[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




    UNPAID PAYROLL TAXES: BILLIONS IN DELINQUENT TAXES AND PENALTY 
                          ASSESSMENTS ARE OWED

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                      INFORMATION, AND TECHNOLOGY

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             AUGUST 2, 1999

                               __________

                           Serial No. 106-116

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform

                                 ______
                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
HELEN CHENOWETH, Idaho                   (Independent)
DAVID VITTER, Louisiana


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                      Carla J. Martin, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

   Subcommittee on Government Management, Information, and Technology

                   STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois               JIM TURNER, Texas
THOMAS M. DAVIS, Virginia            PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon                  MAJOR R. OWENS, New York
DOUG OSE, California                 PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin                 CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
   Bonnie Heald, Director of Communications/Professional Staff Member
                          Grant Newman, Clerk
                    Trey Henderson, Minority Counsel
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on August 2, 1999...................................     1
Statement of:
    Kutz, Gregory D., Associate Director, Governmentwide 
      Accounting and Financial Management, Accounting and 
      Information Management Division, U.S. General Accounting 
      Office, accompanied by Cornelia Ashby, Associate Director, 
      Tax Policy and Administration Issues, General Government 
      Division; and Steve J. Sebastian, Assistant Director, 
      Governmentwide Accounting and Financial Management.........     9
    Rossotti, Charles, Commissioner, Internal Revenue Service, 
      accompanied by Paul Cosgrave, Chief Information Officer, 
      Internal Revenue Service; David Mader, Chief, Management 
      and Finance, Internal Revenue Service; and Charles 
      Peterson, Assistant Commissioner...........................    57
Letters, statements, et cetera, submitted for the record by:
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California, prepared statement of.................     3
    Kutz, Gregory D., Associate Director, Governmentwide 
      Accounting and Financial Management, Accounting and 
      Information Management Division, U.S. General Accounting 
      Office, prepared statement of..............................    14
    Rossotti, Charles, Commissioner, Internal Revenue Service, 
      prepared statement of......................................    61
    Turner, Hon. Jim, a Representative in Congress from the State 
      of Texas, prepared statement of............................     7

 
    UNPAID PAYROLL TAXES: BILLIONS IN DELINQUENT TAXES AND PENALTY 
                          ASSESSMENTS ARE OWED

                              ----------                              


                         MONDAY, AUGUST 2, 1999

                  House of Representatives,
Subcommittee on Government Management, Information, 
                                    and Technology,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2154 Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn, Biggert, and Turner.
    Staff present: Russell George, staff director/chief 
counsel; Bonnie Heald, director of communications; Grant 
Newman, clerk; Chip Ahlswede, staff assistant; Seann Gallagher, 
intern; Trey Henderson, minority counsel; and Jean Gosa, 
minority staff assistant.
    Mr. Horn. A quorum being present, the Subcommittee on 
Government Management, Information, and Technology will come to 
order. Few things are as annoying as seeing a portion of one's 
hard-earned wages deducted from a paycheck for Federal taxes. 
Most workers correctly assume the missing money is on its way 
to the U.S. Treasury. But today's hearing has been called 
because in too many cases, too many of hard-earned wages are 
not being forwarded to the Internal Revenue Service.
    As will be discussed by the General Accounting Office, the 
Congress's financial and program auditors, in releasing a 
report today, it indicates an appalling number of employers, 
estimated at 1.9 million of them, have deducted money from 
their employees' paychecks for programs such as Social Security 
and Medicare, then failed to forward the collected money to the 
Federal Government. The General Accounting Office estimates 
that $49 billion is at stake.
    Now, we are arguing over a piddling amount, saying that we 
have a surplus. Obviously, we would have a real surplus if we 
had the $49 billion there. The loser in this case is the U.S. 
Treasury, and of course that means every taxpayer.
    We will explore if the workers who thought they were 
contributing toward Social Security and Medicare won't be 
penalized for the loss. Often by the time that the loss is 
finally discovered by the Internal Revenue Service, neither the 
business nor the delinquent employer can be located. In many 
instances, the culprits are businesses that were struggling to 
survive. To a lesser degree, some employers knowingly defraud 
the system. Either way, the Internal Revenue Service has failed 
to uphold its responsibility to the taxpayer.
    This is not an isolated problem at the agency. Reviews of 
Internal Revenue Service audits for the past 2 years have 
turned up significant weaknesses in the agency's financial 
procedures. Following each annual audit review conducted by the 
General Accounting Office, this subcommittee has held a series 
of hearings to examine the problems found within not only the 
Treasury, but in the 24 agencies of the executive branch that 
have most of the budget.
    On March 1, 1999, the subcommittee examined financial 
management at the Internal Revenue Service. The subcommittee 
found that serious problems existed with the agency's financial 
management systems which cannot provide basic accounting 
information, let alone management information in an efficient 
manner. In addition, the agency poorly controlled its records 
and the manner in which it handled its cash payments.
    Today we are focusing on those employers who have failed to 
pay mandatory payroll contributions to the Federal Government. 
We are also concerned about those employers who have paid these 
taxes but whose record of payment may be buried in someone's 
file cabinet. We want to know the scope of this payroll tax 
debt, its causes, and what is being done by the Internal 
Revenue Service to prevent this massive violation of the law 
from recurring. We also want to know whether these delinquent 
employers are receiving other Federal benefits such as loans 
and other payments.
    We have excellent witnesses today who can answer these 
questions for us: Commissioner of the Internal Revenue Service, 
Charles Rossotti, and Mr. Gregory Kutz, the Associate Director 
of Governmentwide Accounting and Financial Management Issues 
for the General Accounting Office.
    We will start with the General Accounting Office. Mr. Kutz 
will be accompanied by Ms. Cornelia Ashby and Steve Sebastian. 
Following that panel, Commissioner Rossotti will be here and we 
will introduce those with him at that time.
    [The prepared statement of Hon. Stephen Horn follows:]
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    Mr. Horn. So would the gentleman from the General 
Accounting Office come forward and be sworn in, please? I think 
you know the routine. We swear in all witnesses. It's an 
investigating committee and your full statement is put in the 
record the minute we call on you, and then we would like you to 
summarize the statement.
    [Witnesses affirmed.]
    Mr. Horn. The clerk will note all three witnesses affirmed. 
I think that we have got everybody there.
    Mr. Turner has an opening statement.
    Mr. Turner. Thank you, Mr. Chairman. The issue of unpaid 
Federal payroll taxes is a very important one and has 
repercussions throughout the government. As a result of our 
failure to properly collect payroll taxes, the general revenue 
fund is forced to subsidize Social Security and hospital 
insurance trust funds. Therefore, less funds are available to 
finance other Federal programs when Federal payroll taxes go 
unpaid.
    While the majority of businesses pay taxes withheld from 
employees' salaries as well as the employers' matching amounts, 
a significant number of businesses apparently do not. According 
to IRS records as of September 30, 1998, nearly 2 million 
businesses owed, as the chairman said, about $49 billion in 
payroll taxes, or about 22 percent of the IRS' $222 billion 
total outstanding balance of unpaid tax assessments. 
Additionally, $15 billion in trust fund recovery penalties has 
been assessed against and continued to be owed by approximately 
185,000 individuals who are found to be willful and responsible 
for the nonpayment of payroll taxes.
    Nonetheless, it is even more disturbing to learn that 
individuals and businesses responsible for the nonpayment of 
payroll taxes continue to receive significant Federal benefits 
and other Federal payments such as Federal contracts or loans. 
The GAO estimates that about 16,700 business and individuals 
with unpaid payroll taxes and penalties received an estimated 
$7 billion in Federal payments over a 3-month period.
    Unpaid payroll taxes and penalties have a low recovery 
potential. We are gathered here today to learn about several 
factors that affect the ability of the IRS to enforce 
compliance and pursue collections in this area. These include 
system deficiencies and internal control issues which affect 
the integrity of IRS data, ineffective early warnings and 
taxpayer education programs, procedural limitations, Federal 
and State laws, and staffing resources.
    Another issue affecting the IRS's ability to collect is 
their lack of capability to offset Federal benefits and other 
Federal payments against unpaid assessments. Federal law does 
not prevent businesses or individuals from receiving Federal 
payments or loans when they are delinquent in paying Federal 
taxes. The Debt Collection Improvement Act of 1996, which 
Chairman Horn and this subcommittee steered through the 
Congress, called upon the centralization and aggressive pursuit 
of delinquent Federal receivables. However, they were unable to 
include Federal tax receivables and other unpaid tax 
assessments from its provisions.
    I am pleased to note that the Department of Treasury, using 
the Taxpayer Relief Act of 1997 as its legal authority, is 
developing a mechanism which will grant the IRS the authority 
to place a continuous levy on delinquent taxpayer Federal 
benefits to assist in recovering overdue taxes.
    Mr. Chairman, I hope that we can get at the heart of the 
problem here today with this hearing, and I look forward to 
hearing from each of our witnesses. Thank you, Mr. Chairman.
    Mr. Horn. I thank the gentleman from Texas for that very 
thoughtful statement.
    [The prepared statement of Hon. Jim Turner follows:]
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    Mr. Horn. The vice chairman, Mrs. Biggert of Illinois, has 
an opening statement.
    Mrs. Biggert. Thank you, Mr. Chairman. Thank you for 
holding this timely hearing. I think all of us here today want 
the same thing; that is, to ensure that America's entitlement 
programs such as Medicare and Social Security remain solid and 
dependable for this generation as well as the next.
    However, like many, I am concerned about the health of 
these important programs has been undermined by a number of 
factors. Today's hearing focuses on another but lesser known 
factor that threatens to undermine the solvency of these 
programs: unpaid payroll taxes. And the General Accounting 
Office will present what could only be a disturbing report this 
morning that details the extent to which payroll taxes have 
been withheld by employers, but are not being remitted to the 
Federal Government.
    Keep in mind, payroll taxes such as Federal insurance 
contributions, are used to fund and maintain the Social 
Security and Medicare Trust Funds. If what I understand the GAO 
will report this morning is correct, that unpaid payroll taxes 
represent a substantial amount of the billions owed to the 
Federal Government in unpaid assessments, I further fear for 
the long-term health of these programs.
    Today's hearing presents this committee with an opportunity 
to conduct its most important function--oversight. As such, I 
will be interested to hear from the witnesses. I am also 
interested in hearing about what the Department of Treasury, 
which has jurisdiction over the Medicare and Social Security 
Trust Funds, is doing in this situation.
    Again, Mr. Chairman, I thank you for holding this important 
hearing today. I look forward to working with you and the 
agencies here today and the taxpayers to collect what is owed 
and to strengthen retirement security.
    Mr. Horn. I thank the gentlewoman. I see no other opening 
statements, so we will go to the General Accounting Office. Our 
principal witness is Mr. Gregory Kutz, the Associate Director, 
Governmentwide Accounting and Financial Management for the 
Accounting and Information Management Division of the General 
Accounting Office. He is accompanied by Cornelia Ashby, the 
Associate Director, Tax Policy and Administration Issues; and 
Mr. Steve Sebastian, the Assistant Director, Governmentwide 
Accounting and Financial Management. Please go ahead, Mr. Kutz.

       STATEMENT OF GREGORY D. KUTZ, ASSOCIATE DIRECTOR, 
GOVERNMENTWIDE ACCOUNTING AND FINANCIAL MANAGEMENT, ACCOUNTING 
 AND INFORMATION MANAGEMENT DIVISION, U.S. GENERAL ACCOUNTING 
OFFICE, ACCOMPANIED BY CORNELIA ASHBY, ASSOCIATE DIRECTOR, TAX 
POLICY AND ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION; 
  AND STEVE J. SEBASTIAN, ASSISTANT DIRECTOR, GOVERNMENTWIDE 
              ACCOUNTING AND FINANCIAL MANAGEMENT

    Mr. Kutz. Mr. Chairman and members of the subcommittee, 
good morning. It is a pleasure to be here this morning to 
discuss our report on unpaid payroll taxes. This report, which 
is being issued today, was prepared at the request of this 
subcommittee. With me this morning is Cornelia Ashby, an 
Associate Director in our tax policy area, and Steve Sebastian, 
an Assistant Director who works with me on IRS financial 
management issues.
    The bottom line of my testimony this morning is that 
delinquent payroll taxes are substantial, are largely 
uncollectible, and represent a significant enforcement 
challenge for the IRS.
    My testimony this morning will answer four overall 
questions: What are payroll taxes and trust fund recovery 
penalties? How significant are delinquent payroll taxes? To 
what extent are individuals and businesses responsible for 
these taxes receiving other Federal payments? And what factors 
affect IRS' ability to enforce compliance or pursue collection 
in this area?
    First, what are payroll taxes and trust fund recovery 
penalties? Payroll taxes are comprised of individual income tax 
withholdings and employer and employee withholdings for Federal 
Insurance Contribution Act [FICA], which includes Social 
Security and Medicare taxes. Employers are required to deposit 
payroll taxes every 2 weeks, or monthly, depending on the size 
of their payroll.
    While the vast majority of businesses remit their payroll 
taxes as required, a significant number do not. Think of the 
Federal Government as a corporation and the businesses that pay 
payroll taxes as its customers. Inevitably, some of the 
corporation's customers fail due to factors such as poor 
management.
    As a result, for the Federal Government, unpaid payroll 
taxes are like a corporation's uncollectible receivables. They 
represent a cost of doing business. One or more individuals 
found to be willful and responsible for unpaid payroll taxes 
can be assessed a trust fund recovery penalty. The most extreme 
case of willful and responsible we found was the diversion of 
unpaid payroll taxes to install an individual's swimming pool. 
This penalty covers only the portion of payroll taxes that are 
withheld from employees. The term ``trust fund recovery 
penalty'' is used because the employee-withheld amounts are 
deemed to be held ``in trust'' by the business on behalf of the 
Federal Government.
    The bar chart on the poster board provides an example. In 
this example, the corporation's unpaid payroll taxes are 
$75,000. The three responsible individuals were each assessed a 
$50,000 trust fund recovery penalty. As you can see, this 
penalty represents only amounts withheld from employees for 
Federal income and FICA taxes. While each $50,000 trust fund 
recovery penalty appears as a separate assessment on IRS's 
records, the $75,000 of payroll taxes owed by the business are 
to be collected only once.
    I now move on to our findings, starting with the second 
question: How significant are delinquent payroll taxes? 
Cumulative unpaid payroll taxes at September 30, 1998, were 
about $49 billion and were owed by 1.8 million businesses. The 
components of this balance are old, with about 70 percent of 
the amounts predating 1994. The amounts comprising this balance 
are generally uncollectible.
    Our analysis of 191 unpaid payroll tax cases found that 
many of the businesses were defunct or otherwise unable to pay. 
Given the condition of these businesses, it is not surprising 
to see, as shown on the pie chart, that we estimate only 9 
cents on the dollar will be collected for these cases.
    IRS records indicate that most of the businesses with 
delinquent payroll taxes are corporations. We found that they 
were typically small and closely held, in labor-intensive 
industries, with few assets available as collection sources for 
the IRS. We found that the most common types of businesses that 
owe payroll taxes construction companies and restaurants.
    The cumulative balance of unpaid trust fund recovery 
penalties was about $15 billion at September 30, 1998. IRS 
records indicate that these penalties were assessed against 
185,000 individuals.
    Who are these individuals that are assessed trust fund 
recovery penalties? Typically, they are officers of the 
corporation, such as the president or the Chief Financial 
Officer. Similar to payroll taxes, we found that trust fund 
recovery penalties are generally not collectible. As shown on 
the poster board, IRS records indicate that at September 30, 
1998, nearly 25,000 individuals have been assessed trust fund 
recovery penalties for more than one business. In fact, as the 
chart shows, nearly 6,000 of what I will refer to as ``multiple 
offenders'' are responsible for unpaid payroll taxes at 3 or 
more businesses. Amazingly, the 7 most flagrant multiple 
offenders were responsible for unpaid payroll taxes at 20 or 
more separate businesses.
    IRS revenue officers we interviewed believe that most 
multiple offenders are not flagrantly disregarding their 
responsibility. However, some revenue officers told us of 
multiple offenders who intentionally abused the system. For 
example, in one case we found a president and owner responsible 
for unpaid payroll taxes at 5 separate construction-related 
businesses. Each company accumulated unpaid payroll taxes, and 
then went out of business.
    Whether the individual exercises poor business judgment or 
is abusing the system, the failure to pay these taxes has the 
same effect on the Federal Government--increased collection 
cost and lost tax revenue.
    Let me now move on to the third question: Is it possible 
that businesses and individuals responsible for delinquent 
payroll taxes are also receiving Federal benefits, contracts, 
and loans? Unfortunately, the answer is yes. As shown on the 
table, we found that over 18,000 of these individuals were 
receiving an estimated $212 million in annual civilian 
benefits. These include Social Security, civilian retirement, 
civilian salary, and railroad retirement payments. In addition, 
we found that 16,700 of these individuals and businesses 
received about $7 billion in civilian vendor payments over a 3-
month period.
    Also, we estimate that at September 30, 1998, about 12,700 
taxpayers had received SBA loan disbursements of about $3.5 
billion. Many of these individuals and businesses received 
these loan disbursements after defaulting on their payroll 
taxes. IRS revenue officers confirmed that individuals and 
businesses across the country responsible for delinquent 
payroll taxes were receiving Federal benefits, payments, and 
loans.
    The troubling situation I have described leads to my final 
question: What factors affect IRS' ability to enforce 
compliance or pursue collection in this area? In answering this 
question I will touch on three key factors.
    First, system deficiencies and internal control weaknesses 
make it difficult for IRS to manage its unpaid tax assessments. 
These system and control weaknesses have led to significant 
errors in taxpayer accounts. In our review of trust fund 
recovery penalty cases for fiscal years 1997 and 1998, we found 
error rates of over 50 percent in taxpayer accounts. In one 
case we found that IRS had pursued and collected nearly $1 
million for trust fund recovery penalty assessments from two 
officers and had placed Federal tax liens on their personal 
property. However, these officers' liabilities had already been 
satisfied from bankruptcy proceedings relating to the business.
    Second, based on discussions with IRS revenue officers 
nationwide, we learned that taxpayer education and early 
warning programs are ineffective. For example, IRS' FTD Alert 
Program is intended to prevent potential delinquencies through 
early identification of missed payroll tax deposits. However, 
IRS field representatives noted that alerts typically are 
received too late to prevent employers from accumulating 
substantial tax delinquencies. In addition, these untimely 
alerts sometimes caused revenue officers to contact taxpayers 
who had already paid their taxes. Many revenue officers believe 
the key to improving IRS' effectiveness is to contact the 
business immediately after the first missed payment.
    Third, Federal and State laws inhibit IRS' ability to 
enforce collection of payroll taxes. States govern the 
incorporation of businesses. If businesses fail to pay State 
taxes, State licensing authorities can deny them business 
licenses or license renewals. However, States do not consider 
Federal payroll tax delinquencies, in part because the Internal 
Revenue Code prohibits disclosure of Federal tax information 
without taxpayer consent. Because the IRS is unable to share 
this information with the States to use in granting business 
licenses, stopping multiple offenders is clearly inhibited.
    In summary, unpaid payroll taxes cost the Federal 
Government billions of dollars annually. At the same time, 
businesses and individuals responsible for these unpaid taxes 
are benefiting from billions of dollars of Federal payments. 
The end result is that compliant American taxpayers must pay 
more.
    For the Federal Government, unpaid payroll taxes are a cost 
of doing business. Based on the information I have provided to 
you this morning, I think you will agree that collecting 
payroll tax revenue while protecting taxpayer rights is a 
formidable challenge for the IRS.
    Some of the issues relating to enforcement and collection, 
such as incorporation at the State level, are beyond IRS' 
control. However, to improve the Federal Government's ability 
to prevent default and collect these taxes, IRS must improve 
its systems, policies, and internal controls.
    IRS has concurred with the facts in our report and shares 
our concern. They are working on short-term measures to improve 
the
accuracy of taxpayer accounts. However, we recognize that the 
systems problems resulting in errors in taxpayer accounts must 
be resolved as part of tax systems modernization.
    Mr. Chairman, this ends my statement. My colleagues and I 
will be happy to answer any questions.
    [The prepared statement of Mr. Kutz follows:]
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    Mr. Horn. We thank you very much for that helpful 
statement. We are going to have a round of questions, each of 
us 5 minutes. I will start this one and then Mr. Turner will be 
next and then Mrs. Biggert.
    Let me just clarify a few things here. You have noted the 
businesses, and the ones that are very marginal: restaurants, 
small construction firms, so forth. Did you have a chance to 
look at the degree to which nonprofits, 501(c)(3) tax-exempt 
ones, did they default on some of these matches? Did you have 
an example like that?
    Mr. Kutz. No, we didn't see any in our sample, but we did 
speak to IRS revenue officers who were responsible for that 
area and found that generally it's the same. It's very, very 
small not-for-profits that in some cases do not pay their 
payroll taxes. But it is not any large not-for-profits.
    Mr. Horn. Do we have any idea how large that universe is 
and what the default rate is? You are saying it is about the 
same?
    Mr. Kutz. I don't know if it's the same.
    Mr. Horn. If the taxes are not being deposited in the 
particular general account, as I understand it, it comes in 
with a coupon that is an excise tax, but it really doesn't tell 
which tax it is, it's just sort of lumped in; is that right?
    Mr. Kutz. Right. When the money comes in, it is generally 
not identified. Although with IRS' new electronic tax payment 
system, some of the taxpayers are now identifying how much is 
collected for the various types of taxes. One of the problems 
with that is that IRS currently does not have the systems 
capability to summarize that data by tax type. But they are not 
requiring taxpayers to send the information in with the money 
that tells where the taxes should go.
    Mr. Horn. Someone listening to this hearing is going to 
say, My heavens, do I have Social Security credits, do I have 
Medicare credits? What could you tell them? Do they still get 
their credits even if their employer is running off with the 
money?
    Mr. Kutz. Yes, they do. Essentially there is a subsidy to 
the Social Security and Medicare Trust Funds to the extent that 
payroll taxes are not collected. So the taxpayers do get made 
whole at the end of the day.
    Mr. Horn. You are sure of that? We will ask the 
Commissioner the same question.
    Mr. Kutz. It's basically coming out of the general revenue 
fund of the Federal Government.
    Mr. Horn. It's very clear from your data that the Small 
Business Administration needs to get on board with us and 
perhaps have on one of the loan sheets before they grant any 
loans ``Have you paid all of your taxes?''
    Mr. Kutz. Mr. Chairman, I would say that it's not just the 
SBA. They are the only loan program that we looked at. This 
would potentially apply to any of the loan programs in the 
Federal Government.
    Mr. Horn. So Farmer's Home Administration and all of the 
rest of them?
    Mr. Kutz. It could be. They were beyond the scope of what 
we did for this review.
    Ms. Ashby. Mr. Chairman, if I may add with regard to SBA, 
they do in fact as prospective buyers, whether or not they have 
delinquent taxes. But apparently because we did find several 
instances of SBA loans to such people, that that's not a 
deterrent from them getting the loans.
    Mr. Horn. We have noticed that before. That's why we put 
the debt collection bill on the books. Some guy had taken $3 
million in one part of the State from the same agency that he 
had taken several million from the other part of the State. 
There are a few rascals out there, let's face it.
    I am going to yield the rest of my time to Mrs. Biggert and 
then she can have her own time. I have 2 minutes and then we 
will call Mr. Turner.
    Mrs. Biggert. Thank you, Mr. Chairman. Could you go over 
the early warning signs or the early warning program a little 
bit? How long does the nonpayment go on? Is there a shutdown? 
What happens?
    Mr. Kutz. I will give you an overall answer and then let 
Mr. Sebastian elaborate. Typically it takes months and 
sometimes it could take over a year before the FTD alert would 
get into the field officer's hand to go and knock on the 
taxpayer's door, asking where are the taxes, et cetera. It 
takes a long time for the actual alert to get out into the 
field. Taxpayers file their tax returns about a month and a 
half after each quarter, but the alert sometime goes out later 
than that. Many times, by the time the FTD alert gets into the 
field, the business' doors are shut and boarded and it's all 
over.
    Mrs. Biggert. Then what is the recourse, just to have the 
debt collection?
    Mr. Kutz. The recourse is to determine if some of the 
officers were willful and responsible in that case, or there 
still could be possibilities where there is money that could be 
taken out of bankruptcy proceedings. The next step would be to 
determine whether or not anyone was willful and responsible for 
these withheld taxes and to pursue the officers or whoever that 
might be.
    Mrs. Biggert. Did you have any knowledge of anyone, then, 
say a construction company; it seems like--do they change names 
and then startup another company?
    Mr. Kutz. Yes, they do. They would change the name from--
let's use me as an example--Greg's Construction Co. to Greg's 
Green Construction Co. Something minor, probably. But the 
business is in the same location in many instances. They change 
the name on the lease or whatever the case may be, but it would 
be similar business names.
    Mrs. Biggert. You said that probably the one thing that 
States can't do--or can't get the Federal tax records from 
these people when they incorporate a business or anything. Is 
there any way with that incorporation that it could be 
acknowledged that they had--where they had companies either in 
that State or in other States, and what the financial outcome 
of that company was?
    Mr. Kutz. If IRS could share delinquency information with 
the States, that information could definitely be used in 
granting or renewing business licenses, but section 6103 of the 
Internal Revenue Code does not allow for sharing of information 
unless the taxpayer consents. So right now that's not being 
done.
    Mrs. Biggert. Is there anything else, laws that we have, 
that cause us not to be able to find out or collect the debts?
    Ms. Ashby. In some instances, State property--not property 
taxes, but State property disposition laws or ownership laws 
inhibit IRS from perhaps collecting some amounts that they 
could otherwise. If, for example, a State has ownership by the 
entirety, and a husband and wife--but only one is delinquent on 
taxes--then the IRS can't pursue that property because it's 
owned jointly on that basis.
    Mr. Horn. We will have to continue that in the next round. 
The gentleman from Texas, Mr. Turner, 5 minutes for 
questioning.
    Mr. Turner. Thank you, Mr. Chairman. Ms. Ashby, you were 
talking a minute ago about the fact that SBA, before they 
disperse the proceeds of the loan, they do ask whether the 
borrower is current in their payroll taxes. Is there some kind 
of certification, or just merely asking across the table as you 
routinely go down a checklist of things at loan closing?
    Ms. Ashby. It's one piece of information that is requested 
on the loan application. The prospective borrower is asked if 
they have delinquent taxes and, if so, on a separate part of 
the form they are to provide information about who is owed, how 
much, the nature of the debt and that sort of thing.
    Mr. Turner. So the question says, do you owe them or not? 
And if they say they don't owe them, then they go right on?
    Ms. Ashby. That's correct.
    Mr. Turner. Couldn't the SBA require some kind of evidence 
to be produced by the borrower that the taxes are current? 
Couldn't you secure that kind of information? Couldn't the 
taxpayer either get it from the IRS or bring it in based on 
their payroll deposits and that kind of thing?
    Ms. Ashby. That's certainly possible. As Mr. Kutz said, in 
terms of disclosing taxpayer information, any instance in which 
a taxpayer authorizes IRS to disclose the information, IRS can 
do so. In your question and answer to your question, yes, a 
taxpayer could somehow provide certification that taxes are 
current.
    Mr. Turner. You are saying that if there is a remedy here, 
it may be one that could be implemented simply by SBA 
regulations, and I would welcome your assistance in coming up 
with a suggestion to the SBA that maybe Mr. Horn and I might 
consider sending to the SBA, requesting them to modify the 
regulations, because it does seem totally inexcusable for 
somebody to get a loan or disbursements under a loan when they 
owe payroll taxes. That ought to be paid first.
    Mr. Horn. The gentleman is absolutely correct, and that 
will be done. We will jointly send them a little note.
    Mr. Turner. If you could help us come up with what the 
right suggestion is, we would appreciate it.
    Ms. Ashby. Please note, as Mr. Kutz said, it's not just 
SBA. There are other government agencies, Department of 
Education with student loans, for example. There are other 
departments that issue loans, make grants to delinquent 
taxpayers.
    Mr. Turner. We would welcome any suggestion along that 
line, because it seems to me that the agencies themselves would 
have the power to remedy that through their regulatory 
authority.
    Mr. Sebastian. Mr. Turner, there is actually some guidance 
that was put out by the Office of Management and Budget in 
Circular A-129 that specifically covers this particular 
circumstance in looking through a loan application, making a 
determination as to whether the applicant is delinquent on 
any--including Federal tax debt--and if so, the OMB circular 
would indicate that you should deny the applicant the loan.
    Mr. Kutz. It's kind of a good government type of circular, 
but it's a circular. I don't think that it has any legal 
binding.
    Mr. Turner. It requires you to ask, but not ask for any 
underlying supporting evidence that you have in fact paid your 
payroll taxes.
    Mr. Sebastian. And would indicate actually denying the 
applicant if in fact it is disclosed that they have tax 
delinquencies.
    Mr. Turner. In an SBA loan situation, is it not fairly 
common that a disbursement might occur over a period of time 
under a loan, or is most of the loan made all at once, Ms. 
Ashby?
    Ms. Ashby. I would assume so, but I am not that familiar 
with SBA loans. That would seem reasonable.
    Mr. Turner. If you could help us with a suggestion to 
tighten up on that, it seems like that certainly could be 
remedied. I notice in California they have the requirement that 
a new business post a bond before they can be in business. Do 
you think some bond requirement would be appropriate to ensure 
the payment of payroll taxes?
    Mr. Kutz. That is effective in the State of California and 
that is one of the things that some of the IRS revenue officers 
we spoke to nationwide mentioned, particularly in that area of 
the country, as a potential remedy to this. It is not a remedy, 
but it certainly could protect the Federal Government more than 
they are now.
    Mr. Turner. What would be the pros and cons of a bond 
requirement for payment of payroll taxes?
    Mr. Kutz. Well, the pros would be in the Federal 
Government's favor, and the cons would be that it would 
probably cost the business a little bit more to startup. 
Businesses would have to pay a fee to post the bond. So there 
would be a little bit more cost. There also might be a little 
more time involved in starting up the business.
    Mr. Turner. I guess it would create an enforcement problem 
if we did not have the cooperation of the States to do it? I 
assume that if we had cooperation from the States, a corporate 
charter maybe was not issued until a bond was posted; but in 
the case of sole proprietorships, it might be hard to ensure 
that we get the bond at the outset, at the inception of the 
business.
    Ms. Ashby. I would like to add just a cautionary note. When 
dealing with how to handle government contractors and so forth, 
there are extenuating circumstances sometimes, such as sole 
source for some critical service or good. So all of that needs 
to be taken into consideration in individual cases. It's hard 
to generalize and come up with one way of dealing with Federal 
contractors.
    Mr. Turner. What's the main objection to providing in the 
law that civilian benefits and payments under contracts with 
the Federal Government will not be made if there are delinquent 
payroll taxes? What's the downside? What is the objection?
    Ms. Ashby. I was going to say the main problem now is the 
system deficiencies and internal control weaknesses in IRS' own 
records. Before one would do something like this, one would 
want to make sure that the tax is actually owed. Because of 
system deficiencies and timing differences between the time a 
debt actually occurs and when it becomes--when the revenue 
office becomes aware to do something about it, the tax may have 
been paid.
    Mr. Kutz. You don't want to have somebody having their 
Social Security paycheck garnished when in fact they don't owe 
taxes. And that possibility exists, given the systems problems 
that we have at IRS today.
    Ms. Ashby. All sorts of considerations that the IRS and the 
Federal Management Service are currently trying to resolve in 
order to have a system in place by July 2000 to actually levy 
such payments.
    Mr. Turner. Thank you, Mr. Chairman.
    Mr. Horn. Well, thank you. Let me just ask a question or 
two to followup on it. I think Mr. Turner has an excellent 
suggestion there. There is no law that says Federal agencies 
can't share information. In fact, they can. Now, is the IRS 
compatible enough in its computerization of this that it would 
interface with, say, agriculture loan agencies, HUD loan 
agencies, SBA and all of the others? Is that possible?
    Ms. Ashby. IRS can in fact share tax information for 
certain purposes under section 6103 of the Internal Revenue 
Code. It can share such information with State and local 
governments as well, but only for certain specified purposes.
    Mr. Horn. That's only limited to the States, not the 
Federal agencies; is that right?
    Ms. Ashby. No. The fact is that IRS does share taxpayer 
information with several Federal agencies, Federal departments, 
and several States and local jurisdictions as well. But for 
specific purposes such as for the Department of Education to 
determine whether or not to make a student loan, for local 
agencies to determine whether or not someone qualifies for 
welfare benefits, for example, there are specified reasons 
where such information can be shared. And as of now, none of 
those reasons cover the instances that we are talking about 
today.
    Mr. Horn. So there is no problem, then, on interoperability 
or compatibility----
    Ms. Ashby. I am sure there are some. I don't know the exact 
nature or the extent of them and what it would take to overcome 
them. I am familiar somewhat with the Department of Education, 
because I worked in that area in GAO. There were systems 
problems that the Department of Education had to overcome to be 
able to accept the information from IRS and to be able to use 
it in its systems. I would imagine that's true for other 
agencies as well.
    Mr. Horn. When your team, Mr. Kutz, saw one person go in 
and out of business five times, it's clearly playing games with 
the tax collector. Did anybody check to see what the U.S. 
attorney in that area was doing, and had the IRS put that file 
into the office there? That's a clear pattern and practice, as 
far as I am concerned.
    Mr. Kutz. I don't recall, but the pattern is very clear. 
What you will see is several quarters, let's say in 1994, where 
the taxpayer doesn't pay or the business doesn't pay. Then the 
business appear to shut the doors, and then a year and a half 
or half year later, whatever the case may be, three or four 
more delinquencies for a separate related company. And that 
ends, and then you will see another company. So the pattern was 
clear. I don't recall specifically whether or not that case was 
being pursued.
    Mr. Horn. OK. Mrs. Biggert, 5 minutes for the vice 
chairman.
    Mrs. Biggert. Thank you, Mr. Chairman. You mentioned that 
the Federal Government is really subsidizing Social Security 
and Medicare Trust Funds when these taxes have not been paid 
from the general revenue fund. Do you have any idea how much of 
this--is this on an annual basis or cumulative basis?
    Mr. Kutz. It is likely several billion dollars annually. We 
have done an estimate of the cumulative subsidy, including 
self-employed or SECA taxes, and at September 30, 1998, we 
estimated that the subsidies were about $38 billion. That 
included accumulated interest over time. This estimate is 
understated to the extent that taxpayers have rolled off of 
IRS' system.
    After 10 years, there is a collection statute where the 
taxpayers fall off of IRS' system. So anything that is not on 
the systems anymore would not be included in that $38 billion 
estimate. On an annual basis, the subsidy is several billion 
dollars. Cumulatively it's been tens of billions.
    Mrs. Biggert. Is the IRS in a position to be able to tell 
us how much has been collected for their trust funds, or a 
report from you?
    Mr. Kutz. They concurred with the $38 billion estimate 
cumulatively. They may have a better idea how much the annual 
amount is.
    Mrs. Biggert. Then I think you mentioned in your written 
statement that States like Connecticut publish the names of 
delinquent taxpayers to increase the compliance and generate 
collections. Could this be done for Federal payroll tax?
    Mr. Kutz. Not right now with the Internal Revenue Code 
restrictions. And I would again caution, as Ms. Ashby did a 
moment ago, on the data quality at IRS. You don't want to be 
publishing taxpayer names unless you are certain that the 
taxpayers actually owe, or the amount is correct.
    Mrs. Biggert. Just because of the timing with people paying 
and by the time it's published they have already paid?
    Mr. Kutz. Right.
    Mrs. Biggert. Then you report that the IRS and the 
Department of Treasury are not offsetting any Federal payments 
against unpaid payroll taxes. Does the current law authorize 
the Federal Government to intercept or withhold Federal benefit 
payments to satisfy the delinquent payroll taxes?
    Mr. Kutz. Yes, it does. Under the Taxpayer Relief Act of 
1997, there is a continuous levy provision that allows the IRS 
to levy up to 15 percent of Federal benefit payments to offset 
tax debt. That provision is planned to be done maybe mid--next 
summer.
    Ms. Ashby. July 2000 is the current plan. It has not 
started yet.
    Mr. Kutz. It has not started yet. It will be rolled into 
the overall--under the Debt Collection Improvement Act, the 
overall offset program for the Federal Government.
    Mrs. Biggert. Then the Internal Revenue Code authorizes the 
IRS to enter into installment agreements with taxpayers only if 
the agreements are for the full amount of the liability. You 
reported that as part of its fiscal year 1998 financial audit, 
that the IRS' uses of installment agreements does not comply 
with the IRS code?
    Mr. Kutz. That's correct. I will give you an overall 
example, and then Mr. Sebastian has some examples from the 
trust fund recovery penalty work that we did. We found that for 
over half of the cases we looked at, the IRS was in violation 
of that law. One of the violations that we found as part of our 
1998 audit was a $25 a month installment payment on a $16 
million tax debt. Mr. Sebastian has a couple more that he can 
share with you that we found in this work.
    Mr. Sebastian. Yes. In two cases where we had unpaid 
payroll taxes, one of the situations was a sole proprietorship 
and there was no trust fund recovery penalty assessed. The 
outstanding tax amount was about $220,000 for the unpaid tax. 
The payments that were required under the installment agreement 
were essentially $25 a month, which would have yielded less 
than $2,000 prior to the expiration date of that particular 
unpaid tax assessment.
    We had another situation in which--this was a corporation--
two officers were assessed trust fund recovery penalty 
assessments. One officer entered into an installment agreement. 
The total dollar amount of the trust fund recovery penalty 
assessment was about $3.3 million. And here again when you 
calculate out the monthly payments up to the point in time when 
that particular tax account falls off the IRS' records, the IRS 
would have collected $11,000.
    Mrs. Biggert. When they entered into that agreement, does 
that mean that that agreement satisfies their payment?
    Mr. Kutz. That's what the law requires. But what we are 
telling you is that is not what is happening as of the 1998 
financial audit. What IRS is supposed to do when accepting less 
than 100 cents on the dollar, so to speak, is to go through 
what is called an offer and compromise program where they are 
able to accept less than 100 cents on the dollar.
    The issue with that is there are more stringent procedures 
to review the taxpayers records. I suspect that's one of the 
reasons why maybe some of the officers are circumventing that 
process to do an easier process which--you can do an 
installment agreement right now by telephone, is my 
understanding.
    Mrs. Biggert. So what you are saying is that they entered 
into that agreement and that has satisfied the IRS as far as 
the payment of those taxes?
    Mr. Kutz. It satisfied the revenue officer that entered 
into the agreement, but it did not pay the full amount of the 
tax liability, yes.
    Mrs. Biggert. Is that tax liability still on the books or 
have they wiped out the tax owed?
    Mr. Kutz. As Mr. Sebastian said, it would go off the IRS' 
records after the 10-year statute of collections, yes. So it 
will go away eventually.
    Ms. Ashby. Let me add that with respect to OMB circular A-
129, if there is an installment agreement and an agency 
contracts or issues a loan or grant to that taxpayer, that is 
in accordance with the OMB circular, if there is an active 
installment agreement and the taxpayer is making the 
installments.
    Mrs. Biggert. About how many of these agreements did you 
find that were not tending to the law?
    Mr. Sebastian. This finding came out of our work on the 
fiscal year 1998 financial statements of the Internal Revenue 
Service. There were 93 cases out of a total sample size of 690 
unpaid tax assessment cases. In 48 of the 93 cases where there 
were installment agreements, we found the situation where the 
total amount to be collected under the installment agreement 
would not satisfy the outstanding tax debt.
    Mrs. Biggert. Were most of these companies that had gone 
out of business? Were the officers paying this or the 
companies?
    Mr. Sebastian. These 93 cases are really across the 
spectrum. There are some businesses, there are also a number of 
individuals.
    Mr. Kutz. Many of those were for delinquent 1040 or 
individual income taxes.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Mr. Horn. Thank you. I think we will all have calls from 
our constituents when we get back to the office as to where you 
get this million dollar loan and only pay $25 back? Did I hear 
that correctly?
    Mr. Kutz. That is correct.
    Mr. Horn. What kind of tax was this, or was this a benefit 
out of a Federal agency that wasn't the IRS?
    Mr. Kutz. The ones that Mr. Sebastian mentioned were for 
trust fund recovery penalties where there was $150 being paid a 
month on a $3 million balance. Most of these were----
    Mr. Horn. It sounds like terrific terms. Were they serious, 
or was their brother Uncle Louie or something? OK. The 
gentleman from Texas, Mr. Turner, 5 minutes.
    Mr. Turner. Let me be sure that I understand. In these 
instances, Mr. Sebastian, these 48, the IRS had agreed to 
accept less than the amount owed, but they had not gone through 
the offer compromise program that would allow that?
    Mr. Sebastian. That's correct.
    Mr. Turner. And you mentioned that if this amount is not 
paid within 10 years, that it goes off the IRS' collectibles. 
Is that because there is a 10-year statute of limitations?
    Mr. Sebastian. That's correct.
    Mr. Turner. Would it not be appropriate that if a taxpayer 
is willing to enter into a--whether it is an offer in 
compromise or whether they just simply enter into an 
installment plan, that as a part of that agreement the statute 
of limitation is tolled? Knowing in the private sector any time 
that you acknowledge a debt, you pay on a debt, you extend the 
statute of limitations that would otherwise run the 
collectibility of that debt against the debtor.
    Mr. Sebastian. Yes, Mr. Turner. In fact, that can occur as 
well. The taxpayer can waive that statutory expiration period. 
In these cases they did not.
    Mr. Kutz. We have seen that before as part of our test 
work.
    Mr. Turner. It would seem to me that there should be some 
requirement that if you are going to get the benefit of 
installment payout or the benefit of offer and compromise 
program to reduce your tax liability, that automatically the 
statute of limitations is tolled against the debt that you are 
tying to pay. Would there be anything wrong with that being a 
part of the law?
    Mr. Sebastian. Not to my knowledge.
    Mr. Turner. Is it statute that says that the taxpayer has 
the option to enter into an installment payout, but at the 
taxpayer's option they can see if I can't pay it in 10 years 
the debt is gone? Is that the taxpayer's option under law or is 
that regulatory with the IRS?
    Mr. Sebastian. Under the specific provisions of the 
Internal Revenue Service covering installment agreements, that 
is, in essence, the situation unless the taxpayer consents to 
tolling, as you indicated, the statutory collection period.
    Mr. Turner. So the only leverage that the IRS has is to try 
to negotiate some kind of installment payout and also negotiate 
by trying to persuade the taxpayer to waive the 10-year statute 
of limitations.
    Mr. Sebastian. That section of the Internal Revenue 
Service, as currently written, that's correct.
    Mr. Turner. I think we could strengthen the tax collector's 
hand if we just set in law that if you are going to take 
advantage of a payout agreement and installment payout of your 
tax liability, if you are going to take advantage of a 
compromise settlement, then you have got to be willing to waive 
the statute of limitation. Is that being too harsh? Am I 
thinking incorrectly here? Is there any downside to my 
suggestion?
    Mr. Sebastian. None that I can think of.
    Mr. Turner. Mr. Kutz, am I off base here?
    Mr. Kutz. No, that is certainly a possibility for improving 
the IRS' hand in this.
    Mr. Turner. What is the defense that the taxpayer would 
levy to argue against this suggestion? Is it unduly harsh or 
unreasonable?
    Mr. Kutz. They would have to pay more at the end of the 
day. Let me just say one thing on installment agreements. When 
we did report to you before that IRS was going to collect, I 
believe, $26 billion out of the $222 billion of unpaid taxes, 
much of what we did see that was collectible was from 
installment agreements.
    On the other side of the coin, the IRS has collected 
billions of dollars through these installment agreements. There 
are many installment agreements where the taxpayer is full 
paying the module. But again, as Mr. Sebastian said, we did 
find about half of the installment agreements were being done 
inappropriately.
    Mr. Turner. Ms. Ashby, what would you say to my suggestion?
    Ms. Ashby. I know of no reason why your suggestion would 
not be appropriate. I was going to say that the issue here is 
the particular vehicle that IRS is choosing to use to collect 
from the taxpayer. To the offer and compromise program, it 
would be perfectly acceptable for the IRS to accept less than 
100 percent of the debt, not so through the installment 
agreement program. Apparently that is, in essence, what is 
occurring. The IRS can deny a request for the installment 
agreement, they can deny a request for offer and compromise. It 
can, as far as I know, stipulate certain requirements such as a 
waiver of the statutory statute of limitations.
    Mr. Turner. Well, it seems to me that the law should work 
for the IRS and the Federal Government just like it does, I 
know at least in my State, and that is the statute of 
limitations doesn't start running until you have failed to make 
a payment. Any time you owe a debt and you continue to make a 
few payments along, the statute of limitation period runs from 
the date that the last payment was made.
    There is some valid reason for having a statute of 
limitation, but it just seems to me that in the case of a 
collection of Federal taxes, the statute of limitation runs 
from the date--is this correct, Mr. Sebastian--the date of the 
inception of the obligation, or the date of the original levy, 
that we lose an important tool that every other private sector 
debt collector understands and takes advantage of; that is, the 
statute does not run until someone has refused finally to make 
a payment?
    Mr. Sebastian. Yes. One other statistic that I might point 
out is we apprised the IRS of the noncompliance situation 
during the course of the 1998 audit. The IRS responded by 
issuing some guidelines to its collection division and revenue 
officers, staff, that tightened up the standards through which 
the installment agreements would be entered into; i.e., calling 
for 100 percent payoff of the tax liability.
    If you take a look at some of the recent statistics that 
were published by the IRS, they are showing a significant drop 
in the number of installment agreements through the first half 
of 1999 in comparison with the prior 2 years. So this may be a 
factor, the fact that they are going back now and tightening 
their policies with regard to when they would grant or enter 
into an installment agreement.
    Mr. Turner. If a taxpayer enters into an installment 
agreement or a compromise--which I think are valid tools, they 
are used in the private sector, they are important ways to try 
to collect the debt--but if they do that, and then they fail to 
keep their agreement, does IRS then----
    Mr. Sebastian. They have the ability to go back and pursue 
the entire tax debt; that is correct.
    Mr. Turner. I think if we can change the statute of 
limitation problem, we would be making a significant 
improvement in our ability to collect our taxes.
    Thank you, Mr. Chairman.
    Mr. Horn. You are quite welcome. Let me ask you, when you 
went over these various collection horrors, did you look at 
what IRS had done to recoup them and did they use it with their 
own revenue officers, or did they have private collectors? Did 
you ever try to see any efficiencies and effectiveness in, say, 
private collectors versus revenue officers or revenue officers 
versus private collectors?
    Ms. Ashby. Well, to the extent that IRS issues private 
collectors--and to date, that has been only in a pilot 
program--the collectors did not actually take the final actions 
to collect the tax. They simply located the taxpayer and 
contacted the taxpayer initially.
    In the pilot, one pilot that has occurred, the results were 
not very successful, not very encouraging. It ended up costing 
IRS more to use the private debt collectors. Because of certain 
provisions in IRS' contract with the private collectors, it 
cost the IRS more than the collector----
    Mr. Horn. Explain to me how.
    Ms. Ashby. Well, for example, one of the provisions allowed 
a fixed fee to the collector for locating and contacting a 
taxpayer. It wasn't contingent upon collecting anything or it 
wasn't a percentage of amount collected. So because of the 
fixed nature of the fee, in spite of the result, that in and of 
itself cost IRS quite a bit. In the case of the pilot, IRS had 
to take some of its collection employees----
    Mr. Horn. But you said that they are only going to get the 
person at a certain address? I would have thought that IRS 
would have given them the address.
    Ms. Ashby. In lots of those instances IRS does not have a 
good address. They may have an address but are not able to 
contact the taxpayer at that address.
    Mr. Horn. Well, then, doesn't it make some sense that if a 
private collector finds them and refers them to IRS, that's 
money they wouldn't have had?
    Ms. Ashby. If they in fact collect, if they are able to 
collect based on that information. You might want to ask IRS 
about this later, but it was IRS' determination that it could 
not legally use private collection agencies beyond the point of 
locating and contacting the taxpayer. So any face-to-face 
meetings, any particular levying or anything else IRS had to do 
itself, they had to take its collection of employees to pursue 
those taxpayers.
    In the particular case of the pilot, there were a 
substantial number of delinquent taxpayers that were what IRS 
considers deferred, they owed a small amount of tax. And with 
deferred delinquencies, IRS' practice is to collect that money 
through offsetting refunds. In these cases, a large percentage 
of those were part of the pilot so----
    Mr. Horn. Which pilot are you talking about, the one 2 
years ago under the previous Commissioner?
    Ms. Ashby. That's right.
    Mr. Horn. Yeah, well that was as phoney as they make them. 
They gave them 5-year-old debt and expected them to come in 
some with something.
    Ms. Ashby. That's the only action to date. There has not 
been a subsequent pilot.
    Mr. Horn. We ought to be taking a look at that, but we can 
discuss it with the new commissioner.
    Let me just ask two closing questions on my part. In your 
statement, you mentioned the extreme case of where the payroll 
tax money was diverted to an individual that used the money to 
build a swimming pool. Could you give us a little more detail 
on that case and how many of those did you find?
    Mr. Kutz. Yes, we can give you more detail on that, and I 
guess the case--it's much worse than I described. Mr. Sebastian 
has the details on that, and he will walk you through that 
briefly. It's quite interesting.
    Mr. Horn. OK. Mr. Sebastian, it's all yours.
    Mr. Sebastian. OK. This business actually was heavily 
involved in Federal contracts, had contracts with the 
Department of the Navy as well as other Federal entities.
    Mr. Horn. That's the swimming pool?
    Mr. Sebastian. Exactly. In fact, the business' revenues, 
about 65 to 85 percent of their revenues over a 2-year period 
came from Federal contracts. The business withheld but did not 
pay forward to the Federal Government payroll taxes in excess 
of $2 million. The IRS determined through interviews with the 
former comptroller as well as other third-party information 
that some of those funds were actually being diverted to an 
affiliated company of one of the officers to purchase 
equipment, trucks, et cetera.
    The IRS also determined that other funds--other of the 
company's funds were being used to pay the estimated tax 
liabilities of one of the officers to pay for the purchase or 
the installation and maintenance of a swimming pool, to pay off 
the company president's wife's car loan, to purchase a tractor 
for home use, and to pay for the maintenance of----
    Mr. Horn. This is the suburbs or the farms?
    Mr. Sebastian. Excuse me?
    Mr. Horn. That was in the suburbs or the farms?
    Mr. Sebastian. I can't recall the exact location, and I 
can't recall exactly what the size of the tractor was. So there 
were more diverted payments beyond those for the maintenance of 
the swimming pool. And, again, the diversion occurred at the 
same time that these payroll taxes were being withheld and 
should have been remitted to the Federal Government.
    Mr. Horn. Yes. What about some of the reasons that 
individuals continue to have unpaid payroll taxes at multiple 
businesses? Is it simply poor business management or 
intentional disregard for the individual's responsibility to 
forward the payroll taxes? What's your judgment on that? Are 
they just over the edge and they feel, gee, if I invest that 
money and my company will make it?
    Mr. Kutz. In most cases, I believe it's poor business 
judgment. Cash flow problems come up, and they're faced with a 
choice of paying the utility bill, the rent, or IRS. And I 
believe IRS falls to the bottom of the list. And I don't think 
that they really fully understand what they're doing. I mean, I 
would kind of look at this--similar to a 401(k) plan, where 
you're withholding money from employees to send to the Federal 
Government, and you're not paying it.
    I don't believe everybody fully understands that they're in 
kind of a trustee capacity here as an officer of a corporation.
    Mr. Horn. Mrs. Biggert, any more questions?
    Mrs. Biggert. Thank you, Mr. Chairman.
    I think overall our job and your job is to talk about the 
collectibility and what happens to the taxpayer. I mean, we've 
all ended up having to pay for this. And it seems like we've 
got the education program and we've got the Alert program and 
we've been talking about maybe legislatively with the statute 
of limitations to tell that. I think that's an issue we have to 
look at. Because I think the installment program has brought in 
some money, and whether that will cut that off or not, I don't 
know. But I think the things that we can look at--what else can 
be--we can do, either as the Congress or we can--you can do or 
the IRS can do to make sure that we're not just being able to 
collect 9 percent of that debt that's owed? Or even that there 
is so much debt that has been defaulted on in the first place?
    Mr. Kutz. Well, I would say, first of all, hearings such as 
this one where you're able to talk with the IRS about some of 
the systems problems they have and the control problems they 
have certainly helps, and it helps them focus on some of the 
things that they need to do.
    One other possibility is with respect to the offset 
program, while IRS is fixing its systems, setting up some sort 
of an independent audit process before the information sent 
over to FMS is used for offset purposes to determine that the 
actual data is correct. Because absent that, again, we do have 
some concerns about some of the offset going on here.
    And, with respect to the sharing of information with the 
States, there's possibilities there with respect to changing 
the law. Again, I think this oversight hearing is a good start.
    Mrs. Biggert. Thank you.
    Mr. Horn. If the gentleman from Texas has any more 
questions, please feel free to ask them.
    Mr. Turner. Just one. The IRS, as you've explained, is 
going to implement the continuous levy against civilian 
benefits, and I believe Ms. Ashby said that that would be an 
authority to levy 15 percent.
    Ms. Ashby. Up to 15 percent each payment.
    Mr. Turner. Up to 15 percent. And I can see the wisdom in 
having some limitation on the amount that could be assessed, 
collected, delinquent tax against someone who is receiving some 
government benefit. How does that work with respect to vendors? 
That seems to be the largest category of delinquent tax 
amounts, $7 billion. These are people that do business with the 
Federal Government. How is that program going to affect them?
    Ms. Ashby. It will work the same way with respect to other 
Federal beneficiaries. It's up to 15 percent of each payment 
can be levied, and I believe that's the intention.
    Mr. Turner. So if somebody has a contract to provide paper 
to the Federal Government, there would be the authority to 
withhold 15 percent of the payment to that vendor in payment of 
the supply of paper----
    Ms. Ashby. That's correct.
    Mr. Turner [continuing]. To pay against their taxes?
    Ms. Ashby. Correct.
    Mr. Kutz. Certain programs are exempt from this, also.
    Mr. Turner. For example?
    Ms. Ashby. Needs-based payments, such as----
    Mr. Sebastian. Unemployment, unemployment.
    Ms. Ashby. Right, unemployment insurance payments.
    Mr. Turner. It just seems to be that the rule ought to be a 
little tougher on a vendor who is supplying some product or 
service to the Federal Government than perhaps any other 
category that we've talked about.
    Mr. Kutz. Potentially, you could consider not letting 
venders get Federal contracts, too. That's another issue, 
should companies with delinquent taxes have a Federal contract 
in the first place.
    Mr. Turner. Is the IRS, in implementing this 15 percent, 
are they bound by that by law?
    Ms. Ashby. The 15 percent is statutory.
    Mr. Turner. Statutory, all right.
    Thank you, Mr. Chairman.
    Mr. Horn. You're quite welcome. I agree with you. Maybe if 
we put out the word, we will amend the procurement laws. And 
you've got to pay your taxes. Suddenly billions might flow in.
    So we thank you for your testimony. Don't leave. We hope 
you can stay through the rest of the hearing. And Commissioner 
Rossotti and his team will be up. There might be some questions 
we want to ask you. So get a seat in the front row, if you 
would.
    And now we are honored to have the Commissioner. 
Accompanying the Commissioner is Mr. Paul Cosgrave, the Chief 
Information Officer for the Internal Revenue Service; Mr. David 
Mader, Chief, Management and Finance, Internal Revenue; and Mr. 
Charles Peterson, the Assistant Commissioner.
    If you're all going to testify and anybody behind you 
that's going to testify or have a loud whisper----
    Mr. Rossotti. I think we will be OK.
    Mr. Horn [continuing]. Stand up and raise their hands. I 
only want one baptism at a time.
    [Witnesses sworn.]
    Mr. Horn. The clerk will note all four witnesses affirmed.
    We're delighted to have you, Commissioner. Please render 
your statement however you would like to do it.

 STATEMENT OF CHARLES ROSSOTTI, COMMISSIONER, INTERNAL REVENUE 
   SERVICE, ACCOMPANIED BY PAUL COSGRAVE, CHIEF INFORMATION 
    OFFICER, INTERNAL REVENUE SERVICE; DAVID MADER, CHIEF, 
 MANAGEMENT AND FINANCE, INTERNAL REVENUE SERVICE; AND CHARLES 
                PETERSON, ASSISTANT COMMISSIONER

    Mr. Rossotti. Thank you. Thank you, Mr. Chairman, Mr. 
Turner. I'm glad to be here. I think that the GAO has provided 
a very thoughtful examination of IRS deficiencies with respect 
to the collection of payroll taxes and the Trust Fund Recovery 
Program.
    We agree with the finding that most of these payroll taxes 
on the IRS books at the present time are not fully collectable, 
but, more importantly, I think GAO has identified, as they have 
in the past, some long-standing management systems' 
deficiencies that have prevented us from collecting or solving 
many of these problems. And I think these same shortcomings 
tend to be the root cause of many of the problems described in 
this report as well as other reports.
    And, Mr. Chairman, as we had discussed on a number of 
occasions, our decades-old technology is really a key factor, a 
stumbling block, if you will, in our ability to provide 
adequate service and efficient tax administration, including, 
in particular, early collection and intervention on payroll tax 
issues.
    We need to recall that the basic data systems that the IRS 
uses to keep records on all tax papers, tax accounts, including 
payroll taxes, are built on about a 30-year-old set of systems, 
which is a fundamentally deficient foundation for tax 
administration. And GAO has repeatedly reported and continues 
to report, as they did this morning, the IRS cannot provide 
reliable taxpayer account and financial information for many 
purposes, including the ones that are discussed here today.
    In the opinion on the audited custodial financial 
statements, GAO cited as a material weakness the lack of a 
system to be able to routinely generate reliable and timely 
financial information for internal and external users; and, in 
particular, GAO noted the lack of subsidiary ledgers that track 
unpaid assessments on an ongoing basis.
    So, Mr. Chairman, we simply cannot do our job properly in 
many dimensions without this data. And particularly updating 
our business practices to both serve taxpayers better and also 
to be more efficient in collecting taxes really depends on our 
ability to update these computer applications and to convert 
all of the existing taxpayer data.
    This, as we've noted, is a very vast and complex and, 
frankly, risky undertaking that's going to take a number of 
years to accomplish. However, we think an important initial 
step was taken last month when we received from the 
Appropriations Committees and with the advice of GAO the 
authorization for release--the first release of funds from the 
Information Technology Investment Account.
    Now, this is a first installment toward the development of 
a new set of computer systems and a significant step forward in 
our overall modernization plan. Now that's technology.
    I've also testified before your committee and other 
committees that the whole approach that the IRS takes to 
collection is not at the level of best business practices 
employed widely today in the private sector and especially the 
financial sector. And this process, which I've now had put in 
chart form, Mr. Chairman, and it's shown over there to your 
left where it says collections, current State process and 
issues, is--as you can see, I don't expect you to see all the 
detailed boxes there, but we can provide for your illumination 
copies of this to look at in detail--but it basically shows the 
process that exists today.
    And this process is deeply embedded in a whole variety of 
laws, regulations, operational procedures, as well as in 
particular technology; and the difficult thing here is that 
these factors together are very tightly coupled. I wish it 
weren't that way, but it is the case. And that being the case, 
there is no way really to make major improvements without 
addressing all of these factors together, and what that tells 
you is that there's no quick or easy solution.
    But I think we do know what the solution is. In fact, I 
think it's really quite clear, and that's what we call our 
modernization program, which includes a totally revamped 
approach to collections. And the whole idea here is that, to 
the extent possible, we will prevent taxpayer problems from 
occurring in the first place through education, outreach and 
intervention with specific taxpayer groups, such as small 
business owners and new business startups; and where problems 
occur or may occur, we will begin to be able to address these 
compliance problems such as repeated lack of payment of payroll 
taxes in the most effective way; and when we do identify a 
potential problem, the risk of nonpayment, we can use a variety 
of techniques to settle that debt.
    So that's the direction. But in order to achieve that, we 
must have new technology which provides an updated and accurate 
history of all taxpayers, individuals or businesses who are 
responsible for debt.
    I think, as your committee has looked at this issue, you're 
well aware that any effective collection process, no matter who 
executes it, no matter what the sector is, depends on knowing 
accurately and on a current basis who owes the money, how much 
is owed, and what is the payment history. Those are 
fundamental; and, unfortunately, we are deficient in all of 
those.
    So in addition to that, of course, there are other 
important pieces of technology which could be useful, such as 
updated decision models, telephone, predictive dialing 
equipment and various kinds of collection support systems, and 
we don't have any of those either at the present time.
    Moreover, I think your hearing has highlighted an important 
point, which is that for the particular type of taxes and the 
taxpayer population that has been addressed in today's hearing, 
collection is not a one-time event, it's not a set of debts 
that you hand over and you collect it. It's an ongoing process. 
And this requires a carefully constructed and ongoing 
monitoring process which allows you to intervene at the right 
time and to take the appropriate action based on what you know. 
And, again, this is what we don't have.
    So I just want to note, Mr. Chairman, that in another 
report, a GAO report that was released not too long ago on the 
first anniversary of the Restructuring and Reform Act, GAO 
stated, and I quote, we agree with the Commissioner that 
various components of IRS modernization must be implemented in 
an integrated fashion. Simply restructuring the organization, 
for example, without concurrent revisions to the work processes 
and related information systems will do little to improve the 
quality of service being provided to taxpayers.
    I think we're in agreement with GAO on the nature of the 
problem, and it is particularly relevant to the challenges that 
are outlined today.
    So, in conclusion, I would commend GAO for its thoughtful 
and considerate examination. We fully comprehend the 
significance of approximately $49 billion in payroll taxes owed 
the Federal Government, and we will use the GAO report to make 
what near-term efforts we can to correct the deficiencies, 
especially within the trust fund recovery system. We believe, 
however, that in the long run the best and in fact the only 
solution to these fundamental problems is through the massive 
change program that we already have under way. It will take 
years and it will take some significant and assured resources 
to complete the underlying--to solve the underlying problems in 
both technology and organization that cause these unpaid tax 
assessments to occur. However, with the continued support of 
the Congress and the understanding of the time and resources 
involved, I believe we can succeed.
    Thank you, Mr. Chairman.
    Mr. Horn. Well, thank you.
    [The prepared statement of Mr. Rossotti follows:]
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    Mr. Horn. Let me ask you a few questions that specifically 
relate to your statement.
    I'm delighted you feel good about the computers that have 
been authorized and the money appropriated in Mr. Kolbe's 
budget, I assume. Was that all you wanted or were you in on 
that budget cycle? Maybe you got little after they had started 
firming up downtown.
    Mr. Rossotti. Well, you've got two different things here. 
There has been $500 million that was previously appropriated 
for the Information Technology Investment Account, which was 
held aside specifically for technology until we could get 
adequate plans together. And the point I made in my testimony 
is that we recently got the first $35 million allotment out of 
that fund. I think that really was an important step. It's 
really, literally, just the first step, but it indicated that, 
you know, we've made progress in defining our plans and getting 
a management process in place.
    The ongoing budget issue is still being debated, as you 
know, in the Appropriations Committees and, you know, there's 
certainly--from my point of view, it's very, very important 
that we get at least what's in the President's request in order 
to be able to continue progress. So these are two separate 
issues.
    Mr. Horn. Do you know offhand what the President's request 
was for you on this?
    Mr. Rossotti. Well, the President's request in the total 
appropriation for all of the IRS was $8.1 billion for fiscal 
2000. It did not specifically include any additional money for 
the Information Technology Investment Account, because there 
was already this $500 million that had been advance funded and, 
given our timing, it was not required to have an additional 
increment funded in specifically 2000. It will be very 
important to get that increment beginning to resume funding in 
the following fiscal year.
    Mr. Horn. Well, you should be involved, I guess, around now 
for the President's budget that he proposes to Congress in 
January 2000. So----
    Mr. Rossotti. Well, yes, that's the fiscal 2001. We're 
already working hard on that.
    Mr. Horn. Right. What do you think you will need that you 
didn't get this year?
    Mr. Rossotti. Well, I'm not prepared to talk about specific 
numbers for 2001. But I think the important point was that the 
Information Technology Investment Account, that particular 
segment was advance funded in prior fiscal years. There was no 
funding in fiscal 2000, which was appropriate, because we were 
not--timing wise we weren't in a situation where we needed it. 
But we will need it again in 2001. So that will have to be 
resumed.
    Mr. Horn. Right. Well, I'm assuming you will put in a full 
request on that?
    Mr. Rossotti. Yes.
    Mr. Horn. You know and we know OMB plays all sorts of 
games. If they know we're going to add the money back, they cut 
the budget. Good example, they slashed away at the space 
program, they slashed away at the Veterans, they all know we're 
going to add the money back, and they can look like a group of 
economizers. So, hopefully they will take yours seriously.
    How do you know in IRS when a person has begun a business? 
What do you use as your sources? There are thousands of 
businesses everyday.
    Mr. Rossotti. The main thing that we get is they apply for 
a number. They apply for an employee identification number.
    Mr. Horn. How do they know--see, the average citizen or one 
that's a new immigrant has an idea, might work out of the 
house, et cetera.
    Mr. Rossotti. Well, of course, you know, if they want to 
establish an entity, they have to apply for an employment 
identification number. If they just want to work out of their 
house as an individual and be a self-employed business----
    Mr. Horn. With a business in this day and age, you have 
computers, as you know.
    Mr. Rossotti. Yeah. You don't have to do anything if you're 
an individual and you're just working yourself as a self-
employed individual. But if you want to have employees and pay 
payroll taxes, you have to have an EIN, but, of course, herein 
lies the issue, there are people--I can give you examples of 
people from my own previous business, when I was in the 
software business, where a programmer would leave the company 
because they had, you know, a lot of talent in programming 
software, said I can go out and be an independent consultant 
and make more money and be more successful. So they would do 
that, and the first thing you know they would get together with 
some other people and have some employees. The furthest thing 
from their minds was payroll taxes. I mean, most of those 
folks, frankly, had never seen a, you know, tax form other than 
maybe their own personal income tax return. They can be easily 
somebody that can get behind a quarter or two before we would 
find out about it, and they would get in serious trouble.
    One of the key strategies that I think we need to follow 
for this segment of the population is to work in cooperation 
with, for example, State agencies and other places to educate 
these folks. We have education programs now, but, you know, 
more specific intervention at a very early stage through 
whatever source, either when they apply for a number or when we 
find out some other means that they're starting a business, 
just let them know--look, this is what you need to do to make 
sure you're complying properly with the law. We have some 
programs like that now, but it's a very, very small percentage 
of our operation.
    We have some initial steps that we're taking over the next 
fiscal year, again, modest, to try to what we call mentor new 
employees. It's really very simple--new employers--it's really 
very simple. It is just telling them, here are the forms you 
need to file, and here's what you need to do to make sure 
you're staying compliant. But that is probably the cheapest 
thing we could ever do to get problems solved before they 
occur, and that will be a major part of our emphasis of our new 
program beginning with small steps next fiscal year.
    Mr. Horn. Because a lot of that can be done with the local 
municipality. People do know, gee, I guess I better go down and 
get a permit for this and that. It seems to me there is one 
place to educate more people.
    Mr. Rossotti. Absolutely, I couldn't agree with you more.
    Mr. Horn. Let me ask you, you heard my comments on the 
private collector versus your own revenue officers. Are you 
going to get into an experiment on what can be done in the 
private sector?
    Mr. Rossotti. Well, you know, I think that--here the issue 
becomes, what's the first step and what's the priority step? I 
think there's obviously potential to do those experiments over 
time. But I think if you look at that chart over there and you 
mention, well, you know, the last experiment they give old 
debt, that wasn't realistic. But the difficulty was, if you 
look over there on the right, that's the place that our 
collectors--I know you can't see too much of it, but we will 
give it to you--but the far right third of that chart is 
basically the time when our actual collectors or field 
collectors get the money, get the debt that's turned over to 
them.
    By the time it's there, it's typically a couple of years 
old. So when they did the experiment, you know, actually I 
don't honestly think there was an attempt to rig it. It was 
just all they did was they took what the collectors get, and 
they gave the same thing to the private collectors. The private 
collectors said, what's this? This is junk. We can't collect 
this. I said, yeah, that is exactly what many of our collectors 
are actually collecting on.
    So to really do a proper experiment and do things 
realistically, you really have to get a much earlier 
intervention into this cycle.
    If you look at the middle chart there, this is a chart that 
one--where analysts that are working on our new computer 
systems put together, and what it shows is from some private 
sector sources the probability in the private sector of 
collecting debt, those are the green bars as time goes by. And 
it goes down to about, you know, if you can see that, 12\1/2\ 
percent, 24 months----
    Mr. Horn. I can see that.
    Mr. Rossotti [continuing]. Well, if you look down at the 
bottom, that's about the time that we actually turn the debt 
over to our revenue officers. So, I mean, the game is almost 
over by the time they get it.
    Mr. Horn. Presumably you're going to change that?
    Mr. Rossotti. We're going to change it. But if you look at 
those boxes on the left what you can see is there's an awful 
lot of boxes, and they go through a series of steps. That is 
not something that I or anyone else can decree has changed 
very, very quickly when you recognize that some of those boxes 
are, for example, written into law. I mean, for example, the 
due process, the Revenue Restructuring and Reform Act just 
added a whole lot of new boxes with some of the procedures--
some of them are derived just by procedures, and all of them 
are embedded deeply into the computer systems that we have.
    So this is why, you know, I've said and GAO I think agreed, 
there is no--it would be good if you could pick out one piece 
of this and just say let's fix that. People have tried that 
before, and it's failed every time. Honestly, I think it would 
fail again. You really have to reengineer this process, which 
includes all phases of it, to make it really effective.
    Mr. Horn. The key is to do it earlier, the first 6 months?
    Mr. Rossotti. Absolutely.
    Mr. Horn. Because otherwise----
    Mr. Rossotti. You can see the green bars show you----
    Mr. Horn. Yeah, they think it's a grant. It's like 
students. If they got a loan and nobody says, hey, I want my 
interest, they're going to say, gee, I guess somebody just 
turned it into a grant; I didn't hear from them.
    Mr. Rossotti. Well, the other thing is that, as your 
hearing pointed out in--and the GAO report pointed out in this 
particular sector, the payroll taxes, people are paying all the 
time. So I mean it isn't a matter of just a one-time debt, it's 
an ongoing monitoring process. And with the right kind of 
computer systems, the private sector does this all the time in 
the credit business, that's an ongoing process as well.
    It's really quite feasible to monitor with statistical 
miles to try to figure out where the risk is. If somebody is 
late one or two times, they may not be a risk. They may be away 
on a vacation, and they just didn't pay the bill. In the other 
case, if you had the right information, you could find out very 
quickly there's a risk. We don't have anything like that kind 
of information available at the IRS.
    Mr. Horn. Well, is there a way to really get at that?
    Mr. Rossotti. Well, I think there is, and that's what we 
have--I think that the whole--what we call our modernization 
program basically comprises three elements. It comprises 
reorganizing so we have, you know, instead of 43 different 
people collecting, we have a central process to oversee this. 
That's management.
    The second one is technology, which is what we're working 
on through the ITIA account.
    And the third, that enables you to reengineer this to 
basically do what's on those green bars there.
    I mean, the thing about this, it's really not hard to know 
what to do. We know what to do. Getting it done in the 
magnitude of what we're dealing with and in the--with the 
constraints we have is not so easy.
    Mr. Horn. The gentleman from Texas, Mr. Turner.
    Mr. Turner. Mr. Rossotti, you heard my discussion earlier 
about the possibility of a bond requirement for the payment of 
payroll taxes. And I assume if you had one we would have to 
maybe apply it only to employers that have a certain number of 
employees or greater, certain size payroll or greater, so every 
mom and pop wouldn't be having to file or post a bond. But do 
you think there's any wisdom in considering a bond requirement?
    Mr. Rossotti. Well, there certainly would be wisdom from 
the point of view of reducing the risk of nonpayment of payroll 
taxes. I don't think there's any question.
    The difficulty you get in, as the GAO representative noted, 
is that it does place an additional burden on the taxpayer. 
And, really, if you look at our whole mission at the IRS, it's 
bouncing multiple objectives. Because on the one hand we want 
to make sure we achieve compliance and we don't have people 
failing to pay what's due. At the same time, we want to make 
that process as easy as possible.
    And I go to another hearing once a year or so with Senator 
Bond, Small Business Committee, and their perspective is how 
can we make it easier for small businesses to startup, which is 
a very appropriate thing do to. We try to accomplish both. I 
think a bond program would have the--have to be very carefully 
considered in terms of what its potential burden on new 
businesses that we're starting up might be. That would be the 
principal downside.
    Mr. Turner. Payroll taxes appears, if I have my data 
correct, to be a fairly sizable portion of your uncollected 
taxes, about one quarter of your total taxes?
    Mr. Rossotti. Yes. To put this in perspective, though, I 
don't want to minimize the importance of this number, the $49 
billion and the $38 billion that it represents, but payroll 
taxes and withholding taxes are the largest share of the cash 
that comes into the Federal Government. I mean, it's a very 
large amount.
    I mean, our total in fiscal 1998--our total receipts from 
payroll taxes, and this is both employee and employer shares, 
was about $550 billion, and if you add in withholding payments 
for withheld income taxes, you're getting around $1 trillion. 
So I mean this is the largest single source of money coming 
into the Federal Government. It's an enormous sum, and it's 
actually attributed to the taxpayers of America. But most of 
this actually comes in quite smoothly, and it's more the 
exception that causes the difficulty.
    On the other hand, the exceptions, because of the size of 
the system, are still very large. So I don't want to minimize 
them. But in terms of total scale of operations, there is 
around $1 trillion a year coming in from both withholding 
income taxes and payroll taxes.
    The reason that it shows up as a significant workload for 
revenue officers is because of the ongoing nature of this. I 
mean, the basic kind of--you know, you really have two kinds of 
tax issues--tax collection issues. One is from assessments, 
which are made, for example, when we audit someone and find 
that they underreported their taxes, and now they owe X amount 
more, and then we have to go and collect that money from an 
individual.
    That's more of a sporadic event. I mean, most people don't 
underreport every year. The payroll taxes and withholding is 
something--for an in-business taxpayer is an ongoing, weekly 
kind of an operation. So, clearly, the techniques of collecting 
and the intensity of the need to collect is different.
    Mr. Turner. When will you be able to implement the 
continuous levy that you were authorized to do in the Taxpayer 
Relief Act of 1997?
    Mr. Rossotti. Again, this is a program that involves 
primarily the financial management service and the IRS 
together, although our role is mainly to provide information to 
them. The current target I believe is to have it done, to be 
implemented in July or let's say the summer, or about a year 
from now in the year 2000.
    On that chart over there on the right, it shows you 
actually the simplified version of the process that goes 
through. And, again, I know you can't read these, but you can 
get the impression. We will be glad to give you the detailed 
chart. But it shows you the various steps that have to be done.
    I mean, it's definitely a good program, the 15 percent 
levy, because it will be able to assess, you know, benefits of 
people, Federal benefits from people. But it is not a simple 
thing to do because, as you can see in these charts, there are 
a number of steps. For example, because of the Restructuring 
and Reform Act, there's what's called a due process in the 
collections process.
    So before anybody can be levied, there's an entire process 
that goes all the way through multiple steps internally within 
the IRS and potentially to the tax court before you can 
actually assess a levy. And before you can give somebody a due 
process in collection notice, you have to know that there's a 
valid levy source. So part of the process going back and forth 
there are, first, we have to find out that there's a tax debt. 
Then we have to find out if the financial management service 
actually has, for example, some sources of levy, such as a 
Social Security payment or a vendor payment. Then if there is, 
we have to send--go through the whole due process in collection 
law, which is a multi stepped process in and of itself. Once 
that's done, it has to go back to the financial management 
service.
    So I think, you know, when the GAO representative said they 
believe this is a good program, but there's cautionary notes, I 
think this is some of the things that they were saying. This is 
not to undermine or any way--I don't want to give the 
impression that I'm saying this is not a good program. I 
believe that it makes a lot of sense to do this. It's just to 
try to provide a little bit of information about what's 
involved.
    As best I know it today, and it does depend in part heavily 
on what the financial management service does, it should go 
into effect for everything--well, for most of the things that 
are authorized, except for wages of Federal employees. There 
are some complications there. But it should go into effect, for 
example, for vendor payments and Social Security payments next 
July or so.
    Mr. Turner. Finally, I would like to get your opinion on 
the issue of the statute of limitations that I raised with the 
GAO. Do you think the law should be as it is, giving the 
taxpayer the option to waive the statute of limitations?
    Mr. Rossotti. Well, let me just say that the situation has 
evolved little bit since the GAO--the GAO did the work they did 
in conjunction with their audit of the 1998 financial 
standpoints. But during approximately the latter part of fiscal 
1998, we actually at the IRS, as part of some of our reviews 
that we were conducting, you know, basically discovered or 
realized that this program was not being implemented properly--
and really the way it arose was that revenue officers or others 
that were collecting, what they were really doing was that they 
were going into installment agreements in a lot of cases for 
the authorized period of 10 years. And then what was happening 
is, let's say a few months before the statute expired, we had a 
computer system that was bumping these things out and they were 
going back to the taxpayer and requiring them at that time in 
most cases to actually extend the statute of limitations, the 
alternative being potentially other action--other enforcement 
action such as a seizure of assets or a levy of assets.
    So they were basically, in most cases, requiring the 
taxpayer to extend these agreements. And we found cases where 
people were on agreements for as long as, frankly, 30 or 40 
years, which is somewhat dubious from a lot of point of views.
    Furthermore, what we also found is that practice, although 
it was well-intentioned, actually violated a prior statute on 
the Taxpayer Bill of Rights, which forbid us from basically 
requiring a taxpayer under threat of enforcement action to 
extend a statute.
    So at that point, which was approximately a year ago this 
summer, we completely revised a lot of these procedures and 
basically don't allow installment agreements any longer which 
don't pay off the full loan during the statute or I think it's 
a 5-year extension, one-time 5-year extension. See we can 
request the taxpayer to make an extension if we do it up front 
at the time--as you indicated, at the time that we make the 
installment agreement.
    So under our current process what it boils down to is, if 
you can pay off the entire loan with one extension of the 
statute, we can then enter into an installment agreement on 
that basis. The alternative is to have an expanded offer in the 
compromise program, which is the second leg of the stool, the 
second change that we've made. And as of January of this year, 
we did issue new guidance on the offer in the compromise 
program, which allowed us to have a much wider range of 
different kinds of offers, including deferred payment offers, 
which is essentially a combination of an installment agreement 
and an offer in compromise.
    So we were--basically, if you can look at it this way, we 
are in the process of basically revamping and reconsidering all 
of these tools, so that we have a--I mean, we have to conform 
to the bill of rights, Taxpayer Bill of Rights' issues. We have 
to conform to the statute of limitations' issues, and we have 
to try to figure out what is the best tool to collect the most 
money from the taxpayer. And this is part of this major 
revamping process that we're in.
    I think in terms of the statute of limitations, we actually 
have the authority now essentially to work with the taxpayer to 
request an extension of the statute in order to achieve a full 
payout through an installment agreement. And if they don't 
accept that at the beginning, we do have a number of tools to, 
you know, to essentially provide some enforcement authority 
that I think gives an incentive for the taxpayer to work with 
us to extend that statute.
    Mr. Turner. So you don't think it would be helpful at all 
if the statute of limitations ran from the date of the last 
payment a taxpayer made, rather than from the date of the 
initial tax obligation?
    Mr. Rossotti. Well, that's a technical question. I think 
what we would like to do is to get back to you on that. I think 
that particular question--I don't think we can adequately think 
it through here on-line.
    Mr. Turner. That's fine. And I would urge you to look at 
State laws regarding collection of private debts. I know in my 
own State, statute of limitation runs from the date of the last 
payment on a debt. Oftentimes, debtors refuse to make a payment 
because they know the limitation period is running, and if they 
make a payment they're going to extend the statute.
    Mr. Rossotti. There are those intricate byplays that you 
get into with these statutes. But I think we will be glad to 
take a look at this particular issue that you've raised and get 
back to you with some thoughts on that.
    Mr. Turner. Thank you.
    Thank you, Mr. Chairman.
    Mr. Horn. Mrs. Biggert, vice chairman.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Mr. Horn. Eight minutes.
    Mrs. Biggert. Thank you.
    Mr. Rossotti, the GAO report noted that about 70 percent of 
the amount owed in delinquent taxes predates 1994. How long on 
the average does it take for the IRS to go knocking on 
somebody's door after they first default to require a payroll 
tax deposit? I can see the chart. It's 24 months. Where it's--
--
    Mr. Rossotti. Well, it depends--what happens is, as you can 
basically see in this chart here, but we will get it for you, 
is the first process is the notice process, normally is a 
notice process, where they get some notices depending on 
whether it's business taxes or individual taxes.
    Mrs. Biggert. How long does it take for that notice to go 
out, on the average?
    Mr. Rossotti. The first notice will go out maybe--if I can 
get any colleague here to help me on the precise timing.
    Mr. Peterson. Sure. Basically, on a trust fund, which is a 
little bit accelerated over an individual 1040 liability, 
normally, it's about 3 months from the time the return is filed 
until the time someone knocks on the door. And in the 
intervening time you received a couple of notices and hopefully 
had a call from the automated telephone system, but it would 
bypass a lot of the normal processing. And normally it would be 
about 3 to 4 months from the time the return was filed until 
the time that someone would be out talking about the business.
    Mr. Rossotti. I should note that a return is filed, you 
know, after the end of the quarter. So you've got a whole 
quarter of deposits, and then you've got the leg time to until 
the return is filed. And then you've got potentially up to 4 
months, you know, before someone--and that's probably the most 
accelerated process we have, and that's a whole lot faster than 
most of the processes.
    Mrs. Biggert. That really would then be 7 months?
    Mr. Rossotti. From the time of the deposit, you know, 
depending on, you know, a deposit goes weekly or biweekly.
    Mrs. Biggert. Do you have any statistics then about how 
many companies have already gone out of business before they 
receive the first notice, if it's 7 months?
    Mr. Peterson. No, we really don't have. We can probably 
look to see if we can do an extract on that. But I'm not sure 
if we would have that data available anywhere.
    Mr. Horn. Get the microphone a little closer to you, Mr. 
Peterson.
    Mr. Peterson. Sure.
    Mr. Horn. Thank you.
    Mrs. Biggert. I'm just trying to figure out how many 
businesses are notified and they've already gone out of 
business, because it seems like the process takes such a long 
time.
    Mr. Rossotti. Well, we don't have the exact numbers, but, 
without having any numbers, we already know it takes too long. 
I mean, our whole process is to reengineer this. We do have 
this Alert system, as GAO has noted, that tries to get some 
intervention earlier, but it has its limitations.
    Mrs. Biggert. With your revamping of the computers and your 
program, will there be something done with the first area? GAO 
also noted that it didn't seem like the First Alert was 
working. Do you have something to change that?
    Mr. Rossotti. Yes. I think that--again, this is where you 
get into this intricate complication of regulations, 
organization, technology, and so forth. I mean, part of the 
problem is that, you know, that what triggers the Alerts now is 
a very crude kind of a process. I mean, it requires I think 
four quarters of delinquent taxes, you know, which is pretty 
stringent criteria. So, you know, and then we have a limited 
number of revenue officers that can do this, so sometimes the 
Alerts don't always get followed up on.
    The goal where we need to go on this is to have much better 
history and much better records and then use these--what the 
private sector uses in the credit card business are risk 
prediction models. They take all the things in the computer 
into account, including past payment histories, the 
delinquencies, you know, the patterns of payments and all of 
these things. I mean, you probably made a credit card charge at 
some time--most people have--where they intervene right on the 
spot where you were making the charge and called you back to 
verify that it was really you that was making the charge, 
because their models have detected that particular payment 
even.
    So I mean that's how sophisticated it can be in the private 
sector. There's nothing about our process that says we couldn't 
take advantage of that kind of technology, if we had the 
technology. And the effect of it would be that we would know in 
a much more precise way where the real risks are and where we 
need to intervene and when and we can take the appropriate 
action.
    The appropriate action might be do nothing. Because this is 
the taxpayer that, you know, based on history is really going 
to pay, and it's just probably a clerical error or something, 
don't waste your resources on it to look. This is a real risk, 
high risk; and you need to send a revenue officer out there 
right away and sit down with that taxpayer and figure out what 
to do or it could be an intermediate ground, just sending them 
a notice or just sending a phone call.
    So that's--I mean, it's really not hard to figure out what 
we should be doing; and it's very, very well modeled in the 
private sector. But, again, I don't want to sound like a broken 
record, it really depends on having the right technology, the 
right information and also the right management structure so 
when you get the information you can send it to the right 
people and have them act on it.
    Now, right today it's--the Alert system is a very crude--
very, very crude attempt to approximate that kind of approach. 
And, you know, as GAO indicated, being crude, it doesn't work 
that well.
    Mrs. Biggert. And they also mentioned that there were 
certain types of businesses like the construction business or 
the restaurant business that are more prone to fall into that, 
the category of defaulting. So this would be an area then that 
would be targeted for the type of business that you might send 
to the IRS?
    Mr. Rossotti. Hopefully more precisely than that. That 
could be a factor that would be taken into account. Basically 
what you want to know is, where is your risk, and you want to 
know that very quickly so you can do something about it.
    Mrs. Biggert. Then are there any initiatives that the IRS 
has taken to target high-risk industries, or are you intent to 
be more precise than that?
    Mr. Rossotti. I think, honestly, at this point, you know, 
that we really don't have fine-grained enough information to do 
that without potentially--you know, you have to be very careful 
in the IRS when you start, quote, targeting anybody, because 
they--people on the whole don't like to be targeted, unless you 
can prove there's a very, very good reason to it and just 
identifying a whole industry is not so wise.
    But I think what we need to do is to--I mean is to--I keep 
sounding like a broken record--but to have more accurate and 
updated information. We can apply real models that would then 
be rigorous that would allow us to intervene quickly. In the 
meantime, I think we're stuck with some basically modest 
refinements.
    The one key thing, and you might want to mention the 
mentoring program, we have one initiative that we approved 
right now that I think gets partly to Mr. Horn's point about 
the new employers. And I would ask Mr. Peterson to describe 
this, because this is one thing that we can do now.
    Mr. Peterson. We actually started a test that's going on 
this week, and it's a program which he is talking about that's 
called Mentor and Monitor. And what we're doing is with every--
in a certain area--we are actually testing this out in the 
north Texas district, but with every business that applies for 
a identification number in that area we're making contact with 
every one of those and explaining to them what their 
requirements are, explaining to them what they need to do to 
make sure they're filing all their Federal taxes, including 
payroll taxes.
    We then go ahead and monitor their track record and make 
sure how they're doing; and if there's kind of a missed payment 
or anything else, we give them a call right on the spot. And if 
they have, quote, significant problems, we will send a revenue 
officer out. And we're doing that against a test group to try 
and get an analysis of what that kind of attention does in 
terms of the general business versus the ones that get the 
extra attention and see if that isn't a very valid way of 
starting to do a little bit of what we're talking about in 
terms of more outreach and more monitoring to make sure that 
people are aware of their tax responsibilities, as well as 
complying with them.
    Mrs. Biggert. Is there anything with the States when a 
company files for articles of incorporation that there would be 
information--is there information given with that incorporation 
or would the States perhaps include that in their----
    Mr. Peterson. Not in the Mentor and Monitor program. I 
mean, there are things that we have done, but the difficulty 
with that is those kinds of agreements are done State by State 
under the Fed-State agreements. A lot of States that have no 
tax have no, really, interest in entering into a Fed-State 
agreement with us at this time because there's no quid pro quo 
of exchanging information. So it really is a State-by-State 
basis right now. We've got a program--obviously a formal 
program that attempts to do that, but it really--our success 
with those kinds of agreements really do run by the individual 
State and their wish to get involved with that.
    We are trying to do something in the collection area this 
fall in terms of--for the first time, we're doing a nationwide 
Fed-State symposium on some of the things we can do to try and 
share those kinds of ideas and do things together, but that's a 
first-time effort as well.
    Mrs. Biggert. Thank you.
    Thank you, Mr. Chairman.
    Mr. Horn. On that last point, it seems to me if you picked 
a city, you could pick mine if you want, Long Beach or the 
State, California, you can get those incorporations and those 
business licenses. They're glad to render it for a fee, and 
that might be one way to check when businesses are coming in 
and going out. So it just seems to me there's a way to collect 
$49 billion if we put our minds to it.
    And I guess that I would ask you, Commissioner, what, in 
particular, are you going to do in response to the GAO report? 
I know you feel they're right.
    Mr. Rossotti. Right. I mean, as I indicated in my 
testimony, there are some specific individual initiatives that 
we can take, particularly with respect to the trust fund 
recovery penalty. We have some initiative to try to clean up 
what are called the transcripts in the initiation of these 
trust funds recovery penalties. Although I don't want to 
overstate the effect of that, because this is one of the most 
extreme examples, as GAO has noted, of the deficiencies of a 
computer system where we have two tape files, you know, one on 
individual taxpayers and one on business taxpayers, and the 
process of managing this trust fund recovery is very, very 
labor intensive and very error prone, but we do have to do some 
things to try to improve the cleanup of that, and that's 
probably one of the most important things.
    We do have a few specific initiatives on the payroll. 
Probably one of the more important is this pilot project on the 
early intervention with monitoring and mentoring. But, in all 
honesty, the degree of impact that we can have on improving 
this by these kinds of steps is relatively limited. I really 
have to say that, very honestly, is relatively limited. The 
sources of this problem are very fundamental, and they go to 
the things that we are talking about.
    And I think that it would be wrong to tell this committee 
that there's anything that we can do that's going to have a big 
impact on this area, short of what we really need to do, which 
is a very, very fundamental modernization and revamping of our 
whole collections and process and especially the technology.
    We also have the issue that I think was raised by GAO of 
the more recent decline in statistics. I mean, underlying all 
of this, we also have a need for improvement on taxpayer rights 
that we're trying to implement that was called for by the 
Restructuring and Reform Act, and we haven't talked about that 
here. And I don't want to imply that I don't support that, 
because I think it's the right thing to do, to have these 
taxpayer rights.
    But the immediate impact of this, short of having also 
improved our technology, is simply to elongate the process. I 
mean, it goes in the exact opposite direction in some ways, not 
that it can't be compensated for in the long run. But in the 
near term what it does it adds more boxes to this chart and 
more labor-intensive processes that have to be done manually 
which, in turn, reduces the number of collection activities 
that are--the number of cases that our offices can work. So 
this is another aspect of what we're dealing with.
    The net effect of this is that I think that there are some 
immediate steps that we can take, particularly in the trust 
fund area that can have some effect, ameliorative, the 
mentoring and monitoring program. These are steps and clearly 
we will do those and monitor them, but it would be misleading 
everyone to believe that this problem can be solved in any 
short-term way by anything we do, short of really revamping 
this whole process.
    Mr. Horn. Let me throw out a suggestion for you to think 
about. You've got about 102,000 employees, as I remember, 
unless there's been some changes. Suppose you gave them a 
little crib sheet and a phone number and they phoned up some of 
these people. Each one of them to be in touch with real people. 
Some of them aren't in touch with real people. A lot of them 
are. But you would make it an agency effort. It's like 
libraries, that sort of have a Good Samaritan Day bring the 
books back kind of thing.
    What about using those 102,000 people to make one call a 
week?
    Mr. Rossotti. The trouble is, all of those 102,000 people 
are doing something. And most of them, you know, there's--in 
order to even contact the taxpayer, the IRS, there's many 
requirements, OK, that are legally imposed. You know, without 
the proper training I would be a little reluctant to have 
people calling taxpayers, also without having necessarily the 
correct information. So I think that might be a hard one to 
implement in our current----
    Mr. Horn. Think about it.
    Mr. Rossotti. OK.
    Mr. Horn. It's like having a campus blood drive or 
something. You get their juices going and see if they can win.
    Mr. Rossotti. OK.
    Mr. Horn. And, you know, give flowers to the ones that win.
    Mr. Rossotti. OK.
    Mr. Horn. You heard the discussion on computer capability 
and intraoperatability between agencies. What do you think 
about trying to get the benefits straight from other agencies?
    Mr. Rossotti. Well, I wasn't quite clear as to whether--I 
did hear the question, but I wasn't quite clear as to whether 
the idea was that, for example, when another agency was making 
a loan to an individual that they first check----
    Mr. Horn. To see if the taxes were paid.
    Mr. Rossotti. And they would check with the IRS rather than 
the taxpayer, is that the idea?
    Mr. Horn. They could ask the taxpayer, but there ought to 
be a way that they check the IRS.
    Mr. Rossotti. Yes, there is a way to do that; and private 
mortgage companies can do that, too. And it requires the 
approval of the taxpayer, but if they're requesting a loan, you 
know, that could be a requirement. And they can request a 
transcript from the IRS of their taxes. So that is an ongoing 
process.
    Let me just say that this is another example, interestingly 
though, that the current process for doing that--and it's 
exactly for that purpose--I mean, it serves that purpose. If 
you're applying for a loan, you sign a waiver. You send it in a 
request to the IRS. We do a transcript of your--it's called a 
transcript. It basically says, here's the situation, whether 
you've paid your taxes and send it to the lender. So that 
serves that purpose.
    The real problem right now is a very manual-intensive 
process. It takes about 6 to 8 weeks to do that. We have a 
proposal that we're working on to do a more automated version 
through an e-mail kind of a process that would speed that up 
dramatically. The principal issue there is various security and 
privacy issues. Because here we run into some security and 
privacy concerns that if there's, you know, risk of 
unauthorized people getting access to taxpayer records, that 
could be a problem.
    So there is a process right now to do it, and it could be 
implemented. It's just a little labor intensive and a little 
time consuming, but with some additional investment, we could 
automate that process.
    Mr. Horn. One of the concerns we've had before is when 
various excise taxes come in to the Internal Revenue Service. 
There's a coupon on them, but there's apparently not a coupon 
that says this is Medicare deduction. This is Social Security 
deduction, and all the other deductions one has.
    Mr. Rossotti. Yeah.
    Mr. Horn. And instead of that we just dump it all in one 
big pile, and you've got an office of--what--analysis that--and 
Social Security has it that they say, well, this percentage is 
ours, you owe us for our account. And the fact is there isn't a 
real trust account there.
    Now we've tried to lock that off so Presidents can't put 
their fingers on it and spread it around on all sorts of Santa 
Claus programs. Instead, we want to preserve Social Security. 
So we've heard of a 10 percent radioactive fence right around 
that so-called trust fund.
    Now, do we have a trust fund or don't we? And why can't we 
get them to put the coupon on and actually add those up with 
all that new high-powered computer machinery that you have?
    Mr. Rossotti. Yeah. There's two parts to this. One is what 
we would have to do internally--first off, let me just say that 
you are correct in that the tax deposits that are made on a 
weekly basis or depending on the taxpayer's frequency are just 
that, they're a deposit. They're not a tax return. And, 
traditionally, they have only designated very limited 
information so they don't precisely say what tax trust fund 
each tax should go for, excise taxes or Social Security taxes. 
This then requires a reconciliation process, which is what 
you've described.
    I think that, you know, it certainly would be feasible to 
require precise designations at the time of deposit rather than 
at the time of return, if that would be possible. But there are 
two issues that have been, I think, repeatedly stood in the way 
of this. The more--one issue is just internal. We don't have 
the computer systems, again, to process this data right now.
    Mr. Horn. On that very point----
    Mr. Rossotti. Yeah.
    Mr. Horn [continuing]. You are familiar with the universal 
price system in your friendly grocery store, and they can just 
do a sweep like all of those coupons, and you would have an 
accurate statement of what should go where.
    Mr. Rossotti. Well, we have the--we actually do scan the 
coupon. In fact, most of it does come in electronically through 
banks.
    Mr. Horn. But it doesn't have it subdivided into Medicare 
and Social Security?
    Mr. Rossotti. And that's--I said the easier problem to 
solve is the systems problem. That could be solved. The more 
difficult question is really a policy question and I think, you 
know, possibly would require consultation broadly through our 
Congress, because it would require putting an additional 
mandate on taxpayers. It would require taxpayers who currently 
can file a relatively simple--just, here's the total dollars, 
and then just file a return once a quarter.
    Mr. Horn. You're putting it on taxpayers, in quotes, you're 
putting it on the employer to deduct it. One of the greatest 
schemes ever known to mankind, Beardsley Rummell in the Second 
World War, take it out before you give them the money.
    Mr. Rossotti. It's true.
    Mr. Horn. The citizens--are having a terrible time. A lot 
of people up here don't agree with that.
    Mr. Rossotti. Well, I'm simply saying what it would 
require--and I'm not debating the merits of it. What it would 
require is telling employers, businesses--and many of them, or 
at least a fraction of them, a significant fraction of them are 
small businesses--that whereas today they can file a relatively 
simpler thing which says here's how many dollars we're 
depositing, it would require them to enumerate--obviously, it 
would require them to enumerate how much was for each purpose.
    It may seem like a simple thing to do. I found that, with 
businesses, when you ask them to put more information on forms, 
they don't always respond with great enthusiasm to that 
proposal. And they can do it now voluntarily through the 
electronic system, but I think to make it complete, to provide 
accurate information, it would have to be mandated. And that 
would be the policy issue. Do we want to mandate, you know, a 
couple million businesses to put that more detailed information 
at the time they make these deposits.
    And I don't really think it's a decision that the IRS 
should make, actually. I think that's a policy issue that ought 
to be determined through some process.
    Mr. Horn. Somewhere in the law it must say you're supposed 
to give us--in the case of IRS, you're supposed to give half of 
that salary to a certain level and match it.
    Mr. Rossotti. Yes.
    Mr. Horn [continuing]. With the employer's share. It's the 
employer's share. The employee's share, now, they give you very 
complicated payment statements. Practically everybody has that. 
I don't know why everybody can't--if everybody is doing it, why 
can't the IRS do it and get them to put the accurate amount? 
Because what I'm hearing is that, let's say somebody makes 
$30,000 a year, and you've got maybe $5,000 goes for the 
employer, $5,000 for the individual, and what it sounds like is 
they can just write you a check, and it might only be $4,000, 
when they should have matched it to $5,000 or vice versa.
    Mr. Rossotti. It's a question of when they do it, because 
they do require quarterly, for example, on employment taxes to 
file a tax return that lays out what those details are. The 
difficulty is that prior to the time that they filed their tax 
return, they actually have to deposit the cash, usually weekly 
or biweekly, depending on what size of employer they are; 
sometimes more frequently with each payroll.
    It's the reconciliation of those things that makes the 
issue. We do have the tax return and they do file the tax 
return quarterly in the case of employment taxes and also the 
excise taxes. But the real issue is what to do with the 
deposits. The deposits is when they actually send us the cash 
and the deposit is just that. As it is conceived today, it's 
not a tax return. It's just a deposit. It's just a cash 
advance, if you will, that says this is a cash advance we are 
sending you generally for this purpose. It's not, as a tax 
return is, detailed as to what precisely is there.
    So what would have to be done to be totally precise along 
the lines of I think what you are suggesting, is we would have 
to convert the deposit instrument into something that lays this 
out in detail. In our electronic deposits, we already have the 
capability of doing that. But the question that comes up is do 
we mandate the taxpayers to provide us that detail at the time 
of deposits, which is more frequently than at the time of 
returns. That's a question that I don't know that it's up to 
the IRS to make a decision on it. It is really more of policy 
question. Certainly, if that was a decision of Congress that 
that was what was required, that that was----
    Mr. Horn. We look at our check and we see what is taken out 
of it. If they are not depositing it, it seems to me that's 
where we think they are depositing it because they have 
deducted it off of our gross payroll. Where is it? Is it an 
endowment for swimming pools or what? We have great curiosity.
    The average person that goes and gets their check once a 
month by electronic deposit with a long list of things that 
have been deducted, health care and all the rest, noble causes 
all; but if they are going to do that, why not put the money in 
there on the other side? They have deducted it from us.
    Mr. Turner, the gentleman from Texas.
    Mr. Turner. Just one followup question, Mr. Rossotti. Did I 
understand you to say that if an SBA loan officer wants to find 
out whether or not the individual that he is loaning this SBA 
money to owes payroll taxes to the IRS, that he could make a 
call to find that out; but if he did, it would take 6 weeks for 
him to get an answer?
    Mr. Rossotti. Right. That's the way it works. To get a 
transcript of taxpayer information today is a very manual and 
intensive process. You can't just make a call. You have to send 
in a form, get a taxpayer authorization that goes through a 
manual process. I know this sounds startling. I have been in 
this office a year and a half. I have found many startling 
things. One of the places that we do this is in Tennessee.
    Not to tell a war story, but my first trip down to an IRS 
service center, I was down in the service center of Tennessee, 
and I was asking about this process because I used to do 
business with mortgage companies that check these kinds of 
things and I asked about this. Sure enough, it takes 6 to 8 
weeks. They said, There is a car factory down the road. They 
can build you a car quicker than we can give you a transcript 
for a taxpayer on their return.
    It isn't that we have bad people that are doing a lousy 
job. The process is extremely labor intensive, it is not 
computerized really at all. There is any number of different 
steps that you have to go through. By the time that you mail it 
and so forth, it takes about 6 weeks. We have a pilot project 
that does it electronically, I am sure an e-mail system that 
basically does it almost instantaneously. This is something 
that has been piloted and would speed it up to almost nothing.
    The issues there have to do with both some technology 
issues, but mostly privacy issues, in ensuring that there is 
adequate security; because the other thing that we bump up into 
anytime that we release taxpayer data, anybody, we have very 
strong requirements on us to ensure that (a), that it's only 
given to somebody that is authorized to receive it; that it is 
not misused for other purposes; that it isn't intercepted 
during transmission; that there is a whole variety of security 
requirements that have to be met.
    So when you start to transmit it out electronically through 
the e-mail type of environment, you run into those kinds of 
issues.
    The real solution to this, though, I believe, is to 
automate this through an e-mail process so that any taxpayer 
that wants to get a loan or wants to get their information to 
verify something that they need should be able to send an 
authorized transaction and have it sent back right away. That's 
clearly the right way to go.
    Mr. Turner. I hope that your modernization program will get 
you there so that we can do that. And in the meantime, I hope 
that we can persuade the Small Business Administration to 
request of the IRS 6 weeks in advance to find out before they 
close the loan and disburse funds----
    Mr. Rossotti. There may be some way that we could work with 
the Small Business Administration. There might be some ways, 
frankly, if the Small Business Administration set up a process 
for us, that we could work a special way to get to them quicker 
than 6 weeks.
    Mr. Turner. The GAO study that we heard testimony on this 
morning, if we could solve that one problem, we could save 
$31.6 million in unpaid payroll taxes if somebody would just 
ask before they disbursed the funds.
    Mr. Rossotti. We would be more than happy to work with the 
Small Business Administration on that issue. We have a good 
relationship with them today. The administrator is someone that 
I have gotten to know. If that was something that--we would be 
happy to work with them on that. We have all of these little 
sort of special solutions that we come up with to work these 
particular problems in the interim. It's not the right way to 
go long-term, but we can do some of these things if we work on 
it.
    Mr. Horn. Let me ask before we wrap this up, does the 
General Accounting Office have any other comments they would 
like to make based on this discussion? They don't? Your lucky 
day.
    Commissioner, we assure you we want to do everything that 
we can to help you. We are from the government, too. We are 
here to help you. I have great confidence in your leadership.
    Mr. Rossotti. Thank you.
    Mr. Horn. And I hope that when we meet again, you will have 
that $49 billion in the nearest Federal depository run by the 
Treasury. That would help us on a lot of things that we have to 
do here, like dealing with Medicare. That $49 billion would 
sure help us right now. We hope that you will find it soon.
    Let me thank the staff here that helped on this: Russell 
George, the staff director and chief counsel; Randy Kaplan, to 
my left and your right, the counsel and professional staff 
member; Bonnie Heald, director of communications back there; 
Grant Newman, our clerk; Chip Ahlswede, our staff assistant; 
and Seann Gallagher, the intern for us. And then on the 
minority side, we have Michelle Ash and Trey Henderson and 
Early Green and Jean Gosa, minority professional staff members. 
And we have our two court reporters, Randy Sandefer and Cindy 
Sebo.
    I thank you gentlemen for coming and I wish you well; and 
as you know, if we don't see you before, we will see you on 
April 15th as usual.
    We are adjourned.
    [Whereupon, at 12:09 p.m., the subcommittee was adjourned.]

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