past by the Members of this Subcommittee to
improve the performance of the IRS and look forward to working
with you on implementing this Commission's report into law.
Thank you very much.
[The prepared statement follows:]
Statement of David L. Keating, Commissioner, National Commission on
Restructuring the Internal Revenue Service; and Executive Vice
President, National Taxpayers Union, Alexandria, Virginia
Madam Chair and Members of the Committee, thank you for
inviting me to testify on the Report of the National Commission
on Restructuring the Internal Revenue Service. I am the
Executive Vice President of the 300,000-member National
Taxpayers Union and was appointed to the Commission by Senator
Bob Dole.
The Internal Revenue Service contacts millions of Americans
each year. For many of us, it is the only agency we deal with
so regularly. The Commission's report marks the starting point
for fundamental reform of the IRS, and it's important that
Congress move quickly to improve the IRS. The American people
agree. A poll conducted for National Taxpayers Union last month
found that 90 percent of those surveyed said ``improving the
IRS'' should be a ``very high'' or ``somewhat high'' priority
for Congress.
The Commission's report is a comprehensive and nonpartisan
document supported by 12 of the 17 Commissioners. I strongly
agree with the overwhelming majority of the findings and
recommendations and actively participated in the consensus
building process. Although I have some concerns about certain
areas, I would be pleased to see the entire package become law
and urge the Committee to pass legislation soon to implement
the recommendations contained in the Commission's report.
Management And Governance
The critical issues of management and governance illustrate
why the IRS today is so resistant to reform. The witnesses
heard by the Commission and the evidence collected by its staff
convinced me that management of the IRS is broken and needs to
be fixed. While no proposal can guarantee superb management, it
will establish a framework that, unlike either the Treasury
Department's proposal or the current system, will allow for
management success rather than bureaucratic failure.
Consider for a moment the current management structure of
the IRS. Commissioners with little management experience often
come and go quickly. The Treasury Deputy to whom the
Commissioner reports has many other responsibilities for tax
policy, and an even shorter tenure. He or she is normally
selected with little consideration of ability or inclination to
oversee the IRS.
At the same time, the Treasury Department has many other
issues to worry about, issues that many consider more
prestigious if not more important. Whether the Secretary is
managing the public debt, giving advice to the President on
economic policy, addressing international monetary problems,
reviewing banking issues, or monitoring government-sponsored
enterprises, the Treasury Secretary is a very busy person. Over
the last two decades, I have rarely seen the Treasury
Department take much interest in the IRS unless there were huge
problems.
While Secretary Robert Rubin has recently been a welcome
exception to a long parade of Treasury Secretaries who neglect
the IRS, I have little confidence that his successors will
demonstrate the same interest. That's why the Commission's
proposal for an IRS board of directors is so important. It can
bring continuity, competence and focus to the job. Adding
coordinated congressional oversight and approval of key
decisions should also lead to better direction for the agency.
While I believe our recommendations greatly improve the
odds of good management and taxpayer service, to fundamentally
change the IRS as an organization, many other actions are
required. The President and Congress must select an outstanding
board of directors for the IRS. The board must select capable
leadership for the IRS. Employees who give excellent taxpayer
service must be rewarded and employees who can't give good
service must be terminated. Congress must take more interest in
and more action on tax administration, and should go beyond our
recommendations for coordinated oversight and approval of tax
administration at the IRS.
Even if the Commission's plan is enacted and implemented
quickly and effectively, the American people should not expect
immediate change. The IRS is a huge bureaucracy. It will take
time to reform it. The IRS's computers won't improve overnight
either. Much of the work on improving technology over the next
few years will be to minimize ``year 2000'' conversion
problems. That leaves little management time or procurement
money to upgrade the hardware or software to provide better
taxpayer service.
Taxpayer Service
I want to emphasize one of our most important
recommendations: ``The IRS should only initiate contact with a
taxpayer if it is prepared to devote the resources necessary
for a proper and timely resolution of the matter.'' Here are
some examples of practical changes that would be made if this
principle is followed. New returns should not be placed in the
pipeline for auditors and appeals officers, when there are
unfinished cases older than 90 days. Service Center employees
should make answering phone calls and letters their first
priority, and should not send out new inquiry notices to
taxpayers until the last batch has been worked. Collection
officers should accept or reject ``offers in compromise''
within 30 days, so that neither the government nor the taxpayer
is compromised by delays in resolving the debt.
The IRS should take steps to prevent taxpayer service
problems before they occur. Management must not only train IRS
employees to treat taxpayers fairly, but must also ensure that
fair treatment actually occurs. The Commission suggested giving
the IRS new flexibility to use performance measures relevant to
fair tax administration in order to hold employees accountable
for ensuring that taxpayers receive quality service. These
performance measures should incorporate the requirements of
Revenue Procedure 64-22, which outlines standards of conduct
for IRS employees involving fair and professional treatment of
taxpayers.
The Commission also recommended the use of survey
techniques to gauge taxpayers' opinions about how
knowledgeable, courteous, and respectful IRS employees are to
taxpayers. Incredibly, the IRS does not directly measure
taxpayer service or satisfaction in any way. Taxpayers who
interact with IRS employees are not asked for their opinions of
how IRS employees perform.
Such customer service performance measures are common in
the private sector and many state revenue agencies have formal
systems for receiving taxpayer feedback on individual state tax
agency employees.
One of the most important goals of restructuring that the
IRS can undertake is to transform its culture. Foremost, they
(like the federal bureaucracy as a whole) must always act like
the employees of ``the People'' that they are. Millions of
Americans form much of their personal opinions about government
based on their experience with the IRS.
IRS employees are armed with extraordinary powers--in terms
not only of what they can do to taxpayers but also what they
can demand of them. The taxpayer of course cannot select among
IRS employees or find a new tax agency and IRS employees know
this. Consequently, while most employees are helpful, too many
are often rude, dismissive and abusive to taxpayers.
Moreover, since IRS employees have few cost considerations,
they often fail to take into account how inconvenient or costly
their demands on a taxpayer may be.
The management and governance recommendations will increase
the likelihood that top management of the IRS will be held
accountable for improving taxpayer service. Also, with these
performance measures and enhanced personnel flexibility, the
IRS will be able to provide incentives to employees who provide
taxpayers with quality service, and to discipline employees who
do not. Only by focusing the IRS on taxpayer service will we
see a true change in the culture of the IRS and the way that
taxpayers are treated.
Taxpayers' Rights
The Commission's report repeatedly refers to ``customer''
service. While everyone supports the goal of improving service
to citizens, I'm sure many, if not most, taxpayers certainly
don't feel like they are customers. Real customers have a
choice about the products and services they buy. Yet taxes are,
after all, involuntary payments, and there's no choice about
which IRS to use. That's one reason why taxpayers' rights
issues are so important.
There are many substantial and solid recommendations in the
taxpayers' rights portion of the report. It is essential that
Congress provide more rights and remedies for taxpayers by
adopting these recommendations, as it modernizes and
restructures IRS.
I want to emphasize several of the key recommendations of
the Commission regarding taxpayers' rights.
The Taxpayer Advocate needs more independence and clout. I
strongly believe that the Taxpayer Advocate should not be a
career IRS employee. The Taxpayer Advocate must be free to
function without concern for his career aspirations within the
IRS. He should not have to worry about how other IRS managers
view his input into their areas of responsibility.
A more independent Advocate would come to the job without
the restrictive mission-oriented mentality that besets many
career agency executives. He would be more receptive to the
needs of taxpayers and to changing business-as-usual, and would
be far more likely to recommend to the Congress and the IRS
Board solutions to taxpayers' problems.
The Commission recommended that candidates for Taxpayer
Advocate ``should have substantial experience representing
taxpayers before the IRS or with taxpayers rights issues. If
the Advocate is selected from the ranks of career IRS
employees, the selection should also be a person with
substantial experience assisting taxpayers or with taxpayer
rights issues, and the job description should stipulate'' that
it will not be part of a career track for the employee.
The Commission's recommendation that the IRS Board should
``have final authority over the hiring decision'' of the
Taxpayer Advocate will also help ensure the independence and
clout needed to increase the effectiveness of this position.
The standard of hardship is unnecessarily high for a
Taxpayer Assistance Order (TAO). The Commission recommended
giving more authority and flexibility for the Taxpayer Advocate
to issue a TAO if the IRS is not following guidelines or if
there is ``imminent threat of adverse action; delay of more
than 30 days in resolving a taxpayer account problem; or
prospect of paying significant professional fees for
representation.''
Taxpayers can still suffer severe financial losses even
when they clearly win a tax dispute. Although the Taxpayers'
Bill of Rights packages enacted into law in 1988 and 1996 offer
important new safeguards for taxpayers, the job of protecting
innocent taxpayers from ruin is far from complete.
In the 1986 Tax Reform Act, Congress substantially
liberalized the definition of negligent actions by individual
taxpayers. Beginning in the 1980s, tax preparers were also
subjected to increasing penalties for not exercising due
diligence. Yet incredibly, Congress refuses to require the IRS
to exercise reasonable caution in using its vast array of
enforcement powers.
I was very pleased to see the Commission recommend that
taxpayers who have been financially harmed or devastated by IRS
carelessness should have the right to sue and recover damages
when the IRS is negligent.
Attorney fee awards are still inadequate. Taxpayers can
suffer enormous financial damages even when they win. Again,
the 1996 legislation made several needed improvements in the
law, especially the new requirement that the IRS prove it was
``substantially justified'' in pursuing a case. The Commission
recommended changes to ``allow recovery of costs incurred prior
to the time of the final administrative notice from the IRS.
Because most administrative costs are incurred between the time
of the preliminary notice of deficiency (i.e., the 30 day
letter) and the time of the final notice of deficiency (i.e.,
the 90 day letter), the present construction of section 7430 is
self-defeating.''
I have often heard reports that the IRS will sometimes
crush taxpayers of modest means because agency employees know
such taxpayers often cannot afford representation to ensure
their rights. The Commission recommended that ``Congress also
should clarify that nonprofit clinics that represent low income
taxpayers, and other pro bono representatives, are eligible to
receive awards under section 7430, based upon the number of
hours worked and costs expended.''
As the Commission noted in the report, ``there historically
has been a concern that expanding taxpayer rights to redress
would be disruptive to collection efforts. Setting aside the
issue of whether it is appropriate that taxpayers should be
provided rights only to the extent that it does not disrupt
collection efforts, the Commission found no evidence that the
rights to redress and collection of representation fees
provided to the taxpayer under the Omnibus Taxpayer Bill of
Rights and Taxpayer Bill of Rights 2 have caused disruption to
IRS collection efforts. In addition, the costs of expanding
taxpayers' redress have been vastly overestimated. For example,
the cost of reimbursing representation fees was originally
estimated to be over $100 million per year. The actual cost has
been approximately $5 million per year.''
Simplification
The tax code is so convoluted that no one inside or outside
the IRS understands it. Money magazine's annual test of tax
preparers this year brought another sad result. All forty-five
tested tax professionals got a different answer, and no one
calculated the correct tax on a hypothetical tax return. Two
out of three were off by more than $1,300.
Currently there is no requirement that members of Congress
receive information on whether a proposed tax law change
increases or decreases complexity. Since complexity is not
directly considered in the legislative process, it's often
ignored. At the same time, congressional committees must meet
substantial reporting requirements for revenue estimates and
the political process generates much data on the progressivity
of proposed tax law changes. The tax legislative process is
driven by these two numbers, which further biases the
legislative process towards producing more complex legislation.
The Commission also suggested that Congress consider a
quadrennial simplification process, and I hope that Congress
and the President will quickly implement such a process either
through legislation or by executive order. The Commission found
that many members of the private sector tax community were
willing to volunteer substantial time to make suggestions for
simplification. The fact is, comprehensive simplification
rarely happens. I'm not sure why. Probably because it's too
much work, with too little reward politically.
A quadrennial simplification commission would harness this
volunteer activity and give a broad group of people much more
incentive to work for the adoption of simplification rules.
This quadrennial commission would also give the Joint Committee
on Taxation and the Treasury Department more incentive to
suggest simplification of the law.
Conclusion
In conclusion, I urge the Committee to move forward with
the Commission's recommendations immediately, so that taxpayers
can soon benefit from improvements in the quality of service
they deserve from the IRS. The job of improving taxpayer
service, protecting taxpayer rights and simplifying the laws
and regulations will never end. The Commission's report can
mark the beginning of a historic improvement in the operations
of the IRS. We sincerely appreciate the efforts being made by
members of this Subcommittee to improve the performance of the
IRS and, ultimately, public confidence in our tax system.
Source and amount of Federal government grants and
contracts received by David Keating or National Taxpayers Union
for the current and preceding two fiscal years: None.
Chairman Johnson. Thank you, Mr. Keating.
Mr. Keating, you made a very interesting comment that you
felt the outside board could bring to the management discussion
table, issues that needed to be raised and more forcefully, and
you used the example of the taxpayer advocate.
I think you have hit on a very important point, and I think
the rest of you, particularly those of you who think that we
can do this from inside, need to be able to give me an example
of where any current board has made this level of substantial
input to any government agency over time. I can think of no
example of any advisory board having the kind of substantial
continuous effect on management quality or performance that we
are asking of this board.
I just say to you, 2 years ago in the Taxpayers Bill of
Rights II, to try to get this kind of input, we wrote very
specific provisions, and we asked the taxpayer advocate to
provide us with a list of the 10 most commonly asked problems.
The 10 most commonly seen problems by the advocates, trying to
circumvent the sort of normal process that happens in any
bureaucracy, whether it is State or Federal, whereby any
Commissioner looks at what are the 45 million things that
concern us and what are the 10 things I ought to focus on in
Congress. In that process, little things do not get the
necessary attention. Anybody in government knows that.
We wanted to go around that process. We wanted this
Oversight Subcommittee to just hear from the advocates so we
could make that decision, are these little things or big
things.
I think had we been doing that, we would at least have
structured the earned income tax credit, EITC, 4 years ago,
differently. We would have done different things about reform,
and I can tell you, we are not getting the input on tax policy
that Congress needs. So we put that in there, and the result
was an absolutely pathetic hearing. This is after specific
direction.
So the bureaucracy simply, A, did not hear us. B, it did
not care that much. So this is not to criticize them because
now they are going to come around and do it, now that they have
heard that what they did is not what we asked. We are going to
do this, but now we have lost a year. We spent a year passing
the legislation. We spent a year talking about what it is we
actually asked you to do and now would you please do it all
over again. This is not to demean them, and I am sorry about
the tone of voice because it is so frustrating, but really, it
is not that the bureaucracy does not want to do this. It is
that they have other things to do, and the idea that somehow
OMB people or the Office of Personnel Management people or
other people from outside would give this constant direction
when we specifically gave very specific direction to the agency
which the Treasury knew about and they had this board meeting,
I have to ask you, if they could not hear that simple
direction, how can I possibly believe that an internal board
would provide the kind of constant input, just suggestions,
this is how we do it? If you are going to do customer service,
this is what you have got to do. If you are going to do
technology modernization, you cannot talk about it this year
and not next year. The Congress is going to need more
determined, in a sense, input from IRS overseers, and it cannot
go up through the Secretary of the Treasury and have the
Secretary of the Treasury, who has a lot of other
responsibilities, weigh how much he is going to go to bat for
IRS versus other things under his jurisdiction.
So I think that the burden of proof on this issue of
governance is truly at this time, in my mind, on those who say
it can be done from inside because you are taking on a
responsibility for the internal bureaucracy that I have never
seen the bureaucracy carry out. So I open it to your comments,
but this was a point of difference amongst the Commissioners.
The majority went with the kind of outside board that we have
not tried, and those that oppose that really carry a heavy
burden to give this Subcommittee examples of where we have
seen, because we have appointed a lot of good people, just tons
of good people to outside advisory boards in that sense. So
where is it? I am open to any comments.
Mr. Keating. I would like to take an initial crack at that
because one of the things I struggled with on the Commission
was this whole idea of whether there should be an outside
board.
Now, the IRS is a unique agency of the Government. Most
other agencies, we have got political appointees up and down
the agency. One way of getting the IRS to be more responsive to
the political process would be to add more political
appointees. In fact, that had been tried before I was born, and
my understanding is it did not work too well. So there has been
an understandable reluctance to add more political appointees
to the IRS, but that is certainly one direction you could go
in.
One of the things that I have seen over the years that I
have watched the IRS is that it is so incredibly resistant to
change. There is so little outside input. The agency is so
insular, always looking inward. In fact, we found very few
people who came in from the outside, and the two recent ones
who have come in from the outside seemed to have had a very
beneficial effect. Morgan Kinghorne, who I understand was the
first Chief Financial Officer, and now Art Gross, the Chief
Information Officer.
I think this shows the kind of positive developments you
can get if you bring in an outside perspective, people from
outside the agency.
Now, you have got essentially just the Commissioner and
Chief Counsel who comes in from the outside on any regular
basis. I think having this private-sector board, people
carefully selected, you would wind up with a number of people
like Josh Weston to bring in the customer service skills that
we see practiced so well in many private sector companies. It
would force the agency to stay focused on taxpayer service and
bring in new ideas. So I see it as something that could
invigorate the agency to improve its service.
I have concluded, given the other constraints, we do not
want to put more political appointees in the IRS. We need to do
something like this because the Treasury Department, frankly,
has been in charge of the IRS for decades and nothing seems to
ever change.
Chairman Johnson. Anyone else?
Mr. Irving.
Mr. Irving. I hesitate to wade into these waters.
Chairman Johnson. But you need to because you were going to
in your testimony.
Mr. Irving. You have put the burden of proof on----
Chairman Johnson. Right. So I want to hear this from you.
Mr. Irving. My concern is a little bit different. I think I
understand what you are saying with regard to the need for
outside opinions, but if you have a politically tone-deaf IRS,
I think it would be just a tone-deaf to a governance board, and
a governance board, as I understand it, is not supposed to get
involved in policy. It is supposed to get involved in day-to-
day management.
Some of the issues that this Subcommittee and other
congressional Committees are going to be concerned about are by
necessity going to be enforcement or policy concerns, and I do
not think you want an outside group of people, that governance
board getting involved.
I think advice is important, and I think a high-level
advisory board is important. I think the Treasury Department
recognizes that.
Where I get off the bus really is not on the issue of
outside information. It is having a group of outside, mostly
chief executive officers, predominantly private sector
governing the IRS. That is where I have a difference of
opinion.
Chairman Johnson. Mr. Irving, I made the point before that
I need an example of where we see this working.
We have in the IRS now an advisory board. So we have
outside input. We have businesses and executives who serve on
that advisory board, and it does not have any impact, at least
it has not had any significant impact on any of these issues.
The reason I think this taxpayer advocate example is so
relevant is because it took place during the time that Treasury
was focused on the problems of the IRS. Of course, they were
focused on technology modernization. That is a big problem, but
their interest did not go down to this because they actually
have a vested interest in the opposite effect and are not
getting the information because it always travels through them
so that they can set the larger agencies' priorities.
So the outside advisory board currently--and there
currently is an advisory board called CAG or something,
Commissioners Advisory Group--is not doing the job, and I
really would have to have a good reason to believe that a
different advisory group could do the job, and then I want to
hear from the others because it is not my understanding that
this board would do day-to-day tasks, but it is true it would
not do policy. So we need to clean up what does it do,
actually, but I'd like your comment, and then maybe Mr.
Goldberg and anyone else who wants to comment.
Mr. Irving. I do not know how the governance board is
going, whether or not it would have missed the issue about the
taxpayer advocate if it was not doing day-to-day management, if
it was not getting into the micromanagement. It is as likely a
scenario that the governance board could miss it as a
politically tone-deaf institution missed it, if in fact they
missed it.
I do not know what happened with the taxpayer advocate, but
I am not certain that a board is supposed to do macropolicy
that is looking at hiring, firing, and is not supposed to do
policy, would have not missed it any more than anyone else
would have not missed it.
I understand you are putting the burden of proof on me, but
with this kind of a substantial change for one of the most
important agencies in the Government, I guess my sense is that
the burden of proof of this type of change should not rest just
with those who are advocating the status quo because I am not
advocating the status quo. I am saying that when you are
talking about changing the form of governance, adding another
significant layer of bureaucracy, adding another level of
political appointees, five political appointees at a minimum,
maybe seven, that is a significant change in the governance of
the IRS and one that I think we should do with great hesitancy,
and the particular proposal, I have significant problems with.
Mr. Newstrom. Madam Chairman, may I address this from a
slightly different perspective? Remember that everyone has
testified, and I believe everyone before us testified, that the
preponderance of the recommendations we have violent agreement
on.
Chairman Johnson. Yes, I appreciate that. That is very
helpful.
Mr. Newstrom. Violent agreement on. This one here is
unique, and I find myself in a very unique position, coming
from the private sector, recommending that you do not have an
independent board mostly filled with private-sector people
because of the policy implications.
The comments that the board would hire, be able to set
compensation, approve budgets, and so forth, and not get into
the policy, I just have a hard time comprehending that. So I
liken it to my job and my role in my company. I report to the
president. I have annual targets, requirements to produce
numbers. I contemplate an independent board sitting on top of
me, appointed by somebody who sets my compensation, hires my
executives, theoretically does not get involved in policy, but
controls a large part of what I do, and yet, I have to report
to the president and produce the results. I just have a hard
time with that.
The last part of what I said was that I am comfortable that
there has been progress made by Treasury, by the IRS. The
nominee for IRS Commissioner Charles Rossotti comes from
Northern Virginia. He is a member of the technology community
that I work and live in. I think it is a tremendous message
that there are outsiders, as Mr. Keating said, being brought in
and on the issue of probably the most important thing that the
IRS needs to address, which is technology for the future. You
have a person that has that capability to manage technology
issues.
So, hopefully, with a combination of the other
recommendations, the direction of the IRS and Treasury, and new
leadership, I am comfortable that we are taking new steps, as
Mr. Irving has also said.
Chairman Johnson. This is the most difficult issue that the
Subcommittee will decide, and it is a matter of judgment. That
is why I wanted to provoke you to differ with one another.
Mr. Goldberg.
Mr. Goldberg. Madam Chair, having been in these positions,
I would like to talk sort of how it feels when you are the
Commissioner for a second.
Chairman Johnson. That would be very helpful.
Mr. Goldberg. One of the most difficult parts of the job is
if you believe in the direction that I think our Commission
accepts the IRS should go, in a sense, it is very easy to say,
but, boy, is it hard to do. I think that at least in my
personal experience, and this is going to come across wrong, I
would envision the board as almost a sanctuary. That is the
wrong word, but there is no place that you can go push against
and no place that pushes against you about the things that
matter most.
Congress does its oversight hearings, and the nature of the
process in Congress is it is lots of problems, it is lots of
anecdotes, lots of bad stories, lots of this issue, that issue,
and that is part of the congressional process, and that is
helpful. That is good, but it has its limitations.
You have OMB involved and you have GAO involved and you
have the Treasury involved and you have GSA involved. Where is
the focus on what matters most, and who is going to drag me by
the scruff of the neck as Commissioner periodically and say
this is what matters most, how are you doing? Good, if you are
doing well. Shame on you if you are doing bad, and we are going
to hold you accountable. That is missing from the process. That
is what we are trying to fill, and that is what this board is
about.
Take the example that David Keating gave. If you believe it
should be an absolute maximum of tax administration, that you
just never contact the taxpayer unless you are prepared to fix
the problem timely, on time, and do it well, does the Congress
buy that view? Does the administration buy that view? How are
you going to measure whether you are even doing it? How do you
know that you are getting that result? Who is going to be sure
year in and year out that you have got the measures in place
and is riding you to do that? If it means you do not do 15
other things, at least you are doing that. That is not
happening, and in my judgment, it is never going to happen
unless you deal with these kinds of issues of continuity.
Chairman Johnson. I think you make a very important point
because we do have GAO out there watching and saying things. We
do now have voices, but there is no consistent pressure, and
there is no backup for the agency when it is going in the right
direction and trying to achieve goals, but I want you also to
talk about--because I do not understand--I want you to talk
about this issue of day-to-day management and policy.
If the board is not going to do day-to-day management and
you are not going to do tax policy, what are you going to do?
Why aren't you going to end up doing those other things, I
guess, is the more important question.
Mr. Goldberg. There are a number of reasons. Historically,
the day-to-day management, particularly on the law enforcement
side and the decisions about the day-to-day activities are
delegated way down within the agency. By statute, those
decisions are decentralized. You have Regional Commissioners.
You have District Directors.
The judgment that was made in the early fifties, and it is
a judgment that I believe was correct at the time, is that
those kinds of enforcement decisions happen through an
apolitical career civil service in the field, and I think it
has to stay that way because the threat, even the notion that
law enforcement is going to be politicized, is something that
we have decided we want to stay far away from, and that is the
right decision.
What the board should be focusing on are issues of
strategic importance. The simple decision, I want to be sure
whenever I contact the taxpayer, I am going to be able to
answer the question and solve the problem, sounds easy. The
board should be asking questions like is that your first
priority. How do you measure whether you are delivering on that
promise? What kind of progress are you making toward that
overall objective? Those are the kinds of bigger questions that
I believe are not addressed in the system today, and I believe
the board could address those kinds of questions.
I think they can do it meeting four times a year because
those are high-level questions about putting measures in place
and assessing aggregate performance against aggregate measures.
Are taxpayers satisfied with the service they are getting?
If you believe David's argument that you ought to be surveying
taxpayers about how well they are being treated, that is an
aggregate issue. The board says that is real important, and
that is a large--a big question with aggregate measures that
never involve the board in, well, was Fred or Sally or Jane
unhappy. It is aggregate measures, and I think that is the
function that the board can perform, and it is a function that
at least in my opinion is not being performed today.
The Government, the Treasury Department historically at
least, the White House historically at least, have said we
never want to hear from the IRS Commissioner, we never want to
have anything to do with what that agency is up to on a day-to-
day basis in a specific-case context. I do not think you want
to change that for a minute.
The board spends its time in a completely different
universe, with completely different kinds of issues it is
trying to work through. Maybe the answer is, hey, it is not so
important that every time we contact the taxpayer we are there
to answer the question because that is not really what the IRS
is about. The IRS is about getting tax dollars.
So if we kind of do not respond all the time, so it goes.
The object is to maximize tax receipts. If that is the judgment
that Congress makes, if that is what Congress wants from the
IRS, if that is what the administration wants from the IRS,
fine. Make that judgment. Then you are not worried about
serving taxpayers. What you are worried about is maximizing
compliance revenues. Fine. If that is the direction the board
sets, if that is the direction the President sets and the
Congress sets, go make it happen. I think that is a terrible
direction, but the point is those decisions are not made, and
there is no long-term accountability to get you where you want
to go. That is what is missing. It is not how you audit, who
you audit, when you audit. That is 15 layers below anything the
board of directors should ever consider.
Chairman Johnson. Thank you. That was very helpful.
I am going to yield to my colleague, Mr. Coyne.
Mr. Coyne. Thank you, Madam Chairwoman. I would like to
welcome all the Commissioners and thank you for your service on
the Commission and your testimony here today.
We were very fortunate to have Fred Goldberg serve on the
Commission. Fred has served at the different levels in
government, including IRS Commissioner.
Fred, I had a question for you. You indicated that under
proposed Commission recommendations the Commissioner would now
be directly responsible to the President. But the Commission's
recommendations are different from the way it works today the
board that would hire the Commissioner, so that IRS board is
between the President and the Commissioner.
Mr. Goldberg. Mr. Coyne, that was perfectly a hard issue
for me to deal with in the context of the Commission's report,
having been appointed by the President of the United States.
That is a big deal, but the answer is, right now the
Commissioner does not report directly to the President. The
Commissioner of the Internal Revenue reports to the Secretary
of the Treasury.
Mr. Coyne. Who is appointed by the President.
Mr. Goldberg. The Secretary is appointed, right.
What would happen is that the Commissioner in the day-to-
day law enforcement activities, the Commissioner's role in
policy formulation, all of the roles that the Commissioner
traditionally performs today that is making day-to-day
decisions, advising regarding how the laws or regulations
should be written, advising regarding legislation, the
Commissioner would continue to report to the Secretary of the
Treasury, who would continue to report to the President, in all
of those areas. So that would not change.
With respect to the Board of Directors' activity, Board of
Governors' activity, where the Commissioner is trying to get
beyond the day-to-day fray and sort of step back and talk about
where this ought to be going, what the picture is and what it
ought to be like in gross, the Commissioner is reporting to the
board. That board is appointed by the President. That board can
be removed by the President. As a practical matter, I believe
that board will in the real world turn out to be largely a
creature of the Secretary of the Treasury, which I find very
reassuring, and what it creates is a structure there that does
not change the line, Commissioner, Secretary, President, on the
stuff that affects taxpayers day to day on the rules and
regulations.
The only thing I see it doing is giving the Secretary the
institution, the Department of the Treasury, a mechanism to
enforce continuity, a mechanism to say as we go through
administrations, as we go through Secretaries and Deputy
Secretaries and heads of OMB, there is some incremental measure
of stability so that when you ask the question about the 5
years that it takes you to implement one-stop service on
telephones or when you talk about the 7 years it takes to redo
technology or when you talk about the 4 years it takes to
reform training so that all of the employees are getting the
training they need, there is an institution there that can tell
you here is what has happened, here is where we are going, here
is how we are doing.
It always runs to the President, and the Commissioner is
always going through political appointees to get there.
Mr. Coyne. Well, I was only making the point that it is
going to be different if this board is approved. The board will
hire the Commissioner, which is different from what it is
today.
Mr. Goldberg. Right. That is correct.
Mr. Coyne. I suppose that the Commission could fire the IRS
Commissioner.
Mr. Goldberg. The way the recommendation is laid out, that
is correct. If the judgment were that it was important to have
the Commissioner appointed by the President of the United
States, I think you are still keeping the structure, the same
concept in place at that point.
Mr. Coyne. I was wondering, can you think of any decisions
that you had made as Commissioner of IRS that would have been
different had there been a board of directors in place at that
time?
Mr. Goldberg. There are lots of decisions I made that I am
unhappy with, Mr. Coyne. There are a lot of decisions I did not
make that I wish I had, but my judgment is that this relentless
focus on making it work better for the taxpayer is so
important, and it is so easy to lose sight of that. I believe
that if there had been a structure in place that said this is
what matters most and every quarter you have got to come up and
tell us how you are doing, I believe we would have been a lot
further down that road. I am confident we would have been a lot
further down that road, but those are 2\1/2\ years.
Look at all of the people who have walked through that
office over the last 10 years. Look at all of the folks who
have walked through the Deputy Secretary's job over the last 10
years, every one of them, I believe well intentioned and
capable, but it had not worked. That is what we are missing,
and I think this is what the Commission was trying to get at.
Mr. Coyne. Thanks very much.
Mr. Portman [presiding]. Thanks, Mr. Coyne.
Mr. English.
Mr. English. Thank you, Mr. Chairman.
First of all, I want to congratulate this Commission
because you have really issued an extraordinary report. It is
visionary. It has taken your charter and explored it fully, and
what I particularly wanted to congratulate you on is the fact
that you have tried to get at the core of some of the problems
of the IRS, not just the symptoms.
One of the fundamental problems, and I think all of you
will have to agree with this, is the complexity of the Tax
Code. You have been willing to include that observation as part
of your fundamental recommendations.
I want to say that by referencing and using as an example
the problem of the alternative minimum tax, AMT, you have given
real impetus to the cause of tax reform on the Hill.
The first bill that I introduced in coming to Congress was
a bill to repeal the AMT. It is a tax that every practitioner
knows about. It is incredibly complex and burdensome, dead drag
on the productivity of our economy, and includes staggering
compliance cost. By making the recommendation that we consider
phasing out the AMT and finding some sort of replacement way of
doing the policy, I think you have given our cause a great shot
in the arm.
Your recommendation also provided for a quadrennial process
of reviewing simplification and having recommendations
prepared.
This quadrennial process, I know, Mr. Keating, in your
testimony, you suggested should take the form of a Commission.
Do you want to amplify on that?
Mr. Keating. During our work on the Commission, it seemed
that whenever we were going to do something, have an important
hearing or make an important announcement, the Treasury
Department, the day before, announced some new IRS initiative.
I think one of the reasons why the Treasury Department
announced initiatives for simplification this year was the mere
existence of our Commission.
Mr. English. Mr. Keating, isn't it gratifying to see
immediate results for your recommendation?
Mr. Keating. Well, it is, but I think one of the problems
with simplification is it is a classic public interest-type
good. You do not have people walking the halls of Congress
twisting arms, asking for a simplification of this provision or
the entire Tax Code, other than in a general way.
Our Commission, even though it was not charged with
simplifying the Tax Code, caused many in the private sector,
tax-practitioning community to put together a lot of ideas and
send them to us. We did not endorse them because that was not
our job, per se, but I think if you could create such a
Commission, it would be a prestigious post. People would angle
to get onto it. They would put a lot of voluntary work into
this. They would have ownership of the ideas, and they would
walk the halls of Congress. They would go to the Treasury
Department and promote these ideas, and I think you might see
some very healthy input into the process, both in the Treasury
Department and in the Congress itself. I know the staff is
often stretched thin working on the day-to-day issues, whether
it is Medicare reform or other things that are dealt with by
this Committee and the Joint Tax Committee. Simplification
could, I think, be encouraged by such a Commission.
Mr. English. Could I ask each of you, also included as a
recommendation, that for every tax proposal there be done a
complexity analysis at the time it is submitted. Very briefly,
do each of you support that recommendation?
Mr. English. Mr. Keating.
Mr. Keating. Yes.
Mr. English. Mr. Newstrom.
Mr. Newstrom. Yes.
Mr. English. Mr. Irving.
Mr. Irving. Yes.
Mr. English. Mr. Tobias.
Mr. Tobias. Yes.
Mr. English. Mr. Goldberg.
Mr. Goldberg. Yes, sir.
Mr. English. Thank you. I think it is one of the better
features of your proposals.
A final question. Commissioner Goldberg, welcome. It is
good to see you back. I noticed one of the more, I thought for
me, stimulating comments by Secretary Summers was the claim
that an independent board would ``post an unacceptable risk to
our Nation's revenue stream.'' I think you have already touched
on this in your testimony, but it seems to me what he is
arguing is that by somehow restraining the IRS, we would be
experiencing an unacceptable level of revenue loss, which is
one of the things that we concern ourselves with here.
Can you comment on that? Do you think this is from a
professional standpoint an unacceptable risk to the Nation's
revenue stream?
Mr. Goldberg. No, sir, I do not. I think the contrary is
the case. In my judgment, the biggest threat the tax system has
right now is we are losing the base. We are losing the 90
percent of the people who are trying to do it right. It is too
hard. It is too complicated. It is too intrusive, but unless we
find a way to keep the base, unless we kind of find a way to
make it work right for the everyday Americans out there, we are
in serious trouble.
I believe that these kinds of recommendations that we are
making are intended to make the system work right for everyday
Americans, and if we do not, we will lose it. So I see the
opposite. I see the far bigger risk is in inaction.
Mr. English. Mr. Chairman, I have a lot of other questions,
but I know my colleagues have, I think, many of the same
questions. I appreciate the opportunity to ask this very
distinguished panel for their comments.
Again, this report, I think, is one of the best things I
have seen since I joined the Ways and Means Committee, and it
gives us a clear direction for further legislative action.
Thank you, Mr. Chairman.
Mr. Portman. Thank you, Mr. English, for your patience, as
well as your interest.
I am going to go to another patient colleague and defer and
hope to have some time to ask questions afterward.
Mr. Cardin.
Mr. Cardin. Thank you, Mr. Chairman.
I also want to add my thanks to our panelists not only for
their testimony and presence here today, but for their service
on the Commission. You came up with these recommendations.
We have been spending most of the time today talking about
the governance issue, but there are many other important
recommendations. Mr. Keating, I particularly appreciate your
mentioning the simplification issue. I know that our Chairman,
Mr. Portman, worked hard on the simplification matters and to
sensitize Congress on bills that move through this body that
are well intended, but are very complicated in enforcement.
Hopefully, the policymakers, the Members of Congress, who are
ultimately responsible for enactment of tax policy will be more
sensitive on simplification issues as we consider policy. I
really want to congratulate Mr. Portman for his leadership in
that area.
It seems to me that you all have made a very strong case
that IRS needs to develop a game plan, then given the tools to
carry out that strategy, and ultimately held accountable, and
that an independent board can certainly help in that direction.
Even those that have concern about the authority of this board,
it seems to me, are speaking out for the need for a game plan
and the tools necessary to carry out those game plans.
I stress that because the Ways and Means Committee that has
oversight jurisdiction of the Internal Revenue Service,
historically, has sent letters to the appropriators, to the
Budget Committee, to provide the tools necessary for IRS to
carry out its functions, and those letters are ignored. There
has not been an effective way for us to put a spotlight on what
the Internal Revenue Service will need in order to carry out
its mission, and it seems to me that an independent board can
play a very valuable role in developing not just a game plan in
accountability, but to come forward with a responsible
attention to what Congress needs to do in appropriating the
resources, so that IRS can carry out its function.
Mr. Goldberg, you have had, I think, the most experience on
the direct line on these areas. I listened with interest to
your testimony, and there are two points that I would just want
to take issue with or at least get your response to. One is
that if the Commissioner is going to be held accountable, it
seems to me the Commissioner has to be able to appoint his or
her top management, and that the responsibility must rest with
the Commissioner in that regard. Then, as far as the
appointment of the Commissioner by the board that is appointed
by the President, it seems to me that obviously the board has
to have a role, but ultimately, the appointment of the
Commissioner should be by the President. I think that is
consistent with what you are trying to bring out here, and I
would just like to get your comment. On accountability, doesn't
that make more sense?
Mr. Goldberg. Mr. Cardin, I think that is well within the
framework of what the Commission was looking at. I think the
Commission was trying to create a way to think about the
problem, and my personal judgment is the kinds of things you
are talking about that fit well within that framework, and if
the collective judgment of the Congress were the Commissioner
ought to be appointed by the President or if the Commissioner
were to appoint somebody as his or her senior officials
directly, I would certainly understand those judgments.
I think the role of having some institution outside the
Commissioner deal with some of the senior-level executive
appointments, I believe, is important, not because it is--it is
a balance. You want them accountable to the Commissioner, but
on the other hand, there are institutional issues that I think
are important. So we struck the balance a little bit
differently, but I think those are well within the parameter
that reasonable people could reach different judgments.
Mr. Cardin. Thank you.
Thank you, Mr. Chairman.
Mr. Portman. Thank you, Mr. Cardin.
I have so many questions for my friends that I do not know
where to start. So I will, instead just be brief, and I want to
thank each of you.
This is kind of like family to me. We are having a reunion
here today. Each of you put in a tremendous amount of time and
effort, and I think did so in good faith, and each contributed
mightily to our work; David, on the simplification measures and
pushed us hard on that, otherwise we would not have ended up
where we are. George provided a lot of expertise in the
information technology task force, and with that unique
background you have, as vice president for government systems
for a company that does a lot of its work around the world and
not just the United States, and Hon. Assistant Secretary Larry
Irving provided us expertise not only on the information
technology, which is what you do day to day, but also being
from Capitol Hill, you have brought us a lot of good insight
and input, even on the very controversial issue which was
referenced earlier of congressional oversight. Bob Tobias, I do
have a couple of questions for you.
As I go around talking about this issue and people begin to
understand what the focus of this report is, there are mixed
views. One is, are you talking about the IRS being more
effective? I say yes, actually, it would be more effective.
That actually frightens some people because they have had an
experience with the IRS that perhaps was not an entirely
beneficial one. I explained that this is about restoring trust
and credibility in the agency that affects more Americans than
any others, and it is about having it work right. If you are
going to have a tax collection agency, which we need under our
current Code and our current system, it has got to work better
for the American taxpayer.
I guess what would be interesting for me to hear, and maybe
for the other Members here, is why in the end representing the
employees at the IRS, people who are on the line doing the
actual work, you thought this Commission report ended up in the
right place and you were able in the end to support its
recommendations.
Mr. Tobias. Well, as I said in my statement, I believe that
the Internal Revenue Service has lost a great deal of
credibility with the public, with Congress, with the press, and
I do not see with the existing approach that that credibility
can be restored in a timely manner.
I think that the problems of funding, the problems of
giving employees an effective voice, the problems of governance
structure in the Internal Revenue Service itself, which has not
received a lot of focus or attention by the Commission, sort of
a glancing blow by the Commission, but the hierarchial
management structure, and the symptom of that is a resistance
to change, I do not see that changing. I see more ossification.
So I supported this report because I see it as the best
chance to make the IRS efficient, and I guess I would quibble
with your characterization because if the IRS is efficient, it
is not calling the wrong people. It is calling the right
people. It is not assessing tax that is incorrect. It is
assessing the correct tax. If the IRS is efficient, the
telephone calls get answered by people who are interested in
satisfying the needs, the questions, the concerns of the person
who is on the other end of the line.
So I think that a more efficient IRS would be an IRS that
would be more supported by the public because I believe that
the vast majority of the public wants to comply, and if, in
fact, that trust is reestablished, then there will be the
support in the public to go after those folks who are
noncompliant because, after all, 75 percent of those who filed
their taxes are wage earners, have their taxes withheld, and
they are 95 percent compliant.
So those are the folks who are paying their taxes. Those
are the folks who are supporting this government, and when they
can get their questions answered and their problems resolved,
then there will be the kind of support that I think is
necessary to be more effective in ensuring that those who are
currently noncompliant become compliant.
Mr. Portman. Thank you.
That characterization was not my characterization, but was
the response that I was receiving, and I could not agree with
you more. To have someone who answers the phone who is
responsive, is well trained, who can answer the question, and
who can provide information people need, responsive to the
taxpayer needs, I think is an improved IRS, as well as a more
efficient IRS. I think that is why, in the end, we were able to
not only have the National Taxpayers Union support this report
enthusiastically, but also the Treasury Employees Union, and I
thank you for your work and your willingness, frankly, to take
some risks in this process, as all of this had to be.
Fred, you have already made a number of comments, and I
will not ask you to give us any more of your wisdom, although
it was much appreciated on the Commission and here today. No
one has held all three of those positions in history of Chief
Counsel, Assistant Secretary, and Commissioner, and so you
bring a unique perspective. You did keep us focused on the
criteria, and those criteria include accountability,
continuity, and expertise. Every single time someone came up
with a new proposal, whether it was independent or the board or
some other reiteration such as the Treasury proposal we heard
earlier today, we measured them against those criteria.
Frankly, those criteria, I think, were agreed to by not all,
but certainly the best majority of the Commission, and that is
what got us to where we were.
It was not a preconceived notion. It was something that was
arrived at only through careful analysis and figuring out
whether, in fact, those important measures were met.
I have so many questions. I would like to bring more out.
We are going to have more hearings. Chairwoman Johnson has
committed to doing that. The hearings will be focused more on
some of the specific elements of the legislation to be
introduced next week, and I really look forward to working with
all of you on that process of implementing now these
recommendations and doing it in a way that I think perhaps can
address some of the concerns raised.
I do think we are a lot closer to the Treasury Department
than might have been indicated earlier today, and I just wanted
to make that statement for the record. But there is a
fundamental difference of opinion, and I think it relates in
part to turf. I think it relates in part to the fact that the
IRS is such a big part of Treasury and in part to some of the
legitimate concerns raised, but I think we can address those.
I look forward, again, to working with you, Mr. Coyne and
Mrs. Johnson, and the rest of the Members of our Full
Committee, such as Ben Cardin, and the Subcommittee to address
them and move forward with legislation.
So thank you all very much for being here today.
Mr. Coyne, do you have any additional questions?
Mr. Coyne. No, thank you.
Mr. Portman. This hearing is now adjourned.
[Whereupon, at 2 p.m., the hearing was adjourned.]
[Submissions for the record follow:]
National Society
of Accountants
July 24, 1997
The Honorable Nancy L. Johnson
Subcommittee on Oversight
Committee on Ways and Means
U.S. House of Representatives
1136 Longworth House Office Building
Washington, D.C. 20515
Dear Chairman Johnson:
The National Society of Accountants (NSA) commends the Subcommittee
on Oversight, Committee on Ways and Means, for holding this first in a
series of hearings on the recently released report of the National
Commission on Restructuring the IRS. The report is entitled, A Vision
for aNew IRS.
NSA strongly supports the objectives of the recommendations found
in the National Commission's report. The Commission was charged with a
most difficult task. It has done an outstanding job in producing a
report which details the current practices of the IRS, and making
recommendations for modernizing, improving agency efficiency, and
enhancing taxpayer services.
The IRS Management Structure
The Subcommittee on Oversight is well aware of all the
national press surrounding the report's recommendation
regarding an independent Board of Directors for the IRS. We
believe an independent Board of Directors is one of the
Commission's most important contributions to the issue of
making the IRS a more customer service oriented agency. An
independent Board of Directors has the potential of affording
the IRS the opportunity to take an objective look at the
agency's procedures and programs and overcoming problems
concerning them.
While the independent Board of Directors will help
contribute to the agency's ability to achieve a higher level of
customer service for American taxpayers, the report makes other
very important recommendations for streamlining the operations
of the IRS. NSA commends the Commission's recommendation for
providing the agency with stable funding for the next
threeyears. This recommendation, if implemented, should provide
the agency with greater certainty in carrying out its mission
of improving customer services and raising revenues to fund
governmental programs.
Another excellent recommendation in the report is the
establishment of a five-year appointment for the Commissioner
of Internal Revenue position, similar to the Chairman of the
Federal Reserve and certain other federal agencies. The new
Commissioner position would also have greater flexibility in
the hiring, firing, and salary decisions involved with IRS
senior management.
By providing the IRS with stable funding and a new
management culture, NSA believes that fundamental and positive
changes will take place within the agency. In many ways,
legislative enactment of these management oriented
recommendations will begin the process of restoring the respect
of IRS employees for themselves and by the public. The last
several years of budgetary cutbacks for the IRS has contributed
to a high level of demoralization and dissatisfaction within
the agency's work force; in turn, it has had a clear and
negative impact on the level of customerservices provided by
IRS employees.
Customer Service
One of the major objectives of the National Commission's
report is to upgrade the level of customer service provided by
IRS employees to that which private financial services
companies offer the public. The practitioner community is an
important stakeholder relative to customer service. A great
number of taxpayers deal with the IRS through their tax
practitioners. There are many opportunities for practitioners
to experience IRS customer service at various levels, from
telephone contact through exams, collections and appeals. Based
on their repeated and varied contact with IRS, practitioners
have a unique perspective on IRS customer service issues.
The report emphasizes the concept of customer service over
compliance. However, traditionally the public has viewed the
IRS main mission to be that of tax compliance, i.e. audits and
collection. NSA agrees with the Commission that the service
component of the IRS should be the primary engine which drives
the agency's mission. We believe that a customer service
orientedmission will bring out the best in IRS employees. This
is what the American public wants, and it is what we believe
IRS employees want as well.
There should be improvement in all aspects of IRS's
customer service. For example, from the public s perspective,
the front lines in IRS customer service is what they experience
when they speak with an IRS employee on the telephone. The
quality of the IRS telephone systems, as well as the way in
which IRS employees answer the telephone, has shown substantial
improvement in recent years. Nevertheless, the IRS telephone
system and customer relations process continues to cry out for
further and dramatic improvement.
The proper training of IRS employees and providing them
with technology are important keys to quality customer service.
The Commission's report strives to portray IRS employees as
competent, hard-working employees who want nothing more than to
deliver the highest quality in service to the public. In order
to turn around the supertanker we call the IRS, there needs to
be achange in the management structure of the IRS along the
principles described above. This includes better training of
IRS employees. They also need to be provided with more of the
basic technology tools of the 1990's, tools which NSA s members
often take for granted. This includes providing employees with
more fax machines, copiers, and computers.
Electronic Filing
The Commission report calls for the IRS to develop and
implement a strategic and marketing plan to make electronic
filing the preferred method of filing tax returns within ten
years. The report states that this can be achieved over a ten-
year period by using existing infrastructure, such as tax
practitioners, financial institutions, and the Internet.
According to the Commission, this can be accomplished by a
partnership with practitioners and financial institutions
through a process of burden reductions and incentives.
NSA recognizes that electronic filing contributes to
certain significant efficiencies in terms of the tax
administration process. First, the IRS estimates that the cost
of processing a paper return is $2.65 per return, while it
costs $1.15 to process an electronically filed return (an
amount which also includes the processing of paper signature
documents). Also, the IRS estimates that mistakes occur in only
about 1 percent of all electronically filed returns as compared
to some type of mistake occurring in about 22 percent of all
paper filed returns.
In order to make electronic filing more attractive to
taxpayers and practitioners, the report makes a number of
recommendations to remove barriers to electronic filing. One
such recommendation calls for the elimination of filing
requirements for signature documents and associated W-2s, by
having taxpayers retain signed 1040s and W-2s on file. The
elimination of Form 8453, the current signature form for
electronic returns, would expedite the filing process for
practitioners. NSA fully supports this recommendation.
There are two further recommendations NSA fully supports.
One is a recommendation that there should be a checkoff box on
the electronic return authorizing the preparer to discuss
aspects of the return with the IRS. Another one which is likely
to generate attention is a suggestion that all preparers be
subject to the regulations governing practice before the IRS
(Circular 230). According to the report, Uniform requirements
will increase professionalism, encourage continuing education,
improve ethics, and better enable the IRS to prevent
unscrupulous tax preparers from operating. As indicated, NSA
supports these recommendations and believes thatthey not be
limited to electronic filing.
Other recommendations include a realignment of due dates
for tax returns, expansion of the telefile pool, and making
paperless payment methods available to taxpayers. The report
also recommends that the IRS pay tax practitioners (as an
incentive) for submitting electronic returns until 2004, after
which the incentives will terminate and all practitioners will
be required to file electronically.
NSA clearly recognizes that implementation of these other
recommendations will have a pronounced and dramatic impact on
the tax practice which independent accountants have
traditionally known. Accordingly, it is our intention to report
back to the Subcommittee on Oversight with some further
perspective on whether such recommendations are likely to
improve the use of electronic filing--as well as the extent to
which they are likely to improve the tax administration process
overall.
IRS Notices
American taxpayers traditionally have had a difficult time
deciphering and understanding IRS notices they receive. The
Commission's report aptly describes this problem by stating,
IRS notices and correspondence to taxpayers often fail to
explain the problem in a clear and simple manner and fail to
inform the taxpayer how to resolve it. According to the report,
85 percent of the certified public accountants in a survey
mentioned that IRS notices do not contain a precise explanation
of the problem. NSA supports the report s recommendation
calling for the IRS to continue its notice re-engineering
effort. This effort should continue its focus on designing
notices with concise explanations of the amounts owed, how
adjustments have been calculated, and how taxpayers should
comply.
Tax Simplification
The complexity of the tax laws represent a high level of
frustration for taxpayers and the practitioner community. NSA
recognizes that we live in a complex society and that
complexity is inevitable. We agree with the Commission's plea
for consistent interpretation of the law, rules and regulations
by the IRS. It is the inconsistent treatment of them that
causes the greatest consternation in the practitioner
community. Where possible, the laws need to be simplified and
mechanisms put in place whereby taxpayers can expect to be
treated consistently and fairly no matter where they are
located.
Taxpayer Advocate
NSA acknowledges the Commission's point that over the last
several years Congress has made great strides in passing
legislation that is designed to protect the rights of the
taxpayers. We agree with the Commission that the Taxpayer
Advocate must be empowered to speak for taxpayers and to take
actions on their behalf. In this regard, the Taxpayer Advocate
position needs to be strengthened and made an independent voice
within the IRS. The Commission is on the right track. If the
IRS's primary mission is one of customer service, the
transition of the Taxpayer Advocate will be a natural one.
Conclusion
The National Society of Accountants looks forward to
working closely with the Subcommittee on Oversight in its quest
to improve the working structure and procedures of the IRS. NSA
thanks the Subcommittee for the opportunity to participate in
this important project.
Sincerely,
Leroy A. Strubberg
President
National Tax
Consultants, Inc.
July 22, 1997
The Honorable Nancy L. Johnson
Subcommittee on Oversight
Committee on Ways and Means
U.S. House of Representatives
Washington, D.C. 20515
Dear Chairman Johnson:
The purpose of this submission is to provide more details to my
letter of support for the bipartisan efforts of the National Commission
on Restructuring the Internal Revenue Service. If adopted, Congress
will change the Internal Revenue Service as we know it. This change
will be a positive contribution to the quality of life of not only the
American taxpayers but to the loyal employees of the Internal Revenue
Service as well.
The main controversy of the Commission's report is centered around
the establishment of an independent Board of Directors. While I am not
insensitive to Treasury's objections to such a board, I believe that an
independent Board of Directors is one of the Commission's most
important contributions. The proposed Board of Directors would not be
part of the bureaucratic culture indigenous to large organizations like
the Internal Revenue Service. An independent Board of Directors will be
able to take an objective look at problems, processes, procedures and
programs. The Internal Revenue Service and the Department of the
Treasury can benefit from the insights provided to it by a
knowledgeable, blue ribbon group of people. These professionals,
individually and collectively, will be in a position to help the
Internal Revenue Service change into a ``service oriented, customer
service focussed organization.
Over the past ten years I have attempted to work with the Internal
Revenue Service through a variety of liaison activities including a
two-year term on the Commissioner's Advisory Group. In that extensive
time frame it became evident to me that is very difficult, if not
impossible, for outside groups to have a broad based impact on changing
the Internal Revenue Service. An independent Board of Directors will
provide an institutionalized conduit for positive and constructive
recommendations. The Internal Revenue Service's current structure of
obtaining input and ideas from the tax practitioner community is simply
a public relations effort.
It is important for Congress to realize that Board of Directors
concept is devised to primarily focus on the administration of the tax
policy. Tax policy is and should remain a function of the Treasury
Department. It is the administration of Treasury's policies that the
new Board will address.
The Commission is also emphasizing the concept of service over
compliance. In the last several years, the deficit of this country has
been reduced because the amount of money sent to the Treasury has
increased significantly. Does any one in this nation believe that the
increase in tax receipts is due to the compliance efforts of the
Internal Revenue Service? On the contrary, most of the funds that found
its way into the United States Treasury arrived there without any
collection effort. In other words, the citizens of this country
voluntarily send taxes to the Internal Revenue Service. Unlike the tax
collector in biblical times, the Service does not have to go door to
door to collect its due from the large majority of its citizens. Yet,
the Service still considers its main mission to be one of tax
compliance. While human nature requires us to give the Internal Revenue
Service some compliance tools, the service component should be the
primary engine that drives its mission.
By adopting a service mission, Congress will, in fact, ``change the
IRS as we know it.'' We believe that the American public expects a
service mission from the Internal Revenue Service. A service oriented
mission will bring out the best in people. We have seen how the
compliance mission is bringing out undesirable negative qualities in
some of the agency's employees. It has been my personal experience that
most IRS employees want to do a good job. However, in many instances,
the culture and the system is preventing them from performing the type
of service that they are capable of providing to the taxpayers.
Changing the mission will change the Service's focus in a very positive
sense.
Tax System Modernization is an integral part of developing a viable
service mission. Without avant garde technical prowess, the Service
will never be able to provide the kind of service that Congress and the
American public will come to expect. Furthermore, tax systems
modernization is not just computers and programs. It also includes
modern fax and copy machines, telephone systems and so forth. Tax
system modernization is never completed. If the Service were to
immediately implement any of its ideas, the chances for instantaneous
obsolescence would be very high on the very day of implementa- tion.
Congress must recognize that funds must be built in to the budget to
accommodate changing technology.
The practitioner community and the taxpayers have not accepted the
electronic filing program because it is easier to file a paper return.
The current electronic filing program has more disincentives than it
has incentives. Over the past six years, I have made Herculean efforts
to help the Service understand why the program has not been successful.
The electronic filing of tax returns should be mandatory for most
practitioners. However, many improvements in the system have to be made
before this happens.
In addition to the mechanical improvements, the Service should
consider ``booster shot'' incentives. The problem is critical, and
extreme measures should be considered to expedite its solution. An
incentive that could have significant potential for increasing the
acceptance of electronic filing is to develop a program resulting in
the conclusion that an electronically filed return will not be audited
and that the taxpayer would be notified of the conclusion. This, of
course, would require caveats, conditions and exceptions. While the
recommendation may be a radical departure from current tax
administration procedures and have inherent risks, the benefits may
outweigh those risks. Electronic Filing of tax returns is the platform
for Tax Systems Modernization. We must get the program to work or the
concept of modernization will be greatly compromised.
The complexity of the tax laws represent a high level of
frustration for taxpayers and the practitioner community. Nevertheless,
we live in a complex society; complexity is inevitable. I agree with
the Commission's plea for consistent interpretation of the law, rules
and regulations by the Internal Revenue Service. It is the inconsistent
treatment of the rules that cause the greatest consternation among the
practitioner community. Where possible, the laws need to be simplified
and mechanisms put into place whereby taxpayers can expect to be
treated consistently and fairly no matter where they are located.
The Commission was on track when it pointed out that over the last
several years Congress has made great strides in passing legislation
that was designed to protect the rights of the taxpayers. I also agree
with the Commission that Taxpayer Advocates must be empowered to speak
for and to take actions on behalf of taxpayers. The Taxpayer Advocate
needs to be strength- ened so that advocates are free to help taxpayers
resolve problems the solutions of which may go against the culture of
the system. Their hands must be untied so that they are not so
dependent on their current supervisors for support. I believe the
Commission is on the right track and that if the Service's primary
mission is changed from service to compliance, the transition of the
advocate program will be a natural one.
Financial accountability of an agency like the Internal Revenue
Service should be an inalienable right of our democratic society. The
Internal Revenue Service should provide this nation with a model of
financial accountability. In order to regain the trust and respect of
the American people, the IRS must demonstrate that it is financially
accountable.
In conclusion, I support the recommendations of the National
Commission on Restructuring the Internal Revenue Service. The
recommendations need to be adopted in full as the sum of its parts are
greater than the whole.
Sincerely,
William Stevenson
President