[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
RESULTS OF THE INTERNAL REVENUE SERVICE'S FISCAL YEAR 1999 FINANCIAL
STATEMENT AUDIT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
FEBRUARY 29, 2000
__________
Serial No. 106-154
__________
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
__________
U.S. GOVERNMENT PRINTING OFFICE
66-876 WASHINGTON : 2001
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-HAGE, Idaho (Independent)
DAVID VITTER, Louisiana
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
David A. Kass, Deputy Counsel and Parliamentarian
Lisa Smith Arafune, 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
Bryan Sisk, Clerk
Trey Henderson, Minority Counsel
C O N T E N T S
----------
Page
Hearing held on February 29, 2000................................ 1
Statement of:
App, Steven, Deputy Chief Financial Officer, U.S. Department
of the Treasury............................................ 45
Kutz, Gregory D., Associate Director, Government-wide
Accounting and Financial Management, Accounting and
Information Management Division, U.S. General Accounting
Office, accompanied by Steven J. Sebastian, Assistant
Director................................................... 10
Rogers, Lawrence W., Acting Chief Financial Officer,
accompanied by John M. Dalrymple, Chief Operations Officer
and Commissioner of the Wage and Investment Operating
Division, Internal Revenue Service......................... 35
Letters, statements, et cetera, submitted for the record by:
App, Steven, Deputy Chief Financial Officer, U.S. Department
of the Treasury, prepared statement of..................... 47
Biggert, Hon. Judy, a Representative in Congress from the
State of Illinois, prepared statement of................... 7
Horn, Hon. Stephen, a Representative in Congress from the
State of California, prepared statement of................. 3
Kutz, Gregory D., Associate Director, Government-wide
Accounting and Financial Management, Accounting and
Information Management Division, U.S. General Accounting
Office, prepared statement of.............................. 14
Rogers, Lawrence W., Acting Chief Financial Officer, prepared
statement of............................................... 38
Turner, Hon. Jim, a Representative in Congress from the State
of Texas, prepared statement of............................ 5
RESULTS OF THE INTERNAL REVENUE SERVICE'S FISCAL YEAR 1999 FINANCIAL
STATEMENT AUDIT
----------
TUESDAY, FEBRUARY 29, 2000
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 2247, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Present: Representatives Horn, Biggert, and Turner.
Staff present: J. Russell George, staff director and chief
counsel; Louise DiBenedetto, GAO detailee; Bonnie Heald,
director of communications; Bryan Sisk, clerk; Trey Henderson,
minority counsel; and Ellen Rayner, minority chief clerk.
Mr. Horn. The Subcommittee on Government Management,
Information, and Technology will come to order.
Unfortunately, it is an accepted fact that the Federal
Government's financial systems are obsolete and ineffective.
Most Federal agencies cannot produce complete, consistent and
reliable financial information on a timely basis. These
problems have been identified by the General Accounting Office
and Inspectors General during the audits of the Federal
agencies' annual financial statements.
Attempting to correct these problems, Congress passed
several major legislative reforms, including the Chief
Financial Officer's Act of 1990, the Government Management
Reform Act of 1994, and the Federal Financial Management
Improvement Act of 1996. These were all bipartisan laws and
they were enacted to ensure that Federal agencies produce
timely and accurate information, which they need to manage
their operations and measure the full cost and financial
performance of their programs.
Unfortunately, our previous subcommittee hearings have
demonstrated that this important goal is a long way from being
met. For the past 2 years, this subcommittee has held oversight
hearings on the actions or lack of actions being taken by
Federal departments and agencies to resolve their long-standing
financial management problems. Again, this year, the Government
Management Subcommittee will conduct a series of hearings
examining financial audits of selected departments and
agencies. Today's hearing begins this series.
The auditing process can determine whether entities,
private or public, are managing their money efficiently and
whether they can produce timely, accurate and useful management
information, particularly financial management information. At
today's hearings, we will learn the results of the General
Accounting Office's audit of the Internal Revenue Service for
fiscal year 1999. The results of this audit and related
financial management practices at the Internal Revenue Service
are not only important, but they are important to Congress and
its functioning, they are important to the President, and they
are important to all of the taxpayers who depend on the agency
to accurately collect the taxes the Treasury is due. Further,
many Americans rely on the accurate refund of overpayments and
expect the agency to pursue those who fail to pay the taxes
that they owe.
Last year alone, the IRS collected a total of $1.8 trillion
in Federal tax revenue and paid out $151 billion in tax
refunds. Prior reports by the General Accounting Office have
been alarming. Serious problems in the Internal Revenue
Service's operations and financial management have placed an
unacceptable burden on taxpayers and an equally unacceptable
loss of revenue for the government. Even more alarming, most of
these issues have plagued the IRS since 1992. Throughout the
years, the IRS has acknowledged these issues and has pledged to
take the necessary corrective actions. During this session, we
will learn what progress has been made by the IRS in meeting
this challenge. We will hear testimony from representatives of
the General Accounting Office, the Internal Revenue Service,
and the Department of the Treasury. I welcome each of the
witnesses and look forward to their testimony.
[The prepared statements of Hon. Stephen Horn, Hon. Jim
Turner, and Hon. Judy Biggert follow:]
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Mr. Horn. We will now swear in the witnesses and they are--
let me just go--note who is here.
Mr. Gregory Kutz, the Associate Director of Government-wide
Accounting and Financial Management, Accounting and Information
Management Division, U.S. General Accounting Office, part of
the legislative branch. He is accompanied by Steven J.
Sebastian, the Assistant Director.
Next will be Mr. Lawrence W. Rogers, Acting Chief Financial
Officer of the Internal Revenue Service, accompanied by John M.
Dalrymple, Chief Operations Officer; and Mr. Steven App, the
Deputy Chief Financial Officer of the Department of the
Treasury.
So, gentlemen, if you will rise and raise your right hands.
[Witnesses sworn.]
Mr. Horn. The clerk will note that all five witnesses
affirmed the oath.
We will start with Mr. Kutz, who is Associate Director,
Governmentwide Accounting and Financial Management. So please
begin.
STATEMENT OF GREGORY D. KUTZ, ASSOCIATE DIRECTOR, GOVERNMENT-
WIDE ACCOUNTING AND FINANCIAL MANAGEMENT, ACCOUNTING AND
INFORMATION MANAGEMENT DIVISION, U.S. GENERAL ACCOUNTING
OFFICE, ACCOMPANIED BY STEVEN J. SEBASTIAN, ASSISTANT DIRECTOR
Mr. Kutz. Mr. Chairman, good morning. It is a pleasure to
be here to testify on the results of our audit of IRS's fiscal
year 1999 financial statements. The financial activities in
these statements are enormous when compared to other entities,
including $1.9 trillion in tax revenue, $185 billion in
refunds, and $21 billion in net taxes receivable. With me this
morning is Steve Sebastian who works with me on the financial
audit of IRS. I also thank IRS senior management and staff
across the country for their cooperation and professionalism
throughout this year's audit.
The bottom line of my testimony this morning is that IRS
does not have reliable financial and performance information
that is needed to effectively manage its operations. In
addition, control deficiencies relating to unpaid taxes and
refunds have likely cost the Federal Government billions of
dollars.
My testimony this morning is in three parts. First, the
results of our 1999 audit; second, problems IRS has in
accounting for and managing its $8 billion appropriation; and
third, weaknesses in controls and management of unpaid taxes
and refunds.
Before providing the results of our fiscal year 1999 audit,
I want to recognize the IRS for its notable progress this year
in seven areas: financial reporting, accounts payable, suspense
accounts, documentation of unpaid taxes, fund balance with
Treasury reconciliations, computer security, and controls over
hard-copy taxpayer data. We commend the IRS for their progress
in these seven areas. We also commend the IRS for issuing their
financial statements by the March 1st statutory deadline for
the third consecutive year.
The audit results for fiscal year 1999 include opinions on
IRS's six financial statements and an opinion on internal
controls and a report on compliance with laws and regulations.
Our opinion on IRS's statement of custodial activities is
unqualified. This means that the $1.9 trillion in tax revenue
and $185 billion in refunds are reliable. Our opinion on IRS's
balance sheet is qualified; except for issues relating to net
position, IRS's balance sheet is reliable.
Our opinions on the other four financial statements, the
statements of net cost, changes in net position, budgetary
resources, and financing, are disclaimers. Because of problems
relating to IRS's systems and controls, we were unable to
determine whether the information in these financial statements
is reliable.
Our opinion on IRS's internal controls is that they are not
effective. In addition, we found noncompliance relating to the
structuring of taxpayer installment agreements and the
releasing of Federal tax liens. We also concluded that IRS's
systems do not comply with the Federal Financial Management
Improvement Act. Because of a number of problems, we were
unable to determine whether IRS complied with the
Antideficiency Act.
I want to stress that although an unqualified audit opinion
is a recognized accomplishment that IRS should strive for, it
is not the ultimate goal. Rather, the ultimate goal is for IRS
to routinely produce reliable financial and performance
information to use in managing its operations.
Let me move on to a discussion of my second point, which
relates to problems IRS has in managing an accounting for
activity related to its $8 billion budget. My discussion will
focus on undelivered orders and property and equipment.
The qualification of IRS's balance sheet related to
problems we found primarily with the undelivered orders
component of net position. Undelivered orders represent the
cost of goods and services that have been ordered, but have not
been received. In testing a sample of year-end undelivered
orders, we found a 42 percent error rate.
For example, a large number of items recorded as
undelivered had, in fact, been delivered before year-end. In
addition, many of the items in our sample were no longer valid
orders. Undelivered orders is a key budgetary account. IRS
needs reliable budgetary information to effectively manage its
operations.
In our 1998 audit, we reported that IRS's property and
equipment was likely materially understated. Because IRS could
not rely on its own records, it hired consultants and
appraisers to develop a projected year-end balance. This effort
increases IRS's property and equipment balance by over $1
billion or 600 percent. Although IRS was able to develop a
reliable estimate at September 30, 1999, the chronic problems
in the underlying property and equipment inventory remain. For
example, when verifying the items in IRS's inventory, we found
at one location that 200 personal computers in IRS's records
had actually been disposed of. We also found video-conferencing
equipment and three new mail sorting machines costing over
$800,000 each that were not in IRS's records.
Finally, we found numerous errors in IRS's records relating
to costs. For example, a Compaq laptop computer was incorrectly
recorded at a cost of $310,000, and a copy of Microsoft office
software costing $213 was erroneously recorded at $212,300. IRS
itself has reported property and equipment as a material
weakness since 1983.
My third and most important point is that IRS continues to
have difficulty managing unpaid taxes and refunds. The
difficulty has resulted in burden to taxpayers and has likely
cost the Federal Government billions of dollars. The problems
we found are a result of human error, systems limitations, and
according to the IRS, resource constraints.
For fiscal year 1999, we found that taxpayer records
contained errors that IRS had not caught and resolved in a
timely manner. For example, we found delays in posting trust
fund recovery penalty payments to all appropriate taxpayer
accounts. Some payments made by taxpayers as far back as the
late 1980's were still not properly recorded.
We also found delays in correcting erroneous assessments
due to data input errors. In one case, IRS took 18 months to
correct an erroneous assessment of over $160,000 against a
taxpayer that was actually owed a refund. The case file
indicated that IRS knew of the error 10 months before it was
finally corrected.
Last August, Mr. Sebastian and I testified before this
subcommittee that outdated systems and ineffective processes
make it difficult for IRS to effectively collect delinquent
taxes. At that hearing, the Commissioner noted that IRS's
systems are fundamentally deficient in this area.
In addition to these problems, we found, during our 1999
audit, numerous unpaid taxes with collection potential that are
not being pursued by the IRS. During fiscal year 1999, in order
to reduce a backlog of unassigned cases, IRS removed $2.4
billion of cases from its field collection inventory. As a
result, these cases were closed without filing a tax lien or
taking normal collection action. Some of these cases that we
reviewed appeared to have some collection potential.
In addition, we found other unassigned cases that had
collection potential. For example, in one case, we noted a
doctor that owed taxes of over $100,000 from as far back as the
late 1980's. Although this individual had 1998 adjusted gross
income of nearly $200,000, the case was not being actively
pursued.
As we have reported in prior years, IRS has ineffective
controls that allow invalid refunds to be disbursed. According
to IRS, it relies primarily on detective controls in this area.
In fiscal year 1999, we found significant gaps in the
effectiveness of these detective controls. For example, months
after the filing season, IRS matched its tax return information
to third-party income information such as W-2s and 1099s. This
matching procedure is intended to identify under-reported
income.
For tax year 1996, IRS screened about 155 million
individual income tax returns and found that 12 million had
potential taxes due of $15 billion. However, IRS investigated
only 25 percent of these returns relating to about $5 billion.
Thus, IRS did not pursue nearly 9 million taxpayers with $10
billion of potential unpaid taxes.
Historically, the earned income tax credit has been
vulnerable to high rates of invalid claims. In fiscal year
1999, $26 billion of the $30 billion of EITC claims were
refunded. During fiscal year 1999, IRS examined 573,000
suspicious returns claiming $1.25 billion in EITC and found
that 86 percent of the claims were invalid. If these
examinations are done before the refund is disbursed, that is
an effective preventive control. However, according to IRS, 30
percent of these examinations were completed after the refund
was disbursed.
In summary, IRS cannot do some of the basic accounting and
recordkeeping tasks that it expects of American taxpayers. IRS
must resolve the financial and operational issues discussed in
our report to provide quality customer service and fulfill its
responsibility as the Nation's tax collector. Gaps in the
effectiveness of controls over unpaid taxes and refunds have
likely cost the Federal Government billions of dollars. We
believe that the vast majority of American taxpayers comply
with the Tax Code. However, failure to pursue and collect taxes
due could substantially reduce future compliance and erode
compliant taxpayers' confidence in the current system.
During fiscal year 1999, IRS senior management demonstrated
a high level of involvement and commitment to addressing many
of the issues discussed in our report. We encourage IRS to
sustain the progress made in 1999 and use it as a building
block for further improvement in the future. In addition, the
success of IRS's long-term modernization efforts is critical to
resolving the challenges we are talking about today. We are
committed to working with IRS in fiscal year 2000 and future
years to develop lasting solutions to these issues.
Mr. Chairman, this concludes my testimony. Mr. Sebastian
and I will be happy to respond to any questions.
[The prepared statement of Mr. Kutz follows:]
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Mr. Horn. Well, thank you very much. As you know, we
practice letting all of the witnesses speak and then we take
questions. So, we hope everybody is going to be here this
morning.
That was an excellent document and we have quite a few
questions that are going to come from it.
We now have Mr. Lawrence W. Rogers, the Acting Chief
Financial Officer for the Internal Revenue Service. He is
accompanied by Mr. John Dalrymple, the Chief Operations
Officer, and Mr. App, the Deputy Chief Financial Officer of the
Treasury. So go ahead, Mr. Rogers.
STATEMENT OF LAWRENCE W. ROGERS, ACTING CHIEF FINANCIAL
OFFICER, ACCOMPANIED BY JOHN M. DALRYMPLE, CHIEF OPERATIONS
OFFICER AND COMMISSIONER OF THE WAGE AND INVESTMENT OPERATING
DIVISION, INTERNAL REVENUE SERVICE
Mr. Rogers. Thank you, Mr. Chairman. We have submitted my
testimony for the record, and I have a short summary of that.
Mr. Horn. Just take your time. You are a principal witness.
So automatically, all of your statements go into the record
once we introduce you. But feel free.
Mr. Rogers. Yes, sir. I will give you a short summary of
that and then we will turn to questions. My testimony is for
Mr. Dalrymple and myself representing the IRS.
Mr. Chairman and distinguished members of the subcommittee,
I am pleased to testify today on GAO's report on our financial
1999 audits. I would introduce Mr. Dalrymple whom you have
already mentioned. Mr. Dalrymple is the Chief Operations
Officer for IRS.
This year, due to the combined efforts of the IRS and GAO
teams, GAO was once again able to render an unqualified, or
clean opinion on the IRS statements of custodial activity, as
has been noted by Mr. Kutz, and represents $1.9 trillion that
IRS collected in tax revenues in this past year.
That being said, we are very disappointed that we were
unable to achieve an unqualified opinion on our administrative
actions. I can assure you that this was an effort, an all-out
effort, by the agency to improve; and I am going to talk later
about the improvements that we were able to achieve.
The IRS believes the GAO report is generally accurate. In
its report, GAO staff expressed concern about the IRS use of
labor-intensive, compensating work-arounds. In fact, really,
during the audits that we have, it requires a cooperative
effort by the GAO teams and ourselves to carry out these
audits; and we will have to continue with these types of work-
arounds for the near term, that is, until we are able to
replace the archaic Legacy data systems that IRS now uses to
track its tax collections. With these improvements, though,
that we have made during the past year, we believe we can
sustain the progress that we have achieved and do this while we
are seeking more fundamental system improvements.
I would like to spend a couple of minutes talking about our
improvements over the past year. We were able to overcome the
loss 2 years ago of a mass migration of supervisors out of our
system, out of our accounting system, and we have replaced all
of those people. They are trained and in place. This is one of
the issues that was brought up in last year's report by GAO,
and these folks are there and are working very well.
On the custodial side, we have improved the data extract
process by which the audit is done. In 1999, IRS staff was able
to assume responsibility for analysis of the financial
classifications for accounts receivable. We were also able to
perform collectibility analyses of receivables, and this was
work that the GAO teams previously had to perform before we
were able to come up to speed and take over some of that
workload.
On the administrative side, the fund balance was reconciled
with Treasury at the end of fiscal year 1999, and I think the
GAO notes that in its report, although expresses some concern.
But we think that we have gotten there, and in fact, we are
continuing to reconcile the cash balance each month, and we
have done that for October and November of fiscal year 2000. A
new permanent team is now charged on a recurring basis with
that duty. I will tell you that I personally check on that
every month, just to make sure.
IRS also cleaned up the suspense account to a reasonable
level and the appropriate entries were made to record the
clean-out of that account.
We are providing for this coming year to make a subsidiary
ledger for our accounts available which will enable us in the
future to give GAO cleaner extracts for audit purposes. In
addition, we put into effect procedures that the IRS will
follow to ensure sustainability of our property evaluation
figure from the end of our fiscal year 1999. This process will
remain in place until a more permanent solution is found.
Also of interest to the GAO and the subcommittee, we
continued to improve on an aggressive security management
program which focuses on identifying, managing and mitigating
security weaknesses. We also have established the financial and
management control of the executive steering committee, and
that committee is chaired by the deputy commissioner to
strategically manage and improve on initiatives and ensure that
appropriate controls are an integral part of the IRS programs.
We view these steps and numerous others that are described
in detail in our written statement as necessary investments.
These investments have to be made so that IRS can meet the
statutory policy requirements for good financial data that
fairly presents the status of IRS finances to all interested
parties. We did this to the best of our ability in 1999, and we
will continue to do so from here on.
Mr. Chairman, in the long term, the inadequacies in and
solutions to our financial reporting systems must be addressed
through the broader efforts under Commissioner Rossotti to
modernize both the systems, technology and organization of the
IRS as mandated by the landmark IRS Restructuring and Reform
Act of 1998. I want to thank you, and if Commissioner Rossotti
were here, he would certainly do this as well, for the
leadership that you have provided from this subcommittee,
especially in the area of computer systems and the Y2K process.
In the interim, we intend to develop the best financial data
possible while continuing to concentrate on the more complete
reform of the data systems.
I can assure you that we will sustain each of this year's
improvements. We will work toward a financial management system
that fulfills the requirements of the various acts; and also in
the longer run perhaps--and I think this is what Mr. Kutz is
saying--will provide IRS managers with the data they need to
operate the agency effectively and efficiently.
Thank you very much. We would be glad to answer any
questions that you may have.
[The prepared statement of Mr. Rogers follows:]
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Mr. Horn. Mr. App, the Deputy Chief Financial Officer for
the Department of the Treasury.
STATEMENT OF STEVEN APP, DEPUTY CHIEF FINANCIAL OFFICER, U.S.
DEPARTMENT OF THE TREASURY
Mr. App. Mr. Chairman and members of the subcommittee, good
morning and thank you for inviting me here today to discuss
financial management in the Department of Treasury and the
Internal Revenue Service.
Throughout fiscal year 1999, the reporting cycle senior
management, including the Assistant Secretary for Management
and CFO, as well as the IRS Deputy Commissioner, have provided
critical oversight to improve the audit results at IRS. Mr.
Chairman, that is a commitment we made to you last year. Across
Treasury, we are pleased with the progress that we have made on
financial reporting and the sole qualification this year on our
report will be the IRS administrative statements.
Working with our audit partners and the IRS, we hope to
strive for unqualified opinions in 2000 at both the IRS and the
Treasury. It should be noted, however, that the path to
improved short-term audit results at IRS will remain labor-
intensive for the next few years until the core financial and
management systems can be reconfigured or replaced.
The Department's management fully recognizes the leadership
role that main Treasury must play in sound financial reporting,
and we will continue to support the IRS efforts to sustain the
progress made during fiscal year 1999, to strengthen the CFO
structure and management team at the IRS, and to build the
financial systems needed to improve reporting and, more
importantly, the management of IRS resources.
To that end, the Department is actively engaged with the
IRS on longer-term system solutions. Also, we made needed
changes in CFO leadership at IRS. You have heard from my
colleague, Larry Rogers. Larry Rogers has demonstrated
throughout Treasury his leadership ability, has tackled the
jobs of starting the Inspector General Office at IRS, as well
as filling in the permanent leadership at the Inspector
General. The Department and IRS and GAO have all recognized Mr.
Rogers' capabilities, and I think they are demonstrated by the
results this year. Going forward, our collective goal is to win
the war for top financial talent at IRS, both by selecting a
strong, permanent CFO and strengthening the CFO office.
While freely acknowledging the financial reporting problems
at IRS and the negative impact on the Department, I would like
to conclude my remarks by pointing out three areas of steady
progress across Treasury. First, in terms of timeliness, we
expect to meet the March 1st statutory deadline for the
Department for the first time in Treasury's history. The
Secretary is signing the reports today, as well as the
Inspector General, and we hope to deliver them to OMB today.
Second, for fiscal years 1997 through 1999, as you have
already heard, Treasury has received unqualified opinions on
its primary governmentwide functions: collecting revenue and
also managing the public debt. GAO is again rendering
unqualified opinions, as you have heard, on the revenue of $1.9
trillion at IRS, as well as public debts, $5.7 trillion in
debt. Also, the rest of the Department's bureau and custodial
activities, with the exception of IRS, all have clean audit
opinions, no department-level audit qualifications.
Finally, a last point is that the nonpayroll, IRS
administrative accounts that have been the focus of the GAO
reporting problems this year largely have a negligible impact
on the status or opinion of the governmentwide financial
statements, due to their low level of materiality.
Mr. Chairman, that concludes my testimony. I would be
pleased to respond to any questions you may have. Thank you.
[The prepared statement of Mr. App follows:]
[GRAPHIC] [TIFF OMITTED] T6876.036
[GRAPHIC] [TIFF OMITTED] T6876.037
Mr. Horn. Gentlemen, we are going to now conduct the
questioning. It will be 5 minutes per member, and we will
alternate between both sides of the aisle. Let me just start
with a couple of questions.
On pages 30 and 31 of the GAO report, at the bottom of page
30, it notes taxes collected on behalf of the Federal
Government are deposited in a General Revenue Fund at the
Department of the Treasury from which they are subsequently
distributed to the appropriate trust funds. Now, this is a
question I have asked numerous times in the last 6 years, and I
still am concerned about it.
Here we are: Amounts representing Social Security and
hospital insurance payroll taxes are distributed to their
respective trust funds, based on employee wage information
certified by the Commissioner of the Social Security
Administration.
What I would like, Mr. Rogers, is for you to tell me in
simple English for the average taxpayer that might read this
transcript some day, are we really getting all that we should
be getting from payroll taxes? Because over here in footnote
29, GAO recently reported in detail, unpaid payroll taxes:
billions in delinquent taxes and penalty assessments are owed,
August 2, 1999.
Now, that is what has been worrying me for 6 years, that we
don't quite put the money that comes in as an excise tax from
the employer that is deducted, half of the Social Security wage
and the person's additional half. We just seem to have
economists that say, yes, I guess that is right, and Social
Security administrators say, apparently, that is right.
I don't believe it. Isn't there a simple way, in an age of
digital analysis and sweeps in a grocery store, we could have
sweeps in an excise tax as it comes in and gets it right and
puts it in the right trust fund? We now have the lockbox, at
least out of the House, and we are going to make enough noise
on that lockbox on Social Security that no President,
regardless of party, and no Congress, regardless of party, will
be dipping their hands in it. But I am worrying about the stuff
that never got in there to start with.
So what can you do to reassure us?
Mr. Rogers. I think I can assure you, Mr. Chairman, that
money that is collected for the trust funds does go through the
general fund, but into the trust fund itself. I think in
looking at a stream of information over time and the way the
taxes are collected, there will be some occasions when
employers who have collected the money and were holding it in
trust never paid it. That is, they went out of business or
something happened that the money is not collected.
So when you look at a long-term stream, some of this money
won't get collected; it just will never get there.
However, the certification process calls for the Social
Security Trust Fund basically to be made whole. I think it has
been referred to as a subsidy by GAO, but in fact it is the way
Congress and the government have chosen over time to make sure
that all people whose Social Security benefits have been
withheld, it is guaranteed that way.
So I think there will always be a small loss.
The issue, I think, for IRS is to do the best job it can to
collect the money from those people who do not pay; and that is
the primary administrative issue that I think we face.
Mr. Horn. Now, that M.D. that you cited with a case, was
that part of his problem that he hadn't paid payroll taxes?
Mr. Rogers. I have not seen that case. I would have to ask
Mr. Kutz.
Mr. Kutz. That was individual income taxes, a 1040.
Mr. Horn. It had nothing to do with office employees or
anything?
Mr. Kutz. No.
Mr. Horn. I think we have found, when you look at all of
these cases across the country, you often have nonprofits that
usually hang by the nails anyhow, and the first thing they
don't report to the IRS is their wage deductions from their
employees, and they use that to keep running the information.
Mr. Kutz. Right. As we reported to you last summer, unpaid
payroll taxes are the No. 1 enforcement issue at the IRS.
Indeed, as Mr. Rogers pointed out, the amounts that go into the
Social Security Trust Fund--despite the fact that these payroll
taxes aren't collected, the trust fund is indeed made whole,
which creates a built-in subsidy, and that is in accordance
with the law; but the subsidy we reported in this report is
about $43 billion over time.
But we do continue to see a number of unpaid payroll tax
cases in our samplings as part of the fiscal 1999 audit. We
found again that there were officers that were responsible for
starting up and shutting down business after business and not
paying over their payroll taxes. We have a number of examples
of those that we can share with you if you would like.
Mr. Horn. I will get into that on my next question, but I
will yield now to the gentleman from Texas, the ranking
Democrat and the ranking member, Mr. Turner, for questioning.
Mr. Turner. Thank you, Mr. Chairman. Please excuse me for
being late today. In fact, I would like to submit my opening
statement for the record.
Mr. Horn. Sure. It will be put right after mine and put as
if read.
Mr. Turner. I want to followup on the question you were
pursuing, Mr. Chairman.
This problem of unpaid payroll taxes, it seems to me that
there ought to be some examination of ways to improve upon
that, to include ideas such as, perhaps, what would be the
effect if you required a $200 deposit by everyone who applies
for an employer identification number, to be refunded after
successfully paying your taxes for 1 year, or something like
that? You know, how much would that generate in terms of
savings?
I mean, are we talking about people, Mr. Rogers, who don't
even apply for an employer identification number, or are we
talking about people who do apply for one, but end up being
delinquent in their payroll taxes? I guess if they never apply
for one, you don't know about them, do you?
Mr. Rogers. I think that is right. I think that you are on
the right track.
Mr. Turner. So what would be the financial impact of
requiring a $200 deposit at the time you apply for an employer
identification number? Would that be helpful?
Mr. Rogers. I think $200 seems like a small amount and
probably most employers who are entering into the market could
do that. It brings with it all of the administrative issues of
any situation like this where the government would have to
record it, you know, take care of it, put it into an escrow
account, pay it back at some point when they went out of
business. So there is always a hidden cost that becomes very
real when you start trying to administer something like that.
I think you and Mr. Rossotti were engaged in a discussion
about this earlier, and I think his view was that you have to
kind of balance off the impact and the burden on employers or
people who are trying to startup who may be, you know, eking
out a beginning and whether this would have an impact on them.
I don't know that $200, frankly, would be high enough to be
good, earnest money; it might need to be higher.
Mr. Turner. I think Mr. Rossotti and I talked one time
about the effect of requiring a bond by those, and perhaps a
bond could cover a much larger amount of unpaid liability. Not
knowing anything about the potential market for that kind of
proposal, I don't know what the bond could cost an employer,
but obviously we need something to make some inroads on the
large amount of unpaid payroll taxes.
Mr. Rogers. To some extent, though, one of the problems is
the number of outfits that go out of business. The bankruptcy
laws in this country are such that there is a limit on what you
can get back from a bankrupt company. So there is going to be a
residue along the way of a loss on payroll taxes; and
especially for Social Security, I think the issue is, how do
the country and the government ensure against that?
As was said earlier, I don't view this as a subsidy, but
sort of a self-insurance program that the government has put in
place to make sure that this very important account, Social
Security, is kept whole.
Mr. Kutz. Congressman Turner, let me just mention one thing
on this.
As you may recall from our hearing last summer, the
individuals and businesses that we are talking about here, that
don't pay payroll taxes, many times are receiving other Federal
benefits, such as SBA loans, Navy contracts, et cetera. So that
is another issue. It is even worse than just not paying the
taxes, that these same individuals and businesses are
benefiting from other programs within the Federal Government,
which is another issue that needs to be looked at.
Mr. Turner. I just have the feeling that there are probably
some solutions here that both of you could help us fashion, as
long as they weren't unduly burdensome on the business
community. It seems to be an area we should pursue. After all,
we are talking about taxes, half of which are actually the
funds that belong to the employees who work for those
businesses; so it doesn't seem to me to be totally unreasonable
for us to have some--at least a little bit stronger enforcement
ability to collect those moneys that actually belong, at least
half of it, to those employees.
I want to pursue a little different line of questioning and
perhaps, Mr. Rogers, you could help me on this. I understand
that Secretary Summers has embarked upon an examination of
corporate tax shelters; and I don't know if the GAO audit in
any way touched upon that subject, but is it true--at least it
seems to be what I have read recently in press reports--that
corporate income tax revenues to the IRS are down?
Mr. Rogers. Yes. I am not sure of the figures, but I think
they have dropped from 26 percent of their corporate income to,
I believe the figure is 22 percent over the past few years; but
we would have to get the exact figures for you. That is in the
face of the percentage payment by individuals going up. They
are going in different directions.
Mr. Turner. So the fact that the percentage of total
collections by corporate entities is down from 26 to 22 doesn't
mean that the actual total dollar collections by corporate
taxpayers is down?
Mr. Rogers. I don't think so, but I think the rise in the
economy and the total tax collections is lifting everything,
even though the proportions have changed.
Mr. Turner. It was disturbing when I read that article in
the sense that we all have the impression that the economy is
booming, and you would certainly think corporate income tax
payments would be on the rise, as are individual tax payments,
as a result of the good economy. So it was somewhat troublesome
to me to see that.
It seems to me to address maybe a broader problem that I
would expect you to have an opinion on, and that is this issue
of whether or not many of the problems that we are hearing
about today can be traced back to the complexity of the
Internal Revenue Code, which every year that passes in our
efforts here in Congress to provide additional provisions to,
in many cases, induce good conduct by our taxpayers, we have
new provisions that taxpayers have to deal with and the IRS has
to deal with.
I would be interested in your view as to whether or not
much of the difficulty you face in administering your agency
could be traced back to the very complexity of the Code itself,
and thus, the issue could be raised of whether or not we should
be talking more about simplicity or simplifying the Code.
Mr. Rogers. I am not sure I am ready to give an opinion on
simplifying yet, but I think we can state the facts here.
The comparison, the analogy has been made that the Internal
Revenue Code, in words, is larger than the Bible. I think that
the number of changes in the last couple of years with the
reform act amounts to 800 law changes in the Code. In an agency
that is trying to collect taxes and implement that number, that
magnitude of changes, it obviously makes it difficult.
I recall that you said that you still do your own taxes, as
I do myself, and even from a personal standpoint, this is
something that is pretty daunting. I feel like I am pretty well
informed on it.
So I think the complexity affects everybody. It affects the
administrative apparatus of an agency like this. We have to
deal with a very large economy, with a lot of people, a lot of
activity going on; and the changes and the complexity make it
very difficult. There is no doubt about it. I think at this
point, though, I am really not prepared to speak to whether we
need some broad simplification or something of that sort. I
think this is an issue that is much broader and greater than I
am prepared to deal with today.
Mr. Horn. I have given you your opening statement time. Go
ahead.
Mr. Turner. Thank you.
Let me just ask as a followup. The problem that Secretary
Summers is wanting to address in terms of the increasing
utilization of tax shelters by the corporate community, isn't
that a direct reflection of the fact that the Code has become
so complex that the corporate community and their tax advisors
and attorneys are doing things that really you in the Internal
Revenue Service don't have the ability to even look at to
determine whether or not they are complying with the law or
not?
Mr. Rogers. Well, I think the identification of this
problem is a result of looking at these tax shelters, and the
examination of large companies like this. I mean, I am going to
ask Mr. Dalrymple to help me here in a minute; but I think that
the companies would say that the tax system exists, it is
there, and that they are entitled really to look at it and use
it to their proper benefit.
I think the issue that is in debate right now is whether or
not some of the companies may have pushed that limit a bit
beyond good practice; and that is what Mr. Summers has been
taking on as an issue and has been discussing here on the Hill.
Mr. Horn. Mr. Dalrymple, do you want to add to that?
Mr. Dalrymple. The only thing I would add is that what Mr.
Summers has been talking about, of course, is abusive tax
shelters; because tax shelters, in and of themselves, there is
nothing wrong with them. Everyone shelters their income legally
and should, because that is what the law is all about. But the
real issue is whether there is a real economic base or economic
reality to the transactions.
As Mr. Rogers correctly stated, we have uncovered these
through examination. They are very, very complex issues when we
uncover them. They take a tremendous amount of effort to
uncover them. The idea behind the regulations, of course, is to
ensure that these shelters are identified as the returns are
being filed by the taxpayers, so that they are easily
identified and they are returned and, therefore, are sort of
basically an open book policy.
Mr. Horn. Well, I thank the gentleman for those additional
facts. I just thought that maybe we ought to have only a ``last
year'' for every Presidential term, and then they finally get
around to doing the right thing. So the first 3 years, they
milk the cow for elections and then the last year they do the
public interest. So I am all for having maybe 4 last years for
everybody from now on.
The vice chairman, the gentlewoman from Illinois, Mrs.
Biggert, 5 minutes.
Mrs. Biggert. Thank you, Mr. Chairman. If I might also ask
unanimous consent to put my opening statement into the record.
Mr. Horn. It will go right after Mr. Turner's, and we will
give you some additional time on questioning.
Mrs. Biggert. Thank you. My first question is for Mr. Kutz.
What we have been debating in Congress over the past few
months has been the issue of privacy. I wanted just to ask
about that. Certainly, there is sensitive information about an
individual in the IRS. I am wondering whether, since the
management practices, is there any compromising of that
information?
I am disturbed by reports stating that the IRS is lax in
protecting sensitive taxpayer information. Do you agree with
that concern? Is that a concern?
Mr. Kutz. Yes, it is a concern in two areas. No. 1, the
area of computer security which--as Mr. Rogers said earlier,
IRS has a very proactive program in that area where they go out
and do self-assessments and identify various computer security
issues. They still have a lot of challenges in that area to
resolve.
The issue we are most concerned about at this point is the
delay in the responses of the fingerprint checks where
employees are going into the service centers and handling
taxpayer data, checks, cash, and various other information
before IRS receives the fingerprint results back. What has been
found in the past and what we have reported is that some of
these various individuals have stolen information and committed
fraud with it. So we are very concerned.
We believe that the IRS policy should be that these
individuals should not be allowed into the service centers or
anywhere else to handle this information until satisfactory
results of fingerprint checks are received.
Mrs. Biggert. Thank you. Do you think that there is any
need for congressional action on this issue?
Mr. Kutz. That is pretty much a management issue in our
view, and I think it is something that IRS should be able to
address and get around the various administrative issues they
have in actually implementing it. I think last year we had this
same discussion before this subcommittee, and IRS was going to
have that problem solved by last summer, and they don't have it
solved at this point as far as we have seen. It is something
that needs to be done.
Not only do they have electronic fingerprint issues, and
then they have basically the ink blot at some locations that
they are still using for fingerprint checks. I think that both
of those issues need to be streamlined before employees are
allowed to go into service centers and handle this information.
Mrs. Biggert. Mr. Rogers, I assume that you spoke about
this during your testimony, but I am sorry I missed it, if you
could just comment briefly on that.
Mr. Rogers. I am going to ask Mr. Dalrymple to answer this
question. This is strictly an operational and management issue.
Mr. Dalrymple. I believe it was 3 years ago actually, and
this is part of a much broader context in terms of security,
physical security, at our service centers in which the GAO was
very helpful in terms of pointing out some specific issues that
we needed to address. As you talk about privacy and access to
confidential information, very confidential information,
sensitive confidential information, I believe 3 years ago most
of our controversy at the time was around browsing that we had
by employees; and we have solved that problem.
In addition to that, the GAO pointed out other deficiencies
that we have also addressed, and I think they would be Johnny-
on-the-spot to say that we have addressed a number of the
physical security issues. We have taken the ability for people
to take handbags and hats and things into processing areas; we
have put lockers outside of those areas so that people have to
put their personal belongings in there so that they can't
easily take checks or other confidential information out of
those areas.
In addition to that, we had a process in place prior to
that audit where our background investigations took so long
that by the time our--most of these are temporary employees
that come in during our filing season. By the time our
background investigations came back, the employees were
actually off roll, they were no longer working for us.
Now we have an arrangement with the FBI where we get data
back where there are no hits within 3 days, and on average, we
are getting information back within 8 days. Our current policy
is not to have those folks, until their background
investigations are completed, be in our remittance processing
organization or our receipt and control organization.
Now, what I will say is that during our very peak days, 2
or 3 days where we have tremendous amounts of mail coming in,
and we are recruiting and hiring right up through April 15th,
17th, 18th, when tremendous amounts of mail come in, we do have
to make some decisions on whether or not we are going to make--
get the mail open and get deposits in the bank on a timely
basis, or not. And a lot of that depends on how many people are
available, how many hands.
So what I am saying here is that I can't completely commit
that we wouldn't have to use some people who we don't have the
checks back from; but the bottom line is, we get the checks
back in time to find out whether or not we have people with a
record and that we can take action before they have left our
rolls.
Mrs. Biggert. Do you think that 3 days for fingerprints or
8 days for completion of a background check is soon enough? I
mean, we certainly have been able to do that faster with
criminals now, with the instant background or the instant
check.
Mr. Dalrymple. Well, these are the instant checks that we
are getting through the FBI now. So I am not sure that we can
cut that timeframe any closer, although frankly, we are trying
to do--especially on the cases where we have hits for the 8
days. I think, getting them back within 3 days doesn't pose too
much problem because the training and orientation that goes on
when you hire a new employer takes 1 day, and getting the
information back within 3 allows us to productively employ them
before we put them into sensitive areas.
Mrs. Biggert. Just changing gears a little bit, Mr. Rogers,
some of my constituents who work for the IRS have contacted me
in recent months about the agency and the working environment,
and I think this is all part of what has been happening. They
say that really the morale of the IRS is declining due to the
recent well, congressional reforms, is the way they put it. I
don't know if it is the reforms, but trying to change the
practices or whatever.
Have these concerns been raised to you? Do you see a
situation where people are down, so to speak?
Mr. Rogers. Well, I don't know about down. I think
Commissioner Rossotti has spoken to this issue on several
occasions and perhaps before this subcommittee. The agency is
undergoing massive change, and the reorganization, the
restructuring, is a big one. It is an incredible change in
government circles about the way this agency does business. And
moving from the traditional regional/territorial kinds of
organizations to functional groups like this is almost
unprecedented. It is a change, I think, which the Commissioner
endorses and which the Congress has asked the agency to
undertake. When you have that kind of change, I think it is
inevitable that people are going to be very concerned.
There is also the overlay of the 10 issues that were in the
Reform Act, and the concern that people have had that they
might be fired. I mean, those 10 issues, it moves personnel
actions away from the traditional civil service system of
appeals and safeguards to one of dismissal without review,
except by one person. That is a major change as well.
I think the implementation of those provisions, however,
has been done correctly and clearly employs ``must knowingly
violate'' these things; and if you look at the issues there, if
an employee had knowingly violated them, they would have been
terminated previously.
But until everyone gets comfortable with this new
environment, I think there will be concern. It is a big change
that is going on, and this overlay I think clearly will create
concern on the part of any rational employee. But I don't
think--you know, you look at the record here this year, again,
all of the forms went out, the taxes got collected.
You know, there are issues on the margin that we need to
deal with in the under-reporting and the taxes that haven't
been collected. But in fact, the agency did achieve its basic
purpose; it got the money in, got it reported on, and as the
GAO said, that part of the agency's financial statement
received an unqualified opinion, which I think is a tribute to
people who are working in the place under these conditions.
Mrs. Biggert. Mr. Kutz, have you seen any changes in the
environment since the reforms or your investigations?
Mr. Kutz. I would say overall that many of the people are
very inspired by the Commissioner, I would say the new
Commissioner--I guess he is not that new anymore. But the one
area, we talked to enforcement and collections people across
the country as to the payroll tax work we did for you last
summer--and we testified before you last summer--and I think we
found and heard a change in the culture and atmosphere within
some of the people in the collections and enforcement area
where ``enforcement'' was kind of--almost a bad word to some
extent.
We did find an example of a case this year that I will have
Mr. Sebastian--just to give you an idea of the kind of
environment that you may be dealing with at this point.
Mr. Sebastian. This was actually an unpaid payroll tax case
where the business had accumulated a number of quarters of
delinquent taxes. The IRS had actually assessed several
officers a trust fund recovery penalty for the employee-
withheld but unremitted amount. One particular officer had a
total unpaid tax assessment of $4 million. The IRS had actually
exhausted all other attempts at collection and had seized a
condominium owned by this taxpayer.
Exactly 1 day prior to auction, the property was pulled
from the potential sale and later released and returned back to
the then deceased taxpayer's spouse. The indications in the
revenue officer case files were that the IRS did not want to
have an ``open seizure'' on an internal control report.
In our report, we characterized this as ``no reasonable
explanation'' because the truth of the matter is, aside from
the explanation I have just given you, there is nothing in the
case file that would indicate why the IRS didn't go forward and
sell this property.
Mrs. Biggert. So that was just written up as a loss then?
Mr. Sebastian. At the end of the day, yes.
Mr. Kutz. That was revenue that the Federal Government
would have otherwise collected had the seizure gone through.
Mrs. Biggert. Thank you, Mr. Chairman.
Mr. Horn. I will now yield myself 5 minutes and maybe a
couple more to equal both of you.
Getting back to that Social Security situation, on page 31
you talk about how the Federal Government's general fund
revenue subsidized the Social Security and Hospital Insurance
Trust Funds. A lot of us thought Social Security was
subsidizing everybody else with Presidents, both Democratic and
Republican. Where is that money coming from in the general
revenue into the Social Security Trust Fund?
Mr. Kutz. I will let Mr. Sebastian handle that one. This is
his area.
Mr. Sebastian. Well, essentially, I think we have probably
gone through this in prior sessions. All revenues that are
collected are initially going into the General Revenue Fund of
the U.S. Government, where they are then distributed into the
various trust funds such as Social Security and Hospital
Insurance. The distribution, the initial distributions to the
Social Security and Hospital Insurance Trust Funds are based on
estimates of wage information that is conducted by the Social
Security Administration's Office of the Chief Actuary. Roughly
9 to 12 months after that initial distribution, when actual
wage information is obtained by both the Social Security
Administration and the Internal Revenue Service, the Social
Security Administration Commissioner will certify based on that
wage information the amounts that should have been transferred
into the Social Security and Hospital Insurance Trust Funds.
The Treasury's financial management service will affect any
adjustments needed.
So the bottom line is, the revenue is coming in throughout
the course of the year. It is initially being distributed based
on estimates, but at the end of the day, it is being adjusted
for the wage information. There is really no relationship
between that and the amounts that are actually collected for
Social Security and Hospital Insurance. In fact, the IRS
currently doesn't have a mechanism for measuring the actual
amounts that are collected for Social Security and Hospital
Insurance taxes.
Mr. Kutz. So to the extent you have unpaid payroll taxes,
that is where you have a subsidy to the Social Security and
possible Medical Insurance Trust Funds.
Mr. Horn. How many billions of dollars in subsidies from
taxpayers are generally put into the Social Security Trust
Fund?
Mr. Sebastian. Are you talking about on an annual basis?
Because the number that we actually present here is cumulative,
with some caveats; there are some expired accounts that are not
considered. But roughly it would probably be a couple of
billion dollars a year.
Mr. Horn. Just a couple of billion?
Mr. Sebastian. A couple of billion a year.
Mr. Horn. You are saying it is chicken feed then?
Mr. Sebastian. Over time it adds up.
Mr. Kutz. On an annual basis, yes. Several billion,
probably.
Mr. Horn. Since I sit on the Transportation Committee, let
me ask you about the Airport Improvement Fund and about the
Interstate Highway Fund. Do they have that subsidy also from
the taxpayers?
Mr. Sebastian. A different situation there in that, by law,
the Highway, Airport and Airway Trust Funds receive
distribution based on actual revenue collected. The IRS has the
same problem there in that, as receipts are being paid over the
course of any given quarter, the IRS cannot attribute a receipt
with a specific type of tax. So, initially, excise tax receipts
are distributed into the various trust funds based on an
estimation process done by Treasury's Office of Tax Analysis.
Roughly 6 months after any given quarter as the IRS
receives and processes tax returns, it matches tax return
information against the actual collections for those taxes, and
using the tax return, the IRS certifies the amounts that should
have been distributed to the trust funds based on type of tax.
It is really not until they process the tax return that they
can equate the dollar collected to the specific tax type. Even
then, it is still somewhat an estimation process.
Mr. Kutz. But it is an estimate of what is collected, not
what should have been collected.
Actually, I have the information. The Highway Trust Fund
received $39.3 billion during fiscal year 1999, and we did
audit work on that for the Transportation Inspector General.
The Airport and Airway Trust Fund received $10.4 billion during
fiscal year 1999. Again, this is for all of the various types
of taxes. With the Highway, there are 16 different taxes that
go into that trust fund, and with the Airport and Airway there
are six different taxes that go in.
Mr. Horn. Well, does GAO have any recommendations that
would make this more accurate than having estimators? I still
don't see in this age when a gasoline station is deducting the
pay and it is going into a huge corporation, the thousands of
stations that might be under, say, Chevron or Mobil or Texaco,
and they are going to send on whatever basis--quarterly or
monthly, I have forgotten how that is handled by IRS--but it
just seems to me with that you have so many cents off the
gallon, that is to go into the Federal Treasury and into the
trust fund, and the same with when I fly on my little trip
every other week to California, I have a little excise tax when
I land at certain airports. So that, it seems to me, can
automatically be put into right fund and you don't need an
estimator.
Mr. Kutz. You would have to require the taxpayer when the
money comes in to tell the IRS basically what each piece of the
deposit is for. The money comes in in a bulk amount for excise
taxes and the payroll taxes, and you would have to have them
report up front.
What you could probably do is, at the back end, relieve
some of the other requirements that they have, such as the
quarterly filings. You maybe could have them file annually
their payroll taxes and excise taxes; if you required them to
tell you every 2 weeks--because they make deposits every 2
weeks, the big companies, if they were to tell you every 2
weeks how many dollars of each deposit goes where.
I don't know if Mr. Rogers has anything to add to that,
because the IRS actually has done a study last year where they
looked at this issue.
Mr. Horn. What did they find, Mr. Rogers, when they looked
at the issue? Here you have a bunch of people we are paying
salaries to called estimators, Ph.D.s in economics from the Ivy
League, I assume. We don't need that. Why do we? Why don't we
just get it accurately from the person that is deducting the
money and shipping it to you?
Mr. Rogers. It would shift the burden to taxpayers to
provide more information at this point, the way the tax
structure is set up. But the process here is one of doing an
estimation, and there are not many people that do it. I am
going to guess maybe 4 or 5 or 6 people in our office; this is
not a big operation. The estimates basically allocate the money
at the outset, and then you correct it when the tax returns
come in each quarter.
When you have an income stream, having an estimate and an
adjustment like this is not, in and of itself, dangerous. I
mean, it is something that, as you go along, might be the most
efficient way to do it, as opposed to putting more burden on
taxpayers. They come in, and the emphasis here is on collecting
the money. People who run weekly payrolls provide money every
week, people who do biweekly, every 2 weeks; and that money is
coming in, it is in the government's hands and it is available
for the government to draw interest on, so that you have it in
hand. I mean, that is what withholding is about and that is
what these quarterly payments are about.
So the emphasis has been, over time, get the money, get it
in circulation and have the government get the interest on it,
and then adjust as the returns come in quarterly; and I don't
know--the study shows it would be a burden and my guess is that
employers might resist it.
Mr. Horn. Might resist? You mean we would have tax
resistance?
Mr. Rogers. No. Having a change in the tax.
Mr. Horn. Believe me, we would have it if Bierdly Rummel
hadn't dreamed up withholding. This country wouldn't be past 2
percent when you get to the end of the year, there would be a
tax revolt from one end to the other.
Mr. Rogers. Well, again, that is the emphasis that Congress
put on it is to get the money to pay as you go, and that part
of it I think is working very well.
Mr. Horn. Well, I only wish the taxpayer, when IRS is
wrong, would get their amount back with interest. Now, have we
adjusted that?
Mr. Rogers. Yes. There is a 45-day requirement that we make
refunds and after the 45 days, then we begin to pay interest on
it. I think there has been discussion about that before, and
the mandate to get the refunds out in time so that people who
are owed them don't suffer by having them kept here.
Mr. Horn. Last year, as I remember, we had some felons that
had been hired by IRS, and this gets back to the security
issue. Here you have, as I understand it, you have where the
money flows into these service centers, we have surrounding
fences, security guards, metal detectors, yet GAO reported that
someone somehow was able not only to get into the service
center, he was handed a $28 million deposit without even asking
for identification, just because he was wearing a courier
uniform, even though the security guards and the staff that
handed him the deposit didn't know him. How could something
like that happen?
Mr. Dalrymple. Well, it shouldn't have happened like that.
They should have asked for his identification when he came in.
That is the procedure.
But what happened was exactly the way he described it. He
came in in the courier uniform of the courier that picks up
deposits, he was an employee of the courier, he came in in the
courier vehicle; he parked where he was told to park, where the
couriers are always asked to park; he went in, he got the
receipts as the couriers are supposed to do; and he left. What
they did not do is they did not confirm his employment with
that courier, and they should have done that.
Mr. Kutz. This gets into the issue of how difficult it is
to enforce policies at the IRS. You have so many offices around
the country that IRS can have certain policies in place, but it
is very difficult to enforce them across the board. I know Mr.
Dalrymple knows how difficult that is for the IRS.
Mr. Horn. Mr. Turner.
Mr. Turner. Mr. Rogers, back on the subject of
simplification of the Tax Code, does the IRS have a computer
model in place that would give the Congress access to the type
of information one would need if you seriously wanted to go
about the task of trying to simplify the Tax Code? For example,
if Congress wanted to take a look at how many taxpayers are
utilizing a deduction for educational expenses that the
Congress has in the law and we want to see how many people are
using it, what is the revenue loss as a result of people using
it, do you have the ability to turn around that kind of
information quickly?
Mr. Rogers. I don't think there is a model of the type that
I think I hear you conceiving of, where you have everything set
up and you could just change a variable and it would give you a
new answer. There is not a model of that sort, I am confident
in saying.
However, one of the things that IRS does traditionally is
analyze proposals that are made and provide information of what
the impact would be one way or the other. I think that were
there some specific suggestions of that sort, that the agency
could respond with studies or analyses of what they would
consider the impact to be.
Mr. Turner. So you routinely do analyses of proposals, but
in terms of just looking back and seeing how a certain
deduction is being utilized, who is utilizing, what income
categories of taxpayers are utilizing that deduction, those
kinds of things you really do not have the ability to provide
that kind of information?
Mr. Dalrymple. We actually do quite a bit of that through
our Statistics of Income Division in conjunction with the
Office of Tax Analysis at the Treasury Department and in
conjunction with the Joint Committee on Taxation here on the
Hill. By no means is it every item, but there is a great deal
of work done every year on particular items, specifically
around credits, what they have done, how they have been used,
what the impact has been.
So as Mr. Rogers said, it is more specific than general,
but there is quite a bit of that work that is done.
Mr. Turner. If we were to undertake seriously a project to
simplify the Tax Code--and of course you know in the House
there was a bill that passed that would sunset the Tax Code,
thus forcing a complete review of the Code--would there be
suggestions that you would make to the Congress in terms of
getting the data in better shape for that kind of an analysis
than we have today? Would there be things that would need to be
done prior to a serious review of the Tax Code?
Mr. Rogers. I think it really depends on the nature of the
proposals. Sort of ``simplifying'' is kind of an attractive
word, but as we were talking about earlier, this is a huge
undertaking. I think it would really depend on the nature of
the proposals to be able to react to something like that. This
is a hard area.
Mr. Turner. I guess my concern is that as we hear these
reports from the GAO about the difficulties that the IRS has in
administering the Code, the difficulties in collection, we hear
reports from Secretary Summers about perhaps the stretching of
the utilization of tax shelters, you know, it seems to me that
we are going to come to the point where the general public
begins to sense that there are a lot of folks that are not
paying their fair share. And as we all know, the ability to
collect taxes is based, in large part, on the basic honesty of
the American people right now; their willingness to try to
comply is critical.
I am concerned that, over time, we are seeing an erosion of
the public's confidence in that. Unfortunately, I think from
time to time the Congress contributes to that with their own
rhetoric, but it does seem to me, after reading this GAO
report, that there are many things that certainly would cause a
taxpayer to lose confidence in the collection agency and would
contribute to one's general sense that perhaps some other folks
aren't paying their fair share and, therefore, I don't think I
ought to have to pay all of mine. At some point, it seems to me
that we are going to have to try to deal with that, do
something about that.
Now, you have watched this a lot longer than I have, Mr.
Rogers, and maybe you would disagree with me and not be
concerned about that; and I would be interested in your
observations.
Mr. Rogers. No, sir, Mr. Congressman. I am concerned about
it, but I think that we--if you look at the GAO report, it sort
of breaks down into some financial issues and some management
issues. In my estimation, most of the management issues in here
are things that this agency can control over the longer run, or
even the shorter run. I mean, the whole issue of couriers and
talking about that--that went wrong and it shouldn't have--and
I hope--you know, we can say that the guards have been dealt
with, trained and retrained. So when you sort of split this and
look, we didn't pay some bills, this sort of thing; but when
you look at tax collection, you are right.
I mean, it is amazing. I was looking at some data today
before we came up here, and 180 days past the point at which
taxes are due the outstanding tax liability that is unpaid is
less than 1 percent on personal income taxes. I mean, people do
comply, and what we are looking at is the difference in trying
to pinpoint those issues that deal with collection.
The subsidy issue that has been raised by the GAO, the $43
billion that is subsidizing Social Security, well, that is a
10-year accumulation; so on average, it is $4.3 billion a year,
and 65 percent of that, the penalties and interest. The taxes
are quite small that people didn't pay.
So we get focused, you know, on this, and we miss the
bigger piece, which is this system is working pretty well and
people do come up here and people--tax shelters, I mean the
Secretary is concerned about that, so there is a situation
where people are not doing everything they should. We ought to
do something about it; I think you are right.
In fairness to everybody in this country, everybody ought
to be paying their taxes. But the system is working pretty well
now, and I think when we look at these isolated instances, we
lose sight of that, frankly.
Mr. Kutz. Congressman, let me mention one thing with
respect to that, because I think the issue is even bigger than
what Mr. Rogers said, because what we are talking about with--
the $231 billion in unpaid taxes, for example, is what IRS
knows about. There is still the issue of the remainder of the
tax gap out there, which includes the underground cash economy,
illegal activities, et cetera; and that is something that IRS,
GAO and nobody really knows how substantial that is. But that
is also a consideration in what you are talking about.
Mr. Turner. It certainly is.
Thank you, Mr. Chairman.
Mr. Horn. The gentlewoman from Illinois, Mrs. Biggert.
Mrs. Biggert. Thank you, Mr. Chairman.
Along this line, but just going back to focus on the $23
billion of taxes owed, Mr. Kutz, could you talk a little bit
more about the collectibility of these dollars and about the
issue of that amount of money?
Mr. Kutz. Yes, I can. In the inventory of unpaid
assessments at September 30, 1999, there is $231 billion of
total unpaid taxes. Of that, there are pieces called write-
offs, there are pieces called compliance assessments, and then
there are the gross and net taxes receivable.
What you see up on the poster board to my right are the
taxes receivable for fiscal years 1999 and 1998, and those are
accounts that either the taxpayers acknowledge that they owe,
or the IRS has a favorable ruling that a taxpayer owes the
amount; and you will see there the actual collectibility rates
of, and I guess 32 percent and 27 percent.
So that is the amount of collectible out of the actual
receivables amount.
The write-off amounts that we are talking about are
primarily failed businesses, individuals who have passed away
with no estate, et cetera. So those are the ones that don't
have a whole lot of collectibility. But what really is on the
table as unpaid taxes that IRS has a chance to collect, what
you see on the poster board is what really is most likely to
have some potential down the road.
Mrs. Biggert. Thank you. Mr. Rogers, in your testimony you
stated that the IRS is not able to pursue all of the cases, and
that the IRS thought it was a necessary and sound business
decision to modify its criteria as to which assessments would
be designated as uncollectible. Could you explain how you came
up with that decision?
Mr. Rogers. Yes, ma'am, and I am going to ask Mr. Dalrymple
to help me in a moment. One of the things I would like to do is
put this a little bit in perspective.
The $77 billion is basically a 10-year accumulation. I
think it is not unfair to average this, and you are really
talking about $7.7 billion per year in a system that collects
this year $1.9 trillion. So if you look at this as kind of a
corporate enterprise, any corporation of this size and not
knowing who its customers are and whether they are creditworthy
or not is going to have some loss in collecting its bills.
So when you begin to analyze that and decide where you are
going to put your effort with an agency that, by and large,
still is working full out, you do have to make some decisions
like this. And we have done that, and John will walk you
through how we do that.
Mr. Dalrymple. We have prioritized work for as long as I
have been with the Service, and I have been with the Service
for 25 years in terms of our collection work and what has been
described in the GAO report is the prioritization of our work.
It is clear that with the resources we have to work collection
accounts, there is a certain amount of work that we would do in
particular ways, such as through our notice activities, through
our automated collectionsites, and then eventually through our
field activities.
We have a system in place that is somewhat risk-based, so
that it is certainly not where we want to go with the risk-
based collection activity. But the bottom line is, we do some
risk analysis on this inventory and we determine whether or not
it is worth our pursuing with the resources we have available
to go after that particular account. In these instances, we
felt that it was not; that there were other higher-priority
types of work.
In business trust fund cases, a perfect example, we wanted
to give those a very high priority. So we have determined these
cases to not be collectible at this time. They are currently
not collectible, which does not mean they are not collectible.
It means we put them in a suspense account. We systemically
monitor them. Any offsets to refunds would be taken against
these accounts. Liens are filed on some of the accounts,
depending on the value of them. Again, taxpayers who want to
extinguish the lien have to come back and satisfy the
liability. There are a number of systemic things that happen on
these accounts.
So when we say ``currently not collectible,'' that is
exactly whether we mean, as opposed to--as Mr. Kutz referred to
earlier, these are not considered write-offs at this point.
Mrs. Biggert. Mr. Kutz, it seems to me that some of this
might be a case of lost opportunity, and particularly after
hearing from Mr. Sebastian of a case that was written off the
day before the end of the year so that it won't show up. What
do you think about that?
Mr. Kutz. Well, these are lost opportunities in many ways.
The $2.4 billion that Mr. Dalrymple was talking about that was
taken from the collection inventory had some potential
collectibility. The $10 billion of potential unreported taxes
due, that IRS was unable to pursue, had potential to be
collected to some extent.
They also do a matching program for, I guess it is called a
``combined annual wage reporting program,'' and they get
$600,000 or so discrepancies in that program and that program
has not been funded and they haven't done anything with those
600,000 matches, so there is potential there.
There are also the cases like the doctor case that I gave
you in my opening statement that are sitting in the inventory
as unassigned case, that are not being worked; and that was
clearly an individual that has the means to pay the taxes due.
So I think that there is a substantial number of
opportunities. As Mr. Rogers said, if you look at the bigger
picture and say 1.9 trillion, it is not significant compared to
that, but are billions or tens of billions of dollars
significant? Yes, I think so.
Mrs. Biggert. Since it becomes a trillion, I guess the
saying goes----
Mr. Dalrymple. Congresswoman, if I could address this
particular case, since it has come up a couple of times here,
it is--when I saw this case, I decided to personally look into
this, because I was somewhat concerned about the report; and as
it turns out, this case was a case with a clouded title, and
that is why the case did not go to auction. Our counsel
actually advised against selling this asset at auction and
advised the manager of that. So there was very good reason that
this case didn't go to auction.
Mrs. Biggert. It had a clouded title over and above some of
the tax problems?
Mr. Dalrymple. Exactly, exactly.
Mrs. Biggert. Do you know what that was?
Mr. Dalrymple. I really can't get into the specifics of
that here, but suffice it to say that there was a clouded title
on this case.
Mrs. Biggert. Thank you.
Thank you, Mr. Chairman.
Mr. Horn. Was there political intrusion at all on that
case?
Mr. Dalrymple. No, there was not.
Mr. Horn. So nothing in the files?
Mr. Dalrymple. Not that I have seen.
Mr. Horn. OK. The predecessor to Mr. Rossotti as
Commissioner and I had a discussion in probably early 1995, and
I looked at the $100 billion sitting around that was not being
collected, and she then said, oh, I have another $60 billion
which could be collected. I must say when I look at that
receivable for 1999 and we have $21 billion collectible and we
have $56 billion uncollectible, I ask myself, is any of that,
the $60 billion she talked about in 1995 and the $100 billion
they were just letting go. It just seems to me, as I told her,
it was a national scandal as far as I am concerned.
Then we had the Debt Collection Act in 1996. It doesn't
really apply to the IRS, right?
Mr. Dalrymple. Actually, it does this year. The taxes are
part of that effort starting this year.
Mr. Horn. You make me feel better. As I remember, Secretary
Rubin did care and did use it, whether it was authorized by him
or not.
Mr. Dalrymple. We actually believe that, through your
efforts, that that is going to be a significant event for us.
Mr. Horn. Well, that is good. I am glad. That will make me
feel good. We are going to have an extra panel and you will
probably be back there again on the debt collection situation.
We know that there are bankruptcies in there and all the rest
of it, but there has to be some way that when people in the
audience and everywhere else across the country are paying
their taxes and these people go in and out of bankruptcy and it
is a pattern and practice, I think something ought to be done
about it. I think we ought to get that money somewhere down the
line.
Does the Treasury have any bright ideas on this?
Mr. Rogers. I think the one thing I would do, Mr. Chairman,
is add some analysis about what the receivables look like if
you could go to the $21 billion. Mr. Chairman, 43 percent of
that is the result of insolvent corporations. Another 30
percent are financial hardship situations where the IRS has
pursued collection from an individual and has come to the
conclusion that there is nothing left there, the assets have
been seized, they have no income, so there is just no reason to
keep going. Another 3 percent represent people who are
deceased, and another 21 percent are actually bankruptcies, and
a small 3 percent are people that we are unable to locate.
In other words, while it is sitting there and it looks like
you could do it, there are really pieces of this that make it
difficult to do; and I think it goes to the whole issue of
collecting this kind of debt.
I was looking this morning before we came up here in trying
myself, because I am relatively new to this part of the
Treasury Department, and I was looking and thinking about $1.9
trillion. If you have a 1 percent loss in a year of $1.9
trillion, that is $19 billion. So these are big amounts, and I
think the most important thing from my perspective, in going
back to Congressman Turner, is the whole sense of fairness.
That is, while these are relatively small figures, I think it
is important that the agency be in a position to collect
everything that is due, that we fairly do that, and that we
make that case to the public.
Mr. Horn. Are we using private collectors to help collect
some of this?
Mr. Rogers. No, sir, we are not. I think--as you know, that
was tried, and I was not here and I can't speak to it too
thoroughly, but I think--the Commissioner and I were talking
about this again yesterday. The view here is that we have to
fix this system to get to these debts sooner, and that if we go
through the process of giving the four notices and then the due
process that was put in under the reform act, the restructuring
act of giving it a 30-day due-process notice and a due-process
decision, we really are way down the stream of time before
these debts are really something to be collected. And if the
agency, and even a private collector, could get to them in a
year or two, that is too late. I think that is what he is
saying too.
Mr. Horn. Well, if you are thinking of the private
collector pilot program, that was the phoniest thing I have
ever seen in government. They wanted it to fail. They gave them
5-year-old debt, instead of getting them in on the act in 30
days, 60 days, whatever. And the IRS, at least in 1995, was not
in any way organized to collect anything.
Mr. Rogers. I think that is the problem that the people in
IRS face themselves. They are trying to collect that ancient
debt, that old debt like that; and again, the Commissioner is
trying to reform the system so that we have a computer system
that will let us get close to that 6-month period at which the
private sector is paying. If you let it age more than that, you
are going to lose it. But again, we are looking at the
compliance issue.
On the margin, the numbers here relative to all of the
taxes that people pay voluntarily that comes in, that is huge,
and yet the compliance is very high and within 180 days, the
outstanding debt is less than 1 percent.
Mr. Horn. When you look at that chart, that compliance
isn't very high?
Mr. Rogers. Yes, sir, but again that is, on average, $7.7
billion a year, which is about--it is less than one-half of 1
percent of the collections last year.
Mr. Horn. It is a lot of money.
Mr. Rogers. It is a lot of money. I don't want to take away
from that. But to get enough people and enough money in an
agency to collect everything down to perfection would make this
an extraordinary expensive agency to run.
Mr. Horn. Well, I would sure like to see you organized on
getting the notices out, getting some telephone contact, and
then if that hasn't worked in a month or two, give them to
private people, and they will do it if IRS hasn't been able to
do it. Maybe the Commissioner has some new special task force
that is doing this somewhere, but I wish you would take an area
where you have had a lot of bankruptcy, whatever, and try to
track those people. We have to put a law on the books, or
something, so that they don't keep milking us when everybody
else is paying and these jerks are going out of business.
Well, I wish the Treasury would come in with something on a
proactive area, not just sort of live with it and say, gee,
that is 1 percent. I don't care if it is 1 percent, if it is
$21 billion, I have a concern about it.
Mr. Rogers. Yes, sir, and you are right. The compliance
issue here and the fairness issue here is paramount. It is very
important.
Mr. Horn. Well, you know, one of the reasons people pay
taxes is, they think the IRS really follows this stuff, and now
you look at that, you wonder who is working over there. I know
you dropped from 108 to 102. What are you now in total
employees, 102,000?
Mr. Rogers. The 2001 budget request would be about 102,000.
Mr. Horn. Are we going to get some new agents?
Mr. Rogers. Yes, sir. The budget request calls for
increased staff in almost every function, except the
information technology, and there are funds being requested to
improve the computer systems.
Mr. Horn. It was mentioned that a lot of supervisors left
last year. Was that just a matter of quality of supervisors, or
what led to their going?
Mr. Rogers. I am the one who mentioned that. No, the GAO
pointed out that there was a management problem in not having
adequate managers trained to run the accounting shop, if I
could put it that way. This is a group of about, well, less
than 200 people out of all of the IRS, and 5 of the top
supervisors at one time all left and took jobs at the
Department of Agriculture. It was to their advantage; they saw
this as something they needed to do for their own personal
good. On the other hand, it left IRS in a bit of a lurch, so
that we had to catch up.
We had to get people there, get them trained and make sure
that that part of the agency was working right, and I can
report to you that it is at this point. But it was a gap. I
mean, I think some of the issues that GAO ran into last year,
and specifically I would say, the failure to reconcile the cash
balance with FMS, with the Treasury Department, is directly
attributable to that. And so we have overcome it, but that is a
singular, isolated incident.
Mr. Horn. Mr. Kutz, it says, as I recall, that the IRS does
run some automated matching programs, and I understand they are
run months after the issuance of tax refunds and they don't
investigate all of the taxpayers identified in having
underreported tax liabilities. Don't you report--out of the $15
billion identified as potentially being underreported, the IRS
only investigated $5.2 billion; is that correct?
Mr. Kutz. That is correct. And the other $10 billion that
you are speaking of would not be included in the unpaid taxes.
That would never have been assessed or followed up on. It would
have basically been removed from the files or nothing was done
with it.
Mr. Horn. Well, does this basically mean the individuals
and businesses that are reflected in that 9.8 billion, that
they got away without paying their fair share of the taxes?
Mr. Kutz. To the extent that those 9 million individuals, I
believe, or 10 million--I think it was 9 million actually--
really owed those taxes and actually underreported income; yes,
that is correct.
Mr. Horn. Well, is that a 1 percent deal, or is that
something we ought to worry about?
Mr. Rogers. I think it is something we would worry about,
but I think John will tell you that we are trying to pick those
cases through a winnowing process that are most likely to be
the ones that we need to do.
Mr. Dalrymple. I think the numbers were 155 million
individual tax returns originally filed, and as we looked at
those accounts, we saw about 12 million that had some potential
for running through our underreported matching program. We then
looked again to determine what we considered to be the very
best cases there, so that we wouldn't be burdening people with
letters that we weren't certain would result in--that wouldn't
result in an error on their return.
So we were pretty confident of the 3.1; we went over those,
and we ran an underreported program there. Again, we do not
resource the Service to go after every last account.
Mr. Horn. Well, do you still have them under statutory law
where you could investigate them on the $9.8 billion that was
uninvestigated?
Mr. Dalrymple. Each year we run the same matching program.
There is a 3-year statute of limitations on how long you can go
after those, once we screen a particular year and go after the
particular people in that year. So, for example, the 3 million
underreporters that we investigated, the other 9 million that
we set aside in that year, we do not pursue after that, unless
they come up for examination--and some of them would--come up
for examination in a regular examination. Then those issues
would be raised in that examination, although that would be a
very small percentage of that 12 million, in total.
Mr. Horn. I am just thinking of the $9.8 billion.
Mr. Kutz. Mr. Chairman, one thing I would point out here is
that it would be useful for IRS to provide to the Congress the
kind of information that you could make good decisions based
on, and that would be for every dollar you put looking at these
9.8 million individuals that may have underreported their
income, what would you get back in cash from a governmentwide
perspective for that? That is the kind of information that you
should expect from the IRS, but I don't think you get it at
this point, and that is something IRS should work on in the
future.
Mr. Horn. Well, this was which fiscal year, Mr. Kutz?
Mr. Kutz. It was the last fiscal year which they did the
underreporting. There is always a delay. It was fiscal 1996, so
that was the tax year 1996 which they would do the match in
late--late 1997, and probably followup----
Mr. Horn. So the statute of limitations has expired, or
what?
Mr. Dalrymple. It would have expired this year, yes.
Mr. Horn. It expired this year? Do we still have time?
Mr. Dalrymple. April 15th of this year they would expire.
Mr. Horn. Well, not if you did something. You would still
do it within the 3-year time period. I just wonder, when you
have $9.8 billion that went uninvestigated, I just wonder why
we aren't doing something about it. I mean, is somebody afraid
that the Portman bill, who said smile, but we didn't say smile
on everything. If there are tax cheats, let's go after them.
Mr. Dalrymple. Absolutely, Mr. Chairman.
Mr. Horn. We also reported the Portman bill. So, we are for
smiling IRS agents too, but I would smile a lot more if I saw
that $9.8 billion pursued.
Mr. Dalrymple. Again, as Mr. Kutz pointed out, we have no
idea whether that $9.1 billion is legitimate underreporting.
All we had were indications that there may be some question on
those particular returns. We culled out of the 12 million
returns, we culled out 3 million for investigation.
Mr. Horn. Mr. Turner.
Mr. Turner. Mr. Chairman, I know all of us have been asking
questions based on the GAO report and our other concerns about
the agency. Perhaps it is appropriate for us to--and I think we
all agree on this. There is probably no agency that requires
more of its employees than the IRS; it is a very demanding
position at any level, and I personally want to commend the
agency and its employees. I know--the recent legislative
changes, I think, have made improvements. In each of our
offices we deal on almost a daily basis with the IRS on behalf
of our constituents who have had problems and are seeking our
help. I have noticed a very positive change within the agency
as a result of the recent legislation and in the leadership of
Mr. Rossotti, and I really do believe that we owe all of you a
debt of gratitude for the commitment and the service that each
of you gives from the very top to the very lowest level,
because it is a very demanding job requiring very special
people. So we thank you for your service.
Mr. Rogers. I thank you, Mr. Congressman. And on behalf of
Mr. Rossotti and all of the IRS employees, we really appreciate
that. As I said earlier, we are doing everything we can to get
better. It is not a lack of desire.
Mr. Horn. Well, the reason I am high on Commissioner
Rossotti is that he brings some management skills to that job
where there had never been any management skills. I don't have
a problem with most of the IRS people. I think the problem has
been lack of management over there, lack of organization, and I
think that is now happening, and that should make everybody
happy, the people there and the people here.
Any other questions, Mrs. Biggert?
Mrs. Biggert. I guess you all thought that was the end, but
I do have one further question.
Mr. Kutz, I recall that last year you had a concern that
the property and equipment reported by the IRS could have been
materially understated, and given the massive increase in
property and equipment reported, that is less than the $200
million in 1998 to $1.3 billion in 1999. Could you elaborate on
what you found in your audit?
Mr. Kutz. Well, what that was is a projection by the IRS
using--they had some consultants and appraisers that were
involved and part of it was statistical information and part of
it was from other information that the IRS put together. But
that number--I believe it is the $1.3 billion, or somewhat less
than that--is an estimate of what the balance is on September
30, 1999. As I said in my opening statement, the actual
underlying problems with the inventory and the accuracy of it
is an issue IRS faces for fiscal year 2000. So that number is
just a number at a point in time that was developed for the
purposes of the financial statements.
Mrs. Biggert. So, Mr. Rogers, I guess you would agree that
the property had been materially underestimated or--unless you
purchased $1 billion, or your estimate was really pretty far
off?
Mr. Rogers. No, I think you characterize it correctly. The
records did not show a value at that level, and in government
property management, there has been a tendency over time to be
more concerned about what the article is than what the article
costs. And so if you go to inventory systems, you will see the
item there, but there is nothing in the cell that says this is
the value of it. As a consequence, the value of the property is
materially understated, as you have observed and as GAO has
identified.
We do believe that the estimate that we derived this year
is a fairly accurate and reliable estimate and we worked
through this process with the General Accounting Office
overseeing it, in effect, or testing it as we went along.
I think the important thing for us now is to make sure that
we don't lose that figure; that is to say, we need to maintain
this property level in terms of the accounting systems as we go
through this year. That is, we need to take every acquisition,
value it, every disposal, value it, so that when we come to the
end of fiscal 2000 we have a property figure that will reliably
tell our stakeholders what our property plant and equipment
value is. And we intend to do that. We have worked out a
process to do that during the rest of the year, and in the
longer run, we will introduce a newer kind of automated
accounting office to do that.
Mrs. Biggert. So this property was not subject to theft or
anything, it was just an underestimate?
Mr. Rogers. It is all there. I mean, if you could see the
appraisal process that went on, it went to every building.
There are 600 buildings in IRS. The buildings were selected by
random, they went into floor plans, they drew grids, they
picked the grids by random collection, they went to that place,
they checked if the property was there, they went to the books
to see and then went back and adjusted it. So it was a fairly--
I don't want to say exhaustive, but statistically it was a good
process that gives us a good idea of the value of the place.
Yes, it was undervalued; I mean, the property was there,
but the systems used to account for were simply not used fully
to attribute the right value to them.
Mrs. Biggert. But it still was not a check of every piece
of property?
Mr. Rogers. No. It was a statistical evaluation. On the
other hand, the major portion of the property that is valued is
the information systems, the computers. And the Information
Service Group in IRS has been doing a wall-to-wall, total
inventory, front-to-back, and book-to-floor and floor-to-book;
and that is the preponderance of the value of the plant and
equipment, and that inventory we think will be quite accurate.
Mrs. Biggert. So this is, actually the IRS has received so
much money for the tax systems modernization, so that will be
tracked piece by piece?
Mr. Rogers. Yes, but only a small portion of the
modernization money is directly----
Mrs. Biggert. I meant for the equipment part of it.
Mr. Rogers. Yes, that is directly related to the equipment.
There is a fund actually set aside and identified separately
for the information technology investment.
Mrs. Biggert. Do you know how much the IRS has spent
already on the property and equipment related to the tax
systems modernization, then?
Mr. Rogers. No, ma'am, I didn't come prepared to do that,
but I could certainly get a figure for you.
Mrs. Biggert. All right. If you would do that.
And so you have then tracked all of that property and
equipment? That is not done by an estimate?
Mr. Rogers. On the information and technology equipment?
That is correct.
Mrs. Biggert. Thank you.
Mr. Horn. We thank you.
Let me just ask a few closing questions here. I am
particularly interested in the CFO office for the Treasury. Mr.
App, you spoke about installing a permanent CFO, as well as
strengthening the CFO office. Could you sort of elaborate on
that, what you have in mind, what Treasury has in mind?
Mr. App. Sure.
Basically, as I mentioned, Mr. Rogers has admirably filled
in as Acting CFO, but he, as well as the Commissioner and other
officials at IRS, have been looking for candidates to go
forward and to strengthen the organization. They have also been
looking at alternatives to add responsibilities to that
organization, as appropriate, to improve financial management
and that is an ongoing process as we speak.
Mr. Horn. Now, Mr. App, you are the Deputy Financial
Officer for the Department of the Treasury?
Mr. App. That is correct.
Mr. Horn. Who is the CFO for Treasury?
Mr. App. The Assistant Secretary for Management and CFO is
now Lisa Ross, who has been Acting since December 30th. We have
enjoyed real strong leadership in that position compared to
other agencies. The last two people in that position have
averaged over 2\1/2\ to 3 years in that position, and we have a
good division of labor. Right now, for instance, Ms. Ross is
working with the Secretary to brief one of your colleagues this
afternoon on Customs funding issues.
Mr. Horn. One of the things that concerns me, and I said
that to Mr. Munoz when he held that job, is that to me and to
the Congress on a bipartisan basis, we all agree that the CFO
position is a full-time job, and you can't be Assistant
Secretary for Management and also CFO. I don't know if the new
Secretary is taking that into mind, but it just seems to me
that one of the problems in Treasury has been that the CFO was
part of the Assistant Secretary for Management and not a full-
time CFO, and that is what Congress wanted.
If we had wanted to put it with the Assistant Secretary for
Management, we would have written it into the law. That has
been around since the Hoover Commission of the 1950's--late
1940's, early 1950's. But we just are not getting, I feel, the
leadership there when you don't have somebody full-time that
reports to the Secretary or the Deputy Secretary, as the case
may be.
Mr. App. I would say that the person that has held that job
since I have been there, both Mr. Munoz and Ms. Killefer, and
now Lisa Ross, do take their responsibilities very seriously.
We have a strong deputy network as well, and I think the
progress that we have made on financial management over the
last 4 years that I have been in Treasury shows that commitment
and it really does come from that leadership. The division of
labor is such that we do cover all of the bases, I believe.
Mr. Horn. Well, but a CFO in other agencies is full-time. I
mean, let's face it, the Assistant Secretary for Management has
a lot to do without having the CFO burden put on top of that.
As I recall in your resume, Mr. Rogers, it says you are
Senior Adviser to the Assistant Secretary for Management and
acting CFO. In the case of the Internal Revenue Service, won't
you agree that given the current financial management problems
facing IRS, that the CFO position ought to be a full-time job?
Mr. Rogers. Well, yes, sir, and I will assure you that in
the time I have been here, it has been full-time. While I hold
the other position, I am on loan full-time for IRS, and that is
the only thing I am working on.
Mr. Horn. Well, I just feel at the Treasury level, IRS
level, we want persons absolutely totally focused. Those are
18-hour jobs a day, we know that, and it is 6 days a week.
Anybody in that kind of level. It is just not doing the CFO
job, no matter how they might seem to paint it, but the other
agencies that have come from zero into fairly good shape
nowadays, they are full-time CFO.
And I would hope Secretary Summers understands that, but
maybe he doesn't. Maybe we need to write him a letter to remind
him or something.
Does GAO have any remarks on this?
Mr. Kutz. I would say GAO has been very pleased with the
work Mr. Rogers has done in the short period of time he has
been there. He has demonstrated a tremendous amount of ability
as a manager and someone who can get things done. So we are
very encouraged by what he has done.
I will say that right now the organization of the CFO
within the IRS is a problem. The CFO is three levels below the
Commissioner and is more of a controller position, if you think
of the corporate model, than it is a CFO. So one of the issues
on that we have had--and the Comptroller General spoke directly
to the Commissioner of the IRS on this was that that position
needs to be elevated and given more clout and more
responsibility to try to make sure that some of these issues
get resolved.
Mr. Horn. Well, I noticed that when I looked at your
organization chart here, the mess under previous years where
everybody sort of was all over the place; but I didn't see the
CFO reporting to the Commissioner.
Mr. Kutz. No. Way, way below that level.
Mr. Horn. It should. Well, I couldn't tell from the source
where the level was. That was the problem. I have forgotten now
the page it is on, but here we are. It is the new organization
structure--struggle is right. That is a Freudian slip.
Page 41--page 42 and page 41, presumably it says, exhibit
2, current organization structure, is Commissioner; Deputy
Commissioner, Operations; Deputy Commissioner, Modernization;
and so forth. Well, the Commissioner has turned that completely
around, right, and this is the new organization structure on
exhibit 3 where you have Deputy Commissioner--Commissioner,
Deputy Commissioner, and then a national office staff, which
has finance there somewhere, who--although we can't quite tell
where. And the Chief Counsel reports directly to the
Commissioner and the Deputy Commissioner, but there is no word
that the principal finance or management officer or, the CFO
and the CIO--Congress, after listening to your fine GAO reports
for years said. Hey, we have to do something about this. So we
have to get a line where the people can have access to the
person the President is holding responsible for the agency,
which is the Commissioner.
Mr. Kutz. And a key to involving these problems is to have
a strong manager like Mr. Rogers in the appropriate position
within the organization, to have the clout to make the kind of
changes that need to be made to get these problems resolved.
Mr. Horn. Well, I agree with you. So have we written Mr.
Rossotti that?
Mr. Kutz. We have not written him. The Comptroller General
told him face-to-face.
Mr. Horn. OK. Well, that is good. I will do it either way.
Great. Both.
Anyhow, we thank you all for coming up here. It has been
very helpful. We will send a few questions just for the record
so it is rounded out, but I don't want to take your time today.
Good luck, Mr. Rogers and Mr. App, you are all doing a fine
job; and the GAO always does a fine job. So thank you very
much, gentlemen.
To the clerk, we will note that I want to thank the
following people Russell George, staff director and chief
counsel; Louise DiBenedetto, the detailee counsel here for this
hearing from GAO; Bonnie Heald, director of communications;
Bryan Sisk, clerk for the subcommittee. Minority staff, Trey
Henderson, counsel; Jean Gosa, minority staff assistant; and
the court reporter is Julie Bryan.
With that, we are closed.
[Whereupon, at 1:55 p.m., the subcommittee was adjourned.]