[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]





     THE INTERNAL REVENUE SERVICE: THE COMMISSIONER'S FINAL REPORT

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,
                        FINANCIAL MANAGEMENT AND
                      INTERGOVERNMENTAL RELATIONS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 15, 2002

                               __________

                           Serial No. 107-169

                               __________

       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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                            WASHINGTON : 2003
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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       MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             PATSY T. MINK, Hawaii
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia                    DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida                  ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California                 DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky                  JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia               JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania    THOMAS H. ALLEN, Maine
DAVE WELDON, Florida                 JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida              DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho          STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia                      ------
JOHN J. DUNCAN, Jr., Tennessee       BERNARD SANDERS, Vermont 
------ ------                            (Independent)


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                     Robert A. Briggs, Chief Clerk
                 Phil Schiliro, Minority Staff Director

    Subcommittee on Government Efficiency, Financial Management and 
                      Intergovernmental Relations

                   STEPHEN HORN, California, Chairman
RON LEWIS, Kentucky                  JANICE D. SCHAKOWSKY, Illinois
DAN MILLER, Florida                  MAJOR R. OWENS, New York
DOUG OSE, California                 PAUL E. KANJORSKI, Pennsylvania
ADAM H. PUTNAM, Florida              CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
                 Earl Pierce, Professional Staff Member
                        Justin Paulhamus, Clerk
                      Jon Bouker, Minority Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 15, 2002...................................     1
Statement of:
    Levitan, Larry R., chairman, Internal Revenue Service 
      Oversight Board; Michael Brostek, Director, Tax 
      Administration Issues, U.S. General Accounting Office; 
      Pamela J. Gardiner, Deputy Inspector General for Audit, 
      Treasury Inspector General for Tax Administration; and Nina 
      E. Olson, National Taxpayer Advocate, Internal Revenue 
      Service....................................................    45
    Rossotti, Charles O., Commissioner of Internal Revenue.......     3
Letters, statements, etc., submitted for the record by:
    Brostek, Michael, Director, Tax Administration Issues, U.S. 
      General Accounting Office:
    Followup questions and responses.............................   121
    Prepared statement of........................................    55
    Gardiner, Pamela J., Deputy Inspector General for Audit, 
      Treasury Inspector General for Tax Administration, prepared 
      statement of...............................................    91
    Levitan, Larry R., chairman, Internal Revenue Service 
      Oversight Board, prepared statement of.....................    48
    Olson, Nina E., National Taxpayer Advocate, Internal Revenue 
      Service, prepared statement of.............................   107
    Rossotti, Charles O., Commissioner of Internal Revenue, 
      prepared statement of......................................     7

 
     THE INTERNAL REVENUE SERVICE: THE COMMISSIONER'S FINAL REPORT

                              ----------                              


                         MONDAY, APRIL 15, 2002

                  House of Representatives,
  Subcommittee on Government Efficiency, Financial 
        Management and Intergovernmental Relations,
                            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 and Norton.
    Staff present: J. Russell George, staff director and chief 
counsel; Bonnie Heald, deputy staff director; Henry Wray, 
senior counsel; Earl Pierce, professional staff member; Justin 
Paulhamus, clerk; Jon Bouker, minority counsel; David McMillen, 
minority professional staff member; and Jean Gosa, minority 
clerk.
    Mr. Horn. A quorum being present, the Subcommittee on 
Government Efficiency, Financial Management and 
Intergovernmental Relations will come to order.
    Every year on April 15th the Internal Revenue Service holds 
American taxpayers accountable for the accurate reporting of 
their tax liabilities. The Internal Revenue Service must be 
held equally accountable. That's the purpose of our hearing 
today. Specifically, we are here to examine the progress the 
Internal Revenue Service is making to resolve its many 
management and performance challenges.
    Each year, our subcommittee holds an annual oversight 
hearing focusing exclusively on the Internal Revenue Service. 
As in previous years, the distinguished Commissioner of 
Internal Revenue, Charles Rossotti, is our lead witness today. 
This is a particularly notable occasion since it will be 
Commissioner Rossotti's last regular appearance before this 
subcommittee. Mr. Rossotti's 5-year statutory term as 
Commissioner expires in November of this year. He has done an 
outstanding job in an extremely challenging position.
    The Internal Revenue Service is charged with enforcing the 
Nation's tax laws and collecting nearly 95 percent of the 
Federal Government's annual revenue. The agency collects about 
$2 trillion a year in tax payments, yet a series of management 
problems have plagued the agency and severely impeded its 
performance.
    These were long-standing problems that confronted 
Commissioner Rossotti when he was sworn in. He knew at that 
time that to make the changes which would require change would 
be several years. He has kept the faith and stuck it out. We 
have the highest respect for the Commissioner, and we hope in 
the last few months of his term that he will do everything he 
can to make sure that the Internal Revenue Service is doing the 
best it can.
    I was delighted that President Bush and Secretary O'Neill 
had furthered him, and when I talked to Secretary O'Neill that 
the Commissioner should be maintained, the Secretary said, I 
sure hope to, and I beat you to it. So you've got a lot of 
friends, despite the problems that we have all over the 
government.
    The agency's inability to make effective use of information 
technology is another chronic problem. The Internal Revenue 
Service appears to be recovering from past failures and has 
developed a sound modernization blueprint. It now faces the 
major challenge of implementing that blueprint.
    Computer security is another major challenge for the 
Internal Revenue Service as it is for most Federal agencies. 
Indeed, the agency's Inspector General has identified security, 
including information security, as the most serious of all 
risks facing the Internal Revenue Service.
    The management problems at the Internal Revenue Service 
have taken a severe toll on its performance. Tax enforcement 
and collection activities have declined dramatically over the 
last decade. I am particularly concerned about the agency's 
abysmal performance in collecting delinquent debt. The General 
Accounting Office reports that the Internal Revenue Service had 
discontinued collection action on nearly $12 billion in tax 
delinquencies as of March 2001. The agency primarily blames 
this on its lack of resources. At the same time, however, the 
IRS consistently resists the idea of using private contractors 
to assist in its collection efforts; and I find that 
inexcusable.
    Finally, the Internal Revenue Service needs to be 
substantially improved for its customer service. It's done a 
fine job in many ways. It must do a better job of picking-up 
the telephone when the taxpayers call and providing accurate 
answers.
    Although I have laid out a litany of problems I am 
confident that Commissioner Rossotti has charted a course that 
will eventually overcome the agency's core problems and 
fundamentally improve its performance. Under Mr. Rossotti's 
capable leadership, there are already signs of progress. 
However, many deeply rooted problems remain. There is much more 
work to be done.
    I will now swear in today's witnesses and look forward to 
your testimony.
    [Witnesses sworn.]
    Mr. Horn. I note one, two, three, four, five, six, seven, 
eight, nine, ten, eleven. You've got a good team today, and the 
clerk will note they affirmed the oath.
    So, Commissioner, we're delighted to have you. Your full 
statement, as you know, goes into the record at this point. 
We'd like you to do your summary of it on the high points, and 
then we'll go to the other members that are going to be sitting 
with you. So now proceed in any way you would like.

  STATEMENT OF CHARLES O. ROSSOTTI, COMMISSIONER OF INTERNAL 
                            REVENUE

    Commissioner Rossotti. Thank you very much, Mr. Chairman; 
and I especially appreciate your comments about me.
    I again appreciate your holding these hearings and the 
opportunity to testify about what we've accomplished and what 
we still have to accomplish.
    I will note, on the subject of a collection report, as I 
mentioned to you earlier, I am recused from that; and I have 
Mr. Bennett with me here to testify if questions come up on 
that subject.
    I particularly, Mr. Chairman, want to express my gratitude 
for the support you've given for our modernization program over 
the years. I can remember it was about 3 years ago that I was 
testifying to the subcommittee about the challenges related to 
the year 2000 conversion, which was a subject of great concern 
at that time. Fortunately, that program was a complete success; 
and it also provided some long-term benefits in improving the 
standardization and management of our systems process. Since 
then, we have also made some of the other improvements that you 
have pushed for; and, of course, we're working on others.
    I would like to note on one chart which we're going to put 
up and which you have a copy of in front of you that the 
improvements that we have made in the agency have been 
recognized by the American public. The Roper Starch Survey, a 
public survey, found that our rating has increased in each of 
the last 3 years after reaching an all-time low in 1998; and I 
think it's called public rating of the IRS, Mr. Chairman. There 
are two slides on it. One is Roper Starch. The other is the 
University of Michigan Customer Satisfaction survey, which also 
showed a considerable improvement in customer satisfaction by 
our individual taxpayers. This was the largest favorable gain 
of the 30 Federal agencies that were surveyed.
    The turnaround in the public's rating of the IRS is, I 
think, important for the health of the tax system. It's not 
acceptable for the government agency that affects more 
Americans than any other agency to also be rated the lowest. 
Changing that was a mandate incorporated in the restructuring 
act, and we are beginning--and I do stress beginning--to 
deliver on the mandate of changing that. While the trend is 
good, as you've noted, a lot more needs to be done.
    Let me briefly address our filing season which, of course, 
for most taxpayers is ending today. This is the period in which 
most individual taxpayers interact with the IRS and form their 
opinion of the IRS, and I'm putting up a second chart which you 
also have in front of you which shows some trends in some 
important indicators of service during the past 2 years.
    There's one set of numbers which you will notice are 
increasing literally off the chart, in a high way off the 
chart; and those are the ones that relate to the use of the 
Internet or Web site, IRS.gov. In January, we introduced a 
whole new design which was designed to make this site more 
accessible, and its usage continues to grow, and its practical 
significance for taxpayers is that they are getting information 
and forms when they need them without having to make last-
minute trips to the post office and perhaps guess at things 
that they really should be able to lookup very easily.
    Another important line on this chart, which is loaded 
electronically filed returns is also up very substantially. We 
set an aggressive goal for this year of receiving 46 million 
1040 returns electronically, which would be a 15 percent 
increase over the last year; and I'm pleased to say, looking at 
the numbers, that we are on track to even exceed our goal of 46 
million.
    I should also note that, with the help of a provision 
reported by the Ways and Means Committee a few weeks ago, which 
is to extend the filing date for those who file and pay 
electronically from April 15 to April 30, that proposal, if 
enacted by the full Congress, will help us to continue or even 
accelerate this trend.
    There are a number of lines on this chart that relate to 
the quality of phone service, and I'm also pleased to report 
that we're making progress in the face, by the way, of 
increased customer demand. Primarily because of the increased 
calls concerning the rate reduction credit, the total volume of 
incoming calls on our toll-free lines for the fiscal year 
through the first half March 30th were up 13 percent, totaling 
51 million calls.
    There's another chart which is about to come up which just 
shows the service by month, and I think the important point is 
there was a surge of calls in February which temporarily drove 
down the service. We were able to respond, however; and, as you 
can see, it rapidly improved so that, since the beginning of 
March, it's been above our goal of 71 percent.
    Finally, with respect to quality, to accuracy, our 
responses have also improved substantially. The correct 
response rate for tax law and account correct calls were up to 
83 and 89 percent this year, up from 75 and 88 percent. So 
those are indicators, as noted on the trend chart, that are up 
in the right direction. They're still not in all cases up to 
the level that they need to be, but they're clearly going in 
the right direction.
    Let me turn to the matter of efficiency, which is one of 
the subjects of this committee's jurisdiction. Our key here is 
to leverage our limited resources as much as we can through 
better management and fundamental reengineering of our business 
processes, and we've been able to do that.
    Again, I'm putting up another chart that shows how we're 
reallocating our resources to where they are going to be needed 
the most. This is primarily in improving customer service and 
in our key enforcement and compliance activities. As you can 
see in this chart, Mr. Chairman, for the fiscal year that is 
now before the Congress, 2003, we're proposing to achieve $259 
million worth of increased program delivery but with a net 
requested increase of only $63 million. So, in other words, 76 
percent of the improvements that we are hoping to achieve will 
be achieved by internal efficiency; and only the rest will be 
achieved by increased resources. This is directly responsive, 
we think, to a mandate to improve efficiency.
    Now, let me turn briefly to the modernization program, 
which I know is very important to you, Mr. Chairman. There is a 
$58 million increase noted--requested, rather, for our 
modernization projects; and I think one of the things that is 
important now is that business systems modernization is 
graduating from the planning stage to the design and 
implementation of business results. Again, another chart here, 
a very oversimplified one, I should note, but it gets the basic 
idea. The green blocks in fiscal year 2001 and 2002 represents 
some critical building blocks that will be put in place.
    In 2001, last year, we established a new communications 
infrastructure for taxpayer telephone calls, which is one of 
the reasons that we are providing better service this year. 
Now, in 2002, this coming year, we plan to move the records of 
some of our taxpayers out of the 1960's tape-based system to a 
modern, reliable data base.
    Finally, we plan to establish an IRS-wide security 
infrastructure to manage external and internal secure access to 
our systems, something that is directly responsive to the point 
you noted in your opening about security. I should note that, 
as we sometimes do, we have recently experienced a delay in one 
part of this program, but, nevertheless, we have adjusted to 
that. We still expect to achieve the important goals that are 
noted in the chart.
    We've also gained valuable lessons as we have moved forward 
with these projects, and we are giving equal attention to 
improving the quality of the way we--and the maturity of the 
way we manage the program as well as in delivering specific 
projects.
    One of the most important things that we have accomplished, 
has been noted by GAO, is that we have completed the second 
release of our enterprise architecture. That is what is behind 
this entire circle.
    This is just a little picture of it. I can provide you with 
CDs if you would like to browse it, Mr. Chairman. It shows all 
3,000 pages or so of what the feature of the IRS is going to 
be.
    I have to say I am very proud of this particular product. 
I've worked in this industry, before taking the IRS job, for 28 
years; and it's quite easy to just produce a few charts and 
show that you have an enterprise architecture. I think that the 
one that we have worked on for 2 years is really the most 
rigorous that I am aware of; and I believe it will provide, as 
you again noted in your opening, a blueprint for the future of 
the IRS in modernizing its business practices as well as its 
technology.
    We are also, as I noted, working on improving the maturity 
of our management processes. We, I think, are in good shape of 
using a rigorous enterprise life-cycle methodology. We are in 
less good shape on some other management processes which we are 
working on diligently to improve and especially in addressing 
the recommendations of the GAO and the IG.
    Now let me mention something about our financial 
statements, another topic of this committee.
    I'm pleased to say that GAO issued an unqualified or clean 
opinion on IRS financial statements for fiscal year 2001 for 
the second year in a row on both our revenue and administrative 
accounts. I would say that certainly this success can in part 
be attributed to the hard work and dedication of both the IRS 
staff and the GAO staff, but it can also be traced to 
improvements that we have made, notwithstanding some of our 
systems limitations, in our internal controls and also our 
management focus.
    For example, in February 2002, a couple of months ago, we 
were able for the first time to achieve a 3-day monthly close 
on our books, something that Secretary O'Neill is very keen on, 
and this was certainly a big milestone in the IRS. Some even 
internally thought we could not do this, but we did.
    So we know that we are making progress, but we still have 
considerable requirements to improve financial management in 
part based on our improved technology, and we are working on 
the dual track which we have noted in every year and these 
hearings making those processes that--improvements that we can 
make and modernizing our system, which is a longer-term effort.
    Finally, Mr. Chairman, let me briefly comment on the 
National Taxpayer Advocate's report on the problems that 
taxpayers face in trying to comply with the complexity of the 
Tax Code.
    Internally, we are working, as I've noted, to improve 
service to taxpayers. However, even our best efforts in that 
regard will be limited to a significant degree unless we can 
somehow deal with the staggering complexity that everyone knows 
is woven into the Tax Code. I would say especially in those 
areas of the Tax Code that most average taxpayers must cope 
with, such as the definition of a child in a marriage. I think 
most taxpayers legitimately wonder why is it so hard to define 
what a child is. I've been wondering about that myself ever 
since I've been Commissioner. The taxpayer advocates report 
lays out the amazing items that are in the Code about the 
definition of a child and other related family issues.
    So, in conclusion, Mr. Chairman, I think we can be proud of 
the progress that we have achieved over the past year--over the 
past years, and I think the indicators are in the right 
direction, but I would be the last one in the room to declare 
victory at this point. I know that we have so much more to do, 
and I think that if we stay focused on the path that we're on, 
and was laid out in the Restructuring Act. Our path is defined 
in more detail in our modernization plan and, of course, making 
adjustments as we learn more. We do learn every year, but if we 
don't lose sight of our goals I really do think we can succeed. 
Your support has been important in the progress we've made, and 
we thank you for that.
    That concludes my testimony.
    Mr. Horn. I thank you.
    [The prepared statement of Mr. Rossotti follows:]

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    Mr. Horn. We will now have the presentation of Larry R. 
Levitan. The Honorable Mr. Levitan is the chairman of the 
Internal Revenue Service Oversight Board.
    Why don't we have the others come to the chairs: Michael 
Brostek, Director, Tax Administration Issues, U.S. General 
Accounting Office; Pamela Gardiner, Deputy Inspector General 
for Audit, Treasury Inspector General for Tax Administration; 
and, finally, Nina E. Olson, National Taxpayer Advocate, 
Internal Revenue Service.
    So we'll start in with Mr. Levitan, and we'd like your 
statement to be summarized. All of these statements are 
automatically in the hearing record, and then we can have a 
better basis for questioning, and the Commissioner has done 
this before.

  STATEMENTS OF LARRY R. LEVITAN, CHAIRMAN, INTERNAL REVENUE 
    SERVICE OVERSIGHT BOARD; MICHAEL BROSTEK, DIRECTOR, TAX 
 ADMINISTRATION ISSUES, U.S. GENERAL ACCOUNTING OFFICE; PAMELA 
   J. GARDINER, DEPUTY INSPECTOR GENERAL FOR AUDIT, TREASURY 
 INSPECTOR GENERAL FOR TAX ADMINISTRATION; AND NINA E. OLSON, 
      NATIONAL TAXPAYER ADVOCATE, INTERNAL REVENUE SERVICE

    Mr. Horn. So let's talk with the chairman of the Oversight 
Board.
    Mr. Levitan. Thank you, Mr. Chairman. Mr. Chairman and 
members of the subcommittee, thank you for holding this hearing 
and inviting me to testify.
    Let me preface my remarks by providing a brief explanation 
of the role of the IRS Oversight Board. The Board was created 
as part of the IRS Restructuring and Reform Act of 1998. That 
legislation assigns the Oversight Board the responsibility for 
overseeing the IRS in its administration and management and its 
supervision of the execution and application of the Internal 
Revenue Code. These duties closely resemble those of a 
corporate board of directors.
    In its 2001 Annual Report, the Oversight Board reported 
that the IRS is still not effectively and efficiently serving 
the needs of the American taxpayers, although it has made 
significant progress since 1997. Customer service, although 
improved, as we've just seen, has not risen to desired levels; 
and enforcement activity has fallen for many years. These 
problems are compounded by outmoded computer systems that 
handicap IRS workers and prevent the delivery of effective 
service. It is not surprising that this environment has 
resulted in dissatisfied taxpayers, inadequate job satisfaction 
among IRS employees and difficulty in achieving improved 
performance.
    On the positive side, the IRS is making progress and has 
put in place several key elements that establish a foundation 
for further progress. Under Commissioner Rossotti's leadership, 
the IRS has made major strides in the last few years. A well-
formulated, high-quality strategic planning process has been 
put in place.
    Balanced measures are also being implemented. A major 
reorganization focused on customers was implemented, the senior 
management team strengthened and a business systems 
modernization program that will eventually provide modern 
business processes and tools for employees and taxpayers is 
under way.
    Neither the IRS nor the Oversight Board is satisfied with 
the state of the IRS's performance. Performance measures for 
the key areas of customer service and enforcement are troubling 
to the Oversight Board, although the IRS is beginning to show 
signs of improvement in customer service. The Oversight Board 
is very concerned that the broad decline in enforcement 
activity increases our reliance on voluntary compliance and 
fears that the public's attitude toward voluntary compliance is 
beginning to erode. Because of this concern the Oversight Board 
initiated a survey to obtain data on taxpayers' attitudes 
regarding their obligations to report and pay their fair share 
of taxes.
    The most troubling result was in response to a question 
that asked how much, if any, do you think is an acceptable 
amount to cheat on your income taxes? In 1999, 87 percent of 
the respondents replied ``not at all.'' In 2001, just 2 years 
later, the percentage of respondents who selected that answer 
fell to 76 percent. In short, one-fourth of U.S. citizens 
believe it is OK to cheat on their taxes.
    My written testimony provides several examples of 
troublesome areas of noncompliance, including underreporting of 
pass-through income, use of offshore credit cards and the 
Earned Income Tax Credit.
    These examples highlight a good news/bad news situation. On 
one hand, the IRS is becoming more knowledgeable about 
noncompliance. However, declining compliance resources make it 
difficult to assign additional resources in any meaningful way 
to investigate these situations and enforce the tax law with 
noncompliant taxpayers.
    To better understand compliance issues, the Oversight Board 
believes there is an urgent need for the IRS to increase its 
research on taxpayer compliance so it can identify and correct 
broad areas of noncompliance. The National Research Program is 
designed to do just that, while avoiding the intrusive nature 
of prior research programs. The Oversight Board strongly 
supports this program.
    The most important task the Oversight Board must perform 
this year is to identify candidates to replace Commissioner 
Rossotti. During his 5-year tenure, Commissioner Rossotti 
provided the IRS with the leadership it needed as it went 
through the most dramatic change in its history. He should be 
commended for what he has done to transform the IRS into a 
performance-based organization. I believe he would be the first 
to say, and did say a few minutes ago, we have much further to 
go.
    RRA 98 requires the Oversight Board to recommend candidates 
to the President for the position of IRS Commissioner. The 
Oversight Board has exercised this responsibility by partnering 
with the Treasury Department to develop a Position and 
Candidate Specification describing the qualifications needed 
and hiring a search firm to identify qualified candidates.
    Qualified candidates must be CEO-caliber executives with 
relevant operational experience, preferably gained with an 
intensive information processing and customer-service 
environment. Candidates must understand the leadership 
challenges of managing a 100,000 person organization. Qualified 
candidates must also possess credibility and stature, with a 
reputation for being a strong leader and having been an 
effective change agent.
    The Oversight Board believes that Charles Rossotti has been 
all of this and more. We believe the country owes him a debt of 
gratitude for the public service he has given us in the last 5 
years.
    I appreciate this opportunity to meet with you this morning 
and would be pleased to respond to any questions that you have.
    Mr. Horn. Thank you. Those are very useful ideas you've put 
there for the next commissioner.
    [The prepared statement of Mr. Levitan follows:]

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    Mr. Horn. We go with Michael Brostek, the Director of Tax 
Administration Issues for the U.S. General Accounting Office, 
which is headed by the Comptroller General of the United 
States. We always count on them to analyze what is going on in 
these hearings, and we always get good recommendations. So, Mr. 
Brostek.
    Mr. Brostek. Mr. Chairman and members of the subcommittee, 
I'm pleased to be here today to discuss the management 
challenges that continue to face the IRS. At your request, our 
statement will cover four areas: financial management, 
performance management, computer security and business systems 
modernization.
    In each of these areas the IRS is working to improve its 
operations and has made important progress in the past year. 
Each area, however, continues to have shortfalls in management 
controls or capacity that need to be addressed to better ensure 
the success of IRS's ongoing operations and its long-term 
reorganization and modernization.
    By way of perspective, IRS has been in the midst of a major 
organizational transformation throughout Commissioner 
Rossotti's tenure. Organizational transformations of the scale 
under way in IRS are long-term endeavors. The Commissioner has 
often said that the transformation could take a decade, and we 
agree.
    Transformations are fraught with risk, and mistakes are 
virtually inevitable. To succeed, organizations and leaders 
must learn from their mistakes. Over recent years we have 
observed a consistent constructive reaction from IRS to our 
recommendations in what appears to us to be a good-faith effort 
to implement the management reform agenda setout by Congress.
    Turning now to financial management, for the 2nd 
consecutive year IRS's financial statement received an 
unqualified opinion, meaning that they were fairly presented. 
However, this last year, as in the past, was a once-a-year fair 
representation of IRS's finances, and it was achieved through 
substantial costly and time-consuming processes that 
compensated for serious systems and control deficiencies. 
Consequently, IRS did not have the timely, useful and reliable 
information to assist in managing the day-to-day operations of 
the agency, which was the intent of the reform legislation.
    In addition to concerns about computer security, our audit 
of IRS's fiscal year 2001 financial statements continued to 
identify several material internal control weaknesses and other 
reportable issues related to financial reporting, management of 
unpaid tax assessments, tax revenue and refunds, taxpayer 
receipts and data, and accountability over administrative 
accounts and budgetary resources. Thus, while progress has been 
made, further efforts are needed to ensure that IRS has 
accurate, timely information to support decisionmaking.
    Concerning IRS's overall performance management, IRS has 
continued to make progress in revamping its performance 
management system. For example, IRS now uses its strategic 
planning and budgeting process to reconcile competing 
priorities and initiatives with available resources. However, 
IRS needs to develop better performance measures and perform 
more and better evaluations of its business practices to 
determine what factors affect program performance and to 
identify ways to improve service.
    Further, consistent with the Government Performance and 
Results Act, IRS's fiscal year 2003 budget justification links 
resources requested for telephone services to expected 
performance. This noteworthy step needs to be extended, for 
instance, by including in the budget justification the level of 
resources to be devoted to priority compliance problems 
identified by IRS and the results IRS expects to achieve with 
those resources.
    In the computer security area, IRS has established many 
policies and procedures and controls to protect the security of 
its computing resources, and over the past year IRS has 
substantially improved the safeguards that control access to 
its electronic filing systems. During fiscal year 2002, 
however, we continued to find serious weaknesses with general 
controls designed to protect IRS's computing resources from 
unauthorized use, modification, loss and disclosure. 
Ineffective implementation of policies, procedures and controls 
could undermine the confidentiality, integrity and availability 
of data provided by the IRS.
    In addition, weaknesses and other information system 
controls, including physical security, segregation of duties 
and service continuity, further increase risk to IRS's 
computing environment.
    Finally, I would like to briefly discuss management of 
IRS's business systems modernization, IRS's ongoing program to 
leverage information technology to revamp how the Service does 
its business. IRS has made important progress in establishing 
systems, delivering system applications, and establishing the 
modernization management controls and capabilities needed to 
effectively acquire and deploy modernized systems. Although 
this progress has not yet produced major benefits to the 
taxpayers, it has been critical in laying the sound foundation 
from which major benefits can be realized. Despite the 
progress, IRS is not as far along as it committed to be, and it 
must implement further management controls and capabilities.
    Greater progress has not been made because IRS's first 
priority has been getting new systems up and running. 
Proceeding with new systems before completely building 
management capacity increases the risk of not delivering 
promised systems on time and within budget. As IRS moves 
forward, this risk escalates because system interdependencies 
and complexity increase dramatically during the later phases of 
projects. IRS acknowledges these risks and is committed to 
making correction of management control weaknesses a priority.
    Mr. Chairman, that concludes my statement. I will be happy 
to answer any questions you may have.
    Mr. Horn. Thank you. That's very helpful, and we'll use it 
in the question period.
    [The prepared statement of Mr. Brostek follows:]

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    Mr. Horn. Pamela Gardiner is the Deputy Inspector General 
for Audit, Treasury Inspector General for Tax Administration.
    Ms. Gardiner. Good morning. Mr. Chairman and members of the 
subcommittee, I appreciate the opportunity to appear here 
today. I've submitted to the subcommittee TIGTA's analysis of 
management challenges facing the IRS. I'd like to focus today 
on four of those areas: security of IRS employees, facilities 
and information systems; systems modernization; customer 
service performance; and the decline in enforcement.
    While the IRS has long recognized the risk that violence 
against its infrastructure and employees poses, the events of 
September 11th expanded the security paradigm considerably. For 
instance, in the past, IRS disaster recovery plans generally 
addressed the risk of only one site shutting down. The al Qaeda 
terrorist attacks and the subsequent anthrax and bomb threats 
made it realistically possible that sophisticated forces could 
incapacitate multiple IRS locations. The IRS is now developing 
plans to address multiple acts of terrorism and maintain 
continuity of operations. Completing these actions is important 
because the IRS is the Nation's primary revenue collector and 
any disruption of these activities would have a detrimental 
effect on all government operations.
    In addition, the increased networking of IRS computers and 
increased use of the Internet, combined with the growing number 
of destructive computer viruses, makes the IRS more vulnerable 
to the risk of data loss or theft.
    Apart from the external risks, there is an overall lack of 
awareness of security within IRS among its employees, and 
functional managers have generally not accepted responsibility 
for security. For example, posing as Help Desk employees, we 
contacted 100 IRS employees and asked for their assistance in 
resolving a fictitious network problem. We asked employees to 
temporarily change their password to one that we had created. 
Of the 100 employees contacted, 71 agreed to compromise their 
password, effectively giving us access to IRS systems.
    The second challenge that I'd like to discuss is IRS's 
business systems modernization. This area is considered a 
significant risk due to its high-cost, previous failures, and 
because many IRS reforms such as improved debt collection are 
backlogged awaiting systems modernization. While the IRS has 
made some progress modernizing its systems, the overall pace of 
these efforts has been considerably slower than expected. To 
its credit, the IRS has begun implementing process improvements 
in such areas as configuration management, risk management, 
schedule and cost analysis, and quality assurance. However, 
these improvements are recent, and we have not yet seen major 
improvements in the actual application of these actions at the 
project level. As a result, the projects continue to experience 
significant delays and cost increases, with significant 
decreases in functionality.
    We attribute this to several factors, including the 
initiatives are still struggling with immature project 
management processes; the PRIME contractor has not consistently 
demonstrated the management and technical disciplines that it 
was hired to bring to the IRS; requirements have continued to 
evolve; and lessons learned in previous projects are not being 
applied adequately to other similar projects and problems.
    Another significant issue facing the IRS is meeting its 
goal to provide quality service to taxpayers. At times 
taxpayers need to go to IRS for assistance. My office has 
conducted reviews of the IRS's toll-free telephone operations 
and walk-in activities during this filing season. TIGTA's 
auditors monitored 736 telephone calls and found IRS employees 
responded incorrectly to 22 percent of the questions. TIGTA 
auditors also visited 40 taxpayer assistance centers and asked 
168 tax law questions. IRS employees provided 36 correct 
responses, 42 correct responses despite some procedural errors, 
40 referrals to a publication in lieu of a response, and 50 
incorrect responses.
    Another concern with serious implications for voluntary 
compliance is the well-known decline in enforcement activities 
at the IRS. During the past decade, the number of tax returns 
selected for examination by the IRS has decreased, while the 
number of tax returns filed by taxpayers has increased. 
Additionally, the number of liens, levies and seizures, 
although up from the previous year, continue to be 
significantly fewer than in the past.
    The IRS is at a crucial point in its reinvention process. 
As Commissioner Rossotti completes his term, the risks increase 
that IRS will not succeed in delivering its promised 
improvements. Commissioner Rossotti's strategic planning and 
leadership skills, combined with his willingness to 
substantially change the IRS culture, have been instrumental in 
guiding the IRS to the successes it has achieved thus far.
    I'd be happy to answer any questions on these or any of the 
other management challenges.
    Mr. Horn. Thank you.
    [The prepared statement of Ms. Gardiner follows:]

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    Mr. Horn. Our last presenter is Nina E. Olson, the National 
Taxpayer Advocate, Internal Revenue Service. You might give us 
a little summary of what the National Taxpayer Advocate does.
    Ms. Olson. Thank you. Mr. Chairman and members of the 
committee, thank you for inviting me to appear before you 
today.
    Management and performance improvements are central to the 
Service's ability to fairly administer the tax law and thus are 
of concern to the National Taxpayer Advocate. In our 2001 
annual report to Congress, we identified the top 23 taxpayer 
problems and reasons taxpayers sought assistance from the 
Taxpayer Advocate Service, or TAS, in fiscal year 2001. Each of 
these areas cry out for management and performance 
improvements. In many of them, the IRS already has improvement 
initiatives well under way and is monitoring performance on a 
continuing basis. In many areas, the IRS is working with TAS to 
learn from our experiences and our cases. In some areas, I do 
not believe change is happening quickly enough; and taxpayer 
patience is sorely being tried.
    I believe this is the case with the Offer in Compromise 
program, which ranked in both of our 2001 top 20 lists. 
Taxpayer problems included denials, delays in processing, and 
IRS requests for updated information.
    The current growth in the program and the resulting 
inventory backlog forces IRS management into a reactive mode 
and diverts our collection resources away from more productive 
work. However, program improvement is not just about clearing 
out backlogs or processing cases faster. We must respect 
taxpayer rights in the process of doing so. Particularly when a 
program is operating under pressure, the momentum is there to 
go for a fix. TAS is sometimes the sole voice saying you can't 
do that, your proposal will have these consequences. The voice 
that makes all the planners stop and say oh, right.
    Since coming on board the IRS, I have asked my colleagues 
to include representatives of my office on task forces, design 
teams and project teams, undertaking program improvements, 
particularly in the compliance area. These efforts have been 
met with mixed success, but we are working on it. Our efforts 
will be discussed in detail in my upcoming 2003 objectives 
report to Congress due on June 30.
    I am pleased to report that TAS was invited to join the 
current team that is studying the collection contract support 
feasibility analysis. Inclusion makes sense, since TAS watches 
out for the delicate balance between taxpayer rights and 
taxpayer compliance. Nowhere is this balance more difficult to 
achieve than in the area of collection contract support.
    As the National Taxpayer Advocate, I have concerns about 
using private contractors to collect government tax debt, 
including issues relating to taxpayer privacy, due process and 
access to dispute resolution including the Taxpayer Advocate 
Service. The power to assess and collect Federal taxes is 
constitutionally prescribed. Thus, tax collection is an 
inherently governmental function. Federal tax collection is 
intimately related to the public interest and the public trust. 
Any delegation of this authority to private parties must be 
sufficiently circumscribed so as to ensure that this exercise 
of government power is neither arbitrary, discretionary nor 
without procedural safeguards and the appropriate level of 
agency oversight.
    The responsibility and accountability for the collection of 
Federal taxes must remain with the IRS. To this end, the IRS 
must maintain control on its internal systems of any case sent 
out to a contractor so that it has continued oversight of the 
cases. The taxpayer must be afforded all legal rights due him 
or her under the Internal Revenue Code and in accordance with 
IRS policies and procedures. This consideration alone may prove 
to limit private collection contractors' successes.
    Few State and private creditors are subject to the 
significant due process protections enjoyed by Federal 
taxpayers in the post RRA 98 era. My own personal experience 
with private contractors attempting to collect State tax debt 
has not been positive. In my former tax practice which included 
a large number of collection cases, I continually struggled 
with private collection employees of different skill levels and 
expertise. It was difficult to get a case out of the hands of 
the collection agency and back into the tax authority for issue 
resolution.
    Many of my cases involved low-income taxpayers who were not 
represented when they negotiated payment arrangements with the 
private agencies. Contractors resisted revising inappropriate 
collection terms and agreements. I am, however, trying to keep 
an open mind on this issue, since I am very concerned about the 
current level of collections and the limited IRS resources 
available for the future collection of tax. It is clear that 
the Service must not only articulate a comprehensive philosophy 
of tax collection, but we must also work smarter with respect 
to such collections.
    I am impressed with the approach that the feasibility study 
is taking; and I am pleased that, through Taxpayer Advocate 
Service participation, our concerns will be addressed upfront 
as part of the study rather than after the fact.
    Mr. Chairman, thank you for providing me the opportunity to 
discuss my concerns with you today.
    Mr. Horn. Thank you.
    [The prepared statement of Ms. Olson follows:]

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    Mr. Horn. We will now start the questioning, and I'm going 
to yield 5 minutes to the distinguished Mrs. Norton, the 
Delegate to the Congress from the District of Columbia. Five 
minutes, and then I will do five, she'll do five, so forth.
    Ms. Norton. Thank you very much, Mr. Chairman.
    Mr. Rossotti, I want to thank you for your responsiveness 
to me and to the residents of District of Columbia when we had 
difficulties with the $5,000 home buyer credit and we got all 
kinds of protest calls because this Congress has given the 
District this D.C.-only tax credit to make sure that we make up 
for the loss of population, the fact that we can't tax people 
who come here. You were immediately responsive; and that, of 
course, had to do with the AMT, alternative minimum tax.
    You are, of course, aware that the 600,000 people who live 
in the Nation's capital pay Federal income taxes and have only 
me in the House, no Senators. I vote in this committee and in 
all the committees on which I serve. I do not vote on the House 
floor. Increasingly, my constituents obediently file their 
income tax returns but file them under protest. I'm asking you 
whether or not a taxpayer who files under protest is more 
likely to be subject to an audit.
    Commissioner Rossotti. Well, I think that what we look at 
is not sort of what somebody's thinking is but what they 
actually do in filing their returns. So as long as someone 
files a return and pays the taxes that are due, you know, 
that's really the only concern we have. I mean, the political 
debate about the Tax Code is part of our democracy; and, you 
know, we certainly understand that.
    Ms. Norton. Well, all the evidence does seem to point in 
that direction. I have filed my taxes under protest for the 
last several years and have always gotten something back from 
the IRS. At least----
    Commissioner Rossotti. I'm glad to hear that.
    Ms. Norton [continuing]. I'm not being punished for it.
    I'd like to ask you about staffing. Ten years ago, the IRS 
had about 120,000, more or less. Today, it has about 100,000, 
more or less. This committee, the full committee, the 
Government Reform Committee, has had a joint hearing with the 
Governmental Affairs Committee of the Senate, the comparable 
committee. Actually, Senator Voinovich was chair of the 
committee at that time of those hearings. They were called 
because half of civil servants apparently throughout the 
government now could either retire on early retirement or could 
retire. So there is great concern, bipartisan concern in the 
government now that, after all the downsizing, we ought to do 
something to make sure we don't prematurely lose people with 
special expertise.
    I don't need to tell you about the new technology deficit 
expertise we have. Is the IRS facing particular problems with 
staffing at a time when government work has not seemed to be as 
sexy, if you'll forgive the expression, as going to other kinds 
of employment, especially in private business?
    Commissioner Rossotti. I think the answer--the short answer 
to that is absolutely yes. But I think it comes in two 
categories, if I could say them. One category just has to do 
with the total level of staffing, which is driven by our 
budget. Seventy percent of our budget supports salaries and 
budgets. That's basically the only two things we have in the 
IRS, are people and computers. They both are necessary.
    The staffing by far is the biggest cost; and because of 
budget limitations over the last, say, 10 years, actually, it 
goes back a long time, there's been a steady erosion of the 
staffing. You're quite right. The staffing is about 15,000 
staff years less than it was in the early 1990's. You know, at 
the same time, we've continued to have increased numbers of 
returns filed. So, just from a pure numbers standpoint, it has 
gone down.
    Then the other point is where it has gone down, and I think 
the other part of your point is the skills of specific people. 
Unfortunately, where it's gone down the most is where it had to 
because most of the people were in our compliance operations. 
Our skilled accountants, our skilled collectors, our tax 
auditors are people that really understand the issues that come 
up when people don't necessarily report correctly and so forth.
    The reason that has gone down the most is because that's 
where most of the money is in the IRS budget, and it's also the 
place where you have some limited discretion on a year-to-year 
basis. I mean, essentially, the people who are in the back 
office processing the returns, we have to process the returns. 
If you sent in your return and you didn't get your refund back 
or your constituents didn't, that would be--that would be 
impossible. So, as the total goes down, the only place you can 
really take it out of is in things like where you're doing 
auditing and collections.
    Then looking forward finally to the future, we do have to 
point that the skill levels, the skilled people are the ones 
that are hardest to replace.
    Now, having said all that background, let me say that 
beginning of 2001, we did come in--fiscal 2001, we did come 
into the Congress and request some funds to begin to turn 
around in a very slight way the staffing. We did get some of 
that funding, and we have, as a result, in the last year begun 
to go out into the market and hire accountants and skilled 
people for the first time in 6 years. I mean, for about 6 years 
it was essentially no hiring of any kind for permanent staff.
    And I'm pleased to say that the results of that were very 
good. I mean, we may have been fortunate in the timing of the 
economy in that, you know, the economy was weaker relatively 
than it was in previous years, and we have done a lot of 
innovative things to make it clear that it really is an 
attractive opportunity to come and work for the IRS. We have 
very important work to do.
    We have drastically revamped our training programs for new 
employees. We have improved some of the tools. Even though the 
technology's old, some of the at least personal tools the we 
give to employees has improved; and we got some very, very good 
people last year.
    What is important, however, is that we continue this, 
because it's not a one-shot deal. We have to hire people every 
year. We hope that we will get the funding in 2003 that will 
allow us to hire; and if you note on the chart--I think you 
have the chart in front of you--we put--that showed the 
program. What we are trying to do is to hire especially in the 
compliance area and offset that with some efficiency 
improvements.
    So, basically, my view is that we absolutely must vary the 
operational funds as well as the modernization funds to at 
least incrementally hire the skilled people we need, especially 
for the compliance functions. This is complementary to our 
modernization effort, not in lieu of it, and without that some 
of the negative trends that were noted in the chairman's 
opening statement will not be reversed or at least they will 
not be reversed fast enough.
    Ms. Norton. My time has expired, Mr. Chairman.
    Mr. Horn. Thank you very much.
    Let me ask Mr. Brostek on my 5 minutes, people often 
consider the management challenges you described as the 
technical sort of green eye shade issues that have no real 
consequences. Can you provide some examples of how the 
management problems at IRS directly affect the average American 
taxpayer?
    Mr. Brostek. Yes, Mr. Chairman. Some of the performance 
shortfalls that myself and other witnesses described today I 
think are attributable at least in part to the need to tighten 
up some management processes. For instance, we heard about the 
number of people who receive incorrect answers to their 
questions. We know that there are a number of people who try to 
get through to IRS and have difficulty doing that. The level of 
performance there has been increasing, but it's not yet to the 
world-class standards that IRS would like to achieve. Those are 
the types of performance shortfalls that directly affect 
taxpayers.
    Mr. Horn. You point out that the IRS is not pursuing about 
$12 billion in tax delinquencies because of resource 
limitations. Do you believe that the Internal Revenue Service 
should take the necessary steps to use the private sector 
resources to pursue those debts?
    Mr. Brostek. Well, first, Mr. Chairman, let me say that 
resource limitations play a role in that. There are also again 
management questions that come into play. The efficiency with 
which the resources are used is an important factor as well, 
and we have noticed a decline in the productivity of the 
collections staff.
    On the other hand, yes, it's always prudent to consider all 
the options that are available for improving the efficiency of 
an organization; and to the extent that private debt collection 
might offer that as an opportunity, it's a reasonable thing to 
consider.
    Mr. Horn. The General Accounting Office, as you know, has 
done a number of debt collection practices by various Federal 
agencies, including the use of the private collection agencies. 
Do you believe the most Federal agencies have benefited from 
using private collection agencies and are you aware of any 
abusive practices by the private firms in pursuing Federal 
debts?
    Mr. Brostek. Unfortunately, Mr. Chairman, I'm not 
knowledgeable enough about the range of work that we've done to 
give you a definitive answer to that question.
    Mr. Horn. When we had that situation 5, 6 years ago--and 
this was before Commissioner Rossotti's time--they had a phony 
operation is what they were. They had 5 years where nothing had 
happened while you and I and everybody in this room pay their 
taxes and they let them get away with it, these people that are 
simply doing everything in the works to not pay their taxes. I 
think that's an outrage, and I think anybody that doesn't want 
private collectors, they'd better tell me a better way to do 
it.
    Because Mr. and Mrs. Average citizen--and I'm one of them. 
I pay my taxes, and that's what started me on this whole 
thing--Mrs. Maloney and I back in 1996 where we went after debt 
that nobody was doing anything about, and they had $100 billion 
sitting there before Commissioner Rossotti got there. I just 
think, Ms. Olson, I disagree with you; and I think it's an 
outrage that we don't do that; and I think you've got a very 
good group. Laguna Niguel is an ombudsman role, but I would 
suggest that you're not doing the public interest any good when 
you're letting scoundrels go at bay. So that's so much for 
that.
    Let's go back to another one. Mr. Brostek, do you have any 
data in the General Accounting Office that most Federal 
agencies have benefited from using private collection agencies? 
Mr. Rubin--or Secretary Rubin really knew what he was doing 
when he was Treasury Secretary. He asked every single agency he 
could find to send that debt over to the Treasury, and we made 
some progress as a result of that.
    Mr. Brostek. Again, unfortunately, I'm not prepared to 
comment on the breadth of the GAO's work on this. My 
understanding is that we've had some mixed experiences with 
private debt collection but I can get back to you with more 
details on that.
    Mr. Horn. OK. That's fine.
    [The information referred to follows:]

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    Mr. Horn. Well, my time has expired. I will now give Ms. 
Norton 5 more minutes.
    Ms. Norton. Thank you very much, Mr. Chairman.
    Mr. Rossotti, or whoever among you is best qualified to 
answer this question, we are all aware that audits by the IRS 
increased very little, and the increase was among low-income 
taxpayers who file the simplest returns. Taxpayers with incomes 
of more than $100,000 apparently had their rates of auditing 
lowered rather substantially.
    Now, as I understand it, the return to the IRS from an 
audit of a lower-income taxpayer is $2,577, compared to $4,567 
for a high-income taxpayer. My question is, has this large 
change in who gets audited had a notable effect on decrease in 
revenue and what is that effect?
    Commissioner Rossotti. Yes.
    Ms. Norton. What is that effect?
    Commissioner Rossotti. On revenue. There has been since 
1997 with the decline in audits--there has been some decline in 
what's called enforcement revenue, which is the amount that's 
collected from specific enforcement action by the IRS. That did 
turn around last year. It did level off last year, which was 
our goal. It was about level in 1990--in 2001.
    Ms. Norton. How did it level off if you were continuing to 
audit taxpayers more than higher-income taxpayers?
    Commissioner Rossotti. I think that one of the important 
things--first, let me just say what we're trying to do, OK, 
because I think this is important before we get too wound up in 
the statistics, is that there is--we have as our strategy as--
and in our performance plan to increase the relative auditing 
of upper-income taxpayers, because 62 percent--and it's just 
because that was the money--62 percent of the income in this 
country is income taxes paid by individuals over $100,000; and 
as it's now----
    Mrs. Norton. It's the same reason that people go to banks 
to rob banks. That's where the money is.
    Mr. Rossotti. There is more. OK. And the coverage, the 
coverage of upper income taxpayers is still substantially 
higher than it is for lower income taxpayers, although it has 
declined over the years. But I think the other point to make is 
that audits are not audits. I mean we count them as one 
statistic, but when we audit upper income taxpayers it's 
typically done with a field audit where it may take several 
weeks of time to actually go and look at the taxpayer's books 
and records.
    Mrs. Norton. But it turns out to be worth the time when you 
get more than----
    Mr. Rossotti. Absolutely. Whereas most of the--for example, 
earned income type audits are just a letter that we send to a 
taxpayer. It all counts as one audit, but it's not really 
comparable. What I think is most important is what I think Mr. 
Levitan alluded to that we target the auditing we do. We have a 
limited set of resources. The important thing is to put them 
where they're going to do the most good, where the potential 
noncompliance is the greatest. That is why we do intend and are 
working very hard to increase the targeting of our limited 
audit resources, especially our most expensive resources, which 
is our field auditing to the upper income brackets. It takes 
over a year to complete a field audit. So what you see in the 
statistics is what was started more than a year or even a year 
and a half ago. And it was only really in about the--you know, 
when we really got some information that helped us do this, it 
was only about I think it was in 2000 that we really began to 
put our strategic plan in place and retarget our resources. You 
really will see that a little bit in this current year, but 
mostly in 2003 is when you will actually see the change. And 
the change will be an increase in the attention to where the 
money is, the upper income taxpayers. Now I will say this. 
There is a special appropriation that we have for the earned 
income credit which in effect fences that money. There's $146 
million a year which is specifically appropriated for tax 
administration. It's not all for auditing but the largest 
percentage of it is for auditing. So that portion of the work 
will continue. As long as Congress continues to fund that, it 
will continue at the same level. But for the rest of the money 
that we have, what we are going to be doing is focusing a 
greater percentage of that on the upper income taxpayers.
    Mrs. Norton. What is the figure for the loss and 
enforcement revenue from the change in who gets who got audited 
in last----
    Mr. Rossotti. Let me say it was not so much only from that, 
there were a lot of other things going on, including RRA. From 
the high point in 1997 or 1998 to the low point, it was about 
$3 billion a year, a drop of about $3 billion a year in 
enforcement revenue. That was not just from auditing, that was 
from everything. But I do want to point out that it did turn 
around or it did level off, as we saw last year.
    Mrs. Norton. Most of that would have been from auditing.
    Mr. Rossotti. Well, it would have been from auditing as 
well as collections. It was not all individual taxpayers. It 
could include some corporate audits and so forth. It was from 
all sources.
    Mr. Horn. Let's move to another question. It will be to Mr. 
Levitan, the chairman of the Internal Revenue Service Oversight 
Board. In your testimony, Mr. Levitan, you cited a survey which 
shows that one quarter of U.S. citizens admit that it is OK to 
cheat on their taxes. That's very troubling. What should be 
done to alter this?
    Mr. Levitan. We need to change----
    Mr. Horn. I find it hard to believe because usually the IRS 
has a pretty good feeling around the country that, hey, they 
are after taxes and you can't cheat at them.
    Mr. Levitan. Right. There are a number of things that can 
be done, and the IRS can and should and is doing some of those. 
First of all, the IRS needs to do a more effective job of using 
the resources that they have to do the most effective 
enforcement that they possibly can. Such things as the National 
Research Program will give them a lot better research 
information so they can allocate their resources much more 
effectively. And we think that's important.
    No. 2, and this particularly focuses on the higher income 
taxpayers, the IRS is just initiating a program to do 
information matching for K-1 returns, the passthrough income 
for partnerships and other types of pass through income. We 
believe the IRS should move very aggressively in this program. 
We think there is significant potential.
    No. 3, the IRS should do an even more effective job of 
publicizing cases where they are going after and catching tax 
cheats and aggressively prosecuting them. That has started. It 
is in place. But it can be particularly effective as we focus 
on some of the newer, more high potential areas or areas that 
are getting publicity, such as the use of foreign credit cards. 
So there are certainly things that the IRS can do to send a 
message out that they are efficient and effective collectors of 
the taxes.
    Mr. Chairman, after saying all of that, and there are 
others, I have to tell you that in our opinion that's just 
playing around the edges. What the IRS can do to be a more 
efficient and effective collector of those taxes is just 
marginal. There's a lot more that Congress can do that can 
impact that. And there are two things in particular that I 
think should be acknowledged. One of them is the pure 
complexity of the Tax Code. The complexity of the Tax Code 
invites errors which take tremendous resources. It invites 
cheating because it's easier to cheat when the Tax Code is so 
complex.
    No. 2 is resources. Until the IRS has adequate resources to 
do enough enforcement, then they're not going to do enough 
enforcement. As Ms. Norton mentioned earlier, the resources 
have been reduced over the past decade by about 17 percent. A 
significant amount of that has come from enforcement. As long 
as the IRS's resources for this are at an inadequate level, 
we're going to have an inadequate amount of enforcement and 
many taxpayers will feel that they can get away with cheating.
    Mrs. Norton. I have a question about the fencing off of the 
earned income tax credit matter that you mentioned, 
Commissioner Rossotti. Every year, and I hope other Members of 
Congress go out of their way to publicize and popularize the 
earned income tax credit--one of the landmark pieces of 
legislation tax legislation that if we were to look over, I 
think, the 20th century we would put it in that category. And 
the whole purpose of popularizing this is because lower income 
people are those least likely to know about it or to care about 
taxes. They pay few taxes. When they pay taxes, they can't 
believe it. They simply pay them. And when they learn that you 
can get something back from the government, of course, this has 
been taken up. So there's a great deal of activity that goes on 
to popularize this. So I'd like to know if your audits have to 
do with the fact that a great deal more money may be going to 
taxpayers and others because of the EITC. Is it because of 
cheating by people on the EITC? Is it because of mistakes made 
by people? What would you be looking for in these audits of 
those disadvantaged people in the society?
    Mr. Rossotti. Sure. Sure. Now you raise some very good 
points. We're very actively working on all those points now. 
But I do want to clarify one point, of the appropriations we 
have for the earned income program. It's about $146 million a 
year. It's not all for auditing. As a matter of fact, part of 
it is spent even on advertising. We only have two areas that 
we're allowed to do paid advertising at the IRS. One is promote 
electronic filing, the other is to promote the earned income 
credit. If you noticed some of the TV ads which we have an 
advertising agency, they've gotten good reviews, better than 
they were the previous year. And we are interested in--that's 
not the only method. We have a whole partnership outreach 
program which we've accelerated significantly in the last--part 
of our reorganization we have a group of people throughout the 
country that's called partnership education and communication 
and they work with local community groups. And we've had very 
good success in some of the big cities working with mayors and 
others to try to get the word out so that people who are 
eligible will participate. That is part of our mission. It is 
part of our goal.
    The other side to it is that regrettably there is a high 
error rate in the earned income program. We finished the study 
based on the returns that were filed in fiscal 2000, and it 
showed, depending on how you look at it, that about 25 to 30 
percent, I'll just use round numbers, of the claims were 
incorrect.
    Mrs. Norton. These are people filling out their own claims?
    Mr. Rossotti. Actually about 60 percent of the people use 
preparers. It's interesting that the preparer-prepared returns 
aren't any more accurate than the individually prepared 
returns, which is one of the points we've spent part of our 
money trying to educate preparers. The taxpayer advocate, Nina, 
here that is with us has done a fantastic job in explaining in 
her report the unbelievably intricate definitions that exist in 
not only the earned income credit program but in other programs 
that are related to it, such as the definition of what is the 
head of a household, whether you're married or not. And you 
could laugh at this and you would laugh if it weren't so 
serious. Because the intricate definitions that are--and the 
conflicting ones that are embedded in the Tax Code that tell 
somebody under these circumstances this is what a child is 
under these circumstances, this is what a child is, here is how 
you determine whether you're married or not, this is something 
that anybody can get confused at. So part of it is confusion. 
We have no way to separate really when someone makes an error 
on a return whether it was deliberate or whether it was--we can 
tell whether there was an error, but we can't tell----
    Mrs. Norton. Are there more errors on these returns than on 
the average return, let's say?
    Mr. Rossotti. The other problem is we don't have the 
research on the other returns. It does appear there is a higher 
error rate, but we don't have a comparable set of numbers on 
other kinds of returns. But I think the important point is what 
do we do about it. We got approval from Secretary O'Neill a few 
months back, announced this at other hearings, to really take a 
whole look at this program, and we have a working group that is 
working with Treasury and with components of the IRS, including 
the taxpayer advocate, to look at the entire program and see if 
there's a way that we can reduce this error rate. Because it's 
gotten a lot of attention and it is something that, you know, 
that no one really finds acceptable, and do that in such a way 
that it will also be easier, if possible, easier for taxpayers 
to understand the program. It's hard to reconcile. Some of 
those can be achieved by simplifying definitions, but some of 
them may also require some additional steps to help verify 
taxpayers' returns. So it's a hard balance to achieve.
    But my objective in this program, which has been supported 
by the Secretary, is to try to come up with a better way to do 
it, whatever that means. It may mean and probably would mean 
recommending some legislative changes which Treasury would have 
to do to simplify some of these definitions. It's not that we 
don't know how to do it, because several people have studied 
it, especially Ms. Olson here studied it very well. We know how 
we could do some things. But getting that done is hard. It may 
require some additional certification steps or something where 
somebody could send in a piece of paper with us. We're a lot 
better, you know, at matching documents up than we are at 
trying to probe people's personal household situations. And I 
think if we can find a way to convert that to something that 
is, you know, easier to verify, maybe we can come up with 
something that will really stabilize this program for its 
objectives and still achieve the objective of getting a lower 
error rate. So we're really working on this. It's not a 10 
year. We have a goal within 4 months to come up with a set of 
recommendations on this.
    Now admittedly we haven't developed them yet, so I don't 
want to set expectations at too high a level. But what I can 
tell you is nothing is off the table. We have been given carte 
blanche by the Secretary to look at all possible things that we 
could recommend. We have very good cooperation from the tax 
policy office. We're going to see if we can come up with 
something that is better than what we've got now.
    Mrs. Norton. Mr. Chairman, could I just ask Mr. Rossotti, 
if you could, by the time we go to the public the next time, if 
you could--it's very--it's very good to hear you saying you're 
giving this priority, have them out the next time so that 
Congress can see and so that the public can see that this error 
rate is going down? I think it's important for the continuation 
of the program.
    Mr. Rossotti. I didn't quite understand your question.
    Mrs. Norton. If you will have recommendations in 4 months, 
for which I congratulate you----
    Mr. Rossotti. Well, we hope.
    Ms. Norton [continuing]. I would like to urge that by the 
time we get to the next tax filing season, at least some of 
those recommendations be in order so that we might begin to 
lower their error rate and continue--I'm afraid that some 
people, hearing that the program is under this kind of 
scrutiny, may not even want to file any more for it. We don't 
want to be competing with one another on this.
    Mr. Rossotti. I don't think anyone should take away that. 
The program is in effect. It's continuing in effect. We're 
continuing to advertise it. We're trying to explain. We're also 
trying to get the error rate in place. Whether we can get 
things in place for next filing season, maybe some of them, but 
first we have to get the recommendations out. But some of them, 
I think, almost certainly are going to be legislative. I don't 
think this is a problem, you know, I really don't think this is 
a problem that we in the IRS internally can solve on our own. I 
just don't think we can. If we really want to solve it in a way 
that's meaningful, we're going to have to look more broadly at 
better options. But I will say this, the objective that the 
Secretary has given us for the study is to how to make the 
program work better, you know, from an administrative and 
legislative standpoint, not to abandon the objectives of the 
program.
    Mr. Horn. I'll give myself 10 minutes to get this--so we'll 
pick up the extra my colleague has had. I want to get back to 
the one quarter of U.S. citizens admit that it's OK to cheat. 
We had the views of the oversight chairman, we've had the views 
to be filed by GAO, and I'd like to see, Mr. Commissioner, as 
to what do you think we should do with this in order to make 
that difference that we can simply cheat on our taxes?
    Mr. Rossotti. I do want to make--put one more little detail 
into this discussion that I think is important, and I believe 
this was true in the most recent study that the oversight board 
did that, is that it's interesting they subdivided it further. 
You know, I think it was 76 percent said that it wasn't 
acceptable to cheat at all, but then there was a question of 
how much cheating would be acceptable, and most people said 
that only a little would be acceptable. Now that's not great, 
but it's better than the 3 or 5 percent who said that anything 
goes. So you really have three categories. This really is 
consistent with my experience is that most people really are 
remarkably meticulous in this country about wanting to file 
correctly.
    At the other extreme you have some outright cheats that 
just say I'll get away with anything I can. We're getting a lot 
more information about some of those, about some initiatives 
that we have recently undertaken to, for example, track down 
people who put money in offshore bank accounts, which is a 
bigger problem that we might have thought.
    But then you got this middle ground of people who really 
are influenceable. In business, where I came from before, we 
used to think about the part of the market that we could 
influence. You had some people that were already in your market 
and some people that were outside the market. Then you had the 
group in the middle.
    So I think what that says is we need an array of approaches 
to solve this problem. For those that are in the majority, what 
we need to do, whether it be 76 percent or 83 percent, that 
really are trying to pay, we need to treat them, you know, as 
well as we possibly can, and that's why service is so 
important. They can make errors, too.
    I mentioned the complexity of the Tax Code. Even if you're 
trying as hard as you can, you can still make an error in your 
tax return. We don't want to treat everybody like they are a 
tax cheat. The majority of them, they are, God bless them, you 
know, doing everything they can to pay their taxes. We need to 
do a better job than we are doing now.
    At the other extreme, the people who are really the 
outright cheats, you know, we're really focusing up higher on 
those. One of the things that we have at our disposal is our 
criminal investigation division. This is a very powerful tool. 
When I came in, we asked Judge Webster, who was a former 
director of the FBI, to look at our criminal investigation 
division to find out what we should do about that. His 
recommendation was this was a very fine organization. They are. 
They're fine investigators. They have lost drift in their 
mission and gotten off into narcotics and other kinds of crimes 
which really have nothing to do with the tax system. The only 
people who can prosecute tax cheating is the IRS. So we are 
refocusing our criminal investigation on those people, that 
small percentage that are really the outright cheaters, and 
especially the upper income cheaters. I will say that one of 
the things that we've done that is seemingly going to be an 
unbelievably successful initiative along that line is a set of 
summonses that we have issued to three of the major credit card 
companies in this country to get the records of people who are 
using credit cards issued in a whole number of tax-saving 
companies that just hide income. We are finding out that there 
are much larger numbers than we might have thought of people 
who were doing that. These are not $2,000, $3,000 cheaters. 
These are people who are in the upper income brackets. Through 
both civil and criminal we are going to do everything we can to 
find those folks and track down, track them down and prosecute 
them, either criminally or audit them civilly. That will be our 
top priority, as well as going after the promoters who are 
promoting those kinds of schemes. That's at the other extreme. 
That's for the people who are the real cheaters who I think 
make all of us angry and upset.
    Then you have this middle ground of people. That's a little 
more complex. You need a range of tools for those. I think that 
some of it is auditing to make it clear that no one is able to 
get away with even small cheating over a period of time. But we 
can't and never would have the resources to audit everybody 
that makes a small mistake on their tax return.
    The other thing on that middle ground is we need, and Mr. 
Levitan mentioned this, we need to do a better job. This is 
part of our reorganization, to get the word out to people, to 
warn off people not to get sucked into schemes or to make 
mistakes. This is something that is new. We're devoting a 
relatively small amount of resources, but we think it's highly 
leveraged to things like working with professional societies to 
get the word out to them that they shouldn't fall for these 
schemes, things like that.
    So you have really a whole range of tools that we're trying 
to apply that is appropriate.
    The way I look at it is very much like an, even though it's 
a funny kind of thing to apply in business, it's understanding 
your market. If you understand what your market is, your 
taxpayer, your customers, how they're behaving, why they're 
behaving, you can use the appropriate mechanisms to reach those 
taxpayers. In our case, in some cases, that mechanism is to 
prosecute them and put them in jail. In other cases, it's to 
warn them off of temptation. And in other cases, they're doing 
just fine the way they are, we just have to help them make sure 
they get the tax returns done correctly.
    Mr. Horn. Let us get the opinion of Pamela Gardiner, Deputy 
Inspector General for Audit under the Treasury Inspector 
General for Tax Administration. What would you and the 
Inspector General for Tax Administration propose to get people 
conscious that it doesn't pay to cheat?
    Ms. Gardiner. Well, I agree with everything that's been 
said so far. Certainly some other things that the criminal 
investigation division is doing successfully is to publicize 
some of its successes so that people know that IRS is out 
there, it's active, and it is catching tax cheats. We often 
hear that the average American believes that the wealthy, you 
know, hire expensive attorneys and CPAs to get away with tax 
fraud. And the fact that this credit card initiative is under 
way I think will help address that. Better use of technology. 
The National Research Program should help IRS identify the most 
effective way to go after tax cheats or, like they said, just 
people that make mistakes. And 1203 is still a lingering 
problem for many IRS employees, and addressing that. And I 
think with 1203, time will tell that employees are being more 
convinced now that the repercussions that they originally 
thought they were going to have to pay as a result of the 10 
deadly sins really haven't come to bear, that there will be 
employees being fired every 5 minutes like they thought they 
were going to be if they made a simple mistake. So I think 
those fears are diminishing and that should help as well.
    Mr. Horn. Nina Olson, National Taxpayer Advocate, what 
would your office think about focusing a little more on the 
idea that you can get away with not filing your taxes, you can 
cheat and all this? Do you have any thoughts on that?
    Ms. Olson. I think in my annual report I spoke about my 
concern about the complexity of the code making the people just 
sort of shrug their shoulders and say I can't figure this out 
and I'm going to do whatever makes sense to me, and often what 
makes sense to a taxpayer is directly antipodal to what the 
code is requiring you to do. I think complexity has a fair part 
of that. I also think that the lack of street presence, you 
know, in enforcement gives, creates an environment in which 
people feel it is OK to do those little tiny cheatings where 
you go into a grocery store on your corner and you know that 
the person is running a second cash register, or you hire 
someone to paint your house and you're paying them and you know 
that person is being paid in cash, and that's not showing up on 
somebody's tax return, they're not getting a 1099 from you. So 
there is no way we catch it. And that sort of thing lets people 
say when they go in to their preparer as well, I don't have all 
of my receipts but I think I spend about, you know, $25 or $100 
a month on office supplies and the tax return preparer says OK, 
you know, and that's--that whole environment, it's going to be 
impossible to audit that. But we have to create an atmosphere 
where that's not OK.
    What you're looking at is that you're robbing someone else 
when do you those tiny little cheats. I am concerned about 
preparers, and that goes to Congresswoman Norton's earlier 
questions about the earned income credit environment. It is a 
stunning statistic that more than half of the people who claim 
they earned income credit are using preparers and that an 
enormous number of those returns are in fact filed incorrectly. 
And my office in particular views return preparers either as 
the last stop for these kinds of little cheating, certainly for 
the largest cheating, but for the little cheating as well as 
enablers. And depending on how they interview their clients, 
depending on the questions they ask, depending on their 
expertise and education in tax, you know, that's whether you 
get the errors or not. And so my office is looking actively and 
about to make recommendations about a registration and 
education requirement and a certification requirement for 
return preparers so that taxpayers know when they're going in 
to their preparer that person has some base level of 
understanding of the code.
    And I guess, you know, the 1203 to me, although I think it 
has been painted as something draconian and there are certainly 
structural changes that can be made to it and we've had some 
recommendations in the most recently reported bill, I've always 
looked at 1203 as professional responsibility provision. As a 
lawyer I'm held accountable for my actions. And I think that if 
it's talked correctly up to our employees, that our employees 
over time will understand that actually it's the basis, it's 
the baseline for your professional behavior to taxpayers.
    Mr. Horn. Thank you. We'll go back to the 5-minute rule 
now.
    Mrs. Norton. Thank you, Mr. Chairman. Mr. Rossotti, I thank 
you again for the participation of IRS personnel in my own tax 
day where we fill out the tax forms, could not have done so 
without the help of the IRS finance and revenue from the 
District. Also many of the volunteers. 400 people had their tax 
forms filled out free of charge. We thought that's the least I 
should do for my own constituents. I said to them I don't think 
you should have to pay in order to pay the Government.
    Mr. Rossotti, let me thank you as well for appearing with 
me, you and the U.S. attorney here in this Capital at a press 
conference designed to warn people off of their reparation tax 
credits, taking gross advantage of people who believe that 
they're going to--were entitled to a tax credit of some kind as 
a result of slavery in the United States. I was stunned, 
however, to learn that more than 100,000 tax returns had been--
had paid out more than $30 million just in 2000 and 2001. I 
know that these were not the first years in which the scam was 
going on that--and, of course, there was an IRS employee who 
was reported to have gotten from the IRS more than $43,000, a 
figure that comes from a magazine article, pathetically talking 
about 40 acres and a mule, and that's what African-Americans 
would be entitled to. As you know, there is a bill for 
reparations, for a study of reparations. That bill is only in 
the House, has not gotten a hearing, and there is no bill in 
the Senate. According to the press, the reparation, the claims 
for the reparation, the so-called reparation credit total $2.7 
billion in 2001.
    First, I have to ask you how was this discovered? How did--
how did you typically get on to it? And second, I've got to ask 
you what do they file under? Surely they didn't say I'm filing 
for my reparation, my slavery reparation credit.
    Mr. Rossotti. Well, that's actually--I didn't bring this 
particular--I had some examples in my last hearing I could give 
you, some redacted examples of the answers. They file under a 
variety of different things which is one of the things that 
makes it--sometimes they file amended tax returns, sometimes 
they put a line on a tax return. I saw one where they actually 
even dummied up an alleged 1098 form that showed that they had 
gotten taxes withheld for this. There is all a variety of 
schemes which is why occasionally some slip through. It's true 
the report that you heard that, you know, roughly about--
remember, they tend to charge about--they tend to claim about 
$40,000, sometimes $80,000 or even more. So any one claim, you 
know, when you multiply them by 90,000 claims, that's how you 
get up to $2.7 billion.
    I think we were successful, if I remember the numbers 
correctly, at stopping about 99 percent of them. But there was 
maybe 1 percent that got through because they were not claimed 
always in the same way.
    Mrs. Norton. One percent at $2.7 billion in 2001--oh, 
that's the claim.
    Mr. Rossotti. That's the claim. So the point is that most 
of them, probably maybe as many as 99 percent, we were able to 
find and stop before we ever sent them out.
    Ms. Norton. 30 million got sent out.
    Mr. Rossotti. Which is maybe a little over 1 percent. Even 
then I will say that we do go after those, as with all 
erroneous refunds, we do try to get them back. In many cases we 
have been able to get them back.
    There is one thing I do want to note that is really I 
think, although we don't have the final numbers in this, an 
excellent success story. The work that we did with you, you 
remember in the press conference we did with a number of other 
members, we had a whole set of media events to try to warn 
people off. It appears that from the results we've gotten so 
far this year that we've--the number of these claims that we've 
received has gone down maybe as much as 90 percent over last 
year as a result of that.
    Mrs. Norton. Did you find this out through audits or some 
other process?
    Mr. Rossotti. We have people in the--as the returns are--
audits is after the fact. Our goal is to stop them before 
they're sent out. So we have a screening process that we use to 
screen the returns as they come in to look for these things. It 
has been partially a training process for people that code 
these returns and also now, actually with the help of the IG, 
we're putting in some computer screening program.
    Mrs. Norton. It's a $43,000 credit. I look at how you--I'm 
trying to educate myself as to how you audit. Is that a fairly 
large credit to----
    Mr. Rossotti. Sure. It would be.
    Ms. Norton. You would think that would signal anybody who 
saw it that let's look more closely.
    Mr. Rossotti. Exactly. It does. That's partly why we've 
been able to discover these. We have a variety of techniques. I 
don't want to go into too much detail about exactly how we find 
them, but it's a combination of training people who review the 
returns, computer processing, and really the goal is not to do 
auditing on these because we don't want to send out this money 
and then have to get it back. The goal is to stop it. And we 
have been reasonably successful, considering the statistics. 
But we deal with such huge numbers that even if you get a 1 
percent error rate, it still amounts to a significant amount of 
money that is lost.
    What I think is most gratifying to me, if it holds up, 
which it so far seems to be, is that this year right now in the 
season that's just finishing, it appears that the number of 
these claims has gone down drastically over prior years and 
that's because of the publicity and the educational effort that 
was undertaken by a cooperative effort of the IRS and Members 
of Congress and other people. So it appears that is working 
this year.
    I will say that the history of these schemes is they come 
and go. If we've educated people now and they've gone away and 
we've gotten 90 percent of them down, maybe we'll do the same 
thing next year. Somebody will come up with some wrinkle 2 
years from now or 3 years from now. So we have to be constantly 
on alert for these things.
    Mrs. Norton. Mr. Chairman, I'm going to be leaving. Could I 
ask one more question since I won't have another round?
    I am very concerned, Mr. Rossotti, about preparers who 
promise instant refunds. Of course, these are loans. They are 
rampant particularly among lower income neighborhoods, and 
people rush to file with people who promise them they will get 
their money back within a week, without telling them they will 
get--that this money, in fact, is a loan at a very high rate of 
interest. You have done a very good job on slavery and EITC. I 
have not noticed a comparable job done on these so-called 
instant refunds. They call it refunds.
    Mr. Rossotti. Yeah, unfortunately those--I'll say those 
are--unlike the other things, those are legal. I think that 
the----
    Ms. Norton. I only want information. They're legal, and if 
people really need to borrow money and that--in order to get 
it, fine. But somebody needs to tell people what the rate of 
interest is.
    Mr. Rossotti. There should be full disclosure. Let us look 
into that. But I do want to tell--but one thing that is going 
to kill that practice, although it's going to take a couple 
more years, which is our modernization program, and the reason 
is that when we--the reason it takes a long time, even if you 
file electronically, it may take 3 weeks to get your refund is 
because of the long time in the back office processing tapes 
and so forth. As we begin to increase our new taxpayer data 
base for those who have clean returns--I stress clean returns, 
because if there is a problem, it still may take longer--we 
will get that down to a few days, 3 days.
    Mrs. Norton. Put them out of business.
    Mr. Rossotti. Put them out of business. That's going to 
take a couple more years to get in. But really that's the 
solution. I mean there is no reason why it should take so long 
to get the refunds out.
    Mrs. Norton. Thank you very much, Mr. Chairman.
    Mr. Horn. Thank you. Let me ask you about the degree to 
which the Internal Revenue Service has been able to help find 
out where the so-called 501(c)3's that are really terrorists 
gaining money and going there and you mentioned some of these 
overseas havens. And how are we on that?
    Mr. Rossotti. You're specifically talking about the 
501(c)3's that were involved in the terrorist funding, 
terrorist----
    Mr. Horn. Right.
    Mr. Rossotti. Well, that has been a Treasury initiative, 
and the IRS actually was participating actively in those task 
forces. I can only limit myself to what's been in the press, 
but we've seen some press reports of certain search warrants 
and certain things that have been--certain criminal 
investigations that have been publicized on some of those 
charitable organizations. And while that hasn't been 
exclusively an IRS job, because it's been Treasury-wide--in 
many cases the Customs Service has actually led that--the IRS 
criminal investigation division has been involved with that. 
There is a counterterrorism task force that the IRS 
participates in and I believe that the Treasury IG participates 
in that as well. In looking at the intelligence, the leads for 
any group that is funding terrorists, the Treasury's job is 
primarily following the money. So that terrorism task force 
finds those where there's a money issue. Then they assign that 
out to whoever is the best qualified agency to actually 
investigate it and followup on it. So we have been very--
obviously that has been an extremely high-priority and has 
gotten everything that they have asked for in that regard. It's 
had considerable success.
    Mr. Horn. Well, another area that--this really comes under 
tax policy, and that is when we see American firms going 
overseas, putting thousands of people out of jobs and going to 
some Authoritarian country, it just bothers me that the 
Treasury hasn't said, you know, we could slow that one down if 
we didn't let them bring the money back in some way, or where 
in going after what's left of them and maybe giving them a 
little idea to get some individuals who would maybe slow that 
down and save jobs in America. Is anybody working on that?
    Mr. Rossotti. Well, as you noted, that's really a tax 
policy Treasury issue, so I'm not in a position to comment on 
that, Mr. Chairman.
    Mr. Horn. OK. Let's go to a few things you are competent to 
deal with. What are the key attributes you would like to see in 
your successor?
    Mr. Rossotti. I'm sorry. I didn't hear the question?
    Mr. Horn. What are the key attributes that you'd like to 
see in your successor?
    Mr. Rossotti. OK. Well, I'll give you my views. I think 
that at bottom basically this role of Commissioner of the IRS 
is primarily a leadership job. What you have is a lot of 
people, internal 100,000 employees, externally millions of 
taxpayers, but even more so, we have many constituencies. We 
have committees of Congress, we have taxpayer groups. Trying to 
keep all that aligned and moving forward in a positive 
direction is probably the most challenging part of the whole 
job. What it really is is trying to articulate and listen to 
especially the concerns that people have and reconcile them in 
some way, that you don't have people flying off in every 
different direction. That is quite a difficult thing. I think 
it is probably the most important thing.
    Then beyond that, I will say that we do have a major 
technology challenge in the IRS. There is just no question 
about it. I mean, for a variety of reasons which we won't go 
into, it's one of the harder things to do. You have the joke 
about changing the airplanes on the plane while you're still 
flying and all those kind of analogies. It's not something that 
can be delegated entirely, the Commissioner and very important 
people that we have been able to recruit that are carrying on 
this program with great skill. But, you know, it's so 
fundamental to the agency that it can't be something that's 
purely delegated. So I think anyone who would be commissioner 
is going to have to be capable in taking an active role.
    I would say, you know, there are many OK qualities that are 
obviously necessary that are sort of obvious, like integrity. 
But I think in terms of the particular things right at this 
moment in time in the IRS that are important is that--those 
leadership skills to sort of keep things aligned and the sort 
of--some contribution to making sure this modernization program 
moves forward would be two that I would mention in particular.
    Mr. Horn. I think you, me and Mr. Levitan agree with that 
when the vacancy came that was ultimately filled was the fact 
that I had asked the President, President Clinton, with Mrs. 
Maloney, my ranking member, got her on board and said, look, 
we've had a lot of tax attorneys, we've had a lot of tax 
accountants, and they--what you want is a chief executive 
officer. And they took it seriously. And, Mr. Rubin, I think, 
talked with the chairman of IBM and started scouting around. 
And that's how you do it. And that's the difference. Because we 
need somebody that in an organization of 100,000 people in all 
of these management issues, we need somebody that knows 
something about chief executive officer's role and what they 
should do. And so I assume you would agree with that.
    Mr. Rossotti. Yes. I think that having the experience of 
running a large organization is part of what qualifies you 
potentially to do those sorts of things.
    Mr. Horn. What about the people within IRS? When you go 
into other agencies you've got a civil service group, you've 
got a political group. Do you find enough talent to fill the 
management jobs within the professional staff?
    Mr. Rossotti. This is something that is also very important 
and this committee and others have helped with. We do have a 
very talented executive group in the IRS. It's remarkable, when 
you consider all the challenges that we have and the technology 
we have, it's amazing that we get--sometimes get through filing 
seasons and do things as well as they can. So it is very 
talented. But the limitation is that there is--the way it was 
structured prior to the recent Reform Act is there was one 
commissioner that was a political appointee. Then there's the 
chief counsel who is the political appointee, and the rest are 
all career. So the only limitation is you had no people with 
really any outside experience of how things work in other 
operations. As a result of the Reform Act, we were given the 
authority to bring in a limited number of people from the 
outside for limited terms, which I think is important because 
they're not career executives. And we've frankly, I think, been 
extraordinarily successful with that. We have some people from 
major--it's not just myself with experience, we have people 
with business experience and other experiences from major 
companies throughout the economy. And what has been gratifying 
to me about this is that there are people out there who have 
been successful that have track records who are willing to do 
public service for a reasonable period of time in some very 
challenging positions. That--I would recommend strongly that 
practice be continued because no matter how qualified a 
commissioner is, you need other people. And the internal 
executives, who are most of the people who run the Service, and 
do most of it, need to be complemented by a number, limited 
number of people who have some other experiences.
    Mr. Horn. Well, I agree with you. If I had my way, I'd have 
a lot of the political appointees and other agencies to step 
back and have the people that are there to figure out the 
talents to get the job done. Because it's got to have 
continuity, and you can't just come in for a year or two and 
disappear.
    Mr. Rossotti. Yeah. Of course, in the IRS it's unique 
almost because there are no political appointees other than the 
commissioner and the chief counsel.
    Mr. Horn. What's the enforcement mechanism within the IRS 
to ensure compliance with the tax laws within the IRS and how 
many IRS employees have been punished for failing to file or 
pay their taxes?
    Mr. Rossotti. Well, the enforcement mechanism is--consists 
of two things. One is that under section 1203, the 
Restructuring Act, the so-called 10 deadly sins, two of them 
have to do with failing to file and underreporting income. And 
even before that act was passed, there was a special employer--
employee tax compliance program which checked the tax records 
of every employee. So it is a disciplinary issue even before 
section 1203 was published and was passed. And as a result of 
that--and I don't know that I have the statistics here with me, 
I may, that we have--yeah here it is. Since the beginning of 
the section 1203 implementation for the two sections that 
relate to Federal taxes, they have been the ones that have had 
the most significant number of inquiries and people 
substantiated. We had, let's see, failure to file a Federal tax 
return, we had 269 as I have it, and 12 for understatement of 
tax liability that were detected and disciplined as a result of 
section 1203. We do publish statistics on tax compliance by 
Federal employees, and there's substantially more compliance 
than as far as you know the rest of the tax population. Of 
course, the highest rate of compliance is in the IRS, partially 
because of the disciplinary aspects that are incorporated in 
section 1203 and in our tax compliance program generally. So I 
think we can be quite confident that if there's one thing we 
know, it's that IRS employees are complying with the tax law. 
That's not to say there aren't occasionally some violators, and 
they are dealt with.
    Mr. Horn. The next number of questions will relate to debt 
collection issues, and you have to recuse on that and Brady 
Bennett is the IRS designee for these issues. So if we could 
get Mr. Bennett to the table. We will ask him the questions. 
And I think it's something that the next leader might be able 
to do it.
    Mr. Rossotti. I am recused from the matter of the 
outsourcing and that project, but I can answer questions about 
the more general topic of, you know, what our debts are and so 
forth.
    Mr. Horn. Well, let me just start in on a few. The IRS has 
been working on resolving the several complex legal and 
technical issues inherent to contracting out collection 
activities. And exactly what are these issues? And what are you 
doing to resolve them? And when will they be resolved?
    Mr. Bennett. Sir, there are a number of key issues that we 
are----
    Mr. Horn. You want to move the microphone a little.
    Mr. Bennett. There are a number of key issues----
    Mr. Horn. I can't quite hear you.
    Mr. Bennett. That's better. Again there are a number of key 
issues that we are aggressively working as we speak. But as 
you've heard, we must develop a process that ensures that 
taxpayer rights are protected in the system that's designed. 
This process must ensure the taxpayers are afforded the same 
rights that they would have if they were working with the IRS. 
This would include a right to taxpayer advocacy referral or 
rights as afforded to taxpayers under collection of due 
process. So that's an important area that must be included as 
we go forward.
    We're also working with the counsel and have gained a 
better understanding of the limitations that exist due to the 
concept of inherently governmental activities. This is an 
important distinction that we face in dealing with this issue. 
The IRS may delegate ministerial or nondiscretionary functions 
to a contractor. Areas of discretion, however, may not be 
contracted out. The program must establish clear standards 
under which a contractor will work and be subject to rigorous 
IRS government oversight. And the final decisionmaking 
authority, however, must reside with the IRS.
    We must develop a system that allows contractors to access 
the data that is necessary. You've heard mention of security 
concerns earlier today. The system we establish will certainly 
raise certain security and technology issues that we must 
address as we design the process.
    We're also looking at other Government agencies, both 
Federal and State, to better understand how the effort can be 
funded. We're looking closely at the funding models that exist 
with the Department of Education and FMS as we design this 
system.
    Mr. Horn. Well, those are among the Federal agencies that 
have nontax debt collection. And that goes back to the Debt 
Collection Act of 1982 and the one in 1996. Does the IRS face 
issues fundamentally different from those affecting other 
Federal agencies? And, if so, what are the issues?
    Mr. Bennett. Yes, sir. We do. Those two acts that you 
mention do specifically exclude debt that arises via the 
Internal Revenue Code. We clearly do face challenges in this 
area that are not present for other Federal agencies. Federal 
tax collection is constitutionally considered an inherently 
governmental function. It is permissible, as I said earlier, 
for the IRS to contract out certain ministerial in nature 
events where vendors are governed by strict guidelines and 
procedures. But again, the discretion may not be contracted 
out. What this means is that as we do the design, it's critical 
that we develop clear guidelines, clear procedures, to ensure 
that the design that is in place is legal, prudent and protects 
taxpayer rights.
    Mr. Horn. According to the General Accounting Office, which 
we depend on as our arm in the legislative branch, IRS's 
discontinued collection action or, as the agency puts it, 
shelved about $12 billion in delinquent tax debts because of 
inadequate staff resources. In light of this, how can you 
possibly justify dragging your feet on seeking additional 
resources from the private sector to assist in collection 
efforts?
    Mr. Bennett. Mr. Chairman, I personally have spent 23 years 
in the tax collection business with the IRS, and I share your 
passion around this area. This is an important area that we are 
aggressively working. To accomplish this, we've created a 
partnership with private industry experts. In the coming weeks 
we will be working with a select group of collection 
contractors to agree on the type of inventory that meets the 
contractor's needs while also meeting the objectives of the 
Internal Revenue Service to have an impact, positive impact on 
compliance. To identify the contractors, we've developed, 
posted, reviewed responses to an IRS request for information. 
We use data gathered in that RFI process to assess a state of 
the private collection industry that currently exists, to 
assess their ability to handle the size of debt we're talking 
about. We select the private sector collection agencies to 
partner with us. We're currently doing that right now, working 
with them as subject matter experts to work through the issues 
I described earlier.
    We've also identified a number of alternatives for placing 
cases in the hands of the contractors. We've built on our pilot 
program of 1996, understood the lessons learned from that 
program, and are moving forward. An important piece of this 
is--are the type of cases that we place in their hands. We've 
begun to build a business case that will aid us in selection of 
the best alternative as we go forward.
    Mr. Horn. Would it not make some sense to at least give 
private collection agencies a chance to collect those accounts 
the IRS is ignoring? Or do you not ignore a lot of cases?
    Mr. Bennett. Unfortunately, our resources are stretched 
extremely thin, and we do not have the capacity to work as many 
cases as we'd like. This is an area that where contract 
support, we believe, can provide some additional capacity to--
as opposed to supplementing resources or, I should say, 
supplement our resources as opposed to supplanting resources. 
It will give us additional organizational capacity to deal with 
this particular workload. So I think it's an important area.
    Mr. Horn. Well, I agree with you when I mentioned that $12 
billion delinquent tax debts because of inadequate staff 
resources. This is why some of that's got to be put out, if you 
don't have the staff or get the staff, one or the other, and 
get people off other things that aren't as important. This is 
important, when people can get away with this.
    Mr. Bennett. Yes, sir, it is very important; and it could 
be that the answer is in a combination of additional resources 
to work the right type of cases, to have the expertise to work 
the complex cases and identify an appropriate segment of cases 
that can be contracted out.
    However, as I mentioned, there are a number of complex 
areas that we need to address and be careful in terms of how we 
design the system in the future so we make it work.
    Mr. Horn. Well, I am delighted to hear you are moving ahead 
in this area. It's long overdue, to say the least.
    Mr. Commissioner, as you know, we all are weeping a little 
up here; and we would like you to have, if you'd like, a 
closing statement yourself to the American people. Because a 
lot are going to be listening on our favorite channel, C-SPAN. 
So what would you like to say to the average citizen?
    Mr. Rossotti. First of all, for the great majority of those 
people out there are who are not cheating on their taxes and 
actually submitting their returns on time, which fortunately 
for the country is most people, I would like to thank every 
taxpayer for doing that. You know, it's not the most pleasant 
chore, but it is something that is absolutely necessary. And 
people have done it and some of them are still doing it through 
the rest of this day, April 15th, and most of them have already 
done it. So I think that is an important thing in our whole 
American society. It's something that we are very fortunate in 
this country that most people do.
    Second thing is that I think, as far as the IRS is 
concerned, we're on the side of the average American taxpayer. 
That's why I never accepted the idea that some people--that 
somehow people will always hate the tax collector. That idea 
has gone back to Biblical times, and I think that maybe that 
was because the tax collectors didn't have their thinking caps 
on straight. I think that we're on the side of the average 
American taxpayer. All those people that have filed the returns 
have done it correctly. So what do we have to do? We have to 
make sure that we give everything that those people need, give 
it to them when they need it.
    Then the other thing we got to do is we got to go after the 
other minority that are not paying so they are not allowed to 
increase the burden on the honest taxpayer. That's basically 
what the IRS is all about. It's an important mission and one 
that we certainly have room to improve on, but at the same time 
I think we have made some progress in delivering on that.
    Mr. Horn. I want to thank the members of the staff on both 
the majority and the minority, and then I will have a closing 
statement myself: J. Russell George, Staff Director/Chief 
Counsel; and Bonnie Heald, next to him, Deputy Staff Director. 
To my left, your right, Henry Wray, Senior Counsel; Earl 
Pierce, Professional Staff; Justin Paulhamus, majority clerk.
    For the minority, David McMillen and Jean Gosa. Jean's the 
minority clerk, and Mr. McMillen is the professional staff, and 
Jon Bouker is the counsel for Mrs. Norton.
    We also have three people as court reporters: Lori 
Chetakian, Julie Thomas, Nancy O'Rourke. You can see we needed 
three reporters when we knew you were coming, so we wanted to 
be prepared.
    I want to thank all the witnesses for your fine 
contributions. The hearing I think has been very informative. 
We might send you a few questions for the record that some 
members of the minority who have not been here might want to 
view.
    I again wish to commend you, Commissioner Rossotti, for 
your outstanding work over the 5 years. You certainly will be 
leaving the Internal Revenue Service in better shape than when 
it was when you took office. At the same time, the agency 
continues to recognize various challenges. I intend to continue 
to work closely with you for the remainder of your term since 
my term will be out as of the 108th Congress and I will be here 
until the end of the 107th Congress. I hope that your successor 
as Commissioner and
my successor as Chair of this subcommittee will maintain the 
same close and productive working relationship we have had.
    With that, we are adjourned.
    [Note.--The report entitled, ``IRS Oversight Board Annual 
Report, January 2002,'' may be found in subcommittee files.]
    [Whereupon, at 12:05 p.m., the subcommittee was adjourned.]

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