[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
TREASURY, POSTAL SERVICE, AND GENERAL GOVERNMENT APPROPRIATIONS FOR
FISCAL YEAR 2001--Part 6
TREASURY, POSTAL SERVICE, AND GENERAL
GOVERNMENT APPROPRIATIONS FOR
FISCAL YEAR 2001
_______________________________________________________________________
HEARINGS
BEFORE A
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
________
SUBCOMMITTEE ON THE TREASURY, POSTAL SERVICE, AND GENERAL GOVERNMENT
APPROPRIATIONS
JIM KOLBE, Arizona, Chairman
FRANK R. WOLF, Virginia STENY H. HOYER, Maryland
ANNE M. NORTHUP, Kentucky CARRIE P. MEEK, Florida
JO ANN EMERSON, Missouri DAVID E. PRICE, North Carolina
JOHN E. SUNUNU, New Hampshire LUCILLE ROYBAL-ALLARD, California
JOHN E. PETERSON, Pennsylvania
VIRGIL H. GOODE, Jr., Virginia
NOTE: Under Committee Rules, Mr. Young, as Chairman of the Full
Committee, and Mr. Obey, as Ranking Minority Member of the Full
Committee, are authorized to sit as Members of all Subcommittees.
Michelle Mrdeza, Jeff Ashford, Kurt Dodd, and Tammy Hughes,
Staff Assistants
________
PART 6
Page
IRS-Electronic Tax Administration................................ 1
ATF-YCGII........................................................ 225
Executive Residence Budget Justification......................... 283
________
Printed for the use of the Committee on Appropriations
________
U.S. GOVERNMENT PRINTING OFFICE
67-864 WASHINGTON : 2000
COMMITTEE ON APPROPRIATIONS
C. W. BILL YOUNG, Florida, Chairman
RALPH REGULA, Ohio DAVID R. OBEY, Wisconsin
JERRY LEWIS, California JOHN P. MURTHA, Pennsylvania
JOHN EDWARD PORTER, Illinois NORMAN D. DICKS, Washington
HAROLD ROGERS, Kentucky MARTIN OLAV SABO, Minnesota
JOE SKEEN, New Mexico JULIAN C. DIXON, California
FRANK R. WOLF, Virginia STENY H. HOYER, Maryland
TOM DeLAY, Texas ALAN B. MOLLOHAN, West Virginia
JIM KOLBE, Arizona MARCY KAPTUR, Ohio
RON PACKARD, California NANCY PELOSI, California
SONNY CALLAHAN, Alabama PETER J. VISCLOSKY, Indiana
JAMES T. WALSH, New York NITA M. LOWEY, New York
CHARLES H. TAYLOR, North Carolina JOSE E. SERRANO, New York
DAVID L. HOBSON, Ohio ROSA L. DeLAURO, Connecticut
ERNEST J. ISTOOK, Jr., Oklahoma JAMES P. MORAN, Virginia
HENRY BONILLA, Texas JOHN W. OLVER, Massachusetts
JOE KNOLLENBERG, Michigan ED PASTOR, Arizona
DAN MILLER, Florida CARRIE P. MEEK, Florida
JAY DICKEY, Arkansas DAVID E. PRICE, North Carolina
JACK KINGSTON, Georgia MICHAEL P. FORBES, New York
RODNEY P. FRELINGHUYSEN, New Jersey CHET EDWARDS, Texas
ROGER F. WICKER, Mississippi ROBERT E. ``BUD'' CRAMER, Jr.,
GEORGE R. NETHERCUTT, Jr., Alabama
Washington MAURICE D. HINCHEY, New York
RANDY ``DUKE'' CUNNINGHAM, LUCILLE ROYBAL-ALLARD, California
California SAM FARR, California
TODD TIAHRT, Kansas JESSE L. JACKSON, Jr., Illinois
ZACH WAMP, Tennessee CAROLYN C. KILPATRICK, Michigan
TOM LATHAM, Iowa ALLEN BOYD, Florida
ANNE M. NORTHUP, Kentucky
ROBERT B. ADERHOLT, Alabama
JO ANN EMERSON, Missouri
JOHN E. SUNUNU, New Hampshire
KAY GRANGER, Texas
JOHN E. PETERSON, Pennsylvania
VIRGIL H. GOODE, Jr., Virginia
James W. Dyer, Clerk and Staff Director
(ii)
TREASURY, POSTAL SERVICE, AND GENERAL GOVERNMENT APPROPRIATIONS FOR
2001
----------
Tuesday, October 3, 2000.
IRS-ELECTRONIC TAX ADMINISTRATION
WITNESSES
CHARLES ROSSOTTI, COMMISSIONER, INTERNAL REVENUE SERVICE
PAUL D. HARRISON, PRESIDENT & CEO, FREETAXPREP.COM, INCORPORATED
EDWARD BLACK, PRESIDENT & CEO, COMPUTER & COMMUNICATIONS INDUSTRY
ASSOCIATION
CHARLES LACIJAN, THE IMPLEMENTATION GROUP
Mr. Kolbe. Good afternoon. The Subcommittee on Treasury,
Postal Service and General Government will come to order.
Commissioner, we welcome you here. We are happy to have you
once more before the subcommittee on this oversight hearing,
and we look forward to hearing from you today.
Let me just set the tone for what we are trying to do here
today by giving a little bit of overview for this hearing. The
purpose is to talk about electronic tax administration, where
we are and where we are going. It is a very timely issue. The
country, indeed the world, is becoming very adept at using
electronic media in daily life. Every day we find more services
that are being offered electronically, and more transactions
that are being conducted through the use of electronic means.
As people become more comfortable using digital technology,
as the technology itself improves and becomes more widely
available, the development and implementation of the Federal
electronic tax administration has to proceed appropriately and
with all due speed. So while this is a timely issue it is
certainly not an entirely new issue to the Internal Revenue
Service. Indeed, the IRS Restructuring and Reform Act of 1998
has a whole title on this area that talks about electronic
filing and provides for the establishment of the electronic
commerce advisory group.
Industry is offering a wide range of electronic tax
services to tax filers, including no-cost filing options under
certain circumstances. The IRS, through its Office of
Electronic Tax Administration, has been working for a long time
now to develop and implement aspects of electronic tax
administration.
In the tax season that has just ended, 27 percent of all
the tax returns that were filed, that is 35 million out of 130
million, were filed electronically. But we still have some
issues that need to be looked at, and that is the purpose of
the hearing today.
Some of the issues involving electronic tax administration,
particularly Internet interactions, appear to break some new
ground for the IRS and impact fundamental concepts regarding
the relationship of the IRS to the American people. These
concepts include the establishment of rules and pricing policy
for tax services, the voluntary compliance system on which our
tax system is founded, the relationship between the IRS and the
tax preparation industry and, of course, issues of privacy.
The IRS has made recent announcements regarding its plans
and expectations for moving forward with electronic tax
administration. Our purpose is to get a better understanding of
these plans and expectations, to provide a forum for hearing
concerns and perspectives from outside groups that include
members of the tax preparation industry.
So we will have two panels here. We will begin with Mr.
Rossotti, a panel of one here, who will be followed by a panel
of three outside witnesses. We will hear from Charles Lacijan,
a former chairman of the Electronic Tax Administration Advisory
Committee; Edward Black, President and CEO of the Computer &
Communications Industry Association; and Paul Harrison, who is
President and CEO of FreeTaxPrep.Com.
Before I turn to you, Mr. Rossotti, for your opening
statement, let me ask Mr. Hoyer if he has any comments that he
would like to make. Mr. Hoyer.
Mr. Hoyer. No. I welcome the Commissioner to the hearing
room, and we look forward to his testimony and the testimony of
others.
Mr. Kolbe. Thank you very much.
Mr. Rossotti, we will let you begin with your statement. As
always, we will put the full statement in the record, if you
would prefer to do it that way, or however you want to proceed
here.
Mr. Rossotti. I have submitted the full statement.
Mr. Kolbe. The full statement will be put in the record.
Mr. Rossotti. As you noted, Mr. Chairman, the IRS
Restructuring Act had a whole section concerning electronic
filing. Probably one of the most prominent parts of that was to
establish a goal that 80 percent of returns be filed
electronically by 2007.
More broadly, I think we have, as you noted, Mr. Chairman,
defined electronic administrations to be all of our
transactions with the public; and our overarching goal is to
really convert most of those to electronic means. To meet this
objective, we not only have to make it technologically
possible, we have to make it attractive to the public for them
to change from their traditional paper way of doing business to
electronic.
Now, while our goal, I think, is clear as laid out in the
Act and in spite of the fact that we, I believe, have made some
very significant progress over the last two years, I have to
say we do not have all the answers yet as to how we are going
to achieve this goal. We keep finding new and complex issues,
as you noted in your opening statement, as new technology comes
about, but also as we learn more about what taxpayers need and
want. So given this kind of changing, dynamic environment, we
are constantly seeking advice from the Congress, from industry
and especially from the Electronic Tax Administration Advisory
Committee, which was established for this purpose.
I want to thank you, Mr. Chairman, for holding this
hearing. I think it is very timely to lay out these issues.
Now let me briefly and with the help of this chart, which
is also in the back of the testimony, just give a very short
overview of how this system works. Taxpayers can file
electronically in one of three ways: through tax practitioners,
directly from a home computer or over the telephone. A number
of private companies that are shown on the chart play a role.
For all forms of electronic filing it is important to note
that a return must be prepared electronically in order to be
filed electronically. It is really a combination of those two,
and that creates a lot of the benefit. And just three options--
the first option on the top there, which is currently used by
25 million taxpayers, is the one in which a taxpayer goes to a
tax professional, a tax preparer, to file their return. In our
jargon these are known as electronic return originators, and
last year 25 million returns were filed by this method.
I think, as shown on the chart, most of the tax
practitioners who electronically file returns for taxpayers
actually transmit their returns through bulk transmitters that
collect the forms. Usually, these are the same firms that
provide the practitioner the tax software; and last filing
season there were about 77,000 active practitioners and/or EROs
and all but about 5,300 of them filed through their software
provider, their bulk transmitter. About 5,300 of them actually
filed with us directly.
The IRS does not charge any fees for electronic filing or
receiving these returns, but many of the electronic return
originators do charge a fee to their taxpayers for that
service. Some of them do bundle that in the tax preparation
fee.
The second option, which is becoming prevalent more
rapidly, is the one in which the taxpayers file directly from
their home computer. They put the software on the home computer
and use that commercial software to prepare the return and then
transmit it. This software can actually either reside on their
own personal computer or it can reside on a Web site, which is
a newer option. The taxpayer accesses the software through the
Web site. When the return is completed, the taxpayer can
transmit that information by modem to the software provider
who, in turn, transmits it to the IRS; and last year there were
about five million taxpayers who did it that way.
We do not receive tax returns directly from individual
taxpayers from their home computers. We receive that from the
software providers who provide the software. The tax software
providers sometimes charge the taxpayers a separate fee for
transmitting it, but, more commonly, they bundle that with the
software that they provide either through the Web site or for
purchase cost.
Then there is a third option which is called TeleFile,
which is for really very simple returns, 1040 EZ, in which some
taxpayers can simply pick up a Touch Tone phone, dial in some
numbers, and then it actually computes the tax and transmits it
to us. Last year, we had 5.2 million taxpayers do it that way.
Those are the three ways to electronically file.
I think, going back again into the RRA to determine how we
get from where we are right now, 35 million, 27 percent, as you
noted, to the 80 percent, the Congress wrote in both some
guidance for us and a process as to how we should go about
working in this market process.
One is they encouraged us to work in partnership with the
private sector to improve the offerings of filing services that
were available; and it mentioned three kind of things, reduce
barriers, provide incentive and, to quote the conference
report, press for robust private sector competition. Those were
the words from the Act. I think we have tried to act on those
suggestions from taxpayers and the industry and practitioners
to make filing more attractive and remove barriers.
One of the key barriers is to make it possible to actually
file all the individual returns through this electronic means.
Up until now that has not been possible because we could not
accept certain kinds of schedules and forms. We are solving
that problem rapidly for this upcoming filing season 2001. We
are adding 23 more forms to the program, and we will roll out
the remaining 40 forms and schedules in 2002. So that means by
2002, which is the season after next, we will have solved that
problem. All of the forms and schedules will be able to be
filed electronically with some very, very minor exceptions; and
the importance of that is it does open up about four million
more potential taxpayers.
But I think, more importantly, the practitioners tell us
they want to do business one way. They do not want to do some
with paper and some electronically. So that problem is rapidly
being solved, and by 2001 it will be solved.
The second key barrier that we are eliminating is the fact
that up until now electronic filing has not been truly
paperless. In some cases--in most cases, it was required to
send a signature document in by paper, even though you filed
electronically. That problem will be solved in this coming
filing season. Working with chief counsel and the Justice
Department we have come up with a way, having tested it for a
couple of years, to use a personal identification number as the
taxpayer's signature, with a few exceptions, in this coming
season. This will now be extended to taxpayers nationwide who
will be able to select their own pin, provide some additional
data to us and file electronically without any paper. That
would be true for all three methods.
The third important point is, traditionally, most
electronically filed returns were those where the taxpayer
received a refund and they got them faster, and that is one of
the attractions. But we would also like to encourage taxpayers
who actually have a balance due, as we call it, in other words,
they owe the IRS money instead of the other way around, to be
able to file electronically. In order to make that possible we
are accepting more electronic payment mechanisms, debit
payments through TeleFile, accepting credit cards for Form ES,
which are the estimated tax payments, and also for taxpayers
who have extensions of time to file. So, essentially, through
either debit cards or credit cards, taxpayers will be able to
pay balances due in most cases electronically rather than
through paper.
The fourth thing, which is still in the prototype stage and
is more of a longer term effort, is that especially for our
electronic return originators, we would like to extend our
electronic communication not only for the filing process, but
through other forms of communication that we have. We have a
pilot that is working on resolving account-related issues in a
secure way through the Internet. It will be one of our major
goals through our technologymodernization.
Finally, in terms of marketing, with the authorization of
the Restructuring Act and the funds that this committee has
provided, we do have a marketing campaign which has been quite
successful; and next year--we will show you the chart after
that--there is some new marketing that we will be doing that
revolves around the idea of stressing that over 30 million
Americans are already using e-file. We are now beginning to
promote not just awareness of it but the specific values to the
taxpayer. Those are some pretty important steps that are taken
that we have heard from the industry are needed.
Having taken those steps, or when we will have taken them
over the next 15 to 18 months, there is one additional hurdle,
however, that we--or barrier, if you will--that we have heard
from taxpayer practitioners and others, which is the cost to
the taxpayer. As it is now, taxpayers must either pay a fee to
a preparer or pay a fee to buy or use software to prepare and
file their returns. It was to try to address this issue that
the President included two provisions in the fiscal 2001 budget
proposal. One was a proposed tax credit for electronic filing.
The second was a provision requesting the IRS to find ways to
allow taxpayers to file over the Internet at no cost to
themselves.
Since there has been some confusion about it, especially
this latter proposal, I would like to clear up a couple points,
or at least attempt to right now, that have been I think points
of confusion or concern about this.
One is, it was not and is not intended that this provision
is related to the IRS itself offering tax software preparation
or filing services in any form. That was not the intent. We can
elaborate on that, but I believe that would not be a wise thing
for the IRS to do.
Secondly, with respect to confidentiality of taxpayer data,
it is clear that this must be assured under all circumstances
as is required by law; and there was no implication or
intention in any form that any of the protections for taxpayer
confidentiality would be modified or compromised in any way,
shape or form.
Finally, I think it is the IRS' intent to try to follow the
provisions of the law concerning the promotion of robust
competition in the industry and potential use of incentives to
make e-filing more attractive and to reduce the cost to the
taxpayer. Our approach here was to ask the industry for
suggestions on how to accomplish this objective, which we have
done by putting out a request for them to tell us what their
ideas are. We think this approach is consistent with the
thoughtful advice that we have received from the advisory
committee.
Mr. Chairman, I just want to conclude here and say that we
believe there is a challenge to meet these goals, but we are
working closely with Congress and the industry to try to
achieve them.
[The information follows:]
Mr. Kolbe. Good timing. We have our 5-minute warning here
on the vote. We will go take it. We have two votes, and then we
will be right back and begin our questions.
Mr. Rossotti. Sure. Thank you.
Mr. Kolbe. The subcommittee will stand in recess
temporarily.
[Recess.]
Mr. Kolbe. The subcommittee will come to order again.
At the suggestion of two of our members that it might be--
and I think it is a good suggestion--that it might be useful to
have the private sector panel speak so that we could get--the
questions for the Commissioner might come out of the things
that are said by them. If that is acceptable to you,
Commissioner, why don't we go ahead and ask you to step aside a
moment? We will ask the second panel to come up here, if you
would--all three of you, yes.
Let me, if I might, welcome this panel of outside witnesses
here to the hearing.
We have, first, Mr. Charles Lacijan, who has chaired the
Electronic Tax Administration Advisory Committee during the
production of the most recent report, the one in June. We will
submit a copy of this report for the record here and place it
in the record; and we thank you very much, Mr. Lacijan. We
found it very helpful to us in preparation for this hearing.
Mr. Kolbe. We also have Mr. Edward Black, who is President
and CEO of the Computer & Communications Industry Association.
The members of that association include a variety of companies
that are engaged in electronic tax preparation and filing.
Finally, we have Mr. Paul Harrison, who is President and
CEO of FreeTaxPrep.Com, a relatively new company, who has a
strong interest in electronic tax administration.
We thank you for being with us today. All of you represent
different aspects of electronic tax administration issues, and
I think we look forward to hearing your testimony and views on
this topic.
Your full statements can be placed in the record, and if
you preferred, if you would--and I would hope you would--each
summarize it so we can go directly to questions.
Mr. Kolbe. We will begin with you, Mr. Lacijan, if you
might.
Mr. Lacijan. Thank you, Mr. Chairman.
My name is Chuck Lacijan. I am the Senior Technical Advisor
for The Implementation Group, a Washington, D.C., based
consulting firm. I also served as chair of the Electronic Tax
Administration Advisory Committee from September, '98, to June
2000, and have also evaluated electronic filing issues while
serving on the staff on the National Commission on
Restructuring the IRS. I will summarize my written statement as
you requested.
I would like to acknowledge that in 1995 this committee
initiated the formation of the IRS restructuring commission.
Its final report and the subsequent legislation has led to a
number of new directions at the IRS, including that of
electronic tax administration.
Certainly, as we heard today, electronic tax administration
is one of the most important elements of IRS business systems
modernization. If you take that, combined with the development
of the new data engine which will provide timely and accurate
tax data and post-filing applications, that is really the heart
and soul of the modernized IRS.
My written statement provides some background on the
importance of electronic tax administration and how it can help
the whole tax administration process run more smoothly, and I
would certainly refer you to my statement to get some of the
details of that.
I have also included in the written statement the role of
ETAAC and its membership; and I certainly want to stress that
the June, 2000, report from ETAAC was a consensus among the 22
members who serve on the committee and who represent a very
broad spectrum of electronic tax administration stakeholders.
But let me quickly go to the issue at hand and that is how
to best use the Internet to achieve low- and no-cost tax prep
and e-filing. Certainly, the ETAAC supports this objective
because it believes that no-cost e-filing encourages more
taxpayers to e-file.
My written statement identifies several approaches that the
ETAAC evaluated. The option that involves an IRS offering of
its own product either directly or through working with a few
selected providers was thought to be inappropriate at this time
in favor of letting the private sector continue to provide this
capability. This position was based on the belief that the
clear choice of public policy should be to let the private
sector provide the capability for this no-cost electronic
filing tax prep, with the Federal Government only stepping in
if the private sector does not meet the need.
The reason for this recommendation was simple. It is that
competition works. I think ETAAC believed that competition is
the most effective way to provide taxpayers with the widest
range of tax prep and e-filing services. The marketplace has
made considerable progress towards this goal in the last few
years; and I think my fellow panelist, Mr. Paul Harrison, is
proof positive that competition works and can deliver taxpayer
options for both low-cost and no-cost electronic filing for tax
prep.
The ETAAC also recommended that the marketplace be assessed
in two years to determine if competition is having the desired
effect. If not, ETAAC believed that the IRS would then be
justified in evaluating, in conjunction with the ETAAC, if an
electronic template or other approach was an appropriate needed
tool to promote no-cost e-filing over the Internet.
However, ETAAC is not advocating that the IRS should do
nothing. I would say quite the contrary. ETAAC believes there
are some appropriate actions that the IRS can take. That is,
one, to continue to foster competition; two, to seek industry
reviews on which barriers lower or inhibit lower and no-cost
private-sector-supplied e-filing options; and, three, to
stimulate e-filing through creative advertising and making it
more convenient to use.
I would like to now discuss an issue that has arisen after
ETAAC submitted its report on June 30, 2000; and here I am
getting into the area of personal opinion as opposed to ETAAC
consensus, as the ETAAC has not had an opportunity to meet as a
group to form the consensus since our June 2000 report was
submitted. In July of 2000 the IRS issued the Request for
Information or an RFI that I think has caused some confusion in
the marketplace. The stated purpose of the RFI was for the IRS
to seek comments and input from the public and private industry
concerning IRS providing free tax prep and filing of individual
tax returns over the Internet.
At the heart of the issue was the following statement taken
out of the President's 2001 budget request. No later than tax
year 2002 the IRS would be required to offer one or more
options to the public for preparing and filing individual
income tax returns over the Internet at no cost to the
taxpayer. If the IRS offered such options through contract
arrangements with authorized IRS e-file providers, it would be
with the assurance that the taxpayer's tax return information
would not be used by the provider without the taxpayer's
permission for any purpose other than submission to the IRS.
I think, despite denials by the IRS in several forums that
it did not intend to get into the tax prep business, a number
of private sector firms believe that the RFI was actually the
first step to do just that. I think the resulting confusion
concerning the IRS's true intentions has caused some turmoil in
the marketplace.
Congress is now being asked to articulate a public policy
to address the perceived threat of IRS entry to the marketplace
that previously has only been occupied by the private sector. I
think that several recommendations from the ETAAC June 2000
report can serve as guiding principles in formulating such a
policy; and I have four items I would like to mention.
First, the clear choice of public policy should be let the
private sector provide the desired capability, with the Federal
government only stepping in if the private sector is not
meeting the need. Second, for the next 2 years, do not pursue
the public policy that would require the IRS to offer no-cost
e-filing over the Internet. Third, the IRS, with the support
from ETAAC, should assess the marketplace in 2 years to
evaluate whether the Internet includes no-cost e-filing options
for taxpayers and make the judgment whether an IRS entry in the
marketplace is needed. Lastly, the IRS should be encouraged to
take the appropriate steps, as I just mentioned earlier.
In closing, I just want to make one observation. Congress
has laid ambitious goals for the IRS for e-filing--80 percent
by 2007; and these goals only can be metby partnering with the
private sector. However, partnerships require a sense of trust if they
are to work; and, unfortunately, the current situation--gives little
evidence that the trust needed to succeed is actually present.
I am not here to assess blame to any one organization. I
think it is really a question of deciding where we go from
here. That is the real challenge, and I hope that the guiding
principles that I laid out will be effective in helping the
committee reach a decision.
That concludes my testimony.
Mr. Kolbe. Thank you very much, Mr. Lacijan.
[The information follows:]
Mr. Kolbe. We will hear from Mr. Black.
Mr. Black. Mr. Chairman and members of committee, I am Ed
Black, President and CEO of Computer & Communications Industry
Association. I am very pleased to be here today to testify on
behalf of the high technology industry regarding the future
role of the U.S. Government in electronic commerce and
specifically as it pertains to electronic tax services.
CCIA is an industry association representing Internet,
computer, telecommunications, software and electronic commerce
companies ranging from small entrepreneurial firms to some of
the largest in the industry. Our member companies employ well
over half a million people and generate annual revenues
exceeding $300 billion. We believe technology policy issues
currently before Congress are critical to the future health and
growth of the American economy.
Although the instant question is whether the IRS should get
into the role of providing electronic tax preparation services
to the public, the real public policy question at stake is much
larger and more profound.
In 1997, President Clinton issued a report that declared,
``For electronic commerce to flourish, the private sector must
lead.''
We believe it is this principled approach that has helped
the U.S. technology industry to grow dramatically to the
distinct benefit to American consumers and workers.
Other governments have heavily regulated e-commerce,
managing and directing competition or offering government-
sponsored goods and services, distorting their economies and
stunting their economic growth, which brings us to the matter
before the committee, the Internal Revenue Service's offering
of free electronic tax preparation services over the Internet.
The Congressional mandate of achieving 80 percent
electronic filing of individual income tax returns by the year
2007 is a worthy goal and one the private sector
enthusiastically supports. However, the Congressional mandate
for electronic filing applies only to the filing of tax
returns. Congress has not mandated or even provided authority
to the IRS to offer tax preparation services.
Private sector innovation and competition has enabled the
American taxpayer to prepare and file their income tax returns
electronically at very low cost or at no cost. The options
available to consumers are numerous, and a number of market
leaders even donate their Internet-based services to low- and
middle-income taxpayers at no charge.
It is difficult to understand, therefore, why the Federal
government would seek to interpose itself in this robust
marketplace. Given the success of free market competition in
electronic financial services, it is difficult to understand
why the IRS would contemplate setting price controls on the
products and services of this industry or try to regulate its
commercial business and revenue models, as IRS officials have
discussed doing this spring.
We believe that such regulation would be a fundamental
mistake that would actually endanger our ability to achieve the
electronic filing objectives that Congress has brought forth as
the national policy by impeding the development of a
competitive market for such services.
There appears to be no identified justification, no unmet
need in the marketplace to justify IRS entry into electronic
tax preparation and to offer it to the public as a new Federal
service. Our economic system does not countenance the injection
of the government into competitive private markets in this
manner. Internet-based electronic financial services are a core
competency of the private sector. Most importantly, this
approach runs counter to a sound economic and public policy,
including the administration's own position on electronic
commerce.
As my colleague has mentioned, even the IRS's ETAAC
committee, its own advisory committee, strongly recommends
against pursuing this policy.
The Office of Management and Budget's Circular A-76
provides a strong policy foundation for decision making in this
area. That presidential directive was formulated during the
Eisenhower administration, but it has been forcibly and
effectively reissued and formulated ever since by every
President.
It says, ``in the process of governing, government should
not compete with its citizens.'' It further provides that ``a
commercial activity is not a governmental function.''
A number of Members of Congress have proposed an immediate,
government-wide moratorium suspending those activities that
would duplicate or compete with established private sector
electronic commerce businesses. We believe this is a thoughtful
approach that will enable Congress to determine the proper
government role in the emerging new economy.
We believe Congress and the Administration should act now
to implement this recommendation. We look forward to
participating in the policy review that lies ahead and to
contributing the expertise and insight of high technology to
this dialogue.
In the meantime, however, we think it is vital that the
subcommittee step into the breach, uphold the Administrative
Procedures Act and OMB Circular A-76 by declaring the simple
fact that no authorization or appropriation exists for the IRS
to undertake its announced electronic tax preparation services
project and that further activity should cease in order to
permit Congress to perform its lawful constitutional function.
We think the assessment of every President sinceEisenhower,
Kennedy, Johnson, Nixon, Ford, Carter, Reagan, Bush and Clinton--was
correct that it is not a proper function for the government to do this
and that a competitive enterprise system characterized by individual
freedom and initiative is the primary source of national economic
strength.
I appreciate the opportunity to appear before the committee
today, and I look forward to working with you.
[The information follows:]
Mr. Black. I do have some relevant documents that I would
like to submit for inclusion in the record, if I could.
Mr. Kolbe. Those documents will be placed in the record at
this point--at the point of your testimony, Mr. Black. Thank
you very much. We will get those from you.
Mr. Harrison.
Mr. Harrison. Thank you, Mr. Chairman. My name is Paul
Harrison, and I am the founder, CEO and President of
FreeTaxPrep.com. FreeTaxPrep is a venture capital-backed
company which was founded in December of 1999, and starting
with the 2000 tax season we will be offering free tax
preparation and free electronic filing over the Internet.
I would like to assure everyone here that the management of
this company is both experienced and very serious about this
initiative. The management alone has over 60 years of
experience in the tax technology software and electronic filing
business.
We also understand how critical preparing and assisting
people with the preparation of their taxes is, and we take that
responsibility very seriously in the way we approach this
industry.
In responding to the IRS' 80 percent initiative, I think
there are some things that we all need to understand when we
look at how difficult it is going to be to achieve that goal.
First and foremost, tax software and electronic filing have
been around for 15 years. I have been involved with tax
software from the consumer side since 1990.
To date, only 20 percent of the people who prepare their
own returns use tax software, and only 10 percent file their
returns electronically. That leaves 55 million individuals who
prepare their own returns who do not file electronically.
Getting those people to file electronically is going to be very
large hurdle to achieve by the year 2007.
We believe there are three impediments to achieving that
goal that need to be overcome. The first one is awareness. We
applaud the IRS for the advertising campaigns that they are
undertaking. We applaud the fact that there have been budget
dollars allocated toward creating awareness with consumers
regarding e-filing. But we are concerned that that is not the
most effective way to drive consumer usage of products and
services that allow them to file their returns electronically.
The research that we have done with consumers, reveals that
consumers hear the ads for e-filing, but they don't know what
it is and they don't know how to do it. So we feel what is
required is a much more directed campaign, which tells
consumers what are the options you can use to file your returns
electronically. This approach would be much less expensive than
the current method, which is very expensive, for creating a
brand for e-filing.
The second impediment to the 80 percent goal is access. Not
everyone has access to a computer. Not everybody has access to
computers with modems. I believe there is good news there. All
of the recent research shows that the highest area of growth in
both computer usage and in Internet usage, is in the middle- to
lower-middle-income demographic. That is the demographic that
is currently least involved with electronically filing their
tax returns from a self-preparation standpoint. So there will
be access. Access is moving very quickly into those segments.
The last impediment to the 80 percent goal is price. This
is a very, very serious impediment to achieving this goal.
We are a consumer products company, and as a consumer
products company, we always look at things from the viewpoint
of our customer, the consumer.
Filing your taxes is not a discretionary event; it is
something that you have to do. Most people do not view it as an
enjoyable event; it is a chore. When people are being requested
to file their returns electronically, their first question is,
what is in it for me. What people see at this point in time is
that electronic filing benefits the IRS, it makes the IRS'
handling of paperwork easier; and there is no benefit to the
consumer, because they don't understand that electronic filing
is easier, and they have to pay for it.
Let me give you a very similar example. Prior to forming
FreeTaxPrep.com, I spent the last five years implementing
online banking systems for the largest banks in North America.
When we started doing this work for banks like Bank of America,
and serveral others, thebanks--wanted more customers doing
banking online. We did research with consumers, and consumers said
``You are nuts; we are not going to go online and pay you for the
privilege to make your life easier and to allow it to be less costly
for you to process a transaction.'' Citibank finally jumped the hurdle
and said, It is free.
Guess what? In a 6-month period of time, Citibank added
more customers for online banking than the whole industry
combined. Every other bank got in line and followed, and they
are all happy they did it, because it broke the logjam and
created millions and millions of consumers who are on online
banking now.
The challenge that we are facing here is very similar. If
we don't provide a free option for consumers, there are going
to be some people who are willing to pay, there are going to be
people who want a more branded type of solution. But for the
masses, it is going to have to be free to achieve this 80
percent.
We are very committed to this model, and we will succeed in
this model. And we will succeed upholding the highest standards
of security and privacy for the consumer.
I can assure this committee that we have no intention of
using any consumer data without total approval of the
consumers. We will always ask consumers to opt in to letting us
use their data. We will not try to trick them by having the box
checked on the screen. We will always ask them to opt in.
We will give full disclosure to consumers. We will never
sell the data, we will never rent the data, and we will not
solicit these customers without their approval for products and
services. We want to be the poster child of how you can do this
and how you can do it right without compromising the goodness
of the consumer and the privacy of the consumer.
We do believe the IRS can help companies like us succeed.
We would like to see the IRS have advertising campaigns that
are a little more focused on the solutions in the industry.
We brought to the IRS earlier this year a very extensive
marketing plan on how we felt they could help us. That
marketing plan did not include one budget dollar that the IRS
would have to expend to help us in our efforts. Quite honestly,
we are disappointed that we have not received any response to
those recommendations. We think we understand why that is, but
to date there hasn't been a lot of progress and we have
essentially taken some different courses with our marketing
efforts.
The whole issue of resisting the entry to a market of
companies like ourselves is really based on a simple fact. In
1998, tax preparation software for our citizens was an
oligopoly. There were two companies providing that service. In
1993, I was on the wrong end of the Justice Department blocking
a merger of those two tax companies, and it was still in
oligopoly in 1994.
In the year 2000, tax preparation software is an oligopoly.
There are economic interests that the two companies that
control this market have right now to prevent free tax
preparation from being successful. We have been very disturbed
that there have been articles in some of the major newspapers
throughout the country trying to strike fear in the hearts of
consumers that free is bad, suggesting that if someone is
offering free tax preparation, they are going to misuse your
data.
There have been articles written that the IRS is going to
sell the consumer data in return for its free tax preparation.
We don't believe that, we don't advocate that and that doesn't
need to happen for this to be successful. We plan on proving
that in our efforts in the industry.
The biggest risk here is that these efforts to try to taint
free tax preparation on the Internet are going to slow down the
process. We believe this is what has caused the IRS to be
unresponsive to our request for marketing programs and working
with them. And quite honestly, companies like ourselves are
dependent upon raising money in the venture capital community,
and they ask us the question, does the IRS support what you are
doing.
We would like to see some more support from the IRS.
In closing, I can assure you, we will adhere to the highest
standards possible. We will be good partners of the government,
we will be good partners of our customers, and we will be good
partners of the IRS. We want to make this work. We are
committed to making it work. And we will provide the taxpayers
of this country a secure private online solution which is free
for both preparing their taxes and electronically filing them.
And I thank you for the opportunity of speaking today.
[The statement of Mr. Harrison follows:]
Mr. Kolbe. Thank you very much. I think the testimony of
all of you has been very helpful.
Could I get the three of you to kind of roll your chairs to
the side so we can get the Commissioner up here. There we go.
Now, if we could just get everybody to slide down a little
bit, we will get the Commissioner up there at the table.
Everybody, thank you.
I think this is very useful information for us to have, and
it raises some real questions. I am not on the authorizing
committee, of course, which crafted this language about
electronic filing; and so maybe among all of you, you can help
me understand this a little bit. It is important for us and the
Appropriations Committee because we have the responsibility to
be sure the IRS is doing its job of implementing congressional
intent.
On the one hand, we have the idea of the goal of the 80
percent filing. We have the idea of providing free filing on
the Internet, free filing through the IRS. On the other hand,
although that may be--although Mr. Harrison has told us it is
not to some, it might sound like this is inconsistent in the
marketplace--how do you do something free? I think I know the
answer that Mr. Harrison would give to us.
So let me begin by asking the Commissioner whether
youbelieve it is possible to have free filing to the IRS and have it
done through the private sector?
Mr. Rossotti. I think it is possible because it is being
done now. Even last year there were some offers--as I think Mr.
Black noted, there are some companies that offer free filing to
people that file certain kinds of returns, usually lower-income
returns, and those are potentially fairly significant.
In addition to that, there is at least one company that I
am aware of, maybe others, that offer either no-cost or low-
cost filing through the Internet; and Mr. Harrison has noted
that he is going to be offering some services.
So I think the market is developing much as ETAAC noted,
and I think, contrary to what you may have heard, the IRS is
simply trying to foster that trend. I mean, the act itself
simply says that we are supposed to--I think words are ``reduce
barriers,'' ``provide incentives'' and ``provide for robust
competition.'' Those are the three pieces in the act.
We have not used any financial incentives which were
authorized, because the industry told us they would rather have
us work on reducing barriers rather than do that--although that
possibility could exist. But we have asked, through the RFI.
And again we may have unintentionally caused some confusion
here, but the purpose of the RFI was to solicit--gee, it would
seem I didn't know ``on'' from ``off.''.
Mr. Kolbe. That is one of those computers that handles all
of those.
Mr. Rossotti. But really our intent was simply to solicit
from the industry and our representatives of the industry here
what ideas they had as to what we could do to basically try to
support this trend, which is already happening to some degree,
but we would like to support it as much as possible. And, you
know, we don't know really all the possibilities that exist out
there.
I mean, the Internet especially is a fast-changing market.
We don't know all the business models that people have. So we
would like to get as much input as we can from the industry and
use that to see if there are some things that we could do.
Mr. Kolbe. Does the idea of making it possible for people
to do free electronic filing mean that the IRS needs to provide
a software program to make that happen?
Mr. Rossotti. I don't believe that that is true. I
really--having been a part of the software business myself, and
now having been in the IRS, I think we have enough to do with
developing software for the things that we have to do
internally, that it is not good sense for us to get--that is
not necessary.
But I think you know the access that we should support or--
--
Mr. Kolbe. So you believe you can meet the terms of the act
without actually getting into the software business?
Mr. Rossotti. I believe that we can. I mean, I obviously
won't know everything we can do, but I think that there is
enough going on in the industry that if we do what the act
says--press for competition, provide incentives--we need to
find out more from the industry, what kind of support they
need.
Mr. Harrison said he would like to get more support from
us, you know, in some form. I am not sure exactly what that
means, but we would like to find out from companies like his
what it is that they would want. We have links on our Web site
for example. Maybe we could do more links on our Web site to
refer people to companies that offer these services.
Mr. Kolbe. Let me turn now, if I might, to the industry
people here and ask them the response to that question. I take
it, the concern you have, or at least what we heard certainly
from Mr. Black as a concern, is that you are not at all sure
that the IRS really does intend to meet the requirement of the
reform act without developing its own software.
Would that be a fair recapitulation of your statement?
Mr. Black. Partly, Mr. Chairman, yes. The IRS can get into
the marketplace by them actually writing their own software or
by trying to pick winners and losers by perhaps identifying one
firm, and making an exclusive contract. So they could do it
through a contract.
Mr. Kolbe. Do you see that happening? What is your--are you
concerned that this is a potential problem, or is this
something that you see some----
Mr. Black. There have been a number of statements made by
IRS officials, ETA officials, that have indicated that was the
intent. There was an indication during deliberations on
authorizing legislation, in fact, to obtain certain authority
that moved in this direction. I think the Commissioner has made
a very articulate statement about not wanting to move in this
direction, but I am not at all sure that that is universally
shared within all parts of the agency, and we constantly sense
that there is such a desire.
I should also add that while we fully support the goal of
electronic filing at 80 percent, we do not think there is any
national mandate to move towards zero-cost, free filing. If the
private market can get there--and it is clearly moving to lower
costs, and people that provide these services have great public
services in providing low- and middle-income taxpayers that
opportunity--we think that is great. If the market moves there,
so be it.
Mr. Kolbe. You do not think--let me just see if I
understand.
You do not think there is a mandate. Is that a goal,
though, a public policy goal that we should be moving towards,
of no-cost filing?
Mr. Black. I don't think that there has been such a goal
established by either Congress or the executive branch. If that
is a goal that we should perhaps consider pursuing, then, the
policy process of the U.S. Government ought to make that
decision. But that has not been a decision that has been made,
so far as we can tell, by any statutory authority, nor any
presidential directive. So we think that, if this is a public
policy decision people want to make, we will debate it. We
think the arguments are yet to be made on both sides.
Mr. Kolbe. If I am filing, not electronically, if I can
figure out all the forms and get them filled out myself on
paper, the cost of filing is the stamps to mail it. So it can
be done free other than the postage cost.
Mr. Black. The cost of filing entails tremendous man hours,
huge cost. That is what software, through logarithms, in
essence replaces. There is a huge cost to the private sector in
technological development research to, in fact, create it and
an ongoing need to update those logarithms to do the tax
preparation. So there is a savings----
Mr. Kolbe. There is a savings in time. There is noquestion
that time is dollars, time is money. But in actual cash outlay, you are
saying there is a difference.
Commissioner, do you see that as accurate, that there is no
mandate in the legislation to move to----
Mr. Rossotti. No, I don't think there is a mandate in the
legislation to reduce the cost of filing to zero. I think the
mandate in the legislation or the goal in the legislation is to
find a way to get to 80 percent, and we are supposed to do that
by three means. One is--you know, again I go back to ``reduce
barriers,'' ``provide incentives'' and ``press for robust
competition.'' I think that is what we should do.
That is a perfectly reasonable set of guidelines. It also
provides a process for us to consult with ETAAC, which has been
designated to be set up under the legislation. And we have been
consulting with ETAAC. I think their advice in the June 30th
report is pretty wise advice; I certainly accept that advice.
I think the idea of the RFI we put out was an attempt,
although there might have been confusion about this, to simply
solicit industry views about how we could do what it is, who is
to press for robust competition and support the industry in the
direction it seems already to be moving, which is to provide
more services at less cost.
I think, as I said in my prepared testimony, that based on
what I have heard--and I think Mr. Harrison's research showed
this--that there are a number of barriers that stand in the way
of getting beyond the level we are at now. Not all of them are
costs, but one of them is cost.
We do certainly hear from taxpayers that they--some
taxpayers are concerned about the fact that they have to pay a
fee to electronically file their tax return, and if they can
use a stamp not to--whether that is rational on their part,
based upon how much time they would save or not, it
nevertheless is certainly something that we believe is a view
held by some taxpayers.
Mr. Kolbe. Mr. Black.
Mr. Black. Mr. Chairman, I think what is lost here is there
has been a recent request for information that is, in essence,
a procurement to provide this service.
Mr. Rossotti. It is simply a request for information.
Mr. Kolbe. There seems to be some dispute about this.
Mr. Rossotti. In our information, it is just a request for
people to provide views. There is no procurement involved.
There is no specific proposal. There is no more contemplated.
All we have asked is for people to give us views and answers to
some questions.
I am afraid I have to correct that. That is not an accurate
statement.
Mr. Kolbe. Mr. Black, I would be interested in hearing your
thoughts about that. A request for information is very
different from an RFP, which is a request for a proposal which
is a specific contractual obligation at that time IRS intends
to enter into upon completion of that. Is that not correct?
Mr. Black. It is not an RFP, that is correct. But as we
view it, in essence what it really is doing is requesting that
kind of connection to the private sector and asking for
private-sector participation; and we see that what can go on
here is in essence picking somebody in the private sector to be
the arm of the IRS in providing this service.
Actually, that is what we think is happening.
Mr. Kolbe. I take it your real concern at this point, as I
hear--what I heard in your testimony--what you have said again,
Mr. Black, is the idea of the IRS picking and choosing winners
here; is that it?
Mr. Black. That has certainly been part of it.
If I may make reference to the cover letter of the RFI
itself, it does say that ``the IRS plans to issue a subsequent
solicitation for the purposes of identifying organizations who
are willing to offer free tax preparation, and electronic
filing via the Internet.'' It says ``this RFI is for planning
purposes only. Responses to this RFI are not offers and cannot
be accepted by the Government to form a binding contract,'' but
they do plan a general solicitation. It is the first step in a
procurement process.
It is not an RFP itself, but it appears to be a step in the
procurement process.
Mr. Kolbe. Well, I don't want to get into the ``he said,
you said,'' but let me ask the Commissioner to respond to that
statement.
Then I will ask Mr. Price for some questions.
Then I want to go to some other areas and involve the other
people here.
Commissioner, that statement about subsequently seeking
proposals----
Mr. Rossotti. I think what we intend to do is look at the
responses we have gotten. By the way, we have gotten about 150
responses so far. So therefore we presume there are a lot of
different views as to what could be done and what should be
done, and until we look at that, we are not going to have----
Mr. Kolbe. Where are these coming from? Are these coming
from----
Mr. Rossotti. Industry.
Mr. Kolbe. From Internet as well as software and----
Mr. Rossotti. There is a wide variety of people that have
responded. I am afraid that--you know, it is possible that we
contributed to the confusion, but I think I should make it
clear that there isn't anybody in the IRS that is going to do
anything, to put it very bluntly, that I don't agree they
should do, because that is why I am the Commissioner.
I have stated on the record here to the committee that we
are not doing a procurement, so if there is someone that has
told Mr. Black that we are doing a procurement, let me know who
it is, because that is not going to happen, Mr. Black.
Mr. Kolbe. Once again, we are going to get interrupted. I
am going to see how far we have to go before we go.
This is the vote on the continuing resolution.
Mr. Price, I will ask you for some questions.
Mr. Price [presiding]. Thank you, Mr. Chairman. Let me
echo my thanks to the entire panel, both panels for your
testimony here today.
I would like to concentrate on the Commissioner's testimony
mainly, although I do want to say, Mr. Harrison, I am intrigued
by what you say and that--what you said and some other services
that I have learned about are the pretexts for the question I
would like to pose to the Commissioner.
The Commissioner has said more than once that the hurdle to
be surmounted, cost to the taxpayer, is a significant barrier
to the 80 percent goal we all want to reach. This morning,
actually, I reviewed a tax return and it was not a return from
a particularly low-income taxpayer, a tax return that was filed
electronically for free this year via H.D.Vest Online, and I
have a little information about this service.
This--I don't mean to single out this company particularly;
I am interested in how typical this is, or how feasible this is
to become more widespread.
H.D. Vest--this article from E-Commerce Tax News by David
Harristy, June 25th of this year, says H.D. Vest has a plan to
provide free tax return preparation services. Services include
both Federal and State individual income tax returns, as well
as free electronic filing. According to the company, from
January 28th to April 17th, there were more than 1.5 million
unique visitors to the H.D. Vest site; of these, more than
260,000 prepared and e-filed their 1999 income tax returns free
of charge.
How does this work? Where is the profit in this? Well, the
article goes on that when an individual comes to the H.D. Vest
site for free tax return preparation, the site provides
information on other services that are available from local
affiliates. The hope is that users of free services will
eventually become buyers of premium services.
Now, I assume that there is already evidence, pretty
convincing evidence, that free filing via the Internet is
possible, is feasible, is electronically workable. Is this
something the IRS, Mr. Commissioner, is in any way encouraging?
Are there aspects of it that you are concerned about? Is this,
in fact, the wave of the future?
Mr. Rossotti. Well, I think it is certainly something that
we are observing carefully. I think it points to the fact that
the industry is responding with new and creative options as to
how we can improve the services that are available.
Mr. Harrison noted that he is starting up a company. I
think what we simply are trying to do, notwithstanding maybe
some of the confusion that we may have caused inadvertently, is
to simply support these--you know, these trends which seem to
be moving in the right direction.
There may well be things that we can do in the way of
supporting or encouraging or advertising or marketing or
working with companies that are offering services that are
going in the direction that I think we all want, which is to
offer more services at less cost to the taxpayer.
Mr. Price. There are other hurdles to taxpayer acceptance,
some of which you have referred to--data security, personal
privacy, the prospect of being put on some kind of e-mail
mailing list--and then the problems this could pose, I suppose,
for dispute resolution down the line.
You, of course, have testified very strongly that
confidentiality of taxpayer data must be assured under all
circumstances. Do these online services pose particular
challenges in that regard? Has the IRS's role in overseeing
these services and working with these providers in offering
greater assurance to taxpayers that their data is secure, their
privacy is protected?
Mr. Rossotti. I think that our role is actually spelled out
in the statute or in the regulations. There is a specific
regulation, known as Regulation 7216, which actually deals with
tax people who are tax preparers. And although the Internet is
new, it has been determined that companies who offer tax
preparation software over the Internet are considered tax
preparers, and they are governed by this particular regulation.
And it really spells out pretty concretely, with some very
strict limitations as to the privacy of taxpayer data, the
confidentiality of taxpayer data, including the issue of use,
or reuse, of any information on the return.
So what our goal is, or our--I guess our need is to make
sure that we administer that regulation, get questions as they
come up, if there are new issues that haven't been considered
before; and try to get industry input or industry questions
about any new questions that might come up.
But fundamentally the standard is set by law. It is our job
to administer that and to provide any new answers that might be
coming up as a result of the new technology.
I think more broadly, you know, protection of confidential
tax information, that is one of the most fundamental aspects of
the whole tax administration system. There are many, many
things, you know, that the IRS would like to do with technology
which we are being very cautious about simply because of the
paramount need to protect the security and confidentiality of
taxpayer data. We have no interest and no authority to
relinquish or in any way weaken that standard.
So our role is to administer the standards that exist in
the protection of taxpayer data. Clearly, there could be some
novel issues that come up as the result of new technology
which, with the help of our counsel, we have to react to. But
the policy, I think, is quite clear and it is set by law.
Mr. Price. And you seem to have little doubt that the IRS's
proper role can be clearly delineated.
You have some interest--I think, some responsibility--to
promote and encourage the provision of these services, to
consult with those providing the services, to make certain that
it is meeting your specifications, to make certain that there
are consumer protections involved.
You are satisfied that there is not a problematic gray area
there, where the agency might go into a more overtly
promotional mode?
Mr. Rossotti. Well, I think that there is not a gray area
in the sense that the IRS should be getting into, or would
intend to get into, the business. I think that would be very
unwise, either by contract or in any form.
I think, though, where it comes into the question, to
provide incentives and promote robust competition there is
certainly a question and there may be differences of view as to
how we should do that. I mean, ETAAC said we should continue to
press for competition; the law says we should press for robust
competition, and it also says we could provide incentives,
working with companies to do cooperative advertising perhaps.
We don't know what the requests are, or the ideas are, that
the industry has come up with in response to our RFI.
So there isn't any question about the protection of
taxpayer data. That is set by law and it is of paramount value
and importance in the tax system. I don't think, at least from
my point of view, there is any gray area in terms of the IRS
either by--in any form, really, getting into the tax
preparation or tax--even the tax filing business.
I think where you get into the question is, what does it
mean, you know, and what are the appropriate things to do when
it says ``provide incentives'' and ``press for robust
competition.'' That is what we are trying to find out. The
purpose of the RFI was really to find out what views we might
receive from the industry about how we could proceed there.
Andthere could be disagreements about that.
But I think that is really the question: what should we be
doing to provide incentives and press for robust competition?
Mr. Price. I appreciate that answer. It does seem to me
that the industry complains notwithstanding the fact that the
industry is going to depend on the IRS to promote electronic
filing if they are to succeed, and that this should not be an
adversarial situation.
Mr. Rossotti. I don't think it should be. I think, for the
most part, our interests coincide. That doesn't mean there
couldn't be, you know, disagreements about some specific item.
It is also the case, though, that the law provided, I
think, an interesting process. It said where there is any
disagreement, we should consult through ETAAC, which is what we
would intend to do. So, I mean, before we could do anything of
any significance--there would not be anything that we could do
on our own--we would consult with ETAAC as the designated
advisory group to work with us on any initiatives that we might
take.
Mr. Price. Thank you. We have a vote on. What is our
process here?
Mr. Hoyer. We are going to recess pretty soon.
Following up, I understand this question wasn't asked. I am
sorry that I wasn't here for all the testimony, but I am going
to read all the testimony. I was on the House floor discussing
the next continuing resolution bill.
There is some concern expressed by the fact that the IRS
would align itself with certain e-authorized vendors. Do you
have any plans to align yourself with any vendors?
Mr. Rossotti. We have no plans. Well, we have all the
electronic return originators, about 77,000; we are not aligned
with any one of them.
I think that--you know, the question that may come up as we
receive input to this RFI is, what proposals do people have to
work with us in a cooperative way. We certainly would not be
authorized through this RFI process to pick, you know, one
company or a small set of companies or any subgroup of
companies. But the question that we are asking for is what are
their ideas about how we could effectively work with them--you
know, whichever ones are interested in working with us--and
before we would be able to do anything on that, we would
certainly consult with ETAAC. That is what is described by the
statute.
Mr. Hoyer. Thank you, Mr. Commissioner, and gentlemen. The
chairman is going to be back. I can't come back because I have
a 3:30 meeting, which will obviously be pushed back. But the
chairman indicated he would be back. So we will recess the
hearing until the chairman returns. Thank you.
[Recess.]
Mr. Kolbe. The subcommittee will resume. I apologize. That
was the last interruption for the day, so at least we don't
have to do this again. I apologize--all of you, I suspect, have
testified before--or certainly been around hearings here enough
to know how votes tend to interrupt these hearings. But sorry
that this has happened.
Let me go back to a couple of other things that I wanted to
talk about.
First, Commissioner Rossotti, the plans you are talking
about for reducing the barriers, the things that you need to do
to enhance the electronic filing, to what extent is this
dependent on your modernization plans, your technology
modernization plans; and I might add, your reorganization
perhaps?
Mr. Rossotti. Well, I think that, as with all the things,
you know, Mr. Chairman, we tried to segment things we can do
immediately from things that will take longer.
The immediate things----
Mr. Kolbe. I think your button is off.
Mr. Rossotti. The immediate things that we are doing over
the next filing season and the following filing season are
largely being done by upgrading the existing legacy systems,
because that is the only way we can get those done in that
period of time; and those are well under way.
However, some of the longer-term things are dependent
entirely on the technology modernization and, in particular, to
be able to convert our ability to do business with taxpayers
and practitioners beyond just filing; in other words, to be
able to do other kinds of transactions--to do the whole tax
administration process, to provide them access to taxpayer
accounts, to do electronic messages--those things are entirely
dependent on our technology modernization.
And, in fact, the request that, you know, we have been
working with your committee on for the 2002 release has steps
in that direction. So that would allow, for example, electronic
originators to communicate with us in a secure way over the
Internet for such things as applying for applications and
eventually exchanging account data.
So those things are very important, and they will fit into
the overall process of creating a greater incentive for people
to do business with us electronically.
But the immediate steps that I specifically mentioned of
eliminating the need for the paper form and extending the
filing option to all the forms and schedules, those are more
tactical initiatives that we need to get done right away
through our existing legacy systems.
Mr. Kolbe. By the way, your mentioning the additional forms
raises just one thing in your testimony I just wanted to ask--
this is kind of an aside. You said with that it would then be
possible for 99.1 percent of people who file electronically.
What is the nine-tenths--what is the 1 percent that gets left
out?
Mr. Rossotti. There are some, honestly--we have lots of
little schedules that are used by people in very limited
circumstances.
Mr. Kolbe. So there are some of the forms that will not
be----
Mr. Rossotti. Just a few things. I don't frankly know what
is limited; I don't think it is technical. I think there are
some legal requirements, but effectively they affect a very
small number of people. We consider that will be as close as we
need to get.
Mr. Kolbe. One of your modernizations is the Security and
Technology Infrastructure Release, as it is called, STIR, which
provides the security infrastructure foundation necessary for
conducting the business functions, such as electronic services.
Would you comment on the GAO conclusion that this project needs
to go through a rigorous assessment of security threats and
vulnerabilities?
Mr. Rossotti. We agree with that. It does need to and it
will because that is the sort of core infrastructure project
that will provide appropriate security mechanisms for
essentially all of our technology modernization. So it is
literally the critical component in terms of security. And we
will--through a rigorous security assessment, we have anumber
of resources available to us to do that. One of them is our own
internal security office, which we built up considerably; the other one
is MITRE Corporation that has a great deal of expertise.
We will be using all the resources, as well as that of the
prime contractor, to assess the threats and issues that will
arise. That will be an ongoing process. We will be doing that
as part of the development process, but also as we move through
it and we learn more about threats that might exist.
So we concur with that recommendation, and we intend to
pursue that vigorously.
Mr. Kolbe. Okay. Let me turn back to some of the testimony
that we heard from the other panel.
Mr. Harrison spoke about the concerns that have been
expressed on the privacy issue. I think some of the others
alluded to that, as well.
Commissioner, you did too.
Let me just ask this question as a kind of a--in terms of
being provocative, not necessarily expressing my view of it,
but just to take an extreme position, what difference should
the privacy issue make before the information gets to the IRS?
If I want to go out with some private company--with Mr.
Harrison's company or somebody else--sell it, let him use it,
if I know that he is using it, if he wants to tell me that that
is my business, or my problem, perhaps, but until it gets to
you, until it is transmitted through the Internet or
electronically to you, what concern do you have about that?
Mr. Rossotti. Well, I think that is definitely a broad
policy issue that has been probably thrashed out over the
years. But in that policy-making process which is incorporated
in, you know, Section 7216, which is the part of the regulation
that regulates tax preparers--this is way before there was an
Internet; this deals with tax preparation business--I think the
policy decision was made--and this is long before I was here--
that in this sense, the people that prepare tax returns are
part of the tax administration process and that there are some
protections that need to be established for the taxpayer as to
how their data would be used or not used. And those policy
decisions were incorporated in--you know, and they have been
long-standing policy decisions that have been in place in
business for a considerable period of time.
And I think--you know, it is interesting that those were
made before. You know, I think in recent years the issue of
privacy has become a greater public concern, or at least it has
been expressed more vocally; and yet, you know, even prior to
this time, there was a reasonably strict regulation--actually
quite strict regulations that were established to protect
taxpayer data even while it was in the hands of people who
prepare the data.
In a sense, the tax preparation industry is, I guess,
viewed in that sense as part of the broader tax system. And
certainly we view it that way. We view tax preparers as very
important partners; the tax system wouldn't work without them.
But there is a balancing act there that has been established in
the form of this policy. As I see it, our role at the IRS is
simply to administer that policy the best way we can. And
certainly if there are those issues that arise because of
technology, we would have to try to find answers to those.
So the policy is pretty well established.
Mr. Kolbe. So the policy is that tax preparers are guided
by certain requirements of protecting the privacy even though
they are in the private sector and that is before the
information is transmitted to you.
So, Mr. Harrison--now, the others can comment on this as
well--did you agree with that? And if you do, it is pretty
obvious how a tax preparer that does it not electronically, or
even electronically now, and I walk into their office--just use
a name--an H&R Block, when I walk into their office, it is
pretty obvious how they get their compensation; they charge me
a fee for preparing my return.
You are talking about a system where you don't do that,
where it could be done free, which means that you have got to
get your financial reward in some other fashion. How do you do
that and protect the privacy at the same time?
Mr. Harrison. Well, first off, we agree with the assessment
that the Commissioner has stated regarding the privacy
provisions. I would say that there is a question--while we plan
fully on following those, there is a question as to--it is
wrong for us to say, It is our data; and I think it is wrong
for the IRS to say, it is their data, because in the end it is
the individual's own data and we must not to lose sight of
that.
However, in our business model, we really are focused on
the fact that there are $146 billion of tax refunds that are
issued each year. And the consumer is very concerned with
convenience and very motivated by convenience. We want to make
it convenient for the consumer to put those refunds to their
intended use whether that is putting them in touch with a
merchant where they can buy a product from that merchant,
whether it is putting those funds into an investment account of
some type, whether it is getting a loan against those funds.
Whatever it may be, that is how we are focused on our business
model.
We do not need to use taxpayer's individual data to do
that. We are not going to be looking at how much money they
make. We are not going to be looking at what type of deductions
they have, how many children they have, anything of that
nature.
I would say that if there is one thing I would request that
the IRS look at, it is the use of electronic signatures. The
regulations are currently written to require an actual written
signature, assuming that people are in tax preparation offices.
That does not work in the electronic world.
The IRS has made great strides in allowing taxpayers to
file paperless returns. I think the next thing they need to be
able to do is to allow the individual to use that code that
they create electronically to allow companies like ourselves to
use that data for other means.
Mr. Kolbe. I don't want to lose the thread of what I was
talking about here about--according to your testimony, you are
well on the way to solving that problem; are you not?
Mr. Rossotti. I think what Mr. Harrison is saying, we are
well on the way to solving it with respect to the things that
have been of most concern in the past, up to now, which is
having taxpayers file their return electronically and having to
send in a separate piece of paper with a signature. That
problem is going to be stopped as soon as this current season.
Mr. Kolbe. So they will not have to send in a separate
piece?
Mr. Rossotti. They will not have to for the purpose of
filing their return.
But what I think Mr. Harrison might be referring to--
correct me if I am wrong--is what would be required for a
taxpayer to give a firm permission to, for example, market some
other service or use their name in some other way.
Mr. Kolbe. Directly to the individual?
Mr. Rossotti. In other words, the taxpayer under the
rules--the tax preparer is not allowed to use the taxpayer's
information in any way, shape or form to market without their
permission, without a physical signature----
Mr. Kolbe. Oh, without a physical signature.
Mr. Rossotti [continuing]. For that purpose.
Mr. Kolbe. Okay. And, Mr. Harrison, you are saying that
that is the area where the signature issue has to be addressed?
This is in the rules governing tax preparers, I gather.
Mr. Harrison. Yes. We believe that is the main thing that
needs to be addressed.
We believe there are ways over the Internet of ensuring
that it is a legitimate signature. We would sign up for all of
the audit provisions where people come in and audit, that we
are actually receiving these signatures, before we use the
data; but clearly that hurdle does have to be overcome.
Mr. Kolbe. So this is the kind of signature you would get
at the time somebody comes in or comes through the Internet,
contacts you to do their return, you prepare the return and
file it. You would get it, and that is the way basically you
get the compensation for your company; once you have that
signature on file, you can then market the information not
about their tax return, but only about making available
information about how they could use their refund; is that
right?
Mr. Harrison. Right. We have ways now, we have a revenue
model that is not totally dependent on that signature. There
are things we can do within the rules that do not require that
signature. However, not being able to get that signature
electronically is actually going to force misuse of that data.
Earlier there was a reference to H.D. Vest. They wanted to
use the personal data to help people do financial planning and
to turn them over to a real-person financial planner. Because
of these regulations, what they did--and we don't approve of
what they did, but what they did was, they had a taxpayer go to
their site and they said, We would like to collect your
personal financial information; and they did that up front in
the context of a financial planner.
Then they said, by the way, we will use that data to fill
out your tax return. So they somewhat sidestepped that
regulation by collecting the data first and doing the tax
return second.
We don't think that should have to be the case. We just
feel there needs to be a way to facilitate a signature in the
electronic world.
Mr. Kolbe. The business you are doing seems to be posing
some very interesting questions. And I have no objections to
it; I think it is very good for the consumer. But it is
interesting, I would not--if I were XYZ Investment Company,
Brokerage House, I would not be able to go to the IRS today and
say, hey, I would like to buy a list of everybody that is
getting a refund, just so I could do a mailing to them. I don't
want any other information about their return; I just want a
list of everybody who is getting a refund, but I would like to
contact them about a way in which they could put that money to
good use here.
Mr. Harrison. That clearly is not our intent. What we will
do at the end of a tax return is tell the taxpayer that there
are various things you can do with this refund. If you would
like, you can get a check from the IRS. If you would like, we
have a relationship with X Brokerage Company; we can
electronically deliver that money directly to an investment
account.
But consumers will always be given the option of what they
want done. We will not supply the names in that context.
Mr. Kolbe. Mr. Lacijan, you spoke a couple times in your
testimony about the problem of trust. And I wonder if you would
talk about that a little bit, in what you see as the
relationship between the electronic tax preparation industry
and the Internal Revenue Service.
Is trust an ongoing problem that we haven't solved or
figured out yet, or how are we doing in that regard?
Mr. Lacijan. Just a little side comment first: If the IRS
could sell the names of everybody getting a refund, the need
for future appropriations would go way down.
I think the discussion at the table has confirmed my
testimony that the RFI has caused some confusion in the
marketplace, and we are not quite up at the partnership level
yet. Certainly, I think there are things we need to work
together on to overcome that. I think there needs to be very
open communication on both sides of the issue from IRS to
industry and industry back to IRS. ETAAC certainly is one way
to do that.
There are industry groups that exist in addition to ETAAC.
But clearly industry dislikes uncertainty. You can't expect
someone to invest millions of dollars in a concept for a
product and then find out 6 months after that the IRS is going
to offer the same product for nothing. So there clearly needs
to be a sense of openness in terms of what IRS is planning to
do and what they expect the private sector to do.
Mr. Kolbe. Is the IRS making good use of ETAAC, of the
Electronic Tax Administration Advisory Committee? How do you
feel the relationship between, if not the whole industry and
IRS, between at least your advisory committee and the IRS has
been?
Mr. Lacijan. I think among some of the members the issuance
of the RFI after we made our report caused some concern that
their advice, the advice we gave in the June 2000 report,
wasn't being followed; that they would have expected that IRS
would not have issued the RFI in light of the recommendations
in the ETAAC report not to pursue a public policy to have IRS
offer its own e-filing product.
This was in the belief that the RFI was leading to the IRS
offering its own product. So I think that is part of the
confusion of which I spoke.
Mr. Kolbe. Commissioner, I gather you would say this is a
misunderstanding?
Mr. Rossotti. I have acknowledged--first of all, I believe
that--as I have tried to do very diligently, I think, with
almost all of our stakeholders, all of our stakeholders, I do
believe there is an important relationship in trust and open
communication.
Every once in a while, I have to concede, it breaks down
for whatever reason; then we have to repair it.
But with respect to this RFI, there has been a
miscommunication. It was not our intent, you know, to do
anything other than solicit industry views about how we could
promote the objective of reducing the cost and making
electronic tax preparation more available over the Internet. It
is not, I think, anything more than that.
There are certainly things some people probably said that
could be interpreted that way. My purpose--one of my purposes
here today was to try to clarify that and to make it clear that
was not the intent.
I think that we do have to acknowledge that while we have
to have a good relationship and an open relationship, that
there are different views within the industry. I think we have
heard some of them here today. And there is a question, I think
when you were just coming back, that Mr. Hoyer asked me: Is
there a gray area?
I don't think there is a gray area about what the IRS' role
is in terms of providing services, because I don't believe that
we should provide tax preparation services or tax software.
I think where the question might arise is with respect to
the part of the law that says we should provide incentives and
encourage, quote, ``robust competition''; you know, what it
means, what that means exactly, is open to some interpretation.
And I think that we do have a commitment to work with ETAAC to
get their input and their advice that, I think, has been very
good in the past. I don't see anything in their June 30 report
that I don't agree with. As a matter of fact, they indicated,
in two years they might reconsider and get into some sort of a
product. I think that could happen.
But that is a thing that they propose. I would be very
skeptical of even that, because I don't really see that that
kind of an approach. I think that would be getting the IRS
further even than I would want to see us get into.
So I do believe that there is a need to, every once in a
while, improve communication where it breaks down. I think
there might have been some confusion that we created here. But,
you know, one of the advantages of this hearing is that it
helps to clear that up.
Mr. Kolbe. If we can do at least that I would appreciate
that. Yes, Mr. Lacijan.
Mr. Lacijan. As a the follow-up, I think in the three years
that Commissioner Rossotti has been commissioner external
stakeholders would give him very high marks for outreach.
Mr. Black. Mr. Chairman, first, I would like very much to
associate myself with the comments of Mr. Lacijan. I think it
is important we remove the cloud. We want the trust. We very
much want to work in partnership with the IRS. Right now, we do
have this cloud of uncertainty hanging over us, and while you
were gone we talked about how the language----
Mr. Kolbe. Excuse me for interrupting. But do you see that
cloud as being created by this RFI?
Mr. Black. Tremendously so. There were statements made by
IRS officials which were reported in the press that basically
used the terms RFI and RFP interchangeably over the course of a
whole industry conference. In addition to that, with the
President's budget submission, the fact sheet of the IRS itself
for this year's budget said, ``the IRS could implement this
option by issuing a Request for Proposal to the industry
requesting vendors to submit proposals that would meet these
requirements.'' So there are out on the record indications that
indicate there is some intent of the IRS to move this way.
But the Commissioner made some very useful, strong
statements today; and if we can take some of that, in essence,
as a pledge they are not moving in that direction and if,
frankly, the committee would adopt the ETAAC recommendation to
signal in its language accompanying Treasury-Postal
appropriations that there should be a two-year moratorium on
the IRS moving into this area, that would remove the cloud.
We would say that it is not going to happen. They will have
been told it will not happen. There is a moratorium.
Now let's sit down together and work and really make
electronic filing, make e-government work well and smoothly for
the taxpayer and not worry about this issue, whether they will
compete directly or indirectly with the private sector. I think
you would provide a great service by clarifying that, removing
for everybody that issue from the table.
Mr. Kolbe. I want to follow up. It looked like,
Commissioner, you wanted to make a response.
Mr. Rossotti. No.
Mr. Kolbe. Let me ask the three people from the private
sector, if this happens and if we can remove these doubts or
uncertainties here, do you think the market is much greater
even then what we have seen today? The Commissioner said 150
responses to the RFI so far. I think some of you have indicated
there was low industry response to the RFI.
Mr. Rossotti. At the time I think of the original date it
may have been too tight a date, and we didn't get that many. We
just extended that a little bit, and we got a lot more
responses.
Mr. Kolbe. So you are getting a lot more responses. Do you
think this field--we haven't even touched the field yet in
terms of the amount of competition that is possible out there
in the marketplace. Mr. Lacijan.
Mr. Lacijan. I think that is true. Let me give you one
example. I don't know of anything specific in the works, but in
my much younger days I can remember when banks gave away free
toasters for signing up an account. The new economy version of
that would be for a bank that is offering online banking
saying, if you bank with us, As a competitive edge, we will
allow you to access a tax prep product for nothing and
facilitate technology just as part of our normal service. That
is kind of a normal model that could easily be just around the
corner. That is one example of how the marketplace might react
to provide more e-filing for nothing.
Mr. Black. Mr. Chairman, if I could, a robust private
sector is I think what we have, what we all say we want, andI
think it is important to remember when we talk about competition with
the IRS I think we interpret the language of promoting robust
competition slightly differently. Because in our mind that means let
the dynamic of the marketplace work, and if the marketplace's dynamic
is really working well you will have competition, you will have
innovation. That is what really does it.
What hurts the marketplace is an attempt to artificially
jump in and interfere with it, and that is where there may be
some worry that, in an attempt to help it, you can have
collateral damage in the different dynamic in the marketplace.
We see lots of examples--it's not just taxes. It is a whole
package of financial services offered on the Internet
electronically, many other companies who don't care about the
IRS. But, in fact, we see a lot of different people, lots of
people packaging different kinds of services in a wide range of
ways. But people will not be anxious to create and investors
will not be anxious to invest in companies if they think they
will be competing against a branch of the U.S. Government. That
stifles the dynamic marketplace, not helps it.
Mr. Kolbe. Thank you.
Mr. Harrison.
Mr. Harrison. I would just question the assertion that
there is dynamic competition that exists today.
Mr. Black. You are it.
Mr. Harrison. As I previously stated, for 12 years there
has only been two companies that have survived in this sector.
I know of at least three companies that entered the online tax
preparation business last year that will not be coming back
this year because of how difficult it is to survive. I would
say the biggest cost associated with this business is acquiring
the customers.
Mr. Kolbe. I am sorry. Is what?
Mr. Harrison. Acquiring the customers. And the IRS can play
a significant role in helping us acquire the customer while
they are achieving their goal of the 80 percent electronic
filing. That is where we really believe the effort has to be in
helping people in the industry succeed, and that is going to
require the IRS be proactive and not just sitting on the
sidelines and watching people come into this industry and fail
because they can't provide an economic model that works.
Mr. Kolbe. Why is it that difficult to acquire customers? I
mean, unlike some other things, we know that every April 15 or
somewhere between January and April every single one of us who
is out there working is going to file a return. It should be a
nice market base to work from.
Mr. Harrison. Well, we live in this industry, and it is
amazing, until you do consumer research, you don't realize how
little people know about what we do every day. But if you get a
focus group together and you sit down and talk to people, most
people don't even know that financial software exists for doing
their taxes, and it has been around for 15 years, let alone do
they know that there is an option of electronically filing it.
And surely they don't know there is an option for doing that
for free.
So there is an awareness capability here, and the IRS has
the credibility and ability of creating that awareness very
quickly because they touch every one of those 125 million homes
that has to file a tax return. I can guarantee you that a
mailing from the IRS explaining this to consumers will get a
lot more attention than a mailing from freetaxprep.com.
Mr. Kolbe. Let me turn to Commissioner Rossotti.
Commissioner, what do you see as the IRS role in terms of
educating your filing public about the options that are
available to them?
Mr. Rossotti. I think this is really the essence of it.
Because, as I see it, I don't see any value or benefit to us
either by directly or by contract actually offering these
services. On the other hand, I do see a value potentially. We
need to get people's ideas of how this should be best done, of
letting them know what the options are and helping to educate
them, perhaps through our Web site, perhaps through our
marketing program. That is what we really were asking for, as I
see it, through this RFI: What can we do?
I would categorize that under the category of providing
incentives and pressing for robust competition. I would not
think that just standing by is consistent with the mandate we
have that says to press for robust competition. We could do
that, and we could just stay and say we'll see what happens. I
think the ETAAC report said we should--part of the
recommendation was that we should promote competition, which is
the same thing that the law says.
There might be some disagreements about what that consists
of. People could say that interfering with the private sector,
if we do anything, to even let people know that there are
options out there--and I don't think I would go that far. I
think that wouldn't be consistent with our mandate.
That is a long way of us getting into the business of
either providing software directly or through contracts. That
is why I have no hesitation in saying that is not our intent.
There is potentially, I would say, some disagreement that could
arise about what it would mean for us to take any initiative
based on whatever input we got from the industry to actively
inform the public or let them know what the options are that
they would have to get better services at lower costs.
Mr. Kolbe. So you do see marketing the options as one of
your functions, one of your roles.
Mr. Rossotti. I could see that would be one of our roles. I
think that is what it says we are supposed to do. We already do
that now, but in a very, very general way. I think Mr. Harrison
said maybe there is some more targeted or concrete way. We are
not the experts on figuring out how to market products or how
to let the public know. We are interested in getting the
industry's views on that.
Mr. Kolbe. Mr. Black.
Mr. Black. We think there is a lot of benefit in making
more people aware of the benefits of electronic filing, and I
think the very fact than Mr. Harrison stated that there is such
a large number of people who don't avail themselves of this
service is a great indication that there are great market
opportunities for companies to market to that. But I do think
we have to be careful how we will support going out educating
consumers. It is important that the government--again, there is
a winner-and-loser issue--not do it in a way that is not
balanced and fair and evenhanded.
If all of sudden they say we are going to highlight a
couple of companies over other companies or a certain kind of
service over another service, we can get into very dangerous
territory. But, yes, I think as long as it is truly, evenly
balanced I think there is a great role in promoting the
benefits of electronic filing.
Mr. Kolbe. Final question--at least I think this is my
final one. Mr. Harrison, you spoke about the need for doing
something about changing the rules, regulations with regard to
the signature that allows you to be able to have access to the
market information, from a marketing standpoint, the
information that you have about tax, the tax preparation and
the filing that you are doing. I would like all of you to
comment on whether or not there are other areas where--and the
Commissioner as well--where we need to make changes in either
the rules or regulations or in the law to make this work better
than it is right now. In other words, what can you tell us that
we should be looking at here in Congress to make sure that we
are moving towards a world of electronic tax filing that we are
not now doing?
Mr. Harrison. The only other thing I would add--and I would
say it is a gray area right now--but it is very difficult
especially to build a business plan for a new company when
there is this gray area that you are trying to work around. We
don't think there is a huge amount of advertising revenue
associated with this business, but there is some. Right now, it
is not even clear if you can run an advertisement on a Web site
that does tax preparation. That is no different than telling
someone that has an H&R Block office that the person next door
to them can't have an advertisement outside because someone
will walk past it to get to the tax store. We are a store, a
virtual store but we are a store. And not being able to have
advertisements that are not driven by the consumer data--not
just general purpose advertisements--not being able to have
that on your site----
Mr. Kolbe. You are not talking about advertising about your
business. You are talking about other kinds.
Mr. Harrison. Other kinds--third-party advertising--for
example an advertisement on our site that shows someone doing a
tax return and drinking Coke instead of Pepsi.
Mr. Kolbe. The regulations now prohibit that or you are not
sure?
Mr. Harrison. It is a gray area.
Mr. Rossotti. This is what I meant before. I think the
regulations are out there. We certainly have the obligation to
enforce those and administer those. There are some new
questions as to exactly how to interpret them in the light of
Internet that we probably need to work on.
Again, we need to get some questions from the industry.
This is another point. Any conclusions that the IRS would come
to with the help of counsel would in all cases, as is required
by law, be public inclusions that we would put out in the
appropriate forum, not in the forum of any particular company,
giving advice to any particular company. They would be public
statements that would answer questions for everybody to know
what the answers were. That is the way the process works.
Mr. Kolbe. Mr. Black or Mr. Lacijan, anything we are
missing here that we should be looking at from either a
regulation or law change?
Mr. Black. Mr. Chairman, I think it is an excellent
question. And to follow up on the Commissioner's comments, we
think that updating rule 7216 is exactly what we have been
advocating, that in fact the IRS should conduct a public rule
making process to update and modernize the rule to deal with
the e-commerce era. Public rulemaking would permit full public
comment, sunshine, and let consumers' rights really be aired.
We need to modernize the rule. It needs to be done in a way
consistent with the President's e-commerce policy directive for
all agencies, and that is what we have been asking for. We
think that is the way to go. Not requests for information and
quasi procurements, but let's go through a formal, public,
sunshine rulemaking.
Mr. Kolbe. Mr. Lacijan.
Mr. Lacijan. To avoid repeating what some of the other
panel has said, let me take it to an entirely different area.
The ETAAC strongly endorsed the President's proposal for a
$10 tax credit. Now that has some expense associated with it,
but clearly, in terms of public policy, we are talking in terms
of potential tax cuts in the billions and almost a trillion
dollars. This would cost about half a billion a year. But, in
essence, the repeat rate among e-filers is very high. The
satisfaction rate as measured by public surveys of e-files
compared to other files is also in the 70s, compared to around
50 percent. It would build up a tremendous demand for e-filing
that would allow practitioners to build up infrastructure, and
I think it would have a tremendous impact on making the whole
tax administration system run far more smoothly by getting all
this information in electronically. In the end, I think
actually it would be worth the expense of the half a billion
dollars it would cost.
Mr. Kolbe. That leads to an--I said final question, but it
leads to an interesting thought, Commissioner. Have you done
any cost-benefit studies of this to say for every 1 percent
additional electronic filing what the IRS can save, what
taxpayers can save? Do we know?
Mr. Rossotti. What taxpayers can save, no, we have not done
that, but what we can save, yes.
Mr. Kolbe. I am sorry. When I said taxpayers I meant
through the IRS, not individually.
Mr. Rossotti. In terms of direct cost, we have estimated
what that would be on a per-term basis. There is short-term
cost savings for every return next year, just in terms of the
labor. But then there is a bigger cost saving if we get to the
point where we have a sufficient volume that we can consolidate
some of our activities. So we do have that information, and it
is attractive. It is one of the things we are counting on to be
able to deliver all of the services that taxpayers want within
the limits of the appropriations because we know there is going
to be limited appropriations and so we have to make
technological improvements. So that is one of the things we are
counting on to be able to deliver over the next years.
Of course, it happens year by year. It does not happen all
at once. It happens as we gradually convert people from paper
to electronic.
Mr. Kolbe. So the $10 tax credit really ends up being a
cost savings.
Mr. Rossotti. You aren't going to save $10 per return. I
think the $10 tax credit was intended for a limited period of
time. I think it was for five years. I characterized it lightly
as kind of an introductory offer. As Mr. Lacijan said, once
they do it electronically they will probably not go back to
paper. I think the thought was to get people into the
electronic system with this incentive for the $10 to offset
whatever transitional costs they have might have; and then once
they got on, and especially if the cost to the taxpayer after
that were to come down, then it would make itattractive for
them to stay. So I don't think it was intended as one for one.
Clearly, we are not going to save $10 directly in internal
appropriations, but I think that would be a one-time kind of a
thing for just a few years to get people into it. Then once you
got them there--but I really think the problem is getting them.
Once they get there, and assuming the cost to them is
reasonable, they are probably not going to go back to filing on
paper.
Mr. Kolbe. Mr. Lacijan.
Mr. Lacijan. What the Commissioner said is very true. But
the real cost savings might not just be the few dollars per
return that the IRS saves. It has been well publicized that the
error rate for paper return is about 20 percent and for
electronic returns is 1 percent. So some of those 20 percent of
the errors that paper returns introduce that don't get caught
filter into notices downstream, and a lot of man hours get
spent resolving notices and people going to practitioners. So
the real cost savings, which probably are undocumented, are
downstream after filing occurs.
Mr. Kolbe. Gentlemen, thank you. Is there anything I
haven't asked that I should have asked? Is there anything you
would like to say in closing that I have not given you an
opportunity to say?
If not, I would like to thank all of you. I think this has
been, for me, extraordinarily enlightening. I hope this has
been one of those hearings where we actually contributed
something in a tangible way to maybe clearing the air a bit
between the industry and the IRS, and I hope we have helped to
stimulate the communications. I want to thank all of you again
for coming and participating today.
Mr. Black. We appreciate your leadership. Thank you.
Mr. Kolbe. The subcommittee stands in recess.
Thursday, October 5, 2000.
BUREAU OF ALCOHOL, TOBACCO AND FIREARMS
WITNESSES
BRADLEY BUCKLES, DIRECTOR, BUREAU OF ALCOHOL, TOBACCO AND FIREARMS
DENNIS SCHINDEL, OFFICE OF INSPECTOR GENERAL (TREASURY)
ROBERTA RICKEY, TREASURY, INSPECTOR GENERAL
Mr. Kolbe. The Subcommittee on Treasury, Postal Service and
General Government will come to order. Thank you very much for
being here. Mr. Price, thank you for joining us.
This afternoon we are going to have this hearing to focus
on the implementation of what has been called the Youth Crime
Gun Interdiction Initiative. I understand that Treasury, the
Bureau, refers to it as ``Yogi.'' At least until recently, here
on Capitol Hill we have always called it ``Yiggi.'' So Yogi or
Yiggi; that is what we are talking about here today.
The Bureau of Alcohol, Tobacco and Firearms, following the
direction of the President, initiated this program in 1996 to
focus enforcement efforts against gun traffickers whose weapons
are used by or against youth, particularly those in the age
group of 18 to 24.
Today, to talk about this program and how it has worked, we
have two witnesses. First, we will be hearing from Mr. Dennis
Schindel, the assistant inspector for audit of the Office of
the Inspector General in the Department of the Treasury, and he
is joined at the table here by his assistant, Ms. Roberta
Rickey.
After that, we will hear from the ATF director, Mr. Bradley
Buckles.
Mr. Schindel recently supervised a series of audits of the
Youth Crime Gun Interdiction Initiative, ``YCGII,'' the YCGII
program, including one of particular interest to us today that
examined the implementation and performance measurements. He
will be talking today about the findings of the OIG and their
recommendations.
Director Buckles will then be asked to respond to those OIG
reports as well as tell the subcommittee the steps that ATF is
taking with regard to improving the YCGII performance and
implementations and what plans he might have for this program
or ideas for it for the future.
First, before we ask for Mr. Schindel's remarks here, let
me observe that without question, YCGII is a program that has
grown. It has grown, in fact, from around $300,000 in Fiscal
Year 1996 to $51 million in Fiscal Year 2000, covering 38
cities. Even by Washington standards, that is a hefty growth
rate.
With the $76 million increase in funding expected for
Fiscal Year 2001, or at least what is in the bill, the budget
of the conference report, this would increase it to about 50
cities, the coverage of YCGII to 50 industries, and would
account for over a tenth, or 10 percent, of all ATF salaries
and expenses in their budget. YCGII, in Fiscal Year 2001, will
also have staffing levels that are associated with it of 500
full-time equivalents for agent, administrative, or technical
positions.
So I would say that even by Washington standards, we cansay
this is a big program and certainly, as I just suggested by growth, it
is tremendously big.
But it is a program that has been a priority for ATF and
the administration, and I should emphasize the Congress has
agreed with this so far. They have agreed that this level of
effort is justified by the need to reduce gun violence that
involves our children and youth. However, from the beginning I
think we all expected ATF to carry out a consistent effort in
the participating YCGII cities, with clear program guidance,
standard data, minimum level of effort reflected both in the
processing of trace information as well as in providing
strategic analysis and investigative reports to the cities that
are participating.
What we have seen instead, at least as outlined in the
inspector general's report, is a program that varies very
significantly from city to city. There is not really a
coherent, overall program. It often has very unclear lines of
communication, to the extent that both local ATF field offices
and city police departments cannot always describe the
organization or the level of efforts for YCGII, let alone
characterize or give any clear indication of the impact that it
is having on youth or the reduction of guns or juvenile crimes
involving guns.
In my own city of Tucson, for example, one of the cities
that is involved in this, I found that local law enforcement
agents were completely unaware, for the most part, of the
program's existence. Given the high profile and scale for this
program, such obscurity does not inspire confidence that
funding for the program has really been targeted in any
meaningful way.
So I hope today that the subcommittee can learn in more
detail the inspector general's findings about the program and
then hear from ATF on the current program and the actions they
plan to pursue, since ATF has indicated its agreement with all
of the findings by the OIG. I believe it is fair to say that
this subcommittee is going to look carefully for answers to
these questions as we consider future funding requests for the
program, especially the plan to expand it to 75 cities in
Fiscal Year 2003.
So I think this is a timely hearing for us before we get
into the nitty-gritty of considering next year's budget to
focus on this one very major, fast-growing, program in ATF with
substantial growing pains.
Before I hear from my witnesses, let us see if, Mr. Price,
you have any opening comments that you would like to make.
Representative Price. Thank you, Mr. Chairman. I have no
comments except to welcome our witnesses and to look forward to
their testimony.
Mr. Kolbe. Thank you. And with that, we will turn to Mr.
Schindel for his statement. Of course, the full statement will
be placed in the record. You are welcome to summarize it. Give
part of it, or however you wish to do it here.
Mr. Schindel. Thank you, Mr. Chairman, Mr. Price. I am
pleased to appear before you today to discuss the results of
the audits that we conducted at the Bureau of Alcohol, Tobacco
and Firearms on their implementation of the Youth Crime Gun
Interdiction Initiative. We do refer to it as ``Yogi,'' and
that is how I will refer to it throughout the rest of my
statement.
With me today is Roberta Rickey, who is the director of
program audit in Chicago, and her team performed this audit.
This program brings together federal, state, and local law-
enforcement officials to improve information about and
investigation of the illegal sources of guns recovered from
juvenile and adult criminals, and to use that information to
strengthen the enforcement of the nation's firearms laws.
Our office did conduct three separate reviews addressing
ATF's implementation of YCGII. My testimony will focus on our
most recent audit, which looked at ATF's effectiveness in
implementing YCGII in the field offices and whether
participating local law-enforcement agencies implemented
activities designed to identify and investigate illegal
firearms trafficking to juveniles and youths.
YCGII is a component of ATF's overall, illegal-firearms-
trafficking project. The program targets juveniles and youths
involved in gun crimes. ``Juveniles'' are defined as those ages
17 and under, and ``youths,'' those ages 18 through 24. Through
YCGII, ATF seeks to address a fundamental question in youth gun
crime: How are they getting the weapons?
As you mentioned, the program has grown. It started out
with 17 cities. It has grown to 38 cities in 2000, and plans
are to expand it to 75 cities in the next four years. There are
two components that we feel are crucial to the success of the
YCGII program. First, there are the YCGII coordinators in the
ATF field offices. Second, there are the police departments in
the YCGII cities.
Our review of ATF's implementation of the YCGII program
looked at the initial 17 cities that were put into the program
because they had been in the program the longest, up to two
years at the time we did our review. We found that ATF needs to
do a better job of implementing YCGII so that the full benefits
of the program can be realized. YCGII was not consistently
implemented in all cities, and not surprisingly, this has
produced mixed results. Whereas some cities have a very active
program; others do not.
The results of our work identified four areas that should
be improved for the program to be successful. First, existing
guidance for ATF field-office YCGII coordinators needs to be
updated, expanded, and include best practices that have been
gained over the past three years of experience with the
program. This is especially needed because of a high turnover
of coordinators in some field offices.
We found that ATF field offices did not consistently
implement activities that are critical to the program's
success. These activities included, one, reconciling trace
requests received with police-department records of crime guns
recovered--this is important to ensure that all crime guns are
traced; second, conducting comprehensive or end-to-end traces
of a sample of crime guns--this is important to obtain a more
complete picture of the illicit firearms market; and, third,
ensuring that ATF special agents work actively with ATF
inspectors to target firearms dealers with a high number of
crime guns traced to them. We found that all three activities
were performed in only two of the 17 initial cities in the
program.
Second, ATF needs to develop a formal methodology for
allocating special-agent resources in support of field-office
YCGII investigations. For Fiscal Year 1999,
Congressappropriated ATF $16 million for 81 full-time, equivalent-
special-agent positions. ATF field offices were directed to assign a
minimum of six experienced, special agents to YCGII. These agents were
to spend most of their time on YCGII cases. Field offices were then to
hire six special agents each to back fill for the experienced agents
assigned to YCGII.
We found that while 86 new agents were hired in the initial
17 cities, only 49 experienced agents were reassigned to YCGII
cases. More importantly, ATF's decision to assign six
experienced agents to YCGII in each field office was not based
on an analysis of firearms-trafficking problems in the
respective cities. In fact, YCGII coordinators from two field
offices told us that they did not believe that the trafficking
problem was significant enough in their respective cities to
justify six agents being assigned to YCGII. A coordinator from
a third field office told us that there were not enough
experienced agents in the field office to assign to YCGII cases
without jeopardizing arson or explosive investigations.
Third, ATF needs to better communicate and partner with
local police departments to improve the level of their
participation. Only five of 17 police departments in the
initial cities has the means to electronically submit trace
requests to ATF's National Tracing Center. Other police
departments had to use less-efficient, more time-consuming
means involving at least some manual processing. One impact of
this is that four police departments did not request traces on
all recovered crime guns.
Electronic transmission of requests is essential to make
the tracing of a large volume of crime guns manageable. In that
regard, ATF needs to continue to help participating cities
develop electronic-transmission capabilities.
We also found that police departments were not always aware
of or could not access ATF analytical tools to develop
strategies to combat illegal firearms trafficking to juveniles
and youths. These tools include ATF's on-line lead system,
which provides leads to special agents by analyzing data on
crime gun traces, stolen guns, and multiple gun sales, and the
capability to map the location of recovered guns. With respect
to on-line lead system, representatives from six police
departments were not aware of the system, and representatives
from five other police departments told us that the information
was not readily available to them.
Fourth, ATF needs to develop YCGII performance measures
that gauge its actual impact on gun traffickers who supply
firearms to juveniles and youths. ATF has not developed
specific performance measures to show what impact YCGII has had
in the participating cities. For example, ATF has been
reporting as its principal program measure the number of trace
requests submitted by participant cities. While trace requests
are certainly important for ATF's analysis of trafficking
trends, this statistic does not by itself measure whether
trafficking of firearms to juveniles and youths has decreased
as a result of YCGII.
In summary, we found a number of areas that need to be
improved to ensure the success of the program, specifically
implementation has been inconsistent on the part ATF. The level
of participation by city police departments has been mixed. The
resources appropriated have not been effectively allocated or
fully utilized in support of YCGII, and also, after two years
of operation in the original 17 cities, ATF cannot show the
true impact of the YCGII program. All together, we made nine
recommendations to improve the implementation and management of
YCGII in the 17 cities and in the additional cities that have
been added.
As YCGII continues to grow, it is important that ATF take
immediate action to improve its management of the program. The
good news is that this appears to be happening. In response to
our draft report, ATF provided a comprehensive, corrective-
action plan. They have agreed to implement all of our
recommendations, and they have already completed or have under
way a number of actions. I will just mention a few.
ATF indicated in its response that new guidance and
training have been delivered to ATF field agents as well as
state and local police departments, and a best-practices
pamphlet is being developed. ATF has reevaluated the six-agent-
per-city strategy for its 2001 budget submission and has
processes in place to monitor changing field-office work loads.
Efforts are also under way to develop more meaningful
performance measures.
Mr. Chairman, this concludes my remarks, and I will be
happy to answer any questions you or Mr. Price may have or
other members of the committee.
Mr. Kolbe. Thank you.
I think I am going to do what we did yesterday, which it
worked extraordinarily well in this kind of oversight hearing,
and ask you just to step aside for a minute and let Mr. Buckles
give his testimony, and then do the questions with both of you
up there because I think we are going to find ourselves going
back and forth now, if that is acceptable with you.
Mr. Schindel. That is fine.
Mr. Kolbe. So we will do that. We will ask Mr. Buckles to
come up to the table here, and we can bring up more chairs here
in a minute. Mr. Buckles, we welcome you and are prepared to
hear your testimony. As we suggested to Mr. Schindel, we will
put the full statement in the record here, but you are welcome
to go ahead and summarize.
Mr. Buckles. Thank you, Mr. Chairman, Mr. Price, Mr. Goode.
I thank you for providing me this opportunity today to address
you on one of the most important firearms initiatives by ATF,
the Youth Crime Gun Interdiction Initiative. As you pointed
out, I have submitted a long statement for the record, so I
will be brief this afternoon in my comments.
The Youth Crime Gun Interdiction Initiative was developed
in response to chilling statistics that gun homicides among
young people nearly tripled between 1985 and 1995. Easy access
to crime guns by this most vulnerable segment of oursociety was
clearly an important component to the shocking increase in violence.
Successfully reversing this culture of violence requires action on all
fronts.
As you are aware, our firearms-enforcement efforts directed
specifically at armed criminals, as well as ATF's work with
youth crime-gun prevention through the G.R.E.A.T. program, are
part of ATF's main strategies on dealing with youth violence.
The Youth Crime Gun Interdiction Initiative is designed to
complete that coverage by attacking the sources of crime guns.
Virtually all crime guns begin as legal commodities. Therefore,
developing a better understanding of how firearms move from
legal to illegal commerce is essential.
The first three years of the Youth Crime Interdiction
Initiative focused on tracing of crime guns. Comprehensive
tracing of all crime guns in selected cities, with special
emphasis on those possessed by youth, gave us a more precise
picture of the problem. The number of firearms traced by ATF
climbed from under 100,000 in the early nineties to over
200,000 by the end of the decade. In Fiscal Years 1999 and
2000, the committee supported an increase in ATF investigative
personnel to enable us to take enforcement action at these
sources of crime guns.
Your investment in the Youth Crime Gun Interdiction
Initiative has been significant. Rightfully, you must be
convinced that the return on your investment is actually
significant in terms of protecting the American people and
particularly our youth from the ravages of gun violence.
We believe the early results demonstrate that the Youth
Crime Gun Interdiction Initiative is a valuable program.
Through this program we have dramatically enhanced our ability
to analyze crime-gun information and apply this knowledge
strategically to combat violent crime and illegal trafficking.
In the first two quarters of Fiscal Year 2000 we initiated 874
illegal-firearms-trafficking investigations involving over
14,600 firearms.
While gun homicides by juveniles and youths have declined,
they remain at an unacceptable level, and there is much to be
done. But even the best of programs require careful scrutiny to
ensure that they are executed in the most efficient and
effective manner possible. What brings us here today is a
series of examinations by the Treasury Department's inspector
general into ATF's implementation of the youth crime gun
initiative.
The inspector general has helped us identify a number of
areas where we need to improve, and their recommendations have
proven invaluable as we have moved from a rather modest tracing
initiative to a more strategic effort to systematically attack
illegal sources of firearms to our youth and children. We have
accepted each and every recommendation, the majority of which
have already been implemented, and all of the rest are in some
stages of implementation.
With the support and careful oversight of this committee,
the Youth Crime Gun Interdiction Initiative is making a
difference. As it develops, I am committed to the continued
scrutiny of the management of this program and accountability
to youth for the results. I am convinced that our effectiveness
in reducing armed violent crime is increasing, making our
communities safer for our children and all Americans. And I
thank you for your commitment to this important goal. That
concludes my statement. I would be pleased to answer any
questions you have.
Mr. Kolbe. Thank you very much. Yes, Mr. Schindel, if you
would come back up here. Ms. Rickey, if you would like to join
us, too, that is fine.
Let me begin with kind of a basic question here. Is this
youth program really a youth program? I guess my question is
directed to this. You really trace all guns, do you not,
Director Buckles? This is not a criticism, but it is not a
youth program, is it? It is a tracing of all guns.
Mr. Buckles. It is a tracing of all guns, and it is
identifying traffickers on all levels. [Agency note: To
adequately assess the role played by, or impact to, the age
groups at hand, it is imperative to not only trace all crime
guns in a YCGII city, but to use that information in an
analytical sense with offense data.]
Mr. Kolbe. What is the concentration on the youth, then?
Mr. Buckles. The reason that we were concentrating on youth
when we began this program is, looking at the overall universe
of violent firearms crimes, the single age group with the
highest incidence in many categories was the ages 17 to 24.
Almost 41 percent of all firearms homicide were being committed
by people in that age range. It is also a situation where we
believe that it is probably an area that is most susceptible to
changing that pattern and affecting the access of younger
people to firearms. Older criminals may have different access
to firearms. They are adults; how they can purchase firearms,
what crimes are involved are different, but quite often the
youth are involved in crimes of opportunity, and if we can
interrupt and make it more difficult for people in that age
range to acquire firearms, we have a much greater possibility
of impact through that trafficking interdiction.
Mr. Kolbe. Is there a mission statement for the YCGII
program? Is it laid out in a manual someplace?
Mr. Buckles. Well, we put out documents to our field
describing the program and setting forth exactly what the
objectives are. Part of the criticism or findings with the
inspector general was that there was confusion even within the
agency as to exactly what the overall goals and objectives to
the program were. I think that that is a result of the fact
that it was a program that grew.
It started off, as I said, as kind of a modest tracing
initiative early on, when we received some money from the asset
forfeiture fund to make improvements in our tracing center, and
as it grew incrementally, unfortunately, we did not pull
everything back together so that the field and everyone in the
agency and others dealing with us had that comprehensive view
of what we were doing.
Mr. Kolbe. Mr. Schindel, I think that was one of the
criticisms you made as to whether or not it is really clear,
the focus of this program. In your view, are there adequate
performance measurements here, goals for this program? We are
spending $50 million on this now. Are we getting our money's
worth out of that? I guess that is the bottom line of what I am
looking at here. I know it is popular to talk about youthcrime
and doing something about it, but I do not advocate just throwing money
at a program if we are not getting something from it here.
Mr. Schindel. That was another one of our findings, was
that we do not feel there are adequate performance measures.
Certainly, getting all guns submitted for tracing is an
important part of the program, but there are, as I mentioned,
other activities that have to take place after guns are
submitted for tracing.
Many of the activities, such as the end-to-end tracing,
which really tries to follow the gun all the way back to when
it was first sold by a federal firearms licensee, helps to
identify the trafficking aspect of it, which helps to answer
partially the question, how are youths and others who are not
entitled to these firearms getting them? If that activity takes
place effectively, then the program has the opportunity to do
what it is intended to do, and you get your money's worth. But
there have to be, I think, some measures that show that those
types of things are taking place and that there is a bottom-
line impact that, in fact, it is reducing the trafficking of
firearms to juveniles and youths.
Mr. Kolbe. But in order to measure that, you have to
develop some kind of a baseline, do you not?
Mr. Schindel. Yes. I do not know if there are statistics
out there, crime statistics, that already exist, that can be
used, but obviously we are beyond the start of the program, so
baseline measures have not been established at this point, and
it would be difficult, unless if you just do it now----
[Agency note: Baseline measures used to this point were
ones previously established for the two major aspects of this
initiative, firearms tracing and related trafficking measures.
My statement for the record explains measures that are in
development to assess outcomes unique to this combination of
enforcement tactics.]
Mr. Kolbe. It is kind of hard to establish them after the
program has been operating for four years. Mr. Buckles.
Mr. Buckles. Well, we are looking at baselines that we can
work from, and I think there are a number of them out there. If
we talk about the program being there for four years, early on
one of our most important performance measures was the number
of firearms being traced, because that was the focus of the
initiative.
As we move beyond that, we need more result-oriented
performance measures, and we are looking at a variety of
things. Reduction in the time to crime. We have now, with the
study we have done, have some ideas on the time to crime
between a firearm being sold and ending up in the hand of a
youth. If we are affecting that and slowing down the time to
crime, then it means it is harder for people to get a hold of
firearms. If we are impacting the number of youths who are
being arrested in possession of illegal possession of a
firearm. We have baselines now on the cities that we have
looked at so far. So I think we have things that we can work
off of as we move ahead.
Now, we are also entering into some work with the National
Institute of Justice to come out with some even broader ways to
look at our program and to determine how it is affecting youth
violence overall. So we are exploring all sorts of different
ways that we can come up with measures that can show you some
tangible results that are coming out of this program.
Now, there are a lot of things. It flows in many
directions, and let me give you an example. As we learn and
understand more about what the trafficking problem or what the
firearms sources are in a particular area, what that does, it
allows us to take a number of steps that in the past, frankly,
would have been shots in the dark.
If we determine that one of the principal areas of firearms
showing up in a city is from stolen firearms from FFLS, it
allows us to work with the dealer community to improve security
requirements. Some areas, we find that straw purchasers are the
biggest problem. We recently entered into a program with the
National Shooting Sports Foundation to work on areas to deal
with straw purchasers.
So by knowing what the various sources are--it is not
always going to lead to a criminal case--it also allows us to
engage and address each problem up front through a variety of
other measures as well.
All of these have to be pulled together so that when we
come before you we can tell you what this information was that
we were able to collect, how we were able to use it, and then
see if it has resulted in a reduction of firearms thefts from
dealers, a reduction in straw purchasers, et cetera.
Mr. Kolbe. Well, you have jumped ahead and answered at
least some of the questions I had ongoing as to how this
information is used, and you referred to the pronoun, ``we,''
and I gather that means ATF. If I look at this report here--it
has got a section here for my city of Tucson. If I go out to
the city of Tucson, am I going to find law-enforcement people
there that are going to be intimately familiar with the
information that is in here? What use is made of this?
Mr. Buckles. Well, that was the one of the criticisms from
the inspector general's report, that in some cities it was
being used, and in other cities it was not. I cannot speak
directly to Tucson, but what----
Mr. Kolbe. I am not asking you to speak directly to Tucson.
Mr. Buckles. But what we have done as a result of that is
instituted very clear guidelines as to how we are supposed to
be using those reports in each case, in terms of what ATF can
use from them to develop a strategy and also what the local
police and law-enforcement authorities can do and how they can
use that. So we are taking steps to make sure that the best
practices that we are using in some communities are also being
used in all of the communities as well because that is what it
is designed to do.
Mr. Kolbe. I want to go to my colleagues for some
questions. I have a series of others, and I especially want to
come back to Mr. Schindel, but let me see if Mr. Price has some
questions here and Mr. Goode.
Representative Price. Thank you, Mr. Chairman. I want to
thank both of you for your testimony, and I would like to
start, Mr. Schindel, with the activities that you identified as
being critical to the program's success on page four of your
testimony.
You are talking about, first, reconciling trace requests
received with the records of crime guns recovered; secondly,
conducting sample, end-to-end traces to get a more complete
picture of the illicit-firearms market; and finally, and this
is the one I want to concentrate on, ensuring that ATF's
special agents work actively with inspectors to target firearms
dealers with a high a number of crime guns traced to them.
Presumably, that is the bottom line. Presumably, that is the
end goal.
You say that of these 17 cities you looked at, all three
activities were performed in only two, which, of course, does
not sound very good. With respect to that third
activity,though, which in some ways is the culmination of the effort,
what would the success rate be on that criteria? I think that one was
actually the most successful of the three. I think only two out of 17
cities were not performing that activity.
Representative Price. So that changes the picture a bit if
you break down those three activities in that way. I really did
not anticipate that answer. So you are saying that there would
be 15 out of the 17 on that last criterion.
Mr. Schindel. Right.
Representative Price. Well, presumably, the other two are
somehow leading up to that third activity. Right? The tracing
program leads you to identify these high-volume dealers. Is
that right? How can the third activity succeed or be
implemented without the first two?
Mr. Schindel. It would be difficult. You have to have the
tracing first to get the information to start leading back to
the FFLs, firearm-licensing dealers.
Representative Price. Does that imply, then, that the
targeting of these high-volume dealers is somehow based on
inadequate data somehow or inadequate tracing information?
Mr. Schindel. Well, I think that there could be more
targeting in some of these other cities who are doing that who
were not getting all of their guns traced. So while they were
performing that activity where there was information that they
could develop that lead back to FFLs, there were probably some
missed opportunities because not all of the guns were being
traced in those cities.
Mr. Price. Well, I must say, it does change the picture
somewhat if there is such radically different performance rates
with these three activities. Simply to lump them together and
say all three are being performed in only two out of 17 cases
gives a somewhat misleading picture, would not you think?
Mr. Schindel. Well, again, the idea was that there should
be some consistent application of the program, and obviously
that is not taking place.
Representative Price. But you also seem to be saying here
in your oral testimony that in terms of that third activity,
targeting firearms dealers with a high a number of crime guns
traced to them, that is taking place in most of these cases.
Now, do you have anything further to say about how
thoroughgoing or how effective that targeting is? What does
that entail? Mr. Buckles, if you want to chime in here, I
welcome your thoughts as well.
Mr. Buckles. Well, I think that the information that we
gleaned from the inspector general report was that while we
were using that data, and we have accumulated--make no doubt
about it--regardless of what the performance was, a tremendous
amount of information on crime-gun data and sources of crime
gun.
What we learned from the inspector general report was that
we were not getting all of that, and maybe there were still
opportunities we were missing. Not that we were not using the
information we had to deal with possible sources of guns, crime
guns, but that there may be more sources out there that we are
missing because things were not reconciled, because there were
not complete traces in every situation. That was the way I
understood the inspector general's report, there weren't issues
with making the most of what we had, but that we might be
missing additional opportunities because we were not getting
everything we might possibly get out of this information.
Representative Price. I see. So the deficient performance
in these early stages would then compromise your ability at the
final stage, or it could.
Mr. Buckles. Well, I think, if I am speaking correctly for
the inspector general, it suggests that we may yet be missing
opportunities.
Representative Price. What exactly does it mean to target
these dealers? What kind of specific efforts are you carrying
out with respect to these dealers once you identify them, once
you have the patterns established?
Mr. Buckles. What we are doing is conducting a focused
inspection on dealers that have high numbers of gun traces to
them, short-time-to-crime guns coming from that dealer. We
recently conducted a study of a thousand or so of these dealers
to determine the factors influencing the source of crime guns.
In some cases we are finding out that there are dealers that
have a very high volume of business, and they have been in
business for a long time, and the number of traces coming back
to them are not inordinate, and that their businesses are in
good shape.
In other cases we are finding people who have sloppy record
keeping, and guns may be going to the wrong people simply
because of the way in which they manage their business, and
still in other cases we may find dealers that are intentionally
violating the law and selling firearms off book, for example.
So we are finding the range. What this information is doing is
it is leading us to the sources of crime guns so we can, again,
be able to sort through that data further and refine our focus
on where the problems are.
Representative Price. That is a tip-off as to where further
investigation might pay off and where you might find criminal
activity that you need to zero in on.
Mr. Buckles. That is correct. And we are not assuming it is
criminal activity. If you notice, this is turning information
over to our compliance inspectors, who are first looking at
these dealers from the point of view, ``are they complying with
the law?,'' If they do find that there are problems at that
dealer, then it can be turned into some kind of investigation,
or we can correct the situation with regulatory sanctions, but
we are using this information as a way to target our very
limited inspector resources.
Representative Price. The chairman referred to the quality
of the liaison with local police departments, and both of you
have spoken to that briefly. Of course, that is an important
criticism, I think, in this report and an important thing to be
working on, and apparently you are doing that. To what extent,
Mr. Schindel, or how much weight are you placing on the
efficiency you found in technical capability?
You talked about the fact that four police departments did
not request traces on all recovered crime guns. You seem to be
tracing that back to the absence of a capacity to do that
electronically, to process this information electronically. Is
that your main explanation, or is this failure to undertake
this kind of thoroughgoing tracing activity, is it traceable
maybe to other causes as well?
Mr. Schindel. Well, I think we found that this is probably
the main obstacle. It is less efficient to submit that
information. If you cannot do it electronically, in some cases
when they inventory these crime guns they take time to record
all of this information, and if they cannot submit it to ATF or
to the tracing center at the same time, then they have got to
go back and kind of duplicate their effort. They are on to
other things, and in some cases even where it wasbeing
submitted, it may not have been submitted timely. It may not have been
submitted accurately so that even when the information was submitted,
the trace could not be done. In some cases the information would be
submitted to an ATF field office through fax or through a disk, and
then the ATF agents would have to spend their time filling out the
trace request to send to the National Tracing Center, so it is a very
inefficient process.
Representative Price. Well, Mr. Buckles, to the extent that
that is the problem, to the extent that this lack of a
technical capability is the problem, to what extent are you in
a position to address that, to deal with it?
Mr. Buckles. Well, we are addressing that problem now. We
have a variety of different initiatives going on trying to
provide ways in which police departments can supply this
information in a more efficient manner. The difficulty that we
have run into is with every police department you run into a
different computer system, a different data base, a different
structure, and trying to come up with a solution that will
either extract or submit that data so they do not have to keep
reentering it every time, that can pull out of their system and
place it in the tracing system, has proven to be a somewhat
larger challenge than we thought it might be. We are looking
for Internet-based solutions that will allow a better interface
with that data as one of the solutions on dealing with it.
Representative Price. Thank you very much.
Mr. Kolbe. Thank you, Mr. Price. Mr. Goode.
Mr. Goode. Thank you, Mr. Chairman. Let me ask, I guess,
Mr. Buckles first. I need to be familiarized with current law.
You know, a juvenile, by definition, and I believe in one of
your testimony is 16 or under.
Mr. Buckles. It is 17.
Mr. Goode. Seventeen and under. Now, can a 17 year old
possess a handgun legally?
Mr. Buckles. Well, I believe a juvenile can possess
firearms under certain circumstances, and we are not making
every possession by a juvenile to be illegal. We are interested
in these----
Mr. Goode. I know, but what is the law?
Mr. Buckles. I know they can possess a rifle.
Mr. Goode. A shotgun.
Mr. Buckles. I believe they can possess a handgun if it
is----
Mr. Goode. Is it federal law? Do you enforce a state law
for violation?
Mr. Buckles. No. We do not enforce a state law.
Mr. Goode. So what is the federal law?
Mr. Buckles. Well, I used to be the chief counsel, and you
are going to catch me not knowing exactly what that is, but
federal law generally sets age standards on who can buy a
firearm from a licensee, so a juvenile cannot go to a licensed
premises. I am from Wyoming, and I know youngsters have rifles
that are given to them by their parents, and it is perfectly
legal under federal law. You could not go into a dealer
yourself if you are under 18 and buy one, but you can certainly
have one if it is given to you by your parents.
[The information follows:]
[Clerk's note.--agency adds that under Federal law, it is
unlawful for a Federal fireams licensee (FFL) to transfer a
rifle or shotgun to anyone who they know or have reasonable
cause to believe is less than 18. Federal law does not place an
age or restriction on the possession of rifles or shotguns.
Under Federal law, it is unlawful for an FFL to transfer a
handgun to anyone they know or have reasonable cause to believe
is less than 21. In addition, under Federal law it is generally
unlawful for any person less than 18 to possess a handgun.
There are exceptions to the prohibition on juvenile possession,
for example, target shooting with parental permission.]
Mr. Goode. Okay. I believe you mentioned 200,000 firearms
you confiscated from those under 24. Is that right?
Mr. Buckles. No. I said that the total number of traces at
our tracing center had increased from under 100,000 earlier to
over 200,000 by the end of the decade. Now, that would be all
crime-gun traces, not just out of this program. I believe the
number out of the Youth Crime Gun Interdiction Initiative
cities is somewhere around 60,000 of that. But those are not
all confiscated from juveniles. These would be firearms that
are in some way involved in a crime.
Mr. Goode. All right. The 200,000 involved in a crime,
then, and these are federal crimes. These are federal or state.
Mr. Buckles. No, sir. In most cases they are going to be
state violations. The vast majority of trace requests we get
are from local authorities who are enforcing state laws.
Mr. Goode. In those 200,000 situations, and in how many
instances was someone arrested or charged with that crime?
Mr. Buckles. Well, I could not tell you----
Mr. Goode. Just ball park.
Mr. Buckles. Well, I would imagine in most of those cases
there has been some kind of crime involved. Whether someone was
charged with a crime, it could be a firearm recovered at a
crime scene, and whether anybody is ever charged with that, I
do not know. Generally, the firearms that come into police
departments' custody is where they have arrested someone for
any kind of crime. It may be a breaking and entering, and they
were carrying a firearm. It could be a robbery, but generally
there is some kind of state violation that went on that led the
police to be able to have that firearm, then, in their custody.
Mr. Goode. Of those charged and arrested, and you are
pursuing prosecution, do you have any records of what you are
doing with those persons?
Mr. Buckles. We do not have a record of what we are doing
because the vast majority of those are for state violations,
and we performed a trace on behalf of local authorities who are
asking us to trace the source of that firearm. [Agency note:
ATF uses this information to interdict sources of crime guns.]
Mr. Goode. As a novice, tell me what you do when you trace
a firearm.
Mr. Buckles. What we would be doing, for example, and let
us use something from your state. For example, we have got the
Exile program in Richmond, which is a different kind of
firearms initiative that has to do with the use of firearms
generally in a crime. The Richmond Police arrest someone. They
have got a firearm on them. Perhaps they arrest them for a drug
violation, and they are possessing a firearm.
What we do with that is they provide us the information on
the make, model, and serial number of that firearm, and we
trace that firearm to the first retail purchaser to tell where
that firearm came from and where it was last known to be in
legal commerce. In some cases that firearm may trace back to
the person who was arrested. They may have bought it in a gun
store. In another case we may find that the firearm was
reported as stolen from a gun store; there was a break-in.
There could be any variety of things that we might find when we
trace that firearm.
Mr. Goode. Well, let me ask you this. If I bought--I do not
have one, but if I bought my 17-year-old son a rifle, and that
was used in a crime, you would just know that I purchased it.
Is that right?
Mr. Buckles. Yes, sir.
Mr. Goode. Project Exile has done very well in Richmond, in
my opinion. Do you think you would reduce crime more by
expanding that rather than worrying about tracing the guns as
much?
Mr. Buckles. Well, we believe that we have to do both of
those. It is important to find out where all of those guns in
Richmond are coming from so that every firearm that is
recovered from a suspect in an Exile case is traced through our
National Tracing Center, and we find out where, if there are
any common sources for the firearms that are showing up, and
quite often we will find out that there is.
A large percentage, surprisingly enough, of gun traffickers
also happen to be violent felons themselves, so tracing the
firearm can lead us back to somebody who is not only a violent
felon, but also somebody who is being a multiplier on their
conduct by providing firearms to others in the community. By
being able to trace the firearm and focus in on that
trafficker, we believe, is also a key component to successfully
combating gun violence.
Mr. Goode. But you concur, though, that putting the violent
felons in prison, state or federal, is certainly a key way in
reducing crime and has been.
Mr. Buckles. Yes, and it has been an important component of
our enforcement strategy all along, yes.
Mr. Goode. Thank you, Mr. Chairman.
Mr. Kolbe. Thank you, Mr. Goode. Mr. Hoyer.
Representative Hoyer. Thank you, Mr. Chairman. Let me
apologize for being late.
John Kluge gave $60 million to the Library of Congress, as
you have probably read in the paper this morning. There was a
brief ceremony today and there will be a dinner tonight,
today's brief ceremony honored him, and at that sum, I thought
I would show up, so I apologize for being late, Mr. Chairman.
I did not hear the testimony and, frankly, have not read
the testimony either. My staff has prepared some questions, and
I am sorry if I am redundant. If I am redundant, simply say we
have answered that, and we will go to the record.
Mr. Price asked some questions pertaining to the three
criteria that the two out of 17. I think you have cleared up
that perception a little bit.
You may have answered this Mr. Buckles, but perhaps you
could say something, or perhaps the IG, if he has any
information, on the additional cities that were not looked at,
what progress are we making. Now, was that asked, David? What
progress is being made in light of the IG's observations with
reference to the first 17 cities?
Mr. Buckles. Well, that is why we have found the IG's
report so helpful in making sure as we move on that any
stumbling blocks we had from the original 17 cities is not
repeated in the program as we go forward. So we are using the
same suggestions that the IG found with the original 17 cities
to ensure that we are not repeating those mistakes with the
newer cities.
I believe one of the things that the IG recommended to us
was to update the agreement with the original 17 cities signed,
as to what the program is and what everybody's responsibilities
were. At the time of the original 17, the program was fairly
limited. What happened when we expanded it to other cities and
we had more details as to what we were going to require of the
cities and what was expected in terms of joint enforcement
programs; the original 17 had never been updated. So with their
suggestion, we went back to the original 17 and actually gave
them the more complete description of what the program should
be. So I think that we are in better shape with the newer
cities, and we have actually left the older ones unfortunately
behind with what we had asked them to do.
Representative Hoyer. Well, I suppose that is good news.
Mr. Buckles. That is good news.
Representative Hoyer. That is good news. Let me ask you,
and, again, I know that Mr. Price was getting into some of
these issues in terms of--I think Mr. Goode a little bit as
well. The trace analysis of the program cites 96,747 traces
between 1998 and 1999. What are the number of firearms traced
compared with firearms recovered? Now, you have mentioned that
a little bit with respect to--there has been some discussion
about that, but do you have that relationship?
Mr. Buckles. I am not sure what you mean by firearms
recovered.
Representative Hoyer. Firearms recovered in the course of
police work, that they get firearms.
Mr. Buckles. Do you mean the total number nationwide?
Representative Hoyer. Yes.
Mr. Buckles. We do not know exactly what that number is. It
is kind of like the total number of firearms in society.
Representative Hoyer. Right.
Mr. Buckles. There are various estimates. We believe that
there is probably somewhere between a universe of four to
500,000. If we had universal tracing by all police departments
the way you have universal reporting under the uniform crime
reporting, I think that is probably the ball park of what we
think we would see. So we are seeing probably less than half,
being able to trace less than half, of the firearms that are
currently being recovered by police as having been involved in
crime.
Representative Hoyer. Now, Mr. Price, I think, did askabout
resources available. What is your capacity at this point in time?
Mr. Buckles. Well, the capacity of our tracing center has
expanded rapidly, and we are probably in a better position than
perhaps police departments would be to supply all of that
information. Some of the questions that we addressed earlier
were problems that some police departments have in manually
pulling this information out and submitting the traces. But
with the recent improvements to our computer system, we have
established electronic connections with a number of firearms
dealers that allow them to automatically trace a firearm for us
so that it is less labor intensive for the firearms industry.
We have been able to expand our capacity without putting a
great new burden on the legal firearms industry.
[The information follows:]
[Clerk's note.--agency adds that it could handle gradual
increases in the tracing workload with commensurate increase in
staffing and contract support; generally in increments of
10,000 traces. That is tracing only, not analysis.]
Representative Hoyer. So if the universe is in the
neighborhood of 400,000, what percentage of those, if we were
covering the universe, could we handle?
Mr. Buckles. I would have to get back to you on that to see
exactly what we might be able to do today.
[The information follows:]
[Clerk's note.--agency adds that there is no mandatory
reporting system for requiring state and local law enforcement
agencies to submit firearms crime information such as is the
case with the Uniform Crime Reports (UCR).]
Representative Hoyer. Now, it is our understanding that ATF
has created a model of best practices that is going to be used
as a guide in the program by your coordinators. It is my
understanding you have also had several conferences on this
issue with your field representatives. Are you reasonably
confident that the best practices and best performances are
being applied in all of our field offices?
Mr. Buckles. With the steps that we have taken as a result
of the IG's recommendation, I am very confident that we have
corrected almost all of the problems we saw from before. We
have still got a ways to go. We are still training state and
locals, but we have the training programs now in place that
will help bring them along. We do have clearer instructions to
our people in the field as the program becomes more ingrained.
As a core part of what we do, the systems within ATF are
making sure that things get done in the normal course of things
rather than always trying to force those efforts. But I think
we have made tremendous progress, and I am confident that we
are on the right track now.
Representative Hoyer. You referenced this as well, and,
again, this may be repetitive, but with respect to the 38
departments that we are dealing with now around the country and
their level of participation and cooperation; how would you
characterize that? Are half participating fully or two-thirds
participating fully or all participating fully?
Mr. Buckles. The vast majority are participating fully when
it comes to the tracing, and we are having fewer and fewer
problems with the departments not following through on that.
Just to digress, we have had some departments that initially
wanted to get involved in the tracing program but as their
resources and other priorities change, it is something they
cannot consistently sustain at this time. But most of the
police departments are eager to stay involved in this kind of
approach and to find new ways to deal with gun violence.
I think they all know that the only way we are going to
successfully deal with these problems is by working smarter,
not just working harder, and this is a way in which we can all
work smarter to deal with the gun problem. Nonetheless, it is
going to be a consistent struggle and constant effort on our
part to make sure that everybody is carrying out what they need
to do.
There is the situation that on a very immediate level
tracing a handgun by a particular detective does not seem very
important because he has already arrested the person, the
person has the gun. Solving his crime is not dependent upon
where that firearm gets traced to. [Agency note: But the
initiative seeks to exploit that crime gun information further,
past its obvious value, so having all traces conducted
continuously is essential.] There are always going to be
situations in any system that unless you are forcing issues, it
is easy for the tracing to drop off in particular cases. So
what we have learned from the IG report is we have to remain
vigilant with the departments, and they have to remain vigilant
to make sure firearms are being consistently traced.
Representative Hoyer. I am sure we have a list, and I
probably should have looked at it, but of the 38 departments,
can you give me the range of those departments in terms of
their size? I do not necessarily mean the number necessarily of
sworn officers, per se, but size of jurisdictions.
Mr. Buckles. Well, we would have everything from New York
City to Bridgeport, Connecticut, probably, and that might be a
range of the sizes you would look at.
Representative Hoyer. Bridgeport is pretty large. I do not
know what Bridgeport is. What is it, somewhere in the
neighborhood of 125 to 150,000 people?
Mr. Buckles. Probably.
Representative Hoyer. Here is the list of cities. For the
most part, we are talking about large metropolitan areas.
Mr. Buckles. Yes. And as we move forward this year in the
2001 budget to additional cities, we are obviously moving to
smaller cities each time, and those create additional problems
sometimes and additional potentials.
Representative Hoyer. And I asked that in the context of
your response that some police departments' resources are
obviously limited, and I presume the smaller the department,
the less able they are, although they have a much smaller
volume, the less able they are to participate. Would that be a
correct conclusion or not?
Mr. Buckles. Well, I think we will find that, but Ican tell
you that moving in the direction we have into 2001, with up to 50
cities, we are not finding any problem having cities that want to be
involved in this program and take advantage of it.
Representative Hoyer. Thank you, Mr. Chairman.
Mr. Kolbe. Let me ask you a series, Mr. Schindel, a series
of questions based on your report, and then I am going to turn
to Mr. Buckles and ask him to respond to some of these. Mr.
Schindel, does the ATF headquarters have a full-time,
department or organizational position that oversees this
program?
Mr. Schindel. Not consistently. For some of the field
coordinators it is a collateral or part-time duty.
Mr. Kolbe. But that is within each agency. I said at the
national level.
Mr. Schindel. Oh, I am sorry. I did not hear that. Yes.
They have a director for the Yogi program and, I think, one
assistant.
Mr. Kolbe. Okay. And an assistant there, and you agree with
that.
Mr. Schindel. Yes.
Mr. Kolbe. Okay. Is there a set of published guidelines, a
manual that is available to the field offices, and did you find
that it was out there and available? Is it updated regularly?
Mr. Schindel. There is not a manual, per se. There was a
series of memos issued. There is the agreements that have been
signed with the newer cities, ``statement of participants,''
they call it, which outlines the basic activities of the city--
of the participants, but for the coordinators I would not say--
--
Mr. Kolbe. I am sorry. Outlines what?
Mr. Schindel. Outlines----
Mr. Kolbe [continuing]. Activities? The responsibility of
the cities in terms of participating in this?
Mr. Schindel. I do not believe it necessarily has that.
Mr. Kolbe. Who is it signed by? Is it signed by usually the
police chief?
Mr. Schindel. The police chief and the YCGII----
Mr. Kolbe. And the YCGII coordinator in that city. Is that
correct, Mr. Buckles?
Mr. Buckles. Yes.
Mr. Kolbe. Is that how it would normally be done?
Mr. Buckles. But there is not a manual.
Mr. Kolbe. So there is no manual. There is just a whole
series of little memos and notes. How does your YCGII
coordinator in the city, Mr. Buckles, know what they are
supposed to be doing on this?
Mr. Buckles. Well----
[The information follows:]
[Clerk's note.--agency provided the following: We have
information available on CD-ROM that provides all they need to
know about the essential elements and requirements of this
program as it concerns the basic goals. Those agents involved
as coordinators are in regular communication with the Crime Gun
Analysis Branch for guidance on their cities' tracing and
analysis efforts. They are also brought together with program
managers for workshops, and many are also trained to deliver
associated YCGII instruction for state and locals.]
Mr. Kolbe. Do you have a regular training? Do you have a
formal training for these people?
Mr. Buckles. Yes, we do now. Again, we have to talk about
the difference between when the inspector general looked at
this, which was a period of July 1999, I think, through
December 1999, and where we are today. So the answer is
different depending on what time period.
When the inspector general looked at it, they found a
program that had grown incrementally with a series of memos or
policy statements and that nothing had actually brought all of
this stuff together into one package. We do have that now with
the training that we provide both to our coordinators in the
field division and the state and locals who participate in this
so that they get very clear instructions as to what the goals
of the program are, what the responsibilities of each of us
would be as we move forward on this. So we have made
considerable improvement in that.
Mr. Kolbe. You are looking at going from 38 to 50 cities
with the additional funding you are going to get. What is the
criteria for adding new cities to this program?
Mr. Buckles. The criteria--I will tell you roughly, because
I may miss something here, but it is generally it has to do
with the amount of violent crime in the city, crime involving
youth. There are about five factors detail of which is found in
my statement for the record.
For 2001, we have identified a range of cities that we are
looking at right now. We have contacted cities to see who wants
to be involved and who would be committed to the program, and
once our appropriation is approved for this fiscal year, we are
prepared to move forward with adding the additional cities.
Mr. Kolbe. Mr. Schindel, I know you looked at the 17
original cities, but is there any evidence that the local field
offices play some role in making the recommendations for
evaluating this criteria?
Mr. Schindel. Not in the original 17 cities. I think that
was in part based on the criteria of cities that had expressed
an interest in participating, had a concern about youth gun
crime in their city, and I think a number that were
participating in a program called COPS.
Mr. Kolbe. Yes. I think that was one of the criteria. Mr.
Buckles, when you went from 17 to 38, did you have more
applications than that? Did you have to say yes to some cities
and no to others? Was there a formalized review of this?
Mr. Buckles. I could not answer that specifically. I would
have to supply that for the record. [Agency note: Based on
where those cities fell in our ranking guidelines, we tried to
address those with more critical problems first. The balance
were moved to the list of potential candidates for the next
year.]
Mr. Kolbe. I would appreciate it if you would.
Mr. Buckles. I have been told that we have had morecities
that want to participate than we can bring in each year.
Mr. Kolbe. Mr. Schindel, in your report you say that there
are four police departments not submitting trace requests. Two
told you--this is the original 17--two told you that because
they do not have a computerized system for trace-requests
submission, third was submitting some trace requests, but not
all due to problems with the computer system, but then there
was a fourth one that did not participate at all, did not
submit trace requests, did not have a YCGII representative, and
yet it still included an ATF budget request and statistical
reports on YCGII. Is that correct?
Mr. Schindel. Yes. That is correct.
Mr. Kolbe. Mr. Buckles, what has been done by ATF about
this city that does not participate? Why has not it been
replaced?
Mr. Buckles. They have been dropped.
Mr. Kolbe. They have been dropped?
Mr. Buckles. Yes, and replaced by another city.
Mr. Kolbe. So it is no longer one of these 17. Was that
recently?
Mr. Buckles. Yes. [Agency note: Inglewood, CA, was dropped
and replaced by San Jose, CA. Likewise, Bridgeport, CT, and
Salinas, CA, are also under review to determine their continued
participation.]
Mr. Kolbe. In the last year or two? Do you rely on the
evaluations from your local field office about the criteria
about recommendations for cities that might be included in the
next round?
Mr. Buckles. As we get the proposed cities through our
system, we consult with our own field divisions about their
sense of the police departments involved and their commitment
to be able to work with us as we move forward.
Mr. Kolbe. Last question so I can go back to another round
for everybody else here. In March, Mr. Buckles, you told this
subcommittee that ``personnel may be called upon to provide
assistance.'' You have talked about now the YCGII personnel in
the cities, ``called upon to provide assistance in other
activities, if available, and on a case-by-case basis.'' But
isn't it really kind of the opposite? Isn't YCGII just kind of
an add-on activity for your agents, and it is kind of the last
thing that gets assigned to people?
Mr. Buckles. Well, I do not believe that that is the case.
YCGII is something that is an expansion on quite often things
that some of the agents may already have been doing, but in
order to make it really within the YCGII program, you have to
follow it up and cover all of the bases.
We have been doing trafficking cases for years, for
example, but to make that trafficking case truly part of the
Youth Crime Gun Interdiction Initiative, we have to follow up
with additional steps and analysis of the data and make sure we
are working properly with the locals. So I think we are
requiring a more complete effort to make it fit within this
program, but it is not add-on work, as such. Some of it is the
same kind of case, but as we get more resources, it is the
ability to do more of those cases as well.
Mr. Kolbe. Mr. Schindel, did you find in your analysis of
the 17 cities that the personnel turnover in ATF on this
program was fairly high?
Mr. Schindel. In some cities they were on their third
coordinator, for example.
Mr. Kolbe. Did you find that it is a corollary duty in some
cases?
Mr. Schindel. Yes.
Mr. Kolbe. So it was not really a full-time assignment for
them.
Mr. Schindel. Right.
Mr. Kolbe. Did you find that there were a lot of junior
agents that were assigned to this?
Mr. Schindel. No. I think we found that mostly they adhere
to that requirement to assign experienced agents where they had
them.
Mr. Kolbe. Okay.
Mr. Buckles. Mr. Chairman, I may have misunderstood your
question before if we are talking about add-on duties. If you
were asking me about the YCGII coordinator, that would have
been probably an additional duty placed upon a member of the
division staff who had other responsibilities of program
monitoring responsibilities within that division. So if I
misunderstood your question the first time, I apologize.
Mr. Kolbe. Mr. Hoyer.
Representative Hoyer. I am prepared to have you go on and
ask questions. I am finding you have it pretty well organized
there. I have got some other questions, but I will submit them
for the record. I would like to hear the answers to questions
you are asking.
Mr. Kolbe. Well, let me just try a couple more, then. I
think I am coming close to the main ones that I wanted to get
through here.
Mr. Schindel, the report, your report, indicates that the
ATF headquarters guidance describes critical activities that
the field offices really need to be performing, reconciling the
trace requests with the actual crime guns that are recovered,
conducting the end-to-end traces of a sample of routine cases,
and working closely with industry operations to target the
licensees that have the highest number of guns traced to them.
But I think you found that really of the 17 cities only two
of them--and that goes back to that criteria that Mr. Price was
talking about--in only two cases they were doing it in all of
the three that you labeled there. Did you analyze as to why
they were doing some of the things and not all of them there?
Mr. Schindel. I think in some cases----
Mr. Kolbe. Manpower, or was it simply a misunderstanding?
Mr. Schindel. I think in some cases they were not fully
aware of what all of the requirements were. In some cases I
think that they felt that they had too many other duties to
handle.
Mr. Kolbe. So partly manpower, partly that there was not
any clear direction.
Mr. Schindel. A number of them had their own case load.
They were investigating cases as well as handling this
responsibility.
Mr. Kolbe. I have the impression that there is really not a
clear focus for this program and that it is kind of--you get a
sense from reading Mr. Schindel's report that it is kind of--
maybe this is too harsh, but it is kind of an seat-of-the-
pants, fly-by-night kind of program, and that in each city the
agents kind of interpret it in their own way here as to what
they are supposed to be doing. I do not see a lot of national
direction to this as to what they are supposed to be doing.
Mr. Buckles. Well, you would not see that now, but let me
back up to that question, because the perspective and function
of this initiative has indeed evolved. You have to remember
that the first time we received any FTE for our field component
of the Youth Crime Gun Interdiction Initiative, was in the
Fiscal Year 1999 budget. We had received funds before, but most
of that was related to increasing the capacity of the tracing
center and other technology changes. And, quite frankly, we
were trying to push that out and be as aggressive as we could.
At the same time we really did not have any more people on
board than we did before. You are talking about the middle of
Fiscal Year 1999 before additional FTE were brought on. We were
losing as many people as we were bringing on. We had not
started really getting ahead in terms of the amount of
resources we had, but we were still committed to make the youth
crime gun initiative work.
And seat of your pants; I do not know. That has a lot of
different implications, but I will tell you, we were doing it
as a stretch. We had people who were working very hard to try
to keep this going and to get it up and running without, at
that particular point in time, mid-1999, any big boost in the
resources. That has come since then.
And I think that you would find a very different situation
today as you look at it. We have been able to hire people. We
have had difficulty in almost every program we have in
management of offices and of having people in place a long
time. We are a young agency. We have had a lot of people
retire, and we have been pushing people up through the ranks
and changing jobs, but these are issues we are working through,
and we are determined to address them and make sure that we
have got systems in place that are not just relying upon having
an old salt there that knows what to do and is used to dealing
with people. We will have systems in place and measurements in
place so that when we meet with you again you will see a very,
very different picture, and we will be able to paint out
exactly what it is we are getting of this program.
Mr. Kolbe. Well, I guess what I meant when I said ``seat of
the pants'' is--I will put the question another way. If I were
an ATF agent today and working for us, and I was named the
YCGII coordinator in my own city of Tucson, would I know what
the heck I am supposed to do?
Mr. Buckles. Well, you would be brought in for a training.
Mr. Kolbe. You have a formalized training program now----
Mr. Buckles. Yes, we do.
Mr. Kolbe [continuing]. For the coordinators?
Mr. Buckles. Yes.
Mr. Kolbe. How long is that training?
Mr. Buckles. I think we had a week-long workshop where we
had all of the YCGII coordinators in and state and local
counterparts, and we have continued training planned into the
future so that we have a constant effort there with both our
people and our partners to know what everyone's
responsibilities are, what we have all agreed to do, because
those agreements can get put, either at a police department or
ATF, in a folder somewhere, and it requires additional efforts
to make sure everybody continues to be aware of what their
responsibilities are.
Mr. Kolbe. A conference of field coordinators and their
local counterparts does not sound exactly like training to me.
You would have an annual conference of your YCGII coordinators
maybe to go over what you have done, but do you have a training
process of when I am named the coordinator that I am going to
be brought in for a training process, or do I just wait for the
annual conference and come in and learn it at that time?
Mr. Buckles. Well, let me provide for you for the record,
if I could, what we have done to make sure that our
coordinators know what the programs are and know what their
responsibilities are and also that the people we deal with. If
I try to get too specific on this, I will probably stumble, but
I will give you the specifics on it for the record. [Agency
note: Training now being provided is itemized in the statement
for the record and in ATF's response to the IG report.]
Mr. Kolbe. Mr. Schindel, did you find that the YCGII
structure was consistent from city to city, or did it vary
quite a bit?
Mr. Schindel. I do not think there is really necessarily a
structure. The YCGII coordinators could be in different
functions in the different SAC offices, in some cases in the
intelligence function and in other cases in a different
function, so there is no structure. I do not think there are
YCGII teams, per se, of all of the folks that work YCGII cases
all in one group. They can be agents scattered into different
groups who get assigned YCGII cases. So there is not a
structure, per se.
Mr. Kolbe. What I am hearing is that YCGII is just kind of
an overlay of a program and picks agents. For an hour a day
they might be working some YCGII cases, but then they are back
over here to other assignments here. They are doing other
things.
Mr. Schindel. Other than the coordinator, who should have
more----
Mr. Kolbe. Other than the coordinator.
Mr. Schindel [continuing]. Of a full-time post.
Mr. Kolbe. That is your understanding of the way the
structure of it is?
Mr. Buckles. It varies, actually, in cities. If you have a
large city, a large field office, one of the groups will be a
trafficking group, and almost all of what they do would be
trafficking cases that would fall within the YCGII program. If
you talk about a smaller office, such as Tucson, where we have
got an office with a small number of agents, those same agents
have to be working a trafficking case if that comes up, or if
there is a bombing, they have got to be prepared to deal with
that. So in smaller offices, frankly, the agents have to do a
little bit of everything. Trafficking and ways that help focus
on youth is one of their main responsibilities.
The extent to which we can work on these cases has to
really be viewed on a macro level because every case, even if I
take a trafficking case, a youth-crime-gun case in Chicago,
some of the work on that case, or maybe a lot of the work that
comes out of that, will be in Mississippi because that is the
source state. So we will have agents in Mississippi who will be
working on a particular investigation that is actually a YCGII
case out of Chicago but deals with a source state in
Mississippi. Inspectors associated with the youth crime gun
initiative may well be placed in Mississippi to deal with the
Chicago problem. We have one inspector for the entire state of
Mississippi, but it is a major source state of firearms going
to Chicago.
So when we assign inspectors, we tried to come up with this
as a model and not a cookie cutter that Chicago is going toget
six agents and two inspectors. We have got to look at it as a model of
what we need on a macro level. We are a nationwide organization.
Trafficking problems cross state lines in most cases, and we have to
have resources in every state that are prepared to step in and
contribute when it comes to working on these cases. [Agency note: The
statement for the record elaborates on how we have recognized
geographic patterns that affect work load and resource management.]
What we will have to do in terms of monitoring the amount
of resources we are putting into this program and making sure
we are committing what we need to is look at overall records of
where we are expending our resources. We have time- and case-
management systems that demonstrate to us where our work is
being conducted, the kinds of cases that are being worked that
are managed by field offices, that have YCGII as something they
have got to accomplish, that is, in their performance
evaluation, and then monitored on a macro level at
headquarters.
Mr. Kolbe. Okay. Finally, let me just ask about the cities
that enlist in this program. I am concerned about the
coordination with them, the amount of inspection that they have
and the cooperation level. You mentioned also that there was a
conference where your coordinators come in, and you bring in
the counterparts from the cities. Does part of the change of
your YCGII coordinators include training the person in the city
that is going to be the coordinator?
Mr. Buckles. I do not know if training would be the proper
word, but, yes, I think that that is part of the
responsibility----
[Agency note: Each office has now in place an agent who is
tasked with training State and local partners. We also maintain
a roster of all agents designated as coordinators, so that we
keep any agents new to the program properly informed.]
Mr. Kolbe. The key to this program, this program does not
work if they do not provide all of the information for gun
traces. Is that not right?
Mr. Buckles. Correct.
Mr. Kolbe. And we have already seen that in some cases we
did not get all of that, and some cities are not providing all
of that. So I would assume from the very beginning the emphasis
has got to be on the city. We are going to have to do this. We
are going to help you with this. We are going to give you this
information. You in return have to give us the raw data.
Mr. Buckles. Yes. All of these are things that we have
addressed that came out of the inspector general's
recommendations, and we have taken steps to implement every one
of the recommendations made by the inspector general's office.
That is why maybe there is a disconnect here.
He can describe what the problem was, and I am trying to
make it sound like there is not a problem, but it is largely
because we have recognized the problem that existed and that we
have taken a whole series of steps in each one of these areas
to address the problem of making sure that our partners know
their responsibilities, that we set up systems where we are
monitoring whether or not the police department is actually
sending in the traces so that we will get sooner feedback if
there is a problem. So we have set up systems now to try to
address all of these issues.
[The information follows:]
Mr. Kolbe. There again, what kind of assistance do you give
the city in making use of this data when you have compiled it?
I just opened it randomly to Minneapolis, and there is page
after page here of juveniles, youth, adults, age unknown,
percentages of crimes with firearms, homicide, kidnaping, and
so forth. What kind of use do you make of this data for the
city, and how do you help them make use of it?
Mr. Buckles. Well, one of the commitments we have is that
we will work together to review those reports and identify
where the information can help us develop a strategy for
addressing gun violence in their community.
Mr. Kolbe. You say that is a goal that you have now?
Mr. Buckles. Yes.
Mr. Kolbe. Okay.
Mr. Buckles. I think it was our goal before, but the IG
pointed out that we were not always following through on that,
but that was a stated goal earlier on in the program, and they
found that there was a deficiency in that, that in some cases
we had local partners who were saying they give me the
information, but they do not do anything to tell me what to do
with it. In other places we would find that that is a very
actively used document for defining strategies, but the IG made
it clear that in other places it was not being used as
intended.
Mr. Kolbe. Mr. Schindel, you are finding that local law-
enforcement agencies simply did not know how to use this data?
Mr. Schindel. In some cases that was the situation. They
were not aware of things, like I said, the on-line lead. I
think on-line lead is an issue that ATF needs to figure out how
to address because it is not available to police departments on
line. I do not think ATF wants to make it available on line
because there are some issues associated with that, but some of
the police departments said it is not readily available to
them, and in some cases they felt it was inconvenient to get at
the information. They have got to actually go into an ATF
office and use their system. So that needs to be addressed a
little more. I think they are addressing it with some of the
actions that they are taking.
The coordinator role is probably in some sense a marketing
role, too. They have got to market this program to the local
city police departments, to some extent, because it is
voluntary on their part, and they have to see a benefit to it.
So being able to provide that information, for example other
information that some police departments were looking for was
the ability to use mapping data to be able to identify pockets
ofareas where crime guns are being recovered. They wanted that
information, and it was not always readily available to them.
Mr. Kolbe. I would agree with you. I think that is a key
part of this, and maybe what was missing, and hopefully we are
correcting that, is the marketing aspect of this thing. It only
is going to be as valuable to the local law-enforcement
agencies as the cooperation they have with ATF, and they know
how to make use of this data. I will probably have some
additional questions for the record, but let me see if Mr.
Goode has some additional questions.
Mr. Goode. A couple of questions.
Mr. Buckles. It is not another legal question, is it?
Mr. Goode. No, sir. You get these firearms that are
committed in crimes. Are all of them confiscated, or do you
ever turn any of them--if they are stolen, I guess you give
them back to the owner. What do you all do with the ones that
were illegally obtained, the ones that do not go back to the--
--
Mr. Buckles. There is a very specific procedure in federal
law as to what we have to go through to forfeit those firearms.
There are time periods we have to comply with. There is
notice----
Mr. Goode. Do you resell them, or do you just usually
destroy them?
Mr. Buckles. They have to be destroyed. Under GSA
regulations----
Mr. Goode. I can resell--I mean, you know, a sheriff's
office can resell.
Mr. Buckles. That is right. Many local jurisdictions, they
do. Federal-property rulings published by GSA require all
surplus or forfeited firearms to be destroyed. They can be
converted to official use if they were something susceptible to
that.
Mr. Goode. If you call up a manufacturer and say, ``Hey, we
have got--this is a Colt serial number this and make this,'' do
you keep any record of guns in crimes with regard to
manufacturer source?
Mr. Buckles. Yes. Do you mean would we be able to tell you
how many from each manufacturer or type of firearm was traced?
Yes, we would.
Mr. Goode. Okay. That is all I have, Mr. Chairman.
Mr. Kolbe. One last question, I guess, and we have got a
good wrapup kind of a basis. Looking at the YCGII funding
history, going from $300,000 to the request for this year, and
I believe our budget gives it all to you, $76 million, as I
listened to the answers to these other questions, it sounds to
me like the key to this program is the cooperation and the
involvement of the local law-enforcement agency, that they have
to participate in giving you this data, that you would be doing
this anyhow. You would be doing these gun traces now, with or
without the YCGII program, YCGII program funding for it. Is not
that essentially accurate?
Your job is doing this kind of tracing. You would be doing
this whether or not we have formally called it a YCGII program.
And I guess I am wondering what the funding really enables you
to do that you are not able to do today if you did not have
this. It is more additional personnel, I gather, although we
heard the personnel were not assigned specifically to this task
except for the coordinator.
Mr. Buckles. Right. The significance of this is twofold.
One, it is essentially a trafficking and firearms source
project that is trying to give us information that we can use
both to make trafficking cases and find other ways that we can
impact violent crime. That is something that ATF has always
done to some degree or other, and that has expanded our ability
to do that.
In terms of it being a youth crime gun initiative, it is
centered around youth and crime guns because of the figure I
told you earlier, with 41 percent of all of the violent
firearms crime being committed by people in this age range,
that provided a focus, both of where the biggest problem was
and also potentially where we could make the greatest
difference in and change people's lives. If youth did not get
involved in firearms, if they did not commit firearms crimes,
you have a chance to make the biggest impact in terms of the
future of violent crime as well.
So the program itself is part of what the Gun Control Act
was designed to do. It makes dealers keep records so that
people can find out where crime guns came from. That is the
whole purpose of the Act, going back to 1968. This is just a
way in which we are highlighting exactly how we are trying to
take those authorities and tools and deal both with the larger
issues of source guns on crime with a slant on it that allows
us to look at probably the most vulnerable and potentially most
affected section.
Mr. Kolbe. If you did not have all of this funding, you
would not be able to do all of the tracing or this empirical
data, collecting this empirical data.
Mr. Buckles. No, sir. Our tracing system before was used
primarily as a service. If you had a law-enforcement agency
where they recovered----
Mr. Kolbe. Came to you with a specific gun.
Mr. Buckles. They recovered a crime gun at a scene. They
wanted to see if they could get a lead on finding out who
committed the murder. They would trace the firearm. We would
tell them who purchased it.
This allows us actually to be more carefully focused on
what we are doing on the sources of crime guns.
Mr. Kolbe. Mr. Buckles, Mr. Schindel, I thank you very much
both for being here. Ms. Rickey also. Thank you for your
testimony. I think you have helped add some light, at least, on
this program and certainly given us additional food for thought
as we go into the next budget cycle. We appreciate the
frankness with which you gave your answers today, and I think
you have helped this subcommittee do its work. So thank you
both very much for participating in this. And without
objection, the subcommittee stands adjourned.
W I T N E S S E S
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Page
Rossotti, Charles................................................ 1
Harrison, P.D.................................................... 1
Black, Edward.................................................... 1
Lacijan, Charles................................................. 1
Buckles, Bradley................................................. 225
Schindel, Dennis................................................. 225
Rickey, Roberta.................................................. 225
I N D E X
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Page
Bureau of Alcohol, Tobacco and Firearms:
Buckles, Opening Remarks..................................... 229
Questions for the Record Submitted by Subcommittee........... 256
Schindel, Opening Statement.................................. 227
Executive Residence at the White House: Budget Justification..... 283
Internal Revenue Service:
Black, Testimony of.......................................... 26
Harrison, Opening Remarks.................................... 36
Lacijan, Statement of........................................ 18
Questions Submitted for the Record by Congressman Hoyer...... 70
Questions Submitted for the Record by Congresswoman Emerson.. 68
Questions Submitted for the Record by Congresswoman Northup.. 65
Questions Submitted for the Record by Subcommittee........... 71
Rosotti, Statement of Commissioner........................... 7