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

      OVERSIGHT OF THE INTERNAL REVENUE SERVICE: THE COMMISSIONER REPORTS

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

                                    HEARING

                                   before the

                     SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                          INFORMATION, AND TECHNOLOGY

                                     of the

                                  COMMITTEE ON
                               GOVERNMENT REFORM

                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED SIXTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 APRIL 10, 2000

                                   __________

                               Serial No. 106-189

                                   __________

           Printed for the use of the Committee on Government Reform

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

                                   ----------
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                         COMMITTEE ON GOVERNMENT REFORM

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

                          Kevin Binger, Staff Director
                     Daniel R. Moll, Deputy Staff Director
               David A. Kass, Deputy Counsel and Parliamentarian
                        Lisa Smith Arafune, Chief Clerk
                     Phil Schiliro, Minority Staff Director
                                     ------

       Subcommittee on Government Management, Information, and Technology

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

                                   Ex Officio

    DAN BURTON, Indiana                  HENRY A. WAXMAN, California
              J. Russell George, Staff Director and Chief Counsel
       Bonnie Heald, Director of Communications/Professional Staff Member
                               Bryan Sisk, Clerk
                        Trey Henderson, Minority Counsel

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on April 10, 2000...................................     1
    Statement of:
        Rossotti, Charles O., Commissioner, Internal Revenue Service,
          Department of the Treasury.................................     6
        Wrightson, Margaret T., Associate Director, Tax Policy and
          Administration Issues, U.S. General Accounting Office;
          Colleen M. Kelley, national president, National Treasury
          Employees Union; W. Val Oveson, National Taxpayer Advocate,
          Internal Revenue Service; and David L. Keating, senior
          counselor, National Taxpayers Union........................    54
    Letters, statements, etc., submitted for the record by:
        Horn, Hon. Stephen, a Representative in Congress from the
          State of California, prepared statement of.................     3
        Keating, David L., senior counselor, National Taxpayers
          Union, prepared statement of...............................   101
        Kelley, Colleen M., national president, National Treasury
          Employees Union, prepared statement of.....................    77
        Oveson, W. Val, National Taxpayer Advocate, Internal Revenue
          Service, prepared statement of.............................    90
        Rossotti, Charles O., Commissioner, Internal Revenue Service,
          Department of the Treasury:
            Information concerning deficiencies......................    45
            Prepared statement of....................................     9
        Wrightson, Margaret T., Associate Director, Tax Policy and
          Administration Issues, U.S. General Accounting Office,
          prepared statement of......................................    59

      OVERSIGHT OF THE INTERNAL REVENUE SERVICE: THE COMMISSIONER REPORTS

                                  ----------

                             MONDAY, APRIL 10, 2000

                      House of Representatives,
    Subcommittee on Government Management, Information,
                                        and Technology,
                                Committee on Government Reform,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 10 a.m., in
    room 2154, Rayburn House Office Building, Hon. Stephen Horn
    (chairman of the subcommittee) presiding.
        Present: Representatives Horn, Walden, and Turner.
        Staff present: J. Russell George, staff director and chief
    counsel; Louise DiBenedetto, GAO detailee; Bonnie Heald,
    director of communications and professional staff member; Bryan
    Sisk, clerk; Ryan McKee, staff assistant; Michael Soon, intern;
    Trey Henderson, minority counsel; and Jean Gosa, minority
    assistant clerk.
        Mr. Horn. A quorum being present, the Subcommittee on
    Government Management, Information, and Technology will come to
    order.
        The only contact that most taxpayers have with the Internal
    Revenue Service is when they file their annual income tax
    return. Now, 1 week before the deadline, many taxpayers are
    frantically focused on gathering the year's worth of documents
    and receipts needed to verify the accuracy of their own tax
    return.
        Taxpayers should expect prompt, quality service from their
    Government, especially from the agency that collects their
    money, but over the years critics have bitterly complained
    about the agency's rude service or lack of any service at all,
    and I believe times have changed quite a bit now.
        The IRS has come under fire for everything from its failure
    to assist taxpayers in preparing and filing their tax forms to
    ensuring that all taxpayers pay their tax obligations. The IRS
    had, indeed, become the Federal agency that everyone loved to
    hate.
        The public told the tax agency that it expects better
    services, and on July 22, 1998, Congress passed and the
    President signed the Internal Revenue Service Restructuring and
    Reform Act. Their message to the Internal Revenue Service was
    clear: there must be a fundamental change in the way it
    conducts business. The Internal Revenue Service must not only
    collect taxes; it must provide quality service to the people
    who pay those taxes.
        The law demanded that the Internal Revenue Service shift
    from its self-defined role as an enforcement agency toward a
    role that more resembles a financial service organization.
        Internal Revenue Service Commissioner Charles Rossotti has
    taken that message seriously. He is responsible for planning
    and implementing the most fundamental changes in the IRS in
    nearly half a century.
        A few weeks ago, the commissioner testified before another
    House subcommittee stating that the IRS is ``wholly committed
    to implementing each and every taxpayer's rights provision and
    making them work as intended, while still fulfilling the
    mandate to collect taxes that are due.''
        Some people are now concerned that the agency has become so
    user friendly that it isn't collecting enough of the tax money
    that is owed. In a recent hearing before this subcommittee, we
    learned that taxpayers owe the people and the Treasury $231
    billion in overdue taxes and penalties. We recognize that this
    is an enormous undertaking filled with both short-term and
    long-term challenges.
        We welcome each of our witnesses today and look forward to
    discussing the agency's progress and challenges and how they
    are affecting the American people and the Internal Revenue
    Service workers.
        I might say, Commissioner, I'm very pleased with the
    willingness of the IRS workers to come to our District office
    to set up phones, to have hundreds of constituents go there and
    electronically file for the first time, in most cases, to those
    constituents. We hope down the line that we will all be
    sensitive to filing in time, and that would help get the
    refund, if they had one, and it would also be simpler than most
    people now have to go to.
        [The prepared statement of Hon. Stephen Horn follows:]

        [GRAPHIC] [TIFF OMITTED] T0279.001

        [GRAPHIC] [TIFF OMITTED] T0279.002

        Mr. Horn. So I now yield an opening statement to the
    ranking member, Mr. Turner, the gentleman from Texas.
        Mr. Turner.
        Mr. Turner. Thank you, Mr. Chairman.
        After having worked on my tax return yesterday, I hope I am
    in a good mood here to visit with the commissioner.
        We do appreciate the commissioner being here this morning.
    As we all know, your agency is responsible for the very
    difficult task of administering and enforcing the internal
    revenue laws and related statutes.
        Your mission is to collect the proper amount of tax at the
    least cost to the public and in a manner that warrants the
    highest degree of confidence in the Service's integrity,
    efficiency, and fairness.
        We know the IRS has been subject to many studies and
    congressional inquiries and much criticism. Congress and others
    have identified a long list of problems, including inadequate
    technology, poor services to taxpayers, violation of taxpayers'
    rights, failure to follow established procedures, and lack of
    adequate employee training and resources.
        This concern led the Congress to pass the IRS Restructuring
    and Reform Act of 1998. This law included many provisions to
    enhance taxpayer rights and to fundamentally reform the IRS.
        To achieve these goals, the IRS plans to make fundamental
    changes on virtually every front. The IRS has referred to this
    process as ``modernization,'' because it involves building on
    the essential components that have made the IRS successful in
    the past, while bringing them up to date in a way designed to
    achieve the new mission.
        We are here today to assess the progress the IRS has made
    in implementing its modernization changes. This subcommittee
    wants to ensure that all Federal managers are given the
    necessary tools and incentives to perform effectively and to be
    held accountable for their job.
        We welcome the commissioner this morning and I commend you,
    Commissioner Rossotti, on your leadership. I commend the
    employees of the IRS in your efforts to become a better agency.
    When I came to Congress 3 years ago, the IRS had an image that
    was less than desirable. Since that time, with the new
    legislation and the efforts you have made, I am confident there
    has been significant progress toward the goal of providing the
    type of high-quality service that the taxpayers of this country
    expect and deserve.
        I appreciate the leadership you have brought to the
    position, and I look forward to hearing your testimony this
    morning.
        Thank you.
        Mr. Horn. As you know, Commissioner, and the others that
    follow you, we swear in all witnesses before this committee, so
    if you would raise your right hand we will swear you in.
        [Witness sworn.]
        Mr. Horn. Thank you. Also, as I think you know since you
    are a regular here, your full statement goes in the record
    right now, so we would appreciate it if you could summarize it
    and then we will have more chance for dialog.
        Thank you.

       STATEMENT OF CHARLES O. ROSSOTTI, COMMISSIONER, INTERNAL
              REVENUE SERVICE, DEPARTMENT OF THE TREASURY

        Mr. Rossotti. Mr. Chairman and Mr. Turner, we think the IRS
    is following the clear direction of the Congress in the IRS
    Restructuring and Reform Act. As both of you noted in your
    opening statements, this involves some of the most significant
    changes in organization, technology, and, most importantly, the
    way we serve taxpayers.
        We are already witnessing some positive results. These
    include the implementation of the 71 taxpayer rights that were
    in the act, improved hours and improved phone service, and more
    electronic filing in this current season.
        Just to note some statistics, we expect to receive 127
    million individual returns this season, and electronic filing
    is up 16 percent over last year, so we will get about 34 to 35
    million returns electronically.
        Our level of telephone service overall is about 63 percent
    this year, which is still way too low, but is up a lot from the
    50 percent or so from last year.
        And for the whole year, we expect to collect $1.67 trillion
    in net receipts for the Treasury.
        Of course, all of this has been done after the completion
    of the enormous program to fix the Y2K program, which I am
    pleased to say was accomplished almost flawlessly.
        Just going back for a moment to Y2K, I think that this
    success was achieved due to comprehensive planning and
    preparations over a significant period of time. Mr. Chairman,
    we are most grateful for your guidance and assistance which you
    provided over that entire period. We think your leadership was
    a critical component of our success.
        Mr. Horn. Thank you very much.
        Mr. Rossotti. Despite some of these signs of progress, Mr.
    Chairman, we have to say honestly that today the IRS does not
    meet all the legitimate service expectations of the vast
    majority of compliant taxpayers, and at the same time our
    compliance activities, such as exam and collections, continues
    to drop.
        Further, as GAO has pointed out, many of the systems we use
    to manage and account for the $1.67 trillion in tax revenue are
    inherently deficient.
        These are severe problems, and if they are not addressed
    they will certainly, over time, undermine the fairness and
    perhaps even the viability of the Federal tax system. But these
    problems are not newly identified, nor do I believe that they
    are impossible to solve. In fact, I believe we now have
    employees at the top level plans that will allow us to address
    them.
        We have implemented the taxpayer rights provisions of RRA.
    We have completed a new system of balance performance measures,
    and our reorganization, which is aimed at increasing customer
    focus and management accountability, is progressing rapidly and
    we have a new top management team in place.
        Building on this foundation, we are now beginning the
    longer-term program of re-engineering all of our business
    practices and technology so that we will be able to deliver on
    the RRA's mandates for improved service and taxpayer treatment,
    while also increasing fairness and compliance effectiveness.
        As these new management and technology practices become
    established, we can also improve efficiency. However, to
    succeed in this enormous program, we do need adequate budget
    resources in fiscal year 2001 to address critical operational
    needs in the short run and to invest in new technology for the
    long run.
        The rapidly expanding economy continues to increase the
    IRS's workload. For example, since 1993, the number of
    individual tax returns of over $100,000, which are generally
    the more-complex returns, have increased by 63 percent, but,
    because of budget constraints, the IRS staff has dropped by
    17,000 personnel, which, as shown on the chart at your left,
    shows the workload going up, the staff going down.
        On top of these general trends, as shown on the second
    chart which is going to be put up there, certain specific
    provisions of RRA, alone, have required about 4,500 additional
    personnel to administer. Those are just listed by code section
    there, an estimate of personnel.
        Now, since our compliance personnel, those that do exams
    and collections, represent the largest component of the IRS
    budget, they are also the ones that administer these RRA
    provisions. Our net front line compliance staffing has declined
    quite rapidly, which is shown here in this red line on the
    third chart. So I think we can see that, as a result of these
    resource declines and the pervasive change in the way the
    business has done, there has been not only resource declines
    but some uncertainty, confusion, and a great deal of relearning
    among our employees and managers, and this, combined, is the
    reason that, overall, the number of exam and collection cases
    we have been able to complete has declined about half since
    1997.
        To address these operational problems, we have requested an
    increase in staffing in the 2001 budget which would provide for
    about 2,800 FTEs and would allow us to rectify some of the
    shortages that have developed over the last 2 years, and that
    would be one component of the budget.
        This staffing increase increment will allow us to meet some
    critical short-term needs while we transition to the more-
    efficient structure and re-engineered technology, which is the
    second key needed in our fiscal year 2001 budget and, as you
    have pointed out many times, Mr. Chairman, is really the long-
    term solution that we need to get to.
        Clearly, we depend on our computer systems to administer
    the tax system and to properly collect and account for our $1.8
    trillion of tax revenues.
        We have submitted our plan for re-engineering our systems
    in some detail, and they are included in my written testimony
    and in the funding request that we have made to the
    Appropriations Committees.
        Let me stress that, although there is no way to avoid risk
    in a program of this size and complexity, we believe we can
    manage these risks and achieve our goals, just as we did with
    the $1.4 billion Y2K program, and we now have in place some of
    the elements needed to do this properly, which were not in
    place in the past. These include a single, centrally managed
    information systems organization, a very active top-level
    governance process, adherence to architectural, technological,
    and methodological standards, use of the prime contract to
    manage development and integration activities, and, most
    importantly, an unwavering commitment to an open process that
    includes outside oversight agencies such as GAO and OMB.
        Now, although we have put in place most of the necessary
    elements, I do want to stress, Mr. Chairman, that it will take
    time and practical experience executing projects for our
    management process to mature.
        I would like to call the subcommittee's attention to a
    fourth chart, which is about to be put up on the screens, which
    shows what I would consider the normal pattern by which we
    would expect our management process to mature over time if we
    are successful.
        Based on my experience in the industry, if we were to
    achieve the kind of growth rate depicted on this chart, it
    would actually be a quite rapid rate of growth in maturity of
    our management process, and within 1 to 2 years I think it
    would put IRS in a top category of institutions managing large
    technology programs.
        Since this maturity process necessarily depends on
    practical experience, one of our most important
    responsibilities as top managers is to adjust the level of
    activity we are managing to that which is appropriate to the
    level of management capacity we have at any point in time. We
    have already seen this process in action as we have
    unhesitatingly revised some initial proposals to slow down some
    projects and rearrange others to ensure that management and
    architectural issues were adequately addressed.
        On the other hand, I also have to stress that there is no
    way to achieve maturity in the management process without
    practical experience actually executing projects.
        So, Mr. Chairman, I believe we are making real progress in
    the goals and mandates of the Restructuring Act. I believe, if
    Congress will continue to provide us the support for IRS
    modernization, which includes acting favorably on our budget
    request, we will be able to produce the most visible, tangible
    changes in service, compliance, and productivity that America's
    taxpayers expect and deserve.
        Thank you.
        Mr. Horn. Thank you.
        [The prepared statement of Mr. Rossotti follows:]

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        Mr. Horn. We have a few questions for you, and we will be
    alternating between Mr. Turner and myself 5 minutes at a time.
        Let me first start. There are a lot of different groups,
    including OMB, the IG--Inspector General--that give you
    recommendations. Tell me how you go about prioritizing which is
    which, and particularly the Inspector General's.
        Mr. Rossotti. Well, you are right, Mr. Chairman. We get
    hundreds of recommendations every year from many different
    audits that are done by the IG, as well as GAO, and, of course,
    many other things that come in from congressional sources and
    from our stakeholders, such as the practitioner groups and
    taxpayer groups. There are hundreds of them.
        What we have put in place over the last 2 years is a
    management process which we call ``taxpayer treatment and
    service improvement,'' by which we have a small program staff
    that reviews all of these and lists all of these
    recommendations, tries to apply criteria to them, and then
    comes before a top management group, which I chair, to
    basically determine which ones we can manage in which
    timeframes.
        We are going through a new phase of this process in the
    next year as we establish our new organization. We are folding
    this process into an even more systematic strategic planning
    and budgeting process where we will include this kind of
    prioritization as part of our planning and budgeting and we, as
    a matter of fact, have already started that for fiscal year
    2002, as well as 2001, which is, of course, the budget that is
    before Congress.
        So we made, I think, an important step in prioritizing and
    managing these recommendations, and now we are going even
    further with strategic planning.
        I think the, of course, crux of this is that we have more
    demands on our capacity than we can implement. In other words,
    we have more things that we would like to do and that others
    would like us to do than we have capacity to manage, so we
    simply have to make choices along the way.
        Mr. Horn. How much, if any, do you get from that Advisory
    Committee that was put together to sort of guide the
    commissioner under the Restructuring and Reform Act of IRS?
    Now, who is on and who isn't? Have all the appointees been
    nominated?
        Mr. Rossotti. Yes. I think you're referring to the
    Oversight Board, as it is termed in the act.
        Mr. Horn. That's right.
        Mr. Rossotti. And they were nominated, they were acted upon
    by the Senate Finance Committee favorably in--I believe it was
    February, and it is now on the Senate floor waiting for action
    to go through the Senate floor. That would be the last step
    before they would become active.
        There are seven private sector members, as well as the
    commissioner and the Secretary of the Treasury. So there have
    been no meetings yet because they have not been finally
    confirmed, but we have had some informal discussions when they
    were preparing for their confirmation hearings actually at some
    length.
        I think that these--in fact, I know that these members are
    all very qualified people who are quite fired up, as a matter
    of fact, about the idea of participating in this, and so I am
    looking forward to having them--and, of course, one of their
    statutory responsibilities is precisely the point that you were
    noting in your question, is participating in the strategic
    planning process to help us make the right choices for how we
    deploy our resources and what initiatives we undertake.
        Mr. Horn. The law took effect when?
        Mr. Rossotti. Well, the law took effect July 1998. It
    requested the President----
        Mr. Horn. So we have lost almost 2 years from that
    particular committee?
        Mr. Rossotti. Well, yes.
        Mr. Horn. That wasn't your fault. That was the President's
    fault. He didn't like the system. So is that going to work? I
    mean, they've now got them, you say, before the Senate.
    Hopefully they will be confirmed one way or the other.
        Mr. Rossotti. Yes. Well, I was somewhat involved,
    tangentially involved. It is quite a process to find seven
    private sector qualified people and get them through all the
    clearances. That certainly took longer than expected.
        But I think that, without question, at this point there is
    strong support now for, I think, all quarters for making this
    Oversight Board work. You know, I've met quite a few times with
    the Secretary of the Treasury about this, and he is committed
    to it. He has met with them and, you know, we have a plan to
    get them oriented. So I think as soon as they are confirmed by
    the Senate we will be ready to really gear up.
        I really anticipate that they will be a very constructive
    force in helping us have the continuity to make this whole
    process work.
        Mr. Horn. My last question on this round is the computing
    situation. You went through Y2K. That caused you to look at
    various systems--should you merge some, should you get rid of
    some.
        We've asked the General Accounting Office to look across
    the whole executive branch to look at the hardware and the
    software.
        I wonder--you're an expert in this area--what are your
    plans?
        Mr. Rossotti. Well, I think you are quite right. One of the
    residual benefits of Y2K is that we did standardize and
    consolidate quite a few different systems, I mean, and water
    also, I think importantly, and probably one of the most
    important things is that we centralized all of the information
    systems resources under one management. I mean, previously we
    had about 15 different information--roughly 15 different
    information systems organizations. We now have one, and they
    control almost essentially all the resources. We have
    consolidated our mainframes. By the end of this year we will
    have them all into 3 centers instead of 12. And we've
    eliminated, you know, thousands of one-off type vendor products
    that were on desktops, for example.
        So that was an important benefit of Y2K. We still have more
    work to do in that regard, but I think that is one of the
    foundational elements that gives us a foundation to start going
    up this ``S'' curve that we need to get to to manage in a more-
    effective way.
        Mr. Horn. Thank you.
        The gentleman from Texas, Mr. Turner, 5 minutes.
        Mr. Turner. Thank you, Mr. Chairman.
        Commissioner, the growth in electronic filing seems to be
    impressive, but I gather that most of the electronic filing
    that takes place under current law has to go through some third
    party in order to accomplish it, rather than electronically
    filing directly with the IRS.
        Why is that the case? And is there anything we could or
    should do about that?
        Mr. Rossotti. Well, as a matter of fact, that is one of the
    issues that we are addressing in the whole strategic plan for
    electronic filing.
        I think one thing that is important to understand is that
    preparing a return electronically is a prerequisite for filing
    electronically. Those two processes are very closely linked. I
    mean, you can't file something electronically until you've
    prepared it. In order to prepare it, you have to have tax
    preparation software, and I think, if you've ever used any of
    this software, you know that there are quite a few software
    products out there on the market that are very sophisticated
    and really quite effective consumer software products.
        So the route that the IRS has taken is to essentially try
    to--and this was actually a provision in the Restructuring Act
    encouraged us to do this--was to partner with the private
    sector to encourage competition in the private sector to bring
    down the cost and make it easier to file electronically by
    taking advantage of the capabilities that are offered in the
    private sector.
        We don't see it as the right strategy to try to separate
    these two parts of the equation, if you will--the preparation
    and the filing. Instead, what we are working on--and there is a
    provision, actually, in the President's budget for this that
    was just submitted earlier this year which requests or requires
    the IRS, by 2002, to be able to, working with private industry,
    find a way to allow every taxpayer to file--both prepare and
    file their taxes on the Web at no cost to the taxpayer. I think
    that's really what taxpayers want.
        As a matter of fact, even in this season that's possible on
    a limited basis, because there are a number of providers that
    provide software on the Web that allow you to prepare your tax
    return and send it to the IRS. Many of them charge a fee of
    $9.95. Some of them charge no fee, however, and this is because
    of competition driving down the prices.
        What we have been requested in the President's budget to do
    and will continue to do is to work with the industry to provide
    ways--and this may require us to provide some incentive to the
    industry--to basically drive that price down to zero so that
    every taxpayer would be able to sign on to the Web, use that in
    a secure way to prepare their tax return, which is, I think,
    the thing that people get the most benefit out of, just being
    able to use the question and answer format to prepare their tax
    return, and then just push a button and file it up through us.
        Mr. Turner. Is there any statutory inhibition to doing that
    now? Isn't there a problem with the signature and the way it
    works now? Doesn't the taxpayer get something back in hard copy
    by mail and they sign it and send it back?
        Mr. Rossotti. Right. There's a second issue. Even if you do
    file, you now have to send in a separate--in most cases, you
    have to send in a separate signature document. We have some
    pilot projects this year where we've sent out specific
    identification numbers that avoid the need to send in the paper
    document, and one of our highest priorities is to figure out
    how we can extend those pilots basically to everyone, or almost
    everyone, so that they would not have to send in that paper
    jurad, as it is called.
        We do not, at this moment, think we need special additional
    legislative authority. We think that it is more a matter of
    administrative action to ensure ourselves that we have adequate
    authentication of the return that the taxpayer has filed.
        Mr. Turner. How, then, do you get a signature on that
    return so that the signature line, which is the taxpayers
    attestation that they are providing the correct information
    under penalty of law, how do you get that electronically?
        Mr. Rossotti. What we're doing now in our pilot projects is
    using PINs, as we call them--personal identification numbers.
    Many taxpayers received--I don't remember the exact number. I
    could get it for you. But we sent out letters to quite a few
    millions of taxpayers prior to this season giving them personal
    identification numbers which they could then enter in in lieu
    of a signature, in lieu of a hand signature as the
    authentication that it was a valid tax return.
        Mr. Turner. Thank you.
        Mr. Horn. I think we had the staff furnish you an appeal
    from a particular constituent in Colorado, and his point is
    very interesting. This is Kenny Knapp of Steamboat Springs, CO.
    He received a reply to his appeal from the district director,
    Deborah Decker, and he felt that the proper authority to write
    him on that was the Secretary of Treasury. I wonder if you have
    had a chance to look at that? And do you feel that the district
    director, Deborah Decker, has that authority from the Treasury
    or not?
        Mr. Rossotti. First of all, as you know, I can't
    specifically comment on a particular taxpayer matter, but I
    think that it has been well established that the Secretary
    designates and delegates certain authority to take certain
    actions to the commissioner, and the commissioner, in turn, can
    re-delegate them to other authorized individuals. That's the
    way the tax system has worked for many, many years, and it
    really has to, because you have to be able to delegate
    authority for people to act or you couldn't really function at
    the scale that we function.
        Mr. Horn. Well, is there a delegation from the Secretary of
    the Treasury? And what is the source of that? Is it a
    regulation of the Secretary?
        Mr. Rossotti. There are delegation orders in effect, as
    they're called, that delegate, generally speaking. I can give
    you more technical answers in a written response, but basically
    the way it works is that the law frequently authorizes the
    Secretary to do certain things, and then the Secretary has
    standing delegation orders that delegate to certain officials--
    usually the commissioner--to take action. And then, within the
    agency, we have official delegation orders that delegate
    certain other officials to take certain other kinds of action.
        Mr. Turner. That was really in relation to a deficiency
    notice. So you feel that you have sufficient authority from the
    Secretary of the Treasury?
        Mr. Rossotti. Yes.
        Mr. Turner. Because often Congress, over the years, and not
    just in IRS, has taken the authority away from the President,
    taken it away from Cabinet officers, and vested it in the
    person that really is responsible for the operation. So you
    don't feel a loss of authority there?
        Mr. Rossotti. I don't. And I'd be glad to give you a more-
    specific answer in writing, but generally----
        Mr. Horn. Without objection, we'll put it in the record in
    this place.
        [The information referred to follows:]

        [GRAPHIC] [TIFF OMITTED] T0279.034

        Mr. Horn. Now, on the modernization efforts, and when they
    might be made, I'd like to give you a little time. You've
    mentioned it, but just give us an idea of where some of this
    modernization is going besides the electronic aspect. What else
    is there?
        Mr. Rossotti. Well, there is an entire program of what we
    call our major business systems modernization, which is really
    aimed at replacing all of the basic systems that are deficient
    in the IRS that support basic tax administration processing, as
    well as, I might add, financial management systems, which I
    know in your committee you've had a great deal of concern
    about, because that is really at the root of a lot of our
    problems.
        These go to basic systems that keep all the taxpayer
    records, for example. That's the most fundamental system. We
    still keep all of our taxpayer accounts on tape files in a
    system that was designed in the 1960's. It is hard to believe
    that. Sometimes when I say this people think I'm exaggerating,
    but it really is true. Really, every single taxpayer's records,
    business and individual, is on tape files that are only updated
    once a week. This is the heart of our entire system.
        Then there are about 130 other systems that do everything
    from collecting money to accounting for money to helping to
    support auditing of taxpayers, and then, of course, the actual
    customer assistance. If somebody wants to call up and wants to
    find out where their refund is or there's a mistake on their
    account, to fix that is quite a laborious process.
        All of these are what we call our ``basic tax
    administration systems.'' Frankly, Mr. Chairman, I think I have
    testified before, this agency is very, very deep in the hole in
    this matter. This is not a matter of--you know, most businesses
    today are going forward with their basic--you know, like, for
    your bank the demand deposit system is there. OK. They know how
    many debits and credits there are in somebody's bank account.
    What they're working on is putting it on the Web and making it
    easier for people to do banking over the Web.
        We're going back to foundations and rebuilding, you know,
    if you will, the equivalent of our basic checking account
    system, which I can't stress too much is really an essential
    thing for this country.
        Every day we see examples of really horrible problems that
    we have in just administering the tax laws because of the
    limits of these systems. Unfortunately, we're so far behind
    that this is not an easy process to fix.
        We have in place now, over the last year and over the last
    several years, put together the outlines of a plan of how to do
    this, and we are now beginning to launch this process. In fact,
    we've just, within the last several months, submitted the first
    large request to our Appropriations Committees to get money
    released from the fund that has been established to provide
    this.
        At the same time what we're doing is we're building, as is
    shown on this curb, the management process that we need in
    place.
        This is a very complex, large-scale program, and, as GAO
    and many others have observed, the IRS in the past has not had
    in place the management process to do this.
        We are putting that process in place. To actually make it
    work takes some time and some experience, and so it is not an
    instantaneous process and it can't be done just by reading
    textbooks and by going to training classes. I mean, we can't
    build a world-class football team by just, you know, reading--
    watching videotapes of football games.
        So we have to proceed in a measured pace, and I think one
    of the most important responsibilities that I feel I have--and
    my top management team is working on this--and you've met Mr.
    Cosgrave and some others--is to try to really manage this
    process so the level of activity we undertake, in terms of
    making actual projects go forward, initiating projects, is
    managed in relation to the capacity we have to manage them.
    That's sort of an ever-changing process.
        However, just to put the bottom line as to what I expect to
    happen, if we get the release approval we expect from the
    committees to release funds, we will be launching the first
    real significant development projects which will deliver some
    initial capabilities next year in 2001. These will be mainly in
    the area of customer service and customer communications.
        Then, basically every year for the next, you know, as far
    as we can plan at this point, at least 5 years, every year, at
    least once and possibly twice a year, we will be delivering
    additional new capacity into the system, and this will include
    not only the electronic services, the e-filing, and customer
    communications, but I think one of the most important of all
    these is the taxpayer accounts data base, because, again, we
    need to get rid of that 35-year-old tape file before we can do
    anything else.
        I think we finally have a plan as to how to do that in a
    sort of way that has acceptable risk.
        One other area I'll mention that I know has been important
    to you, Mr. Chairman, as well as Mr. Turner, is the whole area
    of debt collection. We talked about this. We now have, I think,
    the outline at least of a plan to replace the technology that
    we need and to basically completely re-engineer this process. I
    don't have time to go through it this morning, but I think when
    we get to that we will have something that will basically have
    the effect of allowing us to act much more quickly on overdue
    accounts, which right now is not one of our forefronts. We're
    very slow--to act much more quickly on potential or actual
    overdue accounts, and also use our resources more efficiently
    to do collection the right way. If all it takes is a phone
    call, we'll only make a phone call. If it really takes a
    collection officer to go out there, we can do that.
        This, in turn, might provide us some broader opportunities,
    such as the ones I know you are interested in, to use other
    resources, perhaps outside resources to supplement our own,
    because basically we will have in process with this collection
    system what we really need to manage our collection process,
    but this is not going to happen in a year, this is going to
    take a couple years.
        Mr. Horn. You mentioned in this answer that you have two
    committees. Now, that's Senate Finance and House Ways and
    Means? Or are you also including the Appropriations
    Subcommittee?
        Mr. Rossotti. Well, on this matter it is the Appropriations
    Committees actually that we have to work with to get the money
    released.
        Mr. Horn. So this would be Mr. Kolbe's subcommittee?
        Mr. Rossotti. Yes, sir.
        Mr. Horn. And on the Senate side the same?
        Mr. Rossotti. Senator Campbell.
        Mr. Horn. Senator Campbell?
        Mr. Rossotti. Yes.
        Mr. Horn. I now yield to the gentleman from Texas, Mr.
    Turner.
        Mr. Turner. Commissioner, you mentioned your efforts to try
    to improve debt collection. As you know and your staff is
    aware, I introduced a bill, H.R. 4181, last week, joined by
    Chairman Horn, as well as Chairman Burton and Ranking Member
    Waxman, and, as I recall, most of the members of our
    subcommittee, to try to help on your debt collection problem.
        As you know, the law has provided for some time under the
    Debt Collection Act that if a person owes a non-tax debt to the
    Government they can go out and get Federal contracts and get
    Federal loans and other Government benefits, and so we wanted
    to close that loophole by providing that tax debt is now
    subject to those same rules, so that if you owe tax debt you
    can't get an SBA loan until you make arrangements to pay your
    tax debt, or you can't enter into a contract to sell the
    Government some equipment or services if you owe taxes, unless
    you make arrangement to pay those taxes.
        I know your staff has been kind to take a look at the bill,
    and I wanted to ask you just three questions. One is: do you
    feel the concept is good with regard to it? And then I wanted
    you to comment on whether you thought you could
    administratively handle this task and whether you felt good
    about the efforts we've made to address the privacy concerns
    with the provision that we have in there that says the taxpayer
    is the one that will sign the consent form to release the
    information as to whether or not they owe any taxes, and that
    form would be promulgated by your office, but it would go to
    you and then you would respond back to the agency.
        Mr. Rossotti. Let me just talk about the administrative one
    first, because that's the one that most directly affects us. I
    think that we could administer that, provided, in the short
    term, if the volume of transactions was relatively limited. The
    only limitation there is because of our computer systems. A lot
    of this kind of stuff has to be handled semi-manually right
    now, so as long as it wasn't too large a volume of
    transactions, which I don't think it would be if it was Federal
    contracts, we could manage that. In the longer term, we'd be
    able to manage a larger volume, you know, we modernize our
    computer systems, but in the short term that would be the only
    issue administratively is just how large the volume of
    transactions would be.
        As far as the privacy issue, I think that certainly
    requiring a disclosure of consent by the taxpayer would be an
    appropriate step, would be the right and necessary step to
    conform to the requirements of disclosure. We need that under
    our 6103, which is the section of the tax code which deals with
    taxpayer privacy.
        I think that, on the broader issue of privacy, there is, I
    guess, a longstanding and probably never-ending debate over the
    broader question of whether it is the right policy decision to
    use tax information for other legitimate Government purposes.
    That's more of a broader policy issue. The Treasury probably
    takes the lead on that, rather than the IRS.
        The Joint Committee has issued a report just recently on
    this very subject which dealt with disclosures of tax records,
    even with consent of taxpayers, to other Federal agencies for
    various other purposes, and what they simply said was that they
    felt that it should be done only if there is a ``compelling
    case'' made by the part of the other agency. Whether it is a
    compelling case or not is a question.
        But I think that, from the point of view of helping us to
    collect tax debt, to the extent that we had additional, you
    know, incentives, if you will, built into the taxpayers to
    actually pay those taxes, that can only help us.
        Mr. Turner. Thank you. I want to thank your staff for
    helping us on the bill.
        We are going to have a hearing on May 9th, as I recall, Mr.
    Chairman, that you've set, and I welcome any of your staff's
    input between now and then----
        Mr. Rossotti. Sure.
        Mr. Turner [continuing]. Or at the hearing to be sure that
    we do this right.
        Mr. Rossotti. Sure.
        Mr. Turner. The objective clearly is to enhance collection
    of taxes, but to do it in a way that is appropriate.
        Mr. Rossotti. Yes.
        Mr. Turner. So any help that your staff can give us is
    welcome on this.
        Mr. Rossotti. We'll be happy to.
        Mr. Turner. Thank you very much.
        Mr. Rossotti. We'll be pleased to do that.
        Mr. Horn. I thank the gentleman.
        It is on May 9th, a Tuesday, 10 a.m., right here. And so we
    look forward for future action.
        Let me ask you about the General Accounting Office
    testimony before this subcommittee. They said the IRS chief
    financial officer is not appropriately placed in the
    organization to address its serious financial and operational
    problems. What action is being taken by you and your management
    team to address this particular problem, because we had a real
    concern over the lack of internal methods for looking at the
    financial statements.
        Mr. Rossotti. Mr. Chairman, it is always a pleasure to be
    here and to be able to give a clear, simple, straightforward
    answer that we fixed that problem. In this case, I can honestly
    do that because we have successfully recruited and appointed
    Mr. Rogers as the chief financial officer, and he now reports,
    as of about 2 weeks ago, directly to the Office of the
    Commissioner. That includes myself and the deputy commissioner.
        The reason it is stated that way is there are certain
    matters that I am recused from with respect to financial
    systems, but the deputy commissioner, Mr. Winzel, who is here
    with me today, will take my place in those cases.
        But the important point is Mr. Rogers is now, No. 1,
    appointed on a permanent basis. He was previously acting.
    Second, he is reporting up directly through the Office of the
    Commissioner. We've also made certain other realignments to
    give him some more authority and staff.
        And so I believe that I can honestly say at this point that
    we fixed whatever concerns there might have been in that
    regard. They have been definitively addressed.
        Mr. Horn. So you are very happy with it?
        Mr. Rossotti. On that particular point we have. I have to
    say that we still have a tremendous amount of work to do to
    address many of the issues in financial systems--not just
    financial systems, but our whole accounting process. Some of
    them Mr. Rogers and his team, with the support of Mr. Winzel, I
    believe will be able to address this year in a very, you know,
    active way. They relate to such things as reconciling balances
    with the Treasury and hopefully working on our property
    management.
        Others, of course, as GAO, itself, have noted, are really
    longer-term issues related to technology modernization. They
    have to do with fixing the basic accounting systems. Those will
    not be fixed this year, obviously, but we will be working on
    the plans that will allow us to replace those systems longer
    term.
        Mr. Horn. The senior counselor of the National Taxpayers
    Union, Mr. David Keating, noted in his testimony, which is
    about to come, that Treasury Secretary Summers said many times
    that the Board of Oversight is unnecessary and unwise, and
    ``the long delay in submitting the nominations raises the
    question of whether the Administration is seeking to revamp the
    IRS on its own without the oversight and input of the legally
    required IRS Oversight Board. It also suggests to taxpayers the
    IRS reform is a low priority issue for the Administration.''
        Then he says, ``We were also disappointed that none of the
    nominees appear to have, as required by law, professional
    experience and expertise in the needs and concerns of
    taxpayers.''
        Do you want to make some comments on that? I realize they
    aren't your nominees.
        Mr. Rossotti. Yes. Well, first of all, as far as the issue,
    though, of whether the Treasury Department supports this whole
    concept, I mean, it is a fair statement that in the early
    stages, when the bill was being debated, that there was a great
    debate about this and exactly what the powers of the Board
    should be, but I think that threshold was passed long ago,
    frankly, and I worked very closely with the Secretary.
        I can tell you the Secretary was probably, especially
    toward the end of last year, as frustrated as anybody else at
    various things that caused us not to get these nominations up
    there.
        I can tell you just one thing is that going through the
    clearance process to get a private sector person who has never
    been in the Government before into this, because they go
    through the same thing that you would go if you were a full-
    time employee, is really quite an interesting process. And it's
    not only lengthy, but in some cases it caused people to drop
    out.
        So it was very difficult. I do not believe, from my
    observation, that the delay was caused by the Treasury
    Department not wanting this to happen.
        It's true in the early stages they were against it, but
    once they changed they did get behind it, and I think that they
    absolutely--the Secretary does want this to work.
        Now we've had the nominees and they are in the Senate, so
    it's just a matter of the Senate acting, and we'll get them
    there.
        As far as the nominees, themselves, I can only say that we
    have a wide range of nominees that cover such things as, you
    know, for example, Mr. Colby--that's not Congressman Kolbe, but
    the nominee Mr. Colby--who actually is one of Senator
    Grassley's constituents, and he's a cattle rancher from Iowa,
    small business person. The other side, we have people like Mr.
    Farr, who ran American Express and had a lot of experience at
    the big business side, and we have, you know, Mr. Levitan, who
    is very much of an expert in large-scale technology programs.
        So it is a wide-ranging board. I don't know whether one can
    prove that it touches every base of all the things that were
    listed in the legislation, but I think it is a wide-ranging
    board, and they are certainly interested in the task that has
    been assigned to them, from what I've seen from talking to
    them.
        Mr. Horn. Well, my last question--I certainly agree with
    you, by the way, on it's a wonder we get anybody to serve in
    the executive branch of the Federal Government in terms of the
    forms, the ethics, the financial filings, and all the rest. So
    these do take time, and I understand that.
        My last question is that you've testified you've
    implemented the various taxpayer rights legal provisions;
    however, you stated you are several years away from making them
    work more efficiently and at higher quality, so I'd like you to
    elaborate on what you mean by that and what are you doing to
    address that situation.
        Mr. Rossotti. Well, what I mean by it is that the taxpayer
    rights provisions were very pervasive in their impact in a way
    that almost every employee or a large percentage of our
    employees works. And many of them were quite complex.
        An example of what I mean, the innocent spouse provision.
    This was a very important provision, very high profile, and I
    think a very necessary change in the law.
        What happened at the time that the law was passed is that,
    whereas there was one provision in the law that in very limited
    circumstances allowed for relief of liability on a joint tax
    return, there are now four provisions, including the one that
    was there before, and they are really quite finely tuned, as is
    appropriate, to try to determine, you know--because here you
    are talking about taking basically a married couple that filed
    a joint tax return and now has split up, and you're trying to
    figure out who knew what about their tax return at the time
    they filed it. I mean, that's not a simple thing to do.
        Then it adds to it an additional consideration, which the
    IRS has not really been required to do in the past, to my
    knowledge, which is deal with equity. In the past it was
    strictly, you know, who owed the money. On this particular
    provision, as well as some others, there is now what is called
    ``equitable relief.'' Well, you know, figuring out what is
    appropriate to give equitable relief to one spouse in a
    marriage on a tax liability is something that takes some time
    to learn.
        So we went forward and got out forms and we let people file
    claims, because they were--as was required, and we began to
    adjudicate those claims, but learning how to do it correctly
    and learning how to do it in a reasonable amount of time has
    been quite a challenge.
        I think we have made some big progress. Again, it's a curve
    like that. It's a learning curve. You just don't do it
    overnight.
        I think at this point, just taking that provision, we now
    have gotten out lots of guidance. We've learned how to
    adjudicate some cases. We've taken advantage of that experience
    to revamp the training materials. We've done a whole bunch of
    things which I won't go into here. So now we are at a point
    where I think we are starting to do them in a timely manner,
    and, second, do them correctly, with higher assurance that they
    are being done correctly. That's an example.
        And there are 71 different provisions. I could give you a
    story like that on each one.
        Mr. Horn. Does the gentleman from Texas have any further
    questions?
        Mr. Rossotti, the commissioner, will stay through the next
    panel and is prepared to answer questions that are raised by
    panel two.
        Mr. Turner. I wanted to give you an opportunity to make
    this point again about your need for funding for your
    modernization effort. I know you intend to go to the
    appropriate committees and seek some movement of funds within
    your agency, but the overall modernization effort seems to me
    to be one that may very well and could detract from
    enforcement, and I don't think any of us would want that to
    occur.
        I want to be sure that you have been able to make your case
    clearly for why you need additional funding for modernization.
        Mr. Rossotti. Mr. Turner, I think that, you know, what we
    have to do in the budget is to both do the modernization but
    also keep enforcing the tax laws at the same time. I mean,
    that's the two things that we have to do.
        I think if you look at some of the previous charts that
    were up there--I don't know whether, Floyd, you can keep the
    previous one up--what has happened over the last--and this
    really is even before the Restructuring Act, but the budget was
    very constrained, and a majority of the money is for the case
    work, for going out and auditing and collecting money.
        What has happened is you can see in the green line that the
    number--since 1995, the number of front-line people--this is in
    compliance. These are people that actually audit taxpayers,
    collect money--the green line is what was happening just to the
    staffing because of the budget. The red line shows that the gap
    between those two, with the additional requirements of the
    Restructuring and Reform Act, just required more time.
        So if you look the that red line, you can see that we're
    down in 2000 well below where we were 4 years ago. And then
    there are even some intangible factors on top of that.
        The net effect is we have half the number of audits that we
    were doing 4 years ago. Nobody knows exactly what the right
    number is, but I don't think that kind of a line is where we--
    you know, we're really risking the tax system if we keep that
    line.
        So what we've proposed in the 2001 budget is two things,
    basically. One is stabilize that. OK? That's what we call it,
    stable. Give us enough staff to basically keep that from
    continuing to go down, keep it steady so we will no longer go
    down in terms of our compliance enforcement activities, and
    then, the other piece of the money is for the modernization for
    the technology, which is really how we are going to fix this.
        I mean, we know that we can collect money more efficiently.
    I mean, I feel very confident of that. It does require some
    people, but we can leverage those people with more procedures
    and better technology, but it is going to take a few years to
    get to that point.
        Mr. Turner. In my last comment, I want to--for those of us
    that are struggling to get our tax return in, April 15th is on
    Saturday this year. Does that mean we have to have it in the
    Post Office? Can we get it postmarked by April 15th on a
    Saturday?
        Mr. Rossotti. Well, I think that it has actually come to
    the 17th as the day that it has to be done.
        Mr. Turner. OK. So you can actually deposit your tax return
    in the Post Office on Monday and still be in compliance with
    the law?
        Mr. Rossotti. Yes, sir.
        Mr. Turner. And I also wanted to mention, for those who may
    be interested in a phone number, 1-800-829-1040 is where you
    can get information, among--there are several other options
    available, as well, for taxpayers, but that is the 24-hour, 7-
    day-a-week, toll-free phone number, is it not?
        Mr. Rossotti. Yes.
        Mr. Turner. The 1-800-829-1040?
        Mr. Rossotti. Yes, sir.
        Mr. Turner. Well, for those who are struggling, as I am, to
    meet the deadline, I urge them to take advantage of that
    number.
        And I noticed that your website is becoming much more
    popular in the past. I believe you had twice as many hits this
    year as you did last year, and that IRS.GOV is another place
    where taxpayers can get help.
        Mr. Rossotti. Yes, sir. Absolutely. As a matter of fact, I
    can tell you that this calendar year, through the end of March,
    we had 658 million hits on that Website, so it is really quite
    a popular one and one of our best products.
        Mr. Turner. Thank you.
        Thank you, Mr. Chairman.
        Mr. Horn. We thank you. That's good information for the
    average citizen.
        Well, Commissioner, I'm done asking questions of you and
    I'll go to the next panel. And I must say you are a brave
    commissioner to stay here and when your critics are there. Most
    of the other people just run.
        Mr. Rossotti. We're happy to stay. We consider them very
    constructive critics.
        Mr. Horn. Well, I know you are, and that's why you've got
    good relations on Capitol Hill.
        So we will now have panel two: Margaret Wrightson of the
    General Accounting Office; Colleen Kelley of the Treasury
    Employees Union; Mr. Oveson, National Taxpayer Advocate; and
    David Keating, National Taxpayers Union.
        If you will stand and raise your right hands, and if there
    is anybody going to assist you on the answers have them stand,
    also.
        We have four at the witness table, three in back, for a
    total of seven.
        [Witnesses sworn.]
        Mr. Horn. The three helpers and the four witnesses are
    certified and noted to the clerk.
        We will now start with Margaret Wrightson, the Associate
    Director, Tax Policy and Administration Issues of the U.S.
    General Accounting Office, the programmatic arm of the
    legislative branch.

     STATEMENTS OF MARGARET T. WRIGHTSON, ASSOCIATE DIRECTOR, TAX
       POLICY AND ADMINISTRATION ISSUES, U.S. GENERAL ACCOUNTING
        OFFICE; COLLEEN M. KELLEY, NATIONAL PRESIDENT, NATIONAL
      TREASURY EMPLOYEES UNION; W. VAL OVESON, NATIONAL TAXPAYER
       ADVOCATE, INTERNAL REVENUE SERVICE; AND DAVID L. KEATING,
               SENIOR COUNSELOR, NATIONAL TAXPAYERS UNION

        Ms. Wrightson. Thank you, Mr. Chairman.
        Mr. Chairman and members of the subcommittee, Mr. Turner,
    thank you very much for inviting me here this morning to
    discuss IRS' progress on key elements of its modernization
    efforts.
        Let me begin with my three bottom-line conclusions. In each
    case, it is important to say at the outset that there is
    substantial agreement between GAO and IRS on the issues and
    actions IRS must take.
        First, before taxpayers will see any appreciable benefits
    from modernization, IRS needs to make breakthrough changes in
    its business practices and become more customer friendly.
        Second, if IRS is to better balance the value it
    historically has placed on compliance with the value it now
    wishes to place on customer service, it needs to revamp its
    performance management system.
        Finally, modernization will not succeed unless IRS follows
    through on important tasks for information systems
    modernization--most notably, complete its enterprise system
    architecture and systems development life cycle.
        With regard to business practice changes, IRS has already
    completed a number of developmental steps that will help it
    redefine the way it does business, including establishing an
    organizational structure built around customer-focused
    operating divisions. Reorganization is going reasonably well,
    but the agency must also re-engineer business practices.
    Breakthrough changes are needed because IRS' current processes
    are not well-suited to taxpayers' needs.
        IRS has a number of re-engineering efforts underway, and
    the commissioner has mentioned a few. I'd like to highlight
    three this morning.
        The first one is something that we're going to call
    ``creating one-stop shopping at IRS walk-in centers.''
    Taxpayers, as you know, have long been frustrated in trying to
    reach the right person at IRS. In large part, their frustration
    came from IRS' old structure that was kind of a transactional
    assembly line for addressing taxpayer inquiries, clarifying and
    correcting tax returns, and collecting unpaid taxes.
        Because of this stovepipe structure, IRS really couldn't
    take care of taxpayers on an end-to-end basis. To help solve
    the problem, IRS has established a new position that can handle
    a much larger range of taxpayer problems. It is called the tax
    resolution representative [TRR]. TRRs will still perform
    traditional duties like answering taxpayer questions and
    helping prepare returns, but they also will be able to do
    compliance work, like installment agreements, lien and levy
    releases, account adjustments, and simple audits. IRS intends
    to have about 2,000 TRRs on staff by fall, 2001.
        Now, implementing the TRR concept is, of course, going to
    require substantial investments in people and systems. Probably
    the greatest human capital challenge for IRS will be the cross-
    training that is going to be needed, but TRRs are also going to
    need enhanced IT so they can have access to complete and up-to-
    date account information or they won't be able to be successful
    at this new role.
        The second example I want to mention is one that has been
    mentioned previously, which is electronic filing. During the
    filing season, we all see commercials of tired and frazzled
    taxpayers. This year, my personal favorite saga is a taxpayer
    who is on day 20 of trying to paper file his family's return.
    The commercial is pretty funny. I mean, the taxpayer has got
    hands full of pencils, his hair is uncombed, his shirt tail is
    hanging out. But the fact is that paper filing a tax return is
    really no laughing matter.
        Electronic filing, or e-filing, is not going to make the
    tax code any simpler, but it can reduce the wear on taxpayers
    from filing itself.
        E-filing also reduces the calculation and transcription
    errors that later trigger IRS notices, and that's all to the
    good, as well.
        But e-filing will benefit IRS. I don't know how many of you
    have been to an IRS service center, but I think it is fair to
    say that IRS is drowning in paper.
        The returns are literally piled to the ceiling in the halls
    at IRS service centers. These returns must be opened and sorted
    and reviewed, transcribed, shipped, and stored. And then later,
    if IRS employees need additional information, they have to get
    them shipped from where they are stored so they can have access
    to that paper return again.
        Although electronic filing promises to be win/win, however,
    IRS is having difficulty making it sufficiently appealing. A
    major criticism is that e-filing is not yet paperless. IRS has
    been testing eliminating W-2s and signature documents and
    allowing people to pay balances using credit cards. The
    commissioner mentioned that in his testimony.
        However, before electronic filing can fully replace paper,
    IRS must enhance its technology to allow the full range of
    returns to be filed and also develop new marketing strategies
    for additional market segments.
        The last example that I want to point to of business
    process re-engineering is something called risk-based
    examination. Here, I'm going to start with a personal story,
    because I think, while taxpayer benefits from one-stop shopping
    and e-filing are pretty obvious to all of us, I'm not sure it
    is so obvious why IRS building a better mousetrap for auditing
    is going to benefit taxpayers. So let me use an example.
        When I was about 10 years old, I remember standing on the
    porch with my dad, and the postman walked up--that was in the
    days when they, in fact, did walk up--he talked to my dad and
    handed him the mail. And, after thanking the postman, my dad
    started sifting through that mail until he stopped and he
    stared at a very official-looking document. You're right.
    Actually, in retrospect, that was a notice from the IRS.
        I'm never going to forget, as a 10-year-old, looking at my
    dad and seeing this big guy and the panic on his face when he
    looked at that envelope. And I'm also not going to forget that
    he waited until my mom came home before he opened it up. I
    think he needed her moral support.
        What's striking about my own little example is that it is
    not unusual. No taxpayer wants to get a letter from the IRS in
    his or her mailbox--unless, of course, it is a refund from the
    Treasury Department. But they certainly don't want to be
    audited when they are compliant, nor, when audited, do
    taxpayers prefer anything other than for their audits to be
    efficient and targeted only to the questionable return items.
        Our past work has identified weaknesses in how IRS
    determines which taxpayers to audit. When IRS picks the wrong
    person or approaches an audit like a fishing expedition,
    everybody loses. Taxpayers are burdened unnecessarily, and IRS
    wastes valuable resources.
        To improve the situation, IRS hopes to deploy something
    called ``risk-based examination,'' a model that will target
    audits more accurately and help determine which compliance
    strategies are actually going to be the most efficient and
    effective.
        If IRS' approach is successful, taxpayers and IRS will both
    benefit, but, as was true with my first two examples, training,
    new technology, and more data about taxpayers are going to be
    critical if that business process is going to be re-engineered
    effectively.
        OK. The second part of my testimony looks at IRS' efforts
    to revamp its performance management system. Before Congress
    enacted the Restructuring Act, there was an uneasy feeling on
    the Hill and elsewhere that IRS employees were so intent on
    assessing and collecting taxes that they did not give due
    regard to taxpayer needs and rights.
        The Restructuring Act mandated changes to IRS' performance
    management system, including a new mission statement to place
    greater emphasis on taxpayer needs. IRS now has that new
    mission statement and is in the process of revamping its
    performance management system. However, for the system to work,
    IRS employees will need to understand that customer service and
    compliance are intended to be complimentary and not competing
    values and activities. Our work suggests that this relationship
    may not be well understood at IRS at this point.
        The commissioner does not view compliance and customer
    service as competing. Indeed, he has said that improvements in
    customer service will increase compliance among taxpayers who
    do not understand the applicable tax law requirements or find
    IRS' processes too daunting to deal with.
        Understanding that customer service and compliance
    activities are meant to work together will take time at IRS and
    an ample amount of communication and clear training, which I
    think is going to be mentioned by some of our subsequent
    witnesses.
        At the same time, however, it will be very important to
    ensure that IRS employees also understand that they can and
    should use the full range of IRS' enforcement tools to collect
    taxes owed by those who willfully fail to comply with the tax
    laws.
        Our second concern about performance management involves
    IRS' new system of balanced performance measures. Although IRS
    is on the right track with these measures and may well be
    regarded as a leader in the Federal Government in this area, it
    still does not yet have a key measure of performance.
        Mr. Chairman, that measure is a measure of voluntary
    compliance. For over 30 years, until the early 1990's, IRS had
    measures of voluntary compliance that were developed by
    periodically auditing random samples of taxpayers' returns.
        In 1995, IRS formally canceled plans to continue the random
    audits because of concerns that it was overly costly and overly
    intrusive on compliant taxpayers.
        The commissioner has said that, in the absence of such
    measures, informed decisions on strategies to improve voluntary
    compliance will be impossible.
        At this point, you might be wondering: why not just use
    data from audits that IRS does conduct to measure voluntary
    compliance? The answer is that that data would not capture the
    extent of voluntary compliance among all taxpayers. Using only
    audit results is actually akin to using information about
    speeding tickets to measure how many drivers are driving
    safely. As anyone who has ever ventured onto the Washington
    Beltway knows, just because a driver doesn't get ticketed
    doesn't mean he or she is driving 55.
        Similarly, the results of IRS' audits tell you something
    about the population of taxpayers who are audited, but they
    tell you nothing about the population of taxpayers who are not.
        IRS is beginning to tackle the problem of how to measure
    voluntary compliance, but the solution likely will involve
    auditing some--and I say some--randomly selected returns, and
    IRS may have difficulty going forward without the support of
    key outside stakeholders.
        GAO believes that, in moving forward on this, IRS should
    work diligently to minimize intrusion and burden on compliant
    taxpayers; however, we also believe in the principle of random
    selection when necessary to ensure the accuracy and integrity
    of IRS' results.
        The last part of my statement is on a topic that I know,
    Chairman Horn, you are very familiar with, which focuses on IRS
    systems modernization challenges, which is a perennial problem
    at IRS.
        Although IRS' past track record in this area is dismal,
    Congress has supported IRS' most recent efforts to modernize
    its systems through the 1998 and 1999 Appropriations Acts and
    the establishment of the new technology account.
        In light of concerns about giving IRS free reign, however,
    Congress set certain conditions on spending, including
    requiring spending plans to ensure that IRS had the management
    and technical discipline to successfully design major software-
    intensive systems. It is this issue that the commissioner is
    referring to with his ``S'' curve, I believe.
        Thus far, IRS has obligated about $68 million from its
    technology account and submitted plans in March asking for
    approval to spend an additional $176 million; however, based on
    our review of IRS' most recent plan and reported progress, we
    have concluded that IRS is still not ready to build major
    software-intensive systems.
        As I noted earlier in my statement, IRS has not yet
    completed its enterprise systems architecture and systems
    development life cycle. Until we are convinced that IRS is
    ready, we will continue to designate its systems modernization
    efforts as high risk.
        Thank you, Mr. Chairman. I can answer questions now or wait
    until you complete the rest of the panel.
        [The prepared statement of Ms. Wrightson follows:]

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        Mr. Horn. We're going to have everybody else finish. Each
    are going to summarize for 5 minutes each. That's 15 minutes.
    And then we'll still have a chance for questions and the
    commissioner some answers to the questions.
        So we will now go to Ms. Colleen M. Kelley, national
    president of the National Treasury Employees Union.
        Ms. Kelley. Thank you, Chairman Horn, Ranking Member
    Turner, and members of the subcommittee.
        I am the president of the National Treasury Employees Union
    [NTEU] which represents more than 155,000 Federal employees
    across the country, including the employees who work at the
    Internal Revenue Service.
        The IRS interacts with more citizens than any other
    Government agency or private sector business. Twice as many
    people pay taxes as vote, yet many Americans take for granted
    the outstanding work done by IRS employees.
        Following enactment of the IRS Restructuring and Reform Act
    of 1998, Commissioner Rossotti set in motion a process to
    restore the public's confidence in the IRS. The commissioner
    recognized that any meaningful reform had to include the active
    participation of his chief assets, his employees, and employees
    have been involved in the reorganization work being done as we
    speak and going back to the enactment of RRA 1998.
        I believe that modernization will succeed, with the support
    of Congress and the dedicated work of IRS employees, and I
    believe Commissioner Rossotti would agree with me that,
    although the modernization of the IRS will require several more
    years of effort and commitment, the results so far have been
    positive.
        Communication between IRS management and the employees who
    make the IRS work has been crucial and will continue to be
    essential in improving customer service and increasing
    productivity at the IRS.
        I was pleased that Congress, too, recognized the importance
    of ensuring that the employees' voice in reforming the IRS be
    heard by insisting on an employee representative on the IRS
    Oversight Board, which was established through RRA 1998.
        Congress recognized that an employee representative was
    necessary, not in spite of, but because of the important role
    of IRS employees in reform. NTEU takes great pride in the fact
    that we have had a cooperative relationship with the IRS dating
    back more than a decade. Our partnership efforts and employee
    efforts are constantly being tested, reworked, and revised in
    the face of budget restrictions and funding limitations and
    changes in the tax law.
        One particular area where NTEU and the IRS have worked
    together and where we feel we have made great strides has been
    in improving customer service. This has included not just
    providing longer office hours, but hours that meet customers'
    needs.
        Without the commitment of the IRS rank and file employees,
    these well-documented customer service improvements could not
    have been accomplished in the short timeframe in which they
    occurred.
        We are at a critical point in our restructuring efforts at
    the IRS. First, technology improvements and investments must
    continue to give the IRS and employees the tools that they need
    to do the work that America's taxpayers need and want done.
        Next, since 1993, staffing levels at the IRS have been
    reduced by 17,000 FTEs; yet, during this period IRS' toll-free
    phone services and Web-based services for taxpayers have
    improved and taxpayers have more options for filing their tax
    returns.
        Our employees have made great strides in customer service
    at the IRS, while continuing to perform the necessary functions
    of ensuring that the taxes that are due to the Treasury are
    paid.
        Additionally, Congress has made hundreds of changes to the
    tax code in the past 3 years. In fact, the Taxpayer Relief Act
    of 1997, alone, made 801 tax law changes.
        Next, continued record economic growth in this country has
    led to an increased number of tax returns and more complexities
    in taxpayer and business filings. The bottom line is the IRS
    work force is being asked to do considerably more work with
    fewer resources. And, while I applaud advances in the use of
    technology at the IRS and I commend this subcommittee's
    commitment to these improvements, technology, alone, cannot
    possibly manage the increasing workload at the IRS.
        For this reason, I wish to express NTEU's strong support
    for increased funding for staff training and the new IRS
    initiative, STABLE. This initiative will support the hiring of
    approximately 2,800 new employees at the IRS. The number of IRS
    revenue agents has declined by roughly 17 percent since 1995,
    and it will continue to decrease another 4 percent in this
    fiscal year. We need to reverse the severe cuts in IRS staffing
    levels and approve this STABLE request.
        One last thing I would like to mention is that IRS
    employees continue to work in fear in section 1203 of the
    Revenue Restructuring Act. As you know, section 1203 lists 10
    infractions, known as the ``10 deadly sins,'' for which IRS
    employees face mandatory dismissal. The broad scope and vague
    nature of these 10 deadly sins have created anxiety and
    confusion in the workplace.
        Just last week, the House Ways and Means Committee approved
    legislation which would waive penalties for taxpayers who do
    not pay their taxes on time; yet, if IRS employees are as
    little as 1 day late in paying their taxes, they are subject to
    mandatory dismissal.
        NTEU vigorously opposed section 1203 and continues to
    believe that this section of the Restructuring Act should be
    repealed. I am hopeful that this subcommittee will work with
    NTEU and Commissioner Rossotti to address this issue.
        In summary, since 1992 the IRS work force has declined by
    more than 16 percent. In the meantime, demands on IRS employees
    have increased significantly. Unless Congress gives the IRS the
    staffing and the resources for technology necessary to do the
    job, our entire tax system will be threatened and we will not
    be able to meet the challenges of the 21st century.
        Thank you, again, for the opportunity to appear today.
        Mr. Horn. Thank you very much.
        [The prepared statement of Ms. Kelley follows:]

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        Mr. Horn. Our next presenter is W. Val Oveson, National
    Taxpayer Advocate, Internal Revenue Service.
        Mr. Oveson. Thank you, Mr. Chairman and distinguished
    members of the subcommittee. I appreciate the opportunity to be
    here with you today and to talk a little bit about the role of
    the Taxpayer Advocate--the ``Taxpayer Advocate Service'' is the
    name we have adopted internally--in helping taxpayers to
    resolve their problems with the IRS.
        I have now been the National Taxpayer Advocate for 18
    months, and during that 18 months we've implemented the
    provisions or RRA 1998 within the Taxpayer Advocate Service, or
    in the process of implementing them. Many of them, as
    Commissioner Rossotti mentioned, will take some time to
    actually play themselves out.
        The restructuring provided opportunities for the Taxpayer
    Advocates across this country to be better positioned, better
    trained, and more focused to address the problems that the
    taxpayers are facing.
        I am pleased to report to you that the new Taxpayer
    Advocate Service officially transitioned as a modernized
    organization on March 12, 2000.
        Every State now has at least one local Taxpayer Advocate
    who works to resolve problems that individual taxpayers have
    with the IRS. Many States have multiples, depending on the
    population and other factors. They also address taxpayer
    problems within the IRS, policy and procedural failures, and
    recommend solutions to improve those problems.
        Between October 1, 1999 and March 31, 2000, the Taxpayer
    Advocates across this country closed 114,000 cases. During
    fiscal year 1999, Taxpayer Advocates worked on more than
    292,000 taxpayer cases to help resolve their problems with the
    IRS, and almost 93,000 of those cases met the expanded hardship
    criteria defined in RRA 1998.
        RRA 1998 expanded the authority to issue taxpayer
    assistance orders when taxpayers are suffering or about to
    suffer a significant hardship.
        We work with front-line IRS employees in an effort to
    resolve taxpayer problems, and knowing that we have the
    authority to issue the taxpayer assistance order is usually
    enough to convince the functional IRS employees to work with
    the taxpayer to resolve the issue.
        So far this fiscal year we have issued three taxpayer
    assistance orders. During fiscal year 1999, we issued five.
        We also identify and monitor the progress of procedural and
    systemic changes designed to benefit taxpayers. For example, we
    worked with IRS operations to delay the implementation of some
    of the procedural changes related to secondary Social Security
    number matching. By negotiating a change to the implementation
    date, we prevented refund delays and communications
    frustrations for thousands of taxpayers.
        In addition, we worked with a variety of stakeholders to
    identify legislative changes. In the fiscal year 1999 report, I
    included several recommendations related to penalty and
    interest administration, and a proposal that would allow the
    IRS to correct its own errors--amazing as that sounds, that's
    something that needs to be corrected.
        I am pleased that several of these provisions are included
    in the proposed Taxpayer Bill of Rights 2000.
        My annual report to Congress includes a ranked list of the
    top 20 most serious problems facing taxpayers. Today I'd like
    to focus on four of those.
        The complexity of the tax code remains the most serious
    problem facing taxpayers. I believe that the single most
    complicating factor of tax administration is the frequency and
    number of changes to the tax law. I encourage you to reduce the
    complexity of the existing laws, or at least to slow down the
    frequency of change.
        No. 2, the IRS must be able to communicate with taxpayers
    regarding account activity and computer-generated compliance
    notices. This means the toll-free telephone service must be
    improved, and I say that recognizing that some tremendous
    improvements have been made over the last year, but they're
    still not enough.
        The IRS must ensure that taxpayers can get in to an
    individual who can help them with their problems and who can
    answer the phone.
        It is equally important that Congress fund this critical
    activity.
        RRA 1998 provisions expanded the innocent spouse relief
    available to taxpayers, and they are filing in large numbers.
    The sheer volume of cases stretches the ability of the system
    to deal with these cases.
        The IRS must reduce the processing time, increase the
    training, and ensure that all levels of the agency have
    internalized the new requirements of this law in order to get
    it right in the future.
        Offer and compromise is another area of RRA 1998 that I'd
    like to talk about for a moment. This provided the authority to
    resolve collections issues that the IRS now has the authority
    to compromise based on the effective tax administration
    criteria. The training needs are tremendous. The volumes are
    much greater than anticipated. And the IRS must speed up the
    process so that taxpayers can get timely decisions to these
    critical issues.
        The changes being made as a result of the modernization are
    placing the service in a better position to understand the
    problems, the frustrations, and the needs of taxpayers. The new
    operating divisions will be a catalyst to improving service to
    the IRS and to make progress in eliminating problems that are
    on my top 20 list.
        In conclusion, thank you very much for inviting me here
    today. The Taxpayer Advocates mission statement is to help
    taxpayers resolve problems that taxpayers are having with the
    IRS, and with your continued support and the support of the
    Treasury Department and all of the IRS employees, we can
    continue to make progress toward that goal.
        Thank you very much.
        Mr. Horn. Thank you very much.
        [The prepared statement of Mr. Oveson follows:]

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        Mr. Horn. We now have Mr. David L. Keating, the senior
    counselor, National Taxpayers Union.
        Mr. Keating.
        Mr. Keating. Mr. Chairman, Mr. Turner, members of the
    subcommittee, I thank you for the invitation this morning to
    testify on the IRS, and I appreciate your continued interest in
    how the IRS is operating.
        A historic step was taken 2 years ago when the Congress
    passed and the President signed into law the Internal Revenue
    Service Restructuring and Reform Act. As a member of the
    Commission on Restructuring the IRS, I was both proud and
    pleased to see that Congress not only agreed to the far-
    reaching reforms that we recommended, but went a few more steps
    beyond.
        While a promising start has been made by the IRS, I think
    it is still far too early to conclude whether reform efforts
    will succeed or fail. If reform is successful, it will take
    many years before the average taxpayer will notice substantial
    improvements in the day-to-day operations of the IRS,
    especially in the audit and collection area.
        The risk of failure is still high, due to the tax laws'
    growing complexity, the agency's culture that still resists
    change, criticism, and independent advocacy for taxpayers,
    and--I think this is equally important--the possibility that
    elected officials will pressure the IRS to increase enforcement
    at the expense of fairness.
        There are both hopeful signs and discouraging signs. I'm
    hopeful the agency will improve because Congress continues to
    show genuine interest in how it operates. This is something
    that we had not seen in years before the Commission was
    established to review the IRS. Congress also passed much-needed
    taxpayers' rights provisions.
        We're also very much impressed with the work of the
    commissioner and the caliber of several of the people he has
    hired to help him improve the IRS. We believe he brings the
    right background and attitude to the job, and we have had the
    pleasure to meet with him.
        He has proven, I think, beyond a doubt, that a commissioner
    does not have to be a tax lawyer or accountant. In fact, a good
    case can be made that we may be better off with commissioners
    who are not tax lawyers or accountants.
        I do want to say a few things about the IRS Oversight
    Board. My testimony was quoted earlier, but I really do think
    it was important for the administration to meet the legal
    deadline. It was over a year late, and we're still waiting,
    unfortunately, for the nominees to be confirmed, due to an
    unrelated controversy in the Senate.
        I call on the administration today to encourage the unnamed
    democratic Senator, who has placed a hold on at least one of
    these nominees and prevented the Senate from considering all of
    them, to release that hold and let's get these nominees
    confirmed and get them to work. They should have been on the
    job quite some time ago, and I think it is unconscionable that
    we are holding up confirmation of these nominees for some issue
    unrelated to the issue of tax administration and the IRS.
        The IRS touches essentially every American citizen,
    directly or indirectly, and the unrelated controversy that is
    being talked about in the Senate, my understanding is, concerns
    some ambassador to some country that probably isn't even that
    large, certainly not compared to the population of taxpayers.
    The administration should work with its party colleagues in the
    Senate and get that hold released to get these nominees
    confirmed.
        Also, I do want to say a few words about IRS culture. It is
    very important that the agency's culture be changed, and they
    are working very diligently to do that. This, too, requires
    ongoing commitment by the Congress. For far too long in the
    past, the IRS emphasized tax collection as opposed to faithful
    interpretation of the law and respect for taxpayers' rights.
    Much of that attitude, I think, developed over the years from
    the 1970's and 1980's. In that time pressure was placed on the
    agency to increase revenues so that Congress would not have to
    increase tax rates to close the deficit.
        As a result, the IRS developed internal statistic that
    tracked enforcement actions, while neglecting agency compliance
    with laws, regulations, and its own Internal Revenue Manual.
        Recent news accounts indicate some Members of Congress and
    candidates have raised concerns about the IRS' level of
    enforcement actions in the previous fiscal year. While we can
    understand these concerns, we think they are misplaced at this
    time. The IRS is in the middle of a massive restructuring and
    retraining program. In our view, the recent collection
    statistics are almost meaningless.
        Those who expressed a concern about the enforcement
    statistics seem unconcerned by recent reports from the
    Inspector General for Tax Administration that show the IRS
    failed to follow the law, regulations, or internal guidelines
    in roughly one of three enforcement actions reviewed by the
    Inspector General. We think this error rate is also completely
    unacceptable.
        We do note that the IRS is moving ahead with balanced
    measurement statistics. I am very optimistic that these will
    help ensure fair collection and fair treatment of taxpayers in
    the future.
        My statement also explains that the IRS may soon
    administratively define the power of the National Taxpayer
    Advocate to issue a taxpayer assistance order. We think the law
    is rather clear, and we are rather puzzled at the need to
    perhaps administratively define, and we fear limit, that power,
    which we think power is quite clear.
        The advocate can order the IRS to take any action the IRS
    could take on its own. I have spoken with the commissioner on
    this, and I know they are working on it diligently, but the
    same IRS that doesn't think that it can post taxpayers who are
    due refunds on the Internet because they are allowed to send
    press releases out to every newspaper in the country but they
    can't take the same press release and put it on the Internet,
    shows an IRS that tries to adhere to the law to its letter.
    Yet, I think the law regarding the Taxpayer Advocate is equally
    clear and the advocate's power should be duly recognized in any
    administrative action.
        One final point I would like to make here--two final
    points, if I might--while we applaud the IRS' efforts to
    publish photos of missing children on pages of tax form
    instruction booklets, we wonder why the IRS is not doing more
    to reunite millions of parents with their missing part of their
    tax refunds.
        The Inspector General noted that the IRS is not bringing to
    the attention of perhaps--I think it is 1.7 million taxpayers
    who appear to have forgotten to claim the child tax credit last
    year, and presumably they will make the same error this year.
        We found the agency's response to the Inspector General's
    report unsatisfactory and unacceptable, and we think if there
    are 1.7 million taxpayers who may have forgotten a tax credit,
    the IRS should tell them that they may have forgotten it.
        The final point I'd like to make is the issue of
    simplification. As Val Oveson has stated, and many of us have
    stated, the tax law is so complicated nobody understands it.
    Yet we expect the IRS to enforce and administer this law.
        One of the recommendations not taken up by the Congress
    from the National Commission was some sort of procedure to
    establish a quadrennial simplification process or provide
    additional simplification incentives beyond a simple report by
    the Joint Tax Committee on pending legislation.
        I would like to bring to the committee's attention and the
    public's attention the interest in simplification was recently
    demonstrated by an unprecedented joint initiative of the
    American Bar Association, the American Institute of Certified
    Public Accountants, and the Tax Executives Institute that
    recommended 10 ways to simplify the law. Many of these
    recommendations were quite good, and we commend them to the
    Congress.
        We see no reason, for example, why there has to be multiple
    definitions of a child under the tax law to claim various tax
    breaks such as tax credit, and earned income credit and
    personal exemption. It's ridiculous. It makes things
    complicated for the taxpayer as well as the IRS.
        Again, thank you very much, Mr. Chairman, Mr. Turner,
    members of the committee, for holding this hearing and for your
    continued interest in the IRS.
        Mr. Horn. Thank you.
        [The prepared statement of Mr. Keating follows:]

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        Mr. Horn. I would thank all of you, because each of you has
    raised some very interesting points, and we hope to now pursue
    them. We'll start with Mr. Walden, the Representative from
    Oregon, to begin the questioning.
        Mr. Walden. Thank you very much, Mr. Chairman.
        Mr. Rossotti, I thank you for being here today and for the
    work you are doing to improve the situation at the IRS.
        I'm curious as to what you believe are the major obstacles
    in developing a measure of voluntary compliance.
        Mr. Rossotti. Well, the difficulty is finding a way to do
    that measurement without being overly intrusive or burdensome
    on otherwise compliant taxpayers. I think Ms. Wrightson gave
    one of the better expositions that I've ever heard of what is
    involved in doing this and why it is necessary.
        So what we are working on is a plan or a proposal for how
    to get the necessary information that we need to measure
    voluntary compliance and figure out how to target our audit
    resources where they really are needed and not where they are
    not needed. That's the reason we do it.
        We're working on a plan to figure out how to do that with
    the least burden on the taxpayers. It will never be reduced to
    zero, because it is in some ways like jury duty. I mean, you
    have to have some people that go to a jury to basically make
    the justice system fair, and it is certainly burdensome on the
    people that do it while they do it, so there's going to be some
    burden to do this measurement process.
        But what we are working on is trying to figure out a way
    that we would basically do two things to reduce the burden. One
    is to reduce the number of taxpayers that need to be surveyed,
    and, second, reduce the amount of time it will take for them to
    be part of this process.
        We have not yet completed that. We have been working on it.
    As a matter of fact, this is one of the first things that
    amazed me, frankly, when I got to the IRS, because I always
    heard that there were these numbers like 87 percent of the
    people comply and all that, so where did that number come from?
    Well, it turns out it came from some very old studies that are
    no longer valid and I realized that we had to do something
    about this.
        So we have been working on it, and I think we are
    reasonably close to having what I consider an acceptable
    proposal, but we're not quite there yet.
        Mr. Walden. I think I read in somebody's testimony, perhaps
    yours, that there is $231 billion in uncollected taxes out
    there. Is that----
        Mr. Rossotti. Well, on the books there is something like
    $220 or $220 billion of, you know, a whole variety of numbers
    that represent assessments, and we're required to keep them for
    10 years, as well as the interest and penalties. That is,
    frankly, not a valid number as to what could be--a lot of that
    is bankrupt corporations from years ago that are still kept on
    the books, just because they are there for 10 years.
        According to the GAO audit of our 1999 financial
    statements, on the balance sheet there was, if my number is
    right, I think it was $21 billion.
        Ms. Wrightson. I'm not the financial person, but I think
    that's right.
        Mr. Rossotti. It was either $21 or $20 billion. Somewhere
    in that range is the number that was viewed as actually
    collectible amounts that we should be able to collect, which
    actually went down slightly from the preceding year.
        There's another array of money in that $20 billion that
    could possibly be collected that represents what are called
    compliance assessments. These are assessments where we have
    proposed, an adjustment to your tax bill, but you, as a
    taxpayer, have not accepted it, so it is still in, a disputed
    category, and some of that may turn out to be money.
        So there is a significant amount of money that is out
    there, but it's not $221 billion.
        Mr. Walden. You weren't referring to my taxes, personally,
    were you?
        Mr. Rossotti. No, sir.
        Mr. Walden. Good.
        Mr. Rossotti. I meant ``you'' generically. Pardon me for
    using that. I just meant generically, you, as a taxpayer.
        Ms. Wrightson. It is 21.
        Mr. Walden. Twenty-one?
        Ms. Wrightson. Right.
        Mr. Walden. Billion?
        Ms. Wrightson. Right.
        Mr. Walden. OK. What about putting out some of that to
    private collection process? I know Department of Education and
    elsewhere has worked pretty effectively trying to recapture
    overdue student loans using the private sector in a
    responsibility way.
        Mr. Rossotti. Yes. This is a matter that I know the
    chairman has a great interest in, and something that I,
    personally, in my previous life, have actually worked on and
    done successfully.
        I think that possibility exists, but I believe, very
    honestly, where we are right now is that our whole tax
    collection process--and I brought a chart for one of these
    hearings that showed what it is because of our computer
    systems, our internal rules, and the recently passed
    restructuring account. It is so complicated and our data
    systems are so poor that it is really hard to figure out how
    you could ever extract a portion of that and turn it over to
    anybody very effectively in today's world.
        I think, as we re-engineer it, those possibilities may well
    exist. As I said in my earlier testimony, that's one of the
    major initiatives of our re-engineering is re-engineering the
    collection process.
        Mr. Walden. Mr. Chairman, I'll yield back.
        Mr. Horn. OK. The gentleman from Texas, Mr. Turner.
        Mr. Turner. Ms. Wrightson, you were talking about voluntary
    compliance. Is it correct that there is no random audit system
    at the IRS any longer?
        Ms. Wrightson. Well, there is no--hopefully there is no
    random audit system at the IRS because one shouldn't audit at
    random. What we're really talking about here is the random
    selection of returns to audit, so that--and, in fact, today
    there is no random selection process.
        IRS had a process in place. I think the last one was
    probably 10 to 12 years ago, maybe even 13. It abandoned that
    process because it was viewed as too onerous to compliant
    taxpayers and politically sensitive, so there is not one now.
        We believe, like the commissioner, that, as they go
    forward, and they're going to have to do some measure,
    probably, of randomly selected returns; however, no one knows
    right now how much that will be required.
        For example, IRS could use more information that it already
    has about taxpayers. It could audit much smaller numbers. It
    could do it on a continuous basis. But it doesn't have it now
    and it probably will need some measure of that in the future in
    order to get accurate, reliable indicators of voluntary
    compliance.
        Mr. Turner. And did I read somewhere that the IRS is
    working on that, but it's about 2 or 3 years off before they
    may be able to do it?
        Ms. Wrightson. As the commissioner has said, they are
    working on something called the ``national compliance survey.''
    Do I have that right, NCS? They have been holding it fairly
    close, I think for obvious reasons. It is going to be
    politically sensitive. We have not had access to look at what
    they're doing. I think we enjoy a fairly good, close
    communication with the commissioner. I know our Comptroller
    General and he meet every 6 months or so to talk and this issue
    came up. So I expect we'll be looking at that in the future and
    provide to them again our feedback as to whether the strategy
    that they're using is the one with the least burden, but also
    providing reliable results.
        Mr. Turner. Thank you.
        Ms. Kelley, you were critical of section 1203, and I
    understand your concerns. I am curious as to how many employees
    have been dismissed under the new section 1203, to give me some
    feel for the actual impact upon IRS employees.
        Ms. Kelley. To date the numbers are actually probably just
    in the double digits. It is less than 100. Commissioner
    Rossotti probably knows the exact numbers, as there are reports
    issued every quarter on these.
        Part of the problem and the fear that it has created among
    employees is that even if, in the end, there is not the
    ultimate termination, the process that employees go through
    during that period of time puts them in a position where they
    are just afraid to do much of anything.
        There are already processes in place in the IRS that
    require, under the rules of conduct, that employees file tax
    returns, of course, and pay their taxes, and there has always
    been a process in place to deal with employees who don't do
    that as required under law, and it is a process that has
    worked. So those parts of 1203 just haven't, in our opinion,
    been necessary and have led to unnecessary fears and
    investigations. It also has led to, in some cases, managers
    being afraid of making a wrong decision because of this
    overview of 1203. And that is just one example of 1203. There
    are, of course, 10, and the one that I cited was about paying
    taxes late.
        Mr. Turner. Commissioner, what's your impression of section
    1203 and how it has worked.
        Mr. Rossotti. Well, first let me just give the number.
    There have been 17 employees actually finished through the
    termination process. There were a few others that resigned
    without actually being terminated. I have to say that most of
    those employees, as Ms. Kelley said, probably would have been,
    if not terminated, at least severely disciplined even without
    1203, because they really were serious cases.
        I have to say that this provision has turned out to be one
    of the most difficult provisions to administer properly of any
    of the provisions of the Restructuring and Reform Act, simply
    because of the practical difficulty of learning how to apply
    it, and the psychological problems of, on the one hand, trying
    to follow through on the intent of Congress that serious
    misconduct be disciplined and people be terminated, which we
    have done, and, on the other hand, trying to reassure employees
    what I believe is true and have said right from the beginning--
    that this was not intended, was never intended, and as long as
    we are here administering it, it will never be administered in
    such a way as to provide a penalty or a termination penalty,
    especially, for an employee who simply, for example, makes a
    mistake in the normal course of their job. That is not the
    intent.
        The difficulty is that, although I think we have made some
    progress in getting that point across, there is still this fear
    out there that, even if an employee is not ultimately
    terminated, I'm going to go through a long and very unpleasant
    process potentially of being investigated and have this threat
    hanging over me. That is a fact that does exist out there.
        So what we are trying to do, since this law is on the books
    and it is there, is to administer it in a very fair and very
    transparent way so that people know what we're actually doing.
        I mean, one of the--probably the most important thing that
    we've done, one of the most important things that we've done,
    as Ms. Kelley said, is to actually publish on a regular basis
    all the actions that are taken--by the way, not just under
    1203, but all the disciplinary actions, a very mysterious area
    in the past. Nobody actually knew, you know, what kind of
    actions were taken, and there were all kind of rumors that
    spread.
        So we've taken to--actually, I must say, with great
    cooperation from NTEU--it was really their idea to do this--to
    publish on a regular basis, without identifying specifically
    named employees, of course, but, nevertheless, to identify, not
    only on a statistical basis, a complete list of all the
    disciplinary actions that are taken and at what levels they are
    taken so that people will actually know how this process is
    really being administered.
        I believe that in practice we can administer it so that we
    will not terminate employees that shouldn't be, but, whether we
    can convince people to be more comfortable with the fact that
    this process exists. This is where we are going to have the
    most difficulty.
        Mr. Turner. Thank you.
        Mr. Horn. Any other questions? The gentleman from Oregon?
    The gentleman from Texas?
        Mr. Turner. I just want to followup with Mr. Rossotti. What
    is your assessment of the morale of the IRS employees
    currently? They've gone through quite a bit of stress because
    of restructuring legislation, and now we hear this specific
    problem on 1203. Give us an assessment from your point of view.
    Ms. Kelley says it is not too good. I just want to hear from
    your point of view.
        Mr. Rossotti. I would concur with that. We do a regular
    survey of all IRS employees, and then we do other samples, and
    more than that. I, personally, travel almost all the time
    talking to people.
        It is varied by different segments of the 100,000-person
    work force. I would say that the field compliance employees,
    especially the collection employees and the exam employees, are
    the ones that had the most pervasive changes as a result of the
    Restructuring Act and were the ones that took some of the
    criticisms most personally, I think that there is where we have
    our most significant morale problems.
        They're learning how to implement these new provisions.
    They're learning what it means to--again, I have to say Ms.
    Wrightson was very articulate in saying that our goal is to
    provide good service and provide taxpayer rights to all
    taxpayers, but also to enforce the law for the people that are
    not willing to comply. Doing both of those things--it's harder
    to learn how to do two things at the same time than one thing
    at the same time. Those are all things that are learning
    process.
        So I think if you look at the field compliance employees,
    where they've had the biggest change, certainly I would not
    describe the morale there as good. I think we've gotten by some
    of the really serious fears about 1203 to some degree. We've
    started to put the balanced measurement system in place. We've
    certainly done a lot of training. I could go on and on and talk
    about all the things that we've done, but I think that we are
    still at a fair low point.
        Now, I will say that--violating my own rule that it is OK
    to make predictions, as long as they're not about the future,
    I'll go off on a limb and predict that this fiscal year, in
    terms of the field compliance, will be sort of that we will hit
    the bottom in terms of both morale and some of the statistics,
    and that in 2001, especially if we get the budget request
    approved, we will see a material turn-around, because we will
    have a new organization structure in place, we'll have the
    balanced measurement system in place for a longer period of
    time, we will have gotten a lot of the training issues
    resolved, at least to a certain level, and I do believe that we
    will see, in several tangible measures of both morale and
    operational effectiveness, some improvements during 2001 in the
    area where we have the greatest weakness today.
        Mr. Horn. Let me ask you about the level of supervisorial
    training. Do you have enough funds there and enough people to--
    --
        Mr. Rossotti. Yes.
        Mr. Horn. I know when I was at your swearing-in you said,
    ``This is going to take me a few years,'' and there's no
    question----
        Mr. Rossotti. Well, it's a very, very important----
        Mr. Horn [continuing]. We all knew that, but training is
    key, our human resources.
        Mr. Rossotti. It is important, and you mentioned
    specifically the supervisory training. I think that the answer
    to your question is the Congress did provide that particular
    funding, so I can't use that as an excuse, if you will. I mean,
    the funding for the training has improved significantly.
        What we have is, though, a job where, you know, training is
    one thing and learning is something else. OK? I mean, we have a
    learning process, and this ``S'' curve that I put up could be
    used for a lot of things that we're learning at the IRS.
        In the case of the first-line supervisors, especially in
    exam and collection, the big learning process is how do we
    manage, in a world where it is not just one thing that we're
    measuring, but it is two things we're measuring--we want to
    provide taxpayer service and taxpayer rights. We also want to
    collect the money. That is a learning process that many
    businesses have gone through. You know, every business has to
    do the same thing.
        It is starting to get there. We did one thing recently that
    was never done before. We brought all of the first-line
    managers for our field collection organization, which is about
    550--these are the first line, the first level of management,
    the group supervisors that supervise the collection employees.
    We brought them all together in one place, about 550 of them,
    for a 3-day training session, and all of our top executives
    were there for almost the entire time, and they were some of
    the employees that--some of the managers that I'd say, first of
    all, are the most critical, in terms of turning this whole
    thing where we want it to go, and, second of all, you know,
    probably had some of the more significant morale problems.
        You know, General Eisenhower said one time that when he
    hears his generals say that there is a morale problem, he
    thinks that they're the ones that may have the morale problem.
    Well, I think that, in the case of our managers, they were
    talking about the employees' morale problem, they're the ones
    that had morale problems for very legitimate, understandable
    reasons.
        I think in that meeting we made a significant turn-around,
    because we began to get down to very concrete details about
    what we really expect in the collection area for people to do
    and what we don't expect them to do, and, most importantly,
    just created an atmosphere of support for what we did. And we
    acknowledged very openly that there is a long list of things
    that we, as the top management, have to explain better or
    resolve in how we're going to go about reconciling these
    competing objectives, which was a good thing for them to hear.
        So that's a step, I mean, but there are many steps.
        My bottom-line conclusion is I think that we will--that
    this year we will sort of hit bottom, if you will, and I really
    do believe that, with some luck, and especially if we can get a
    little bit of resource to meet some of these stop-gap staffing
    problems, that next year, meaning fiscal year 2001, we will
    see, you know, some noticeable indicators of improvement in the
    field area.
        In the customer service area and the phones, and so forth,
    we've already had some noticeable improvement, but I'm talking
    about in the area where we have the most problems still.
        Mr. Horn. Well, as you said, dear to my heart is the Debt
    Collection Act of 1996, and we put that on the books through
    using the omnibus appropriations bill, which nobody could veto
    it that way, and Mrs. Maloney, the ranking democrat then, was
    very helpful with that.
        Could you give me an idea of what do we do, in terms of
    someone that has a debt to IRS, in terms of the number of
    letters they go from IRS, the telephones they go, and to, if
    any degree, you have a revenue officer knock on their door.
        Mr. Rossotti. Well, I think that this is the chart that I
    think that I showed you that you took back to your office last
    time. Unfortunately, we still have that long process.
        Mr. Horn. We've got a broader audience today.
        Mr. Rossotti. Well, it really is--I mean, here's a simple
    way to understand it. If you look at the main resources we have
    in debt collection, which are our phones and revenue officers,
    about 90 percent of their time is spent on accounts that are
    more than 6 months old, and if you look at the revenue officer
    inventories, many of those would be a couple of years old.
        That's not because they are doing the wrong thing as
    employees, it's just the process--some of it is defined in
    regulations, some of it is defined in just procedures. All of
    it is embedded in our computer systems. A lot of it is related
    to the fragmentation of our collection organizations.
        You know, it's just not a very easy thing to fix, but we
    are moving one step at a time. Now, one step will be in place
    by the end of this year, a very important step, which is we
    will have consolidated the organization, so we will have
    collection processes, you know, managed in a more integrated
    way.
        We are making some smaller steps that we can do within our
    existing technology later this summer on our phone collection
    operations to accelerate some things.
        And then the really big opportunity is through this re-
    engineering process, which will basically replace the
    technology underpinnings but also the business practices. Then,
    at that point, we can be more effective in using various kinds
    of resources to do debt collection.
        Mr. Horn. Your predecessor, when I discussed the matter
    with her, they had, as I looked at your financials--this is
    back in 1994 and 1995--that it was roughly $100 billion to $110
    billion that had been sort of written off with the
    bankruptcies, as you said, with small business and this kind of
    thing, and they had another pile that was roughly $60 billion
    they thought they could collect.
        I raised the obvious question: besides your own revenue
    people, what about putting that out for debt collectors that
    know their business? And then I was told, ``Oh, no, there are
    privacy problems.'' Look, you just give them the address, you
    give them the amount. No privacy problem as to the details of
    their tax form. And if they have a gripe about what IRS is
    doing to them, then you put them in to the revenue officers
    that are authorized to deal with that particular situation.
        Now, have you thought about going to your authorizing
    committees--Ways and Means in the House, Finance in the
    Senate--and get that authority for the private collectors, or
    do you feel you already have it?
        Mr. Rossotti. I think that actually the way it works is
    that we could--it's a little more complicated because you can't
    give out any information, even names and addresses, under
    current law, but I think, on the other hand, if we were to
    treat some people as contractors we could get them to agree to
    certain--under even existing law, we probably could overcome--I
    say ``probably,'' because anything that deals with these legal
    issues really requires research. We could probably overcome the
    privacy issues, and basically I think we could solve that
    particular part of the problem.
        The more serious problem right now is just the process that
    we have that is just--it's really not in a shape right now,
    very honestly, to pull a piece of this out and give it to
    somebody. If we did that, we would end up just having them
    fail, probably, and give a bad name to the whole thing.
        I'm not saying that it can't be done in the future, but I
    think there's some work we have to do to get the data in shape
    and get the process simplified to at least a level where we
    could realistically turn over to it.
        One opportunity that might exist longer-term is that, as we
    get to a newly re-engineered process, one of our challenges
    will be what we do with the old inventory, because we will have
    to take our existing resources of revenue officers and others
    and apply them to more-current work, so then we would have this
    base of old work, and that might be an opportunity in the
    future. But we are probably, realistically, a couple years away
    from that.
        Mr. Horn. Well, I would also hope that the Treasury and IRS
    would look at the people that have claimed bankruptcy, and when
    they pop up again and there is a pattern and practice of where
    they are milking the taxpayers, very frankly--and, since those
    of us that pay our taxes aren't too happy when we see them
    getting away with murder. I would hope that the Treasury and
    the IRS would figure out a way to follow them through their
    business career and try to get some of the money back that are
    owed to the taxpayers of the country.
        Mr. Rossotti. Incidentally, the biggest obstacle in that
    area is our data systems, because, you know, part of our
    problem is that the basic records don't allow us to point and
    make these relationships between one taxpayer and another. It's
    all one taxpayer number.
        It's like the way that the old phone systems used to be.
    You know, the telephone companies used to bill everything off
    the phone number because they thought everybody had one phone
    number, and that was one of the problems that they ran into
    that I used to work on in my old days, you know, when people
    started to get five phone numbers. How do you point them and
    make them one customer? The issue that we have is how do you
    track, as you say, a small business person or principal through
    multiple entities that they may have, either at one time over
    time. Right now our data systems don't really provide very good
    support for that.
        Mr. Horn. One of the things that I have found when I'm
    looking at the IRS claims that go through our District office--
    and you have some very good people at Laguna Niguel that we can
    talk to there, and I'm really interested in the degree to which
    the Taxpayer Advocate with--are you now handling those that
    come from District offices? There's 435 District offices on the
    House side--there may be 40 with the territories--and you've
    got 100 on the Senate side. So when we've got these cases of
    people that say, ``I've got a problem with the IRS,'' or others
    are obviously Social Security, Medicare, Immigration, the whole
    works, when I look at the ones on IRS, the ones I've found over
    the years that bother me is one part of the IRS has put a lien
    on the person and they can't pay what the other part of the IRS
    is. Have we solved that problem? And the right hand didn't seem
    to know what the left hand was doing, by the way.
        Mr. Oveson. There are still challenges in those
    communications that you've mentioned, but Connie Adams is the
    Taxpayer Advocate in Laguna Niguel, and she reports now
    directly to me, rather than the district director. We are
    handling the congressional cases that you've mentioned, and
    hopefully doing an excellent job of that.
        Mr. Horn. Well, we have great praise for the people that
    are helping us solve this, and that's why I wanted to know, are
    we still going to the district directors, or do we strictly go
    to the Taxpayer Advocate?
        Mr. Oveson. Again, the congressional correspondence and the
    individual casework is being handled now by the Taxpayer
    Advocate.
        With the modernization program, that is being solidified
    and standardized throughout the country, and hopefully it will
    continue to work well.
        Mr. Horn. Now, when you say you have taxpayer assistance
    orders, five in fiscal year 1999 and three in fiscal year 2000
    so far, is that then across the whole IRS system as to a
    generic issue, or is this one case?
        Mr. Oveson. No. That's across the whole IRS. And I
    mentioned in my annual report right up front that I felt those
    numbers were too small, but you need to understand that this
    year there were nearly 90,000 applications for taxpayer
    assistance orders, and the need to actually implement the
    taxpayer assistance order in the end was only used five times
    last year, three times so far this year.
        Most of those situations are resolved by the Taxpayer
    Advocate visiting with and talking with the individual that has
    the case in either exam or collections and working out an
    arrangement that is acceptable. But my No. 1 goal for this year
    is to get the taxpayer assistance order process into a
    situation that is more meaningful and more representative and
    that we have more experience with the taxpayer assistance
    orders as per the intent of Congress, I believe.
        Mr. Horn. Mr. Keating made a very interesting point in his
    testimony that the IRS is over-collecting millions of dollars
    every year because they are not informing taxpayers of their
    right to the child tax credit, and I wonder, Mr. Keating, how
    significant do you believe this problem is, and what do you
    believe should be done about it?
        Mr. Keating. Well, I think it is especially interesting,
    given the comparison to the way the IRS has acted in the past
    regarding the earned income credit. There have been examples in
    the past where the IRS sent checks out to people who didn't
    even quality for the earned income credit. Then there was no
    chance of ever getting the money back from these people, almost
    by definition. They had probably gone out and spent it, and
    these are people of modest means, by and large.
        I think what should be done is what the Inspector General
    recommended, which is to at least send a notice to the taxpayer
    flagging a potential error on the return that may have resulted
    in an overpayment by the taxpayer.
        The IRS management response was that they were worried that
    taxpayers receiving such a notice would lower their withholding
    in response to the notice, then find out when they completed
    the subsequent tax returns they were not eligible for the
    credit.
        I think there is a very, very small chance of that
    happening. First of all, three-quarters, roughly, of all
    taxpayers receive refunds. A very smaller number go and adjust
    their withholding in the middle of the year in response to an
    IRS letter such as this.
        We are not calling on the IRS to automatically send a
    refund check. We think the notice should flag it and send a
    questionnaire to the taxpayer to go through the steps needed to
    ensure the taxpayer may actually be due the additional refund.
    So we think it can be done, and we hope that it will be done.
        I don't know how many other areas of the law are like this.
    I suspect this is one that might be a problem because it is a
    new item in the tax code it started. I believe, in the last tax
    filing season, and there are some taxpayers that haven't
    figured it out yet.
        Mr. Horn. Well, we thank you for those suggestions, and we
    have a few questions the staff on both sides would like to send
    you, and we'll put them at this place in the record, if you
    don't mind.
        Let me just ask, as one more point, as many Americans work
    toward meeting the filing deadline, is there anything you wish
    to say to them, Commissioner?
        Mr. Rossotti. I just want to say that I hope that every
    taxpayer will have an increased level of confidence in the IRS
    interest in basically helping taxpayers get the right--pay the
    right tax, no more, no less.
        I do agree with Mr. Keating that it is our obligation to
    inform taxpayers of where they have credits due. As a matter of
    fact, we had a public service commercial that was, I think,
    pretty effective on the child tax credit.
        So if they call us, I really hope that we are making some
    progress in getting taxpayers to have increased confidence that
    we are not there as the enemy, we are not there as an
    adversary, we are there as a resource to basically help people
    get it right.
        Of course, we are also there--if there is that small group
    of taxpayers that wants to burden everybody else by not paying,
    we are also there to make the system fair, and we are looking
    out for those that are not willing to pay. But the majority
    are, and I hope they will recognize that that's what our
    interest is, is in helping to make the system fair and having
    them pay what they owe, no more, no less.
        Mr. Horn. Well, I thank you and I thank all of your
    colleagues here that have made excellent suggestions, and I
    want to thank the staff that prepared this hearing: J. Russell
    George, the staff director and chief counsel of the
    Subcommittee on Government Management back there against the
    wall; and to my left and your right, Louise DeBenedetto, who is
    the professional staff person on this issue and a detailee from
    the General Accounting Office; Bonnie Heald, director of
    communications, professional staff member, on the wall in the
    back there; Bryan Sisk, clerk; and Ryan McKee, staff assistant;
    and Michael Soon, a valued intern; and, on the minority side,
    counsel to Mr. Turner as the ranking Member is Trey Henderson;
    and Jean Gosa, the minority clerk; and we thank Mel Jones for
    being the court reporter today.
        With that, we are adjourned.
        [Whereupon, at 12 noon, the subcommittee was adjourned.]
        [Additional information submitted for the hearing record
    follows:]

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