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



 
JOINT REVIEW OF THE STRATEGIC PLANS AND BUDGET OF THE INTERNAL REVENUE 
                             SERVICE, 2001
=======================================================================


                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                      COMMITTEE ON APPROPRIATIONS
                     COMMITTEE ON GOVERNMENT REFORM
                        HOUSE OF REPRESENTATIVES

                                AND THE

                          COMMITTEE ON FINANCE
                      COMMITTEE ON APPROPRIATIONS
                   COMMITTEE ON GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 8, 2001
                               __________

                               JCS-2-02 
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         Printed for the use of the Joint Committee on Taxation


                        U.S. GOVERNMENT PRINTING OFFICE
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                      COMMITTEE ON WAYS AND MEANS

WILLIAM M. THOMAS, California,       CHARLES B. RANGEL, New York
Chairman

                      COMMITTEE ON APPROPRIATIONS

C. W. BILL YOUNG, Florida, Chairman  DAVID R. OBEY, Wisconsin

                     COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman        HENRY A. WAXMAN, California
                                 ------                                

                          COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman  MAX BAUCUS, Montana

                      COMMITTEE ON APPROPRIATIONS

TED STEVENS, Alaska, Chairman        ROBERT C. BYRD, West Virginia

                   COMMITTEE ON GOVERNMENTAL AFFAIRS

FRED THOMPSON, Tennessee, Chairman   JOSEPH I. LIEBERMAN, Connecticut











                            C O N T E N T S

                              ----------                              
                                                                   Page
Press release of April 25, 2001, announcing joint review.........    VI
Opening statements...............................................     1

                               WITNESSES

Internal Revenue Service, Hon. Charles O. Rossotti, Commissioner.     7
IRS Oversight Board, Hon. Larry R. Levitan, Chairman.............    61
Department of the Treasury, Hon. David C. Williams, Treasury 
  Inspector General for Tax Administration.......................    89
General Accounting Office, Mr. James R. White, Director--Tax 
  Policy and Administration Issues...............................   103

                       SUBMISSIONS FOR THE RECORD

Senator Charles E. Grassley, Iowa, statement and questions.......   132
Senator Fred Thompson, Tennessee, statement and questions........   136
Hon. Charles O. Rossotti, Internal Revenue Service Commissioner, 
  response to questions..........................................   139
Hon. Larry R. Levitan, IRS Oversight Board, Chairman, response to 
  questions......................................................   148
Hon. David C. Williams, Department of the Treasury, Treasury 
  Inspector General for Tax Administration, response to questions   151
Mr. James R. White, General Accounting Office, Director--Tax 
  Policy and Administration Issues, response to questions........   154













           JOINT REVIEW OF THE INTERNAL REVENUE SERVICE, 2001

                              ----------                              


                          Tuesday, May 8, 2001

    The joint review met, pursuant to notice, at 9:00 a.m., in 
room 1100 Longworth House Office Building, Honorable William M. 
Thomas, presiding.
    [The press release announcing the hearing follows:]











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JOINT REVIEW OF THE STRATEGIC PLANS AND BUDGET OF THE INTERNAL REVENUE 
SERVICE, AS REQUIRED BY THE INTERNAL REVENUE SERVICE RESTRUCTURING AND 
                           REFORM ACT OF 1998

                              ----------                              


                          TUESDAY, MAY 8, 2001

             U.S. House of Representatives,
                              United States Senate,
                               Joint Committee on Taxation,
                                                    Washington, DC.
    The joint review met, pursuant to notice, at 9:02 a.m., in 
room 1100, Longworth House Office Building, Hon. Bill Thomas 
(chairman of the Joint Committee) presiding.
    Representatives present: Thomas, Houghton and Coyne.
    Senators present: Grassley.
    Chairman Thomas. The joint review hearing will come to 
order.
    We are here this morning pursuant to legislation on ongoing 
follow-up and focus on the Internal Revenue Service. The joint 
review, by statute, is to include two members of the majority 
and one member of the minority of the relevant committees, 
namely, the Committee on Ways and Means, Appropriations, and 
Government Reform in the House of Representatives, and the 
Senate Committee on Finance, Appropriations and Governmental 
Affairs.
    The chair has an opening statement and would place it in 
the record and would request any other members who have opening 
statements to have them placed in the record.
    [The opening statements follow:]
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    Chairman Thomas. With that, does the gentleman from Iowa, 
the Chairman of the Senate Finance Committee, have any opening 
comment?











  OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, SENATOR FROM 
                              IOWA

    Senator Grassley. I want to comment on two topics, worker 
productivity at the IRS, and financial management at the 
agency.
    On worker productivity, the General Accounting Office, in 
its testimony today, states that the IRS cannot provide a valid 
explanation of why the productivity has declined at the IRS. I 
want to suggest two factors for this decrease in productivity 
that comes from the Treasury Inspector General.
    The Inspector General, in written reports, states that 
there has been significant misuse by the IRS employees of 
Internet and e-mail. The IG states that over half of the 
Internet activity was for nonbusiness purposes, including even 
looking at filth.
    During just one seven-day period, IRS employees spent over 
half their time on the Internet for nonbusiness purposes. The 
amount of time spent on the Internet by IRS for nonbusiness 
purposes was 8,250 hours in just one week, equal to 429,000 
hours a year that would be wasted. That translates into about 
238 people at the IRS who do nothing all year except ``surf'' 
the Internet, shopping, looking at filth, and joining ``chat 
rooms''.
    Now, are taxpayers sitting on hold while the IRS employees 
are surfing the Internet instead of answering the phone? Of 
course, we hope not. And this waste doesn't include the time 
spent by IRS employees on thousands of non-business e-mails 
every day. The IG, in this case, says that e-mails 
significantly impact productivity. It's tough for me to hear a 
Federal agency talk about needing more money when it's wasting 
money they've already got.
    I would like to make one note regarding a letter that I 
received from Commissioner Rossotti. There has been much in the 
news about the drop in employees at the IRS, but in response to 
my questions, the Commissioner's letter admits that at the same 
time the number of IRS employees has gone down, the amount of 
money spent on contract employees has skyrocketed. The IRS has 
gone from $444 million in contract spending to nearly $1.3 
billion in the year 2000. So, to talk about the number of IRS 
employees without mentioning a huge increase in money spent on 
contract employees is not providing a full picture to Congress.
    I would now like to turn to the financial management at the 
IRS. I have a longer statement and questions on this matter 
that I will submit for the record. But I want to say quickly 
that I'm concerned that there is a double standard in auditing 
at the IRS, a very strict standard for taxpayers and a lax 
standard at the agency.
    When the IRS audits a tax return, everything had better be 
in order. But the same standards I think should also apply to 
the agency. So we have the Chief Financial Officers Act of 1990 
requiring that every agency must prepare a financial statement 
every year. These statements are then subjected to independent 
audit by the General Accounting Office or the Inspector 
General.
    While the General Accounting Office gave an unqualified 
opinion to the IRS this year, it still had a lot of ``ifs, ands 
or buts'', the main one being that an IRS-paid accounting firm, 
KPMG, performed a work-around. KPMG had to manually reconstruct 
the records and fill in the gaps. Billions of dollars in 
unrecorded transactions had to be backed into the general 
ledger. The General Accounting Office characterized this as a 
``monumental, labor intensive, ad hoc effort.''
    Unfortunately, this work-around is not sustainable and is 
not in keeping with the goals of the Chief Financial Officers 
Act. The goal is to produce accurate financial information as a 
basis for sound decisions. The IRS needs to clean up the books, 
fix the problems as soon as possible, and I would ask that my 
statement and questions be placed in the record.
    I would like to say in closing that these comments may be 
strong, but they aren't really any stronger than I would make 
to the Department of Defense on an annual basis, when the 
General Accounting Office reports that their books are not in 
order. What I am concerned about in the case of the IRS is that 
you cannot be the only one ``pulling the wagon''.
    I would appreciate any thoughts you may have on my comments 
about low productivity, the IRS waste of taxpayers' money, or 
financial management.
    Chairman Thomas. I thank the chairman for the statement.
    I will turn now to our first witness, the Honorable Charles 
O. Rossotti, Commissioner of Internal Revenue. I would tell the 
Commissioner that his written statement will be made a part of 
the record and he can address us in the time he has in any way 
he sees fit.

 OPENING STATEMENT OF HON. CHARLES O. ROSSOTTI, COMMISSIONER, 
                    INTERNAL REVENUE SERVICE

    Commissioner Rossotti. Thank you very much, Mr. Chairman. 
Let me thank all the members of the Joint Review Committee, as 
well as the President and Secretary O'Neill, for their 
continued support of the IRS modernization program.
    Even before RRA'98 became law, it was clear to the members 
of the Presidential commission that preceded the law that a 
long-term commitment was required to fix the IRS. The changes 
that were triggered by the Act, together with the need to 
modernize the IRS' archaic computer systems, probably are of 
unprecedented magnitude for any government agency.
    Since the RRA's enactment, the IRS has a new mission and 
goals. We have changed the entire way that success is valued at 
the agency, both individually and collectively. We have 
implemented and are administering 71 new taxpayer rights 
provisions that represent a new way of doing business for all 
of our 100,000 employees.
    We have also inaugurated a new, more taxpayer-focused 
organization, eliminating a 50-year-old structure of District 
service centers, regions and national office staffs. Tens of 
thousands of IRS managers and employees have new jobs and many 
old jobs were abolished. We are now in the process of 
redesigning nearly every business process and system, the way 
examinations are planned and conducted and the way phone calls 
are answered.
    We are making these changes while achieving our first clean 
financial opinion from the GAO, stopping the drop in 
enforcement revenues in fiscal year 2000, and managing an 
extremely difficult Y2K program in three consecutive successful 
filing seasons. In 2001, the filing season just ended, new 
records were set for electronic filing and web site use, and 
although the phone service is still not adequate, more 
taxpayers are getting through on the phones and they are 
getting more accurate responses.
    We know that we are still not providing the level and 
quality of service that taxpayers desire, nor are we collecting 
all the taxes due as efficiently as we could. Nor are we 
keeping our books and records in the most completely effective 
way consistent with the CFO Act. However, we are setting the 
stage for year-by-year improvements in performance and for 
implementation of fundamental improvement enabled by our 
business systems modernization program.
    Our new strategic plan spells out what we must do to solve 
these problems, to improve taxpayer service and meet our 
compliance goals, while continuing to shrink the size of the 
agency in relation to the economy.
    We think that this strategic plan, together with the 
implementation of major parts of the reorganization and our 
other RRA provisions, means that there is one very important 
difference between the IRS situation today and even that of a 
year ago; that is, that the level of uncertainty about the 
future is reduced. We still have much to do, but we think we 
know more clearly how to do it and have put the foundation for 
doing it in place.
    The fiscal year 2002 budget request of $9.28 billion will 
enable us to continue to maintain current operations and 
provide crucial investments for our longer-term business 
systems modernization program. It will address the highest 
priority gaps in our ability to meet our mission and goals, and 
focus on areas that will need more resources, even while 
modernization continues.
    I think it is very important to note the time that it takes 
to see practical effects from changes in IRS resources and from 
our initiatives. For example, through the STABLE initiative, 
the IRS requested some additional staff resources to cope with 
the RRA workload and responsibilities. That request was 
formulated in calendar '99 for the 2001 budget request, which 
was submitted to Congress last year. The resources were 
appropriated and made available by the Congress this year, 
2001, and they will really produce significant results in 2002, 
and the statistics will be reported in 2003. So there are 
significant time lags to see the effects of modernization, and 
that makes it all the more important to sustain the effort over 
a period of time.
    In terms of responsibility for this sustained effort, we 
believe it is shared by the IRS, the Treasury, the Oversight 
Board, and Congress. We think the greatest responsibility does 
fall on us, the IRS management, to make the necessary 
improvements and to identify essential resources and other 
support. Treasury and the Oversight Board are providing 
essential guidance and oversight and, of course, the Congress 
has the critical role in providing resources through the 
appropriations process, oversight and guidance through the 
oversight committees, and legislative changes through the tax-
writing committees.
    Mr. Chairman, I am frequently asked, and I was last year at 
this hearing, if there are changes to RRA that we would 
recommend. Now, based on almost three years of experience, I 
believe there are some modifications that would help us 
implement the Act's intent more effectively.
    With this hearing, I would like to begin a dialogue with 
Congress about certain changes. These would include a 
modification to section 1203 that would continue to provide the 
IRS the authority to terminate employees for the listed 
offenses, but would reduce the impact of unsubstantiated 
allegations.
    Another would be technical changes to the collection 
provisions that would provide the IRS more flexibility to 
settle debts with taxpayers, and to simplify procedures for 
court appeals and collection due process cases. Still other 
provisions would be a measure to reduce the impact of the 
frivolous use of collection due process, offers and compromise 
and taxpayer advocate protections. I believe these changes 
would be fully consistent with RRA's intent and will allow us 
to implement it more successfully.
    In conclusion, Mr. Chairman, I think we have laid out a 
plan and we have demonstrated the ability to make some short-
term improvements in service, but more importantly, I think we 
have the path ahead of us laid out that will guide our efforts 
and allow us to raise the performance of this agency to the 
level that the public has a right to expect.
    Thank you, Mr. Chairman.
    [The statement of Mr. Rossotti follows:]
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    Chairman Thomas. Thank you very much, Commissioner.
    There are a lot of questions that can be asked, and my hope 
would be that, given the limited time that we have, both for 
the questioning and the response, that, where appropriate, we 
could get written answers so that we can more fully appreciate 
the positions that are taken.
    Commissioner Rossotti. Yes, sir.
    Chairman Thomas. I applaud you for going right back in and 
examining legislation. One of the things I hope we do not do in 
this particular relationship is stick to whatever posited goals 
or results we thought we could get prior to actually getting in 
and looking at the situation, and then having a series of 
hearings in which basically not enough money has been funded 
and that the rationale for not meeting whatever percentage you 
throw on out, the 80 percent of electronic returns, for 
particular reasons, and never going back and examining the 
goals that were originally established to determine whether or 
not they were realistic.
    I think this effort is one in which I wouldn't mind at all 
reviewing the previously stated goals, examining them to 
determine whether or not they were really realistic in the 
light of what we know now, and adjusting them so that we can 
have some measurable but achievable objectives. I have been 
through too many of these review hearings in which there is a 
failure to communicate in terms of ``it's not our fault'' and 
``these are the reasons why.'' The reasons why are almost 
always not enough money.
    We can posit at the beginning there is never going to be 
enough money. What I want is a clear understanding of 
priorities within the amount of money that we have. What goals 
are achievable? What goals are not achievable, and where we 
need to adjust those goals so that neither one of us is 
frustrated at the next review and we repeat that cycle over and 
over and over.
    So in the brief time that I'm able to stay on top of 
shepherding this legislation, I would be very much concerned in 
creating a goal structure which is achievable upon agreement 
and, where we fail, we analyze why we failed and readjust our 
goals.
    In that light, Commissioner, what goals that were 
established initially do you believe are either not realistic 
and that you would like to reexamine adjustment of those, and 
what would be that readjustment? I know my time is brief, so 
that if you want to follow up with written statements, I would 
be more than willing to accept that.
    Commissioner Rossotti. Mr. Chairman, first of all, I really 
welcome the way that you phrased that. I think we do have three 
years of experience now with this Act. We have learned a lot. I 
think there are, as I mentioned in my statement, some 
modifications to some provisions.
    I would say, though--and I will follow up----
    Chairman Thomas. If I might, just on those items that you 
mentioned, most of those are fine-tuning and adjustments from a 
management point of view.
    Commissioner Rossotti. Right.
    Chairman Thomas. Most people who will be concerned about 
achievement of goals are looking at those broader interactions 
between the government and the individual and the follow up. 
For example, the initial statement of the Chairman of the 
Finance Committee, the larger picture goals, whereby we're 
measured, if not by each other, at least by the press.
    Commissioner Rossotti. Yes, and let me go directly to that. 
I will follow up with a more lengthy written statement, because 
I think it's an extremely important question you have asked.
    But to summarize it this way, my personal belief--and I 
really took this job because I believed in the goals that were 
set in this Act--I believe that those goals, in the broad 
sense, are achievable. I guess I would describe them as being 
able to satisfy the reasonable expectations of the average 
taxpayer and how they deal with the agency, while still 
collecting the tax. I mean, those are the two basic goals, and 
the Act sets forth a lot of specific ways that that's supposed 
to be done. Most of them, by the way, are not quantitatively 
set forth in the Act, with the exception of the electronic 
filing goal. So I think we can achieve those goals.
    I will say there's been skepticism by many parties about 
whether there was some conflict inherent in tax collection that 
you couldn't treat people correctly and protect taxpayers' 
rights and still be effective in tax collection. 
Notwithstanding the difficulties, my belief is that it can be 
done. It is, however, a process that is going to take some 
time.
    I think the main issue that I would comment on is the 
question of time. I believe that if we sustain this effort over 
a period of another three, four, five years, I believe we will 
be able to raise the agency's performance very, very 
significantly.
    Now, some of the items in the bill that were specifically 
designed for the protection of taxpayer rights and setting 
forth certain procedures, we have found costly and difficult to 
implement. We have some suggestions about how to modify those. 
By the way, those don't involve any money. They just involve 
ways of improving.
    Let me finish with just a comment about the money, and I 
will give a more detailed written statement. I believe that if 
we were to attempt to meet all the goals broadly defined in the 
Act by continuing to do business--I'll call it ``the same old 
way''--it would be extraordinarily expensive. There would be a 
requirement to add very significant numbers of staff to answer 
phones and collect debts, the way it's been done, and to do 
many other things that are required.
    We have not proposed that kind of a plan. What we have 
proposed are some limited increases in the operational 
resources and some significant investments in modernization. 
Modernization encompasses especially the computer technology, 
but also the ways of doing business.
    So my proposal is that we achieve those goals over a period 
of time by investing and improving the way we do business, 
primarily, rather than simply throwing money at the problem, to 
make everything bigger and address all the problems. That does 
mean we have to tolerate some deficiencies for a period of 
years as we gradually proceed towards our goals.
    Chairman Thomas. I thank the Commissioner.
    My concern will be that we evaluate periodically the goals, 
and that where they were overly ambitious, we refocus them so 
that the hearing would be on supposedly achievable goals, those 
we've met and those we haven't, and why we haven't, and how we 
have adjust those goals to reach achievable goals. To me, 
that's the only way we can move forward in this extremely 
difficult and complex area.
    We can beat each other up any day of the week over any one 
of these points that we're trying to deal with. The intent of 
Congress in providing this structure with the Oversight Board 
was to, in fact, move forward on achievable goals. I look 
forward to the written follow up on those statements.
    The gentleman from Iowa, the Chairman of the Finance 
Committee.
    Senator Grassley. First of all, I want to acknowledge that 
I appreciate very much your opening statement, where you talked 
about possible changes that will increase IRS productivity.
    Do you agree that we can achieve both the protection of 
taxpayers rights and improve IRS productivity?
    Commissioner Rossotti. Yes, Mr. Chairman, I do. I think 
that's the sort of crystallizing question of the Reform Act. I 
have to say that I wouldn't be sitting in this chair if I 
didn't believe that. That's why I really took this job.
    I don't think that it's an easy thing to do, because there 
is a propensity to view those goals as being either/or. Either 
you provide good service and protect rights, or you collect 
money. It's my belief that you do both. One of the main reasons 
is that most taxpayers are honest taxpayers.
    I do think, as I have said in here, there are some 
taxpayers who are taking advantage of some--I'll call them 
loopholes--in the way some of these provisions are written, and 
I believe if we could work together with Congress to make some 
adjustments in those, we can eliminate that problem. But I 
consider those more fine-tunings of how the process works than 
anything that would be a deviation from the basic direction 
that the Congress set in the Restructuring Act.
    Senator Grassley. Ways and Means and the Senate Finance 
Committee recently received a major report from the Joint Tax 
Committee on simplification of the Tax Code, with 150 
suggestions, and I think the people doing the study would 
characterize this as obviously not necessarily an easy 
simplification, but simplification that is very obvious and not 
going in the direction that a lot of people would suggest 
simplification of throwing the Tax Code out and starting over.
    But based upon that study, and whether you know all 150 
recommendations or not, my question would be very general to 
you. How much will simplification of the Tax Code make the IRS' 
job easier and within the general approach of the study that 
was given to us?
    Commissioner Rossotti. Yes, Mr. Chairman, I have had a 
chance to read--I have to say I've read the executive summary. 
I haven't read all the three volumes yet. But I thought it was 
a very excellent layout. Some of these points have been made by 
others, including our own complexity report, and yes, they 
would definitely make our job easier.
    I think what might be even more important is that they 
would make the taxpayers' job easier, because we do need to 
remember that for every dollar that the IRS spends on its 
administrative budget, taxpayers spend somewhere between 10 and 
20 times that amount of money--and, by the way, we're getting a 
good study of that number and we'll give it to you when we have 
it. But it is much greater. The taxpayers, in terms of their 
own time and the money they outlay to practitioners, is very 
great.
    I think that if the recommendations that were in the Joint 
Committee report were adopted, many of them, they would 
definitely reduce that burden on the taxpayers and would also 
make the IRS's job easier.
    I can give you a practical example. We strive mightily to 
answer questions that taxpayers pose to us over the telephone. 
During the filing season, we get about 100 million questions, 
or calls. Many of them, about 30 percent of them, are questions 
about the tax law. Some of those can be quite complex to 
answer, even though they seem simple. Like if you ask the 
question, ``Can I take my niece or nephew as a dependent'', it 
seems like a fairly straightforward question. When you 
penetrate down, you find that there are a lot of sub-questions 
that you have to ask. In the Joint Committee report, they laid 
that out pretty carefully. And then you go on and on into the 
alternative minimum tax and all these other things.
    If those provisions were changed along the lines of what 
the Joint Committee said, I believe that it would reduce the 
burden on taxpayers and simplify the IRS's job.
    I do need to point out a qualification. A lot of what the 
IRS does is not so much keyed to the specific provisions of the 
Code, as just the process of collecting and processing and 
following up on two trillion dollars. When you have that many 
transactions, there's a lot of work to do. Even if the Code was 
simpler, there is a lot of work that has to do with the 
processing and the accounting and the follow up for people who 
don't pay in full and all those sorts of things. So that part 
of it would not be changed. But the actual filling out of the 
returns and the accuracy of the returns would probably increase 
significantly.
    Senator Grassley. My time is just about up.
    My last point would be--and your response may be short now, 
but I would encourage you to write longer answers in your 
reaction to my comments in my opening statement, particularly 
the misuse of the Internet and just to put things in 
perspective, so that you don't think we're just looking at the 
IRS.
    Within the last short period of time, I have heard about 
employees at the U.S. Department of Agriculture watching soap 
operas all afternoon. So we have a major problem throughout 
government here. We aren't just looking at the IRS. But we do 
have the IRS Inspector General speaking to these, and I would 
think that would be an authoritative voice within the Treasury 
on this issue.
    Commissioner Rossotti. There is no question that the 
Internet, as he said in his report, is a tremendously powerful 
tool that we want to give to our employees, because they do use 
it to look up information that they need to process taxpayer 
cases. But, of course, it is difficult.
    Even in business, I remember in my previous firm we had an 
issue and people had access to the Internet, and some people 
would use it for nonbusiness uses. It is hard to filter those 
things.
    Since that report was done, we have put some additional 
policies in place, but I will concede that it is a challenging 
issue, the use of the Internet, and making sure that it's used 
for business purposes. Of course, ultimately, it's a management 
issue. We need to have our managers making sure they understand 
what our employees are doing and following up on that.
    Could I comment on your other one, on the financial 
statements, Mr. Chairman, because that was your other opening 
point?
    We have been working very hard on these financial 
statements. I think you know that, for the first time ever, the 
IRS did get a clean opinion. It did require a tremendous 
effort. Most of that effort was actually put in by IRS 
employees who were working very hard, as was the GAO, by the 
way, they were working very hard with us, and we did have some 
support from our contractors.
    Many of the things that were done in fiscal 2000 to get 
that clean opinion were not limited to getting the statements 
done for that year. They have also been aimed at making the 
process better for next year. What we are basically doing is 
having a plan year-by-year to make that process more efficient, 
so that we will continue to get a clean opinion. But we will 
also do it in a more orderly way and in a more systematic way.
    Part of the solution does involve upgrade of the computer 
systems. We are using very, very old computer systems to 
process data, about two trillion dollars worth of tax money. 
That is not the only problem, but it is certainly at the root 
of many of the problems having to do with our accounting and 
financial management.
    Senator Grassley. Thank you.
    Chairman Thomas. I thank the Chairman.
    I would just tell the Commissioner that his last statement 
is one I'm concerned about, because we're slipping back into 
the argument that the reason we aren't able to do something is 
because of a well-known fact when we began the process of 
reform. We need to factor in when and how we update computers 
to address the problems that we see, rather than to simply 
state that our computers aren't up-to-date.
    It has been a decade-long attempt, and will be an 
additional decade-long attempt. I would rather create 
measurable milestones to determine whether or not we're moving 
in the direction that we need to move.
    Commissioner Rossotti. Yes, sir.
    Chairman Thomas. I thank the chair.
    Does the gentleman from New York, the Chairman of the 
Oversight Committee of Ways and Means, wish to inquire?
    Mr. Houghton. Yes, Mr. Chairman, I would.
    First of all, thank you, and also, Commissioner Rossotti, 
thank you very much for being here, and thanks for the job 
you're doing for the IRS and for the country.
    You quoted in your testimony something about Alfred North 
Whitehead, who was sort of a hero of mine, about producing 
change amid order and order amid change.
    It seems to me that you've got two issues here. One, you 
have the short-term issue of trying to fulfill the objectives 
that you set out and the IRS is required to produce in terms of 
its everyday activities. The other thing is long term, the 
business systems modernization program.
    Where should we be most concerned? With both, or with one 
of those?
    Commissioner Rossotti. Well, I think we have to pay 
attention to both of them, Mr. Chairman. I think the most 
difficult challenge that we have--and it really goes exactly to 
what Chairman Thomas said--is that we have to operate every 
year. We have to do a filing season; we have to make progress. 
And yet, we know we're not going to reach fully the goals that 
we are striving for until we've made some more fundamental 
changes, and especially in the computer systems. So I couldn't 
agree more with the Chairman's approach.
    I think we need to make step-by-step progress in both 
service and compliance at the same time we're performing these 
more fundamental issues. That is really the most difficult 
thing about this whole job. I mean, I often joke that if we 
could just shut down the IRS for two or three years and rebuild 
the systems and start over, it would be an easier job. Of 
course, that's not practical or possible. So we have to do both 
at the same time.
    That's really what our whole plan attempts to do. We try to 
balance long-term progress and short-term progress at the same 
time.
    Mr. Houghton. Yeah, but where's the biggest problem?
    Commissioner Rossotti. What is the biggest problem? The 
biggest problem is really trying to do them both at the same 
time. I think that is really the most challenging problem, 
balancing----
    Mr. Houghton. But this happens in any business. It happens 
in any institution. You don't shut down a business that has 
problems.
    Commissioner Rossotti. Right.
    Mr. Houghton. You try to fix them and then look forward to 
the future. But it would seem to me that one of the reasons 
that you came into this job was to do this very basic systems 
modernization program.
    Commissioner Rossotti. Right.
    Mr. Houghton. Is this something we should be concerned 
about? Is it on track?
    Commissioner Rossotti. Well, first let me say that I think, 
no matter what else we do, if we don't succeed in the business 
systems modernization program, we will never reach the goals 
that the Congress has set, because the thing that is unique 
compared to other businesses, Mr. Chairman--yes, all businesses 
have these problems--but I don't know there's any large 
business that I was ever aware of--and I was in it 28 years--
that got this far behind in its systems. Because if they were 
that far behind, they would have been acquired by a competitor 
or someone else. So it's really a unique situation. This, I 
believe, is honestly an accurate situation, that we still 
have----
    Mr. Houghton. Maybe we should sell it to the Bundestag or 
something like that.
    Commissioner Rossotti. That's what makes it unique. Every 
business has to upgrade its systems, but not in the extreme 
that we have. So it is absolutely essential, and it is a risky 
situation.
    Are we on track? I believe that we are making progress. I 
think, if you get your testimony later from GAO, you will note 
that they see some weaknesses still, some improvements that we 
have to make in our management capacity--and we are fully in 
accord with that.
    What we are doing is trying to build our management 
capacity, our ability to manage this really complex program. At 
the same time we make progress in the program, we can't just 
make progress in management without actually applying that to 
real work. Every once in a while we make adjustments, you know, 
in the speed with which we go forward, or the speed with which 
we, in some cases, slow down a bit, to make sure our management 
is caught up.
    But I believe that in the less than two years we've been in 
this, we have done some very significant things. Over the next 
few months we will be delivering our first actual operational 
projects, that will improve business results this year. We have 
put a program management office in place that has put in some 
discipline procedures. They're not fully at the level we would 
like, but they have matured a great deal. We have laid out a 
long-term plan in architecture, and there's more work to be 
done. But it is dramatically more substantial than it was even 
six months ago. And we have, over the next 18 months, a 
significant amount of additional practical results that we hope 
to deliver. I think that's quite a bit.
    So are we on track? I believe we are on a positive path. I 
think we can succeed. Have we addressed every issue? No, we 
have more work we need to do in terms of management and 
organization.
    Mr. Houghton. In other words, you have not lost confidence 
in the opportunity for doing these things you wanted to do in 
the first place?
    Commissioner Rossotti. I have definitely not lost 
confidence. While I often say this is a very risky program, I 
sometimes have to correct a misimpression I give, that I'm 
saying I think it's going to fail, that it's not going to work. 
I don't believe it's going to fail. I believe it's going to 
succeed. I believe it is succeeding, but not without twists and 
turns in the road and, you know, occasional delays. Our 
management responsibility is to adjust to those as quickly as 
possible and not let them get too far off track before we 
correct any problems we find.
    Mr. Houghton. Thank you, Mr. Chairman.
    Chairman Thomas. I thank the gentleman.
    Does the gentleman from Pennsylvania, Mr. Coyne, wish to 
inquire?
    Mr. Coyne. Thank you, Mr. Chairman.
    Commissioner, what is the administration's position 
relative to the Oversight Board's recommendation of a $10.3 
billion funding for fiscal year 2002?
    Commissioner Rossotti. Well, I think the administration's 
position is reflected in the President's budget request, which 
lays out the specific budget--I believe it's $9.276 billion, if 
I have the number correct--that is requested. So, obviously, 
there are some difference between that number and what the 
Oversight Board has suggested.
    Mr. Coyne. Is that going to result in some diminution of 
service as a result of not getting the request that the Board 
wanted?
    Commissioner Rossotti. Well, as in any agency that has 
pressing needs, if we had more resources, we could do more in 
terms of delivering service and perhaps moving some of the 
modernization forward more quickly. But I believe that, with 
the budget that the administration has proposed, we will be 
able to continue to make progress on our operations as well as 
on our modernization program. I think those are the twin things 
that we really need to do in this agency.
    Mr. Coyne. Well, in future years, when the Oversight Board 
comes and makes a recommendation for a budget, are they going 
to be taken seriously in the recommendations they make?
    Commissioner Rossotti. Well, I hope so. One thing to note 
is that the Oversight Board was getting in business at the same 
time the new administration was getting in business. It was a 
very short period of time for the administration to put the 
budget together. There were conversations, but I think it was a 
limited period of time.
    I know Mr. Levitan is going to testify later, and I'm sure 
he'll be able to comment on his views on that. But I think we 
all have a goal of making this process work cooperatively 
between the IRS, the Oversight Board, and the administration.
    Mr. Coyne. But one could make the case that, without the 
funding that they recommend after a close examination, that 
some of the services will not be provided?
    Commissioner Rossotti. Certainly, I mean, if we had more 
funding, we could accelerate the improvement of service.
    Mr. Coyne. Thank you.
    Chairman Thomas. Thank you very much, Commissioner.
    With that, we will ask our next panel to come forward, the 
Honorable Larry Levitan, the Chairman of the Internal Revenue 
Service Oversight Board; the Honorable David C. Williams, 
Inspector General, Tax Administration, U.S. Department of the 
Treasury; and James R. White, Director, Tax Issues, U.S. 
General Accounting Office.
    Thank you, gentlemen. Any written statement you may have 
will be part of the record, and you may address us in any way 
you see fit in the time that you have.
    I will start with Chairman Levitan and then move across the 
panel.

OPENING STATEMENT OF LARRY R. LEVITAN, CHAIRMAN, IRS OVERSIGHT 
                             BOARD

    Mr. Levitan. Chairman Thomas, members of the committee, I 
appreciate the opportunity to appear before you today. I am 
proud to represent the IRS Oversight Board and to discuss our 
role of improving the operations of the IRS.
    I would like to take this opportunity to also recognize two 
other Board members that are here, Steve Nichols and Chuck 
Kolbe.
    Mr. Chairman, one obvious but powerful way to summarize the 
challenges the IRS faces is to tell you what the IRS is failing 
to do. The IRS is not meeting any of the three strategic goals 
and objectives defined in its own strategic plan:
    The IRS does not provide top-quality service to each 
taxpayer in every interaction. For example, phone calls 
frequently go unanswered and notices to taxpayers are often 
difficult to understand.
    The IRS does not provide top-quality service to all 
taxpayers through fair and uniform application of the law. For 
example, the level of audits and other enforcement activities 
have fallen to an unreasonably low level.
    The IRS does not provide productivity through a quality 
work environment. Because of outdated technology, the work 
environment is completely inconsistent with efficient and 
modern practices.
    These problems are well understood by Congress, by 
Treasury, and by the IRS. They were the subject of 
congressional hearings and led directly to the IRS 
Restructuring Commission and the passage of the IRS 
Restructuring and Reform Act of 1988. The passage of RRA '98 
was landmark legislation that pointed the IRS in a new, long-
overdue direction. The IRS oversight Board believes that with 
this legislation in place, with new management on the job, with 
a modernization program back on track, the IRS is on the right 
course now, but much work still remains in order to turn around 
years of neglect.
    Mr. Chairman, as you know, one of our statutory 
responsibilities is to review and approve the IRS budget each 
year. The statute requires the Board to submit its own budget 
proposal, which rides in tandem with the President's budget 
submission to Congress.
    Much of our efforts since we went into business last 
September focused on reviewing and approving the IRS strategic 
plan and putting together a budget that supports the goals and 
objectives outlined by Congress. Mr. Chairman, our conclusion 
is that the President's fiscal year 2002 budget does not 
adequately support the IRS strategic plan and fails to provide 
enough funding for technology modernization and other vital 
operations.
    The administration claims that their budget provides a 6.6 
percent increase over 2001. While this statement is technically 
accurate, the Board believes it is misleading, since the IRS 
had an additional $256 million of available funds in 2001 in 
ITIA carryover from previous years. Therefore, the real, 
spendable, increase in the President's budget is 3.4 percent, 
not 6.6 percent.
    The IRS Oversight Board reviewed the budget recommended by 
the President very carefully. We applied our judgment and we 
looked at it carefully and independently. To illustrate our 
budget recommendations, let me quickly outline a number of the 
major differences between our budget and the President's 
budget.
    The Board recommends full funding of the STABLE program 
that will end a decade-long reduction of IRS personnel and 
provide approximately 3,800 new employees to improve service 
and enforcement capabilities. The administration also claims to 
fully fund STABLE. This statement is also technically accurate, 
but misleading. While the STABLE line item in the budget is 
fully funded, the President's budget eliminates funding for 
$137 million of real costs that the IRS will have to fund by 
eliminating approximately 1,300 positions.
    The Board recommends an expenditure of $54 million to start 
to replace out-of-date laptop and desktop computers that will 
not support the new software--that is available today and 
improving daily--that will improve security and make IRS 
employees more effective. The President's budget provides no 
funding for this program. It makes no sense to the Oversight 
Board to spend hundreds of millions of dollars on new software 
and then not provide the necessary computer equipment to run 
the software.
    The Board recommends providing the ITIA with an additional 
year of expenditures, $550 million for 2003, to ensure that 
projects that cross fiscal years will not have to experience 
inefficient delays and slowdowns. This multi-year funding of 
the investment account was part of the original strategy for 
the fund, and this will be the first year since the fund was 
set up that it will drop to a zero balance. The President's 
budget does not recognize the importance of multi-year funding 
for ITIA, which the Board believes is a critically important 
concept.
    The Oversight Board believes that the IRS is at a critical 
juncture. The IRS has begun an aggressive program of 
modernization that has the first real chance in many years to 
create a new and greatly improved system of tax administration 
and an agency that can finally provide the kind of service and 
responsiveness that the American taxpayers deserve.
    Mr. Chairman, thank you for the opportunity to be here 
today. The newly restructured and modernized IRS is very much a 
work in progress. The IRS Oversight Board is proud of its 
important role in this process.
    I appreciate this opportunity to report on our activities 
and our views on these critical matters, and would be pleased 
to answer any questions that you may have.
    [The statement of Mr. Levitan follows:]
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    Chairman Thomas. Thank you very much.
    Mr. Williams.

  OPENING STATEMENT OF DAVID C. WILLIAMS, INSPECTOR GENERAL, 
    TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION, U.S. 
                   DEPARTMENT OF THE TREASURY

    Mr. Williams. Mr. Chairman and members of the House and 
Senate committees, I appreciate this opportunity to appear 
before you to discuss the progress that the IRS has made in 
implementing the IRS Restructuring and Reform Act of 1998.
    In my testimony before you last year, I committed TIGTA to 
timely and accurate reporting on the IRS reforms and making 
recommendations to improve the direction and pace of the 
progress. Today, I will report to you on the results of our 
work involving taxpayer protection and rights, systems 
modernization, and organizational restructuring.
    Since July, 1998, when the RRA '98 was enacted, the IRS has 
involved itself deeply in implementing the law's 11 major 
components, with considerable emphasis on the 71 provisions for 
taxpayer protection and rights.
    Our audit work for the provisions that TIGTA is required to 
review has shown that the IRS has made substantial progress in 
protecting taxpayer rights, but it still needs to complete its 
efforts to comply with the following areas: providing proper 
and timely notices for all Federal tax liens, timely 
consideration of innocent spouse relief claims, and fully 
eliminating the use of illegal tax protester designations.
    With respect to systems modernization, the IRS has 
completed major foundational aspects, including overall 
architecture and program management processes, to guide the 
modernization. However, most of the projects have taken longer 
and cost more than originally planned. These delays are of 
concern because the seriously needed improvements in IRS 
operations are heavily dependent on the success of the 
projects.
    Some of the expected benefits the taxpayers will receive 
are: quicker access to more accurate tax help, readily 
available, correct, and current account information, more 
electronic filing capabilities, refunds in days instead of 
weeks, and expanded self-service options over the telephone and 
Internet.
    The other major component of the IRS modernization involves 
organizational restructuring. The IRS has made significant 
progress over the past three years in its restructuring 
efforts. For example, on October 1, 2000, the IRS substantially 
completed the stand up of its four customer-focused business 
units.
    Although the organizational standup was an important first 
step, the next phase of IRS reengineering needs to address 
management and operational issues that relate to designing 
management information systems to support the new 
organizational structure, improving taxpayer access to walk-in 
and toll-free telephone services, increasing accuracy of 
responses provided to taxpayers, hiring, training and retaining 
a qualified workforce, and eliminating computer security 
weaknesses.
    Through October 27th, the IRS has had a successful 2001 
filing season, but a great deal of work is still needed to 
achieve its primary goal of providing quality customer service 
as the key to improving tax compliance. As of this date, 
approximately 39.6 million of the 118 million individual income 
tax returns have been filed electronically, which is a 13 
percent increase over last year. Similarly, the number of 
refunds deposited directly into bank accounts increased by 
almost 15 percent. In addition, the IRS Web site recorded over 
1.5 billion accesses, which is a 57 percent increase over last 
year.
    In contrast to these successes, the IRS has experienced a 
drop in its examination and collection activity. From fiscal 
year 1996 to 2000, revenues attributed to compliance activities 
have declined by $4.2 billion, to $33.8 billion, and unpaid 
assessments have increased by 22 percent.
    Finally, the IRS customer service statistics continue to 
show the need to improve dramatically. It may take some time 
before we have conclusive evidence of the totality of IRS 
efforts to better protect taxpayer rights, modernize its 
systems and organization, and achieve a higher level of 
customer service. In this regard, my office will continue to 
review the progress made and problems encountered in 
implementing RRA '98.
    This concludes my statement and I would be pleased to 
respond to any questions that you have at the appropriate time.
    [The statement of Mr. Williams follows:]
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    Chairman Thomas. Thank you very much, Mr. Williams.
    Mr. White.

  OPENING STATEMENT OF JAMES R. WHITE, DIRECTOR, TAX ISSUES, 
  GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY RANDOLPH C. HITE, 
        DIRECTOR, INFORMATION TECHNOLOGY SYSTEMS ISSUES

    Mr. White. Mr. Chairman and members of the committees, I am 
pleased to be here today as we approach the third anniversary 
of the IRS Restructuring and Reform Act of 1998. I will 
summarize some of our major points regarding IRS' current 
performance in its ongoing modernization effort. I will also 
note some issues related to IRS' fiscal year 2002 budget 
request.
    First, current performance. We are calling IRS' current 
performance mixed. On the plus side, during this year's tax 
filing season, the IRS processed millions of tax returns and 
issued refunds without significant problems. Importantly, 
taxpayers calling IRS with questions had an easier time this 
year than last getting through. And for the first time, IRS 
earned an unqualified opinion on their financial audit.
    On the down side, I want to highlight two issues. The 
trends in audit rates and enforcement programs continue to be 
troubling. As the board shows, which is also figure 2 on page 6 
of my statement, audit rates in the upper left-hand corner, 
seizures in the upper right, and the use of liens and levies, 
the two lower graphs, are all down dramatically in recent 
years.
    Also troubling is that IRS has not been able to work many 
cases of known delinquencies. IRS has been closing these cases 
after sending the taxpayers written notices, but without making 
follow-up contacts either by phone or field visit. IRS refers 
to this as shelving cases. The next board, figure 3, which is 
on page 7 of my statement, shows that, as of March 31, 2001, 
IRS has shelved about 2.5 million delinquency cases with 
outstanding debts totaling about $12 billion.
    Related to these declines are declines in compliance 
staffing and productivity. For example, between 1996 and 2000, 
the number of IRS employees working collection cases fell by 
about a third, from 5,500 to 3,600. During the same time 
period, the amount of staff time per case increased by about a 
third. That is, productivity decline. We are concerned that 
these declines could increase the temptation for taxpayers to 
underreport their tax obligations.
    Now I want to discuss IRS' ongoing modernization efforts 
where IRS made important progress this year. It implemented its 
new organizational structure, focused on types of taxpayers, 
and it also made progress in managing its business systems 
modernization program, its multi-year program to replace its 
antiquated computer-based information system.
    Specifically, IRS made progress this year implementing a 
variety of management controls and capabilities. However, IRS' 
progress in this area, as in others, has been slower than 
expected. For example, we are concerned because business 
systems modernization projects are moving past critical 
milestones without certain essential management controls in 
place and functioning.
    We have discussed these control weaknesses with the 
Commissioner and his modernization executives. They recognize 
the need to address these weaknesses. They have taken steps to 
implement many of these controls by the end of June this year, 
and decided recently to slow ongoing projects and new projects, 
giving priority to putting into place missing management 
capacity.
    Because of the slowdown, it is unclear whether IRS needs 
the $53 million requested by the IRS Oversight Board for the 
investment account beyond the $397 million in the 
administration's request for fiscal year 2002.
    Performance management is another key part of IRS' 
modernization. A performance management system that establishes 
goals and clear measures that is a structure of guiding and 
evaluating the transformation of IRS, and that creates 
incentives for front-line employees to work in new ways to 
support the goals, is essential to meeting congressional 
expectations for a new IRS.
    Regarding performance management, IRS deserves credit for 
its strategic plan and its new management planning and 
budgeting process. However, IRS is still missing key measures 
of voluntary compliance without which the consequences of the 
decline in enforcement actions discussed earlier cannot be well 
understood.
    Furthermore, managers throughout IRS do not routinely 
collect and analyze data to learn what caused past performance 
and, based on this understanding, make informed decisions to 
improve future performance. One example is financial data. 
While IRS received a clean audit opinion from GAO this year, 
the data underlying the opinion was compiled months after the 
fact. The data was not available to IRS managers on a real time 
basis and, thus, could not be used as an input into managerial 
decision making.
    Another example is the productivity decline I mentioned 
earlier. IRS managers were unable to give us a data base 
explanation for what caused the declines, in turn leaving 
managers with less information about how to improve 
productivity.
    Mr. Chairman, that completes my statement. I would be happy 
to answer any questions.
    [The statement of Mr. White follows:]
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    Chairman Thomas. Thank you very much.
    One of the difficulties that I think we're going to be in 
is trying to get a handle on the Oversight Board in terms of 
just exactly how we deal with reports, recommendations, 
especially the Inspector General from Treasury, since my 
assumption is the relationship to the Board is a dotted line 
and not a direct one--GAO gets to parachute in anywhere and 
examine at any time requests are made.
    With that as a kind of backdrop, Chairman Levitan, my 
understanding is that the Board, because of the difficulty in 
going through appointments, was not up and running until 
September. How many meetings of the Board have we had so far?
    Mr. Levitan. The Board came into play late in September. 
Our first meeting was September 29th. We meet as a full Board 
every two months for two days, and in addition to that, we have 
committees that meet periodically. In addition to that, we have 
individual Board members who do additional work. As Board 
chairman, I probably spend over half my time on these efforts.
    Chairman Thomas. And what about staffing?
    Mr. Levitan. We have operated up until last week really 
without any full-time staffing. We have brought on board a 
staff director, Mr. Chuck Lacijan, who is seated behind me, who 
will help us in our efforts.
    Chairman Thomas. The reason I ask that question is to try 
to put into context the statements that you have made as 
chairman, in terms of your analysis in the time frame that 
you've been on board with the resources that you have 
available, the statement that the administration's funding 
proposal is inadequate, and that you not only have been able to 
assess that it's inadequate, but that you have been able to 
recommend specific amounts in specific areas.
    I guess my question would be, how are you able to achieve 
that in the time frame that you've been up and running with the 
staff that you have?
    Mr. Levitan. Well, the bottom line is through a lot of hard 
work. We realized in September, at our first meeting, that we 
needed to jump on the budget very, very quickly and spend a lot 
of time and effort working on it. So we have been working on it 
since September and, you know, the administration didn't come 
on board until January.
    Quite honestly, from the discussions we've had, from the 
results, we feel that at the time the budget was prepared, both 
ours and the administration's, that we knew a lot more about 
the specific needs and situations at the IRS than the White 
House, the OMB, or the Treasury Department did.
    Chairman Thomas. Or the General Accounting Office?
    Mr. Levitan. I am not aware of GAO's work on the budget, so 
I----
    Chairman Thomas. Not so much the budget, but the results of 
what the budget is intended to do, and that is to fund, in an 
orderly fashion, the various departments and agencies.
    So I guess my question would go to you, Mr. Williams and 
Mr. White. Based upon the IRS' decision, in terms of dealing 
with the modernization question and the timing, versus the 
budget money available and the budget money proposed by the 
Board, clearly either there's going to be more money than they 
can spend reasonably or they are not following a timetable 
which indicates they need to spend more money in a more rapid 
fashion. So where do you, either Mr. Williams or Mr. White, 
come out in analyzing the IRS' decisions on its change of pace 
in modernization, versus the additional recommendation of 
additional resources to be supplied to that area?
    Mr. White. Mr. Chairman, I would like to break that 
question up into two pieces. One has to do with business 
systems modernization, and I have with me Mr. Hite from GAO, 
who is our Director of Information Technology, and he will 
address that part of the issue.
    Chairman Thomas. I believe my question allowed you to 
utilize the resources available to us.
    Mr. Hite. Mr. Chairman, subsequent to the decision by the 
administration to fund the business systems modernization at 
$397 million, we have had discussions with the Commissioner and 
his executive staff about the need to ensure that plans for 
moving forward with the modernization are in line with their 
capacity to manage that. So, based on those discussions, the 
Commissioner has chosen to pull back on certain ongoing 
projects in terms of the pace and the plans for those, and also 
the timing for the initiation of new projects.
    In light of those changes, it was our opinion that the 
necessity of the additional $53 million then becomes an item of 
question, and whether or not the money that would be needed, in 
fact, would have a material effect on the progress of the 
modernization over the next year.
    I understand your position, that we don't want to throw 
more money at something unless we have the capacity to 
reasonably invest it in the software engineering community. 
This is referred to as the concept of the ``mythical man 
month'', where just throwing more resources at something 
doesn't necessarily mean that it's going to get done faster and 
better. You have to invest in something within the context of 
your capacity to manage that investment and, hence, our 
question about the necessity of that $53 million.
    Chairman Thomas. That gets to my initial question to the 
Commissioner. Any initial goals are stated with a degree of 
ambition and, to a degree, devoid of reality. As we move 
forward, my hope is that reality is what governs us. Because 
if, in fact, the IRS, as they have indicated on their business 
system projects, is beginning to experience performance 
shortfalls, not meeting deadlines, making adjustments, it 
clearly would have a budgetary impact in implementing.
    My concern would be how we make sure that we coordinate so 
that we can get the best advice possible between the GAO, the 
Treasury Department, and the Oversight Board, with the 
Oversight Board urging ``more gas, step on the pedal'', and IRS 
and GAO overseeing, give me some indication that perhaps the 
original goals were a bit overambitious and that we need to re-
adjust what our goals are, which would clearly affect the 
funding stream.
    I don't want this oversight to be the usual ``we didn't get 
enough money, therefore, we failed in what we were doing.'' I 
want to know if the original goals were achievable goals, which 
apparently there seems to be a reexamination of whether or not 
they're achievable. GAO would best function, for my purposes, 
in evaluating those goals and determining whether or not the 
reassessment or the readjustment of the reestablishment of 
those goals is an appropriate adjustment, and that an 
achievable time line has now been created so that we can 
measure against that time line.
    My concern is that, at the very beginning of this process, 
I want to know how the Board views itself and its role in 
trying to accomplish those very laudable goals that were stated 
for the purpose of the legislation, and how you hope to achieve 
some integration between the monitoring of the ongoing 
historical structures and the role of the Board, both in terms 
of encouragement, oversight analysis, and hopefully resource 
for the Congress. That's my concern in how we continue this 
coordination.
    So, with that, Mr. Levitan, on what basis do you feel 
comfortable evaluating the amount of money that you felt was a 
shortfall in the budget for the IRS, and whether or not the 
IRS, if they got the amount of money that you're proposing, 
could actually spend it in a meaningful way, given the 
adjustment of the various phase-ins of the modernization?
    Mr. Levitan. Chairman Thomas, that's an excellent question, 
and I really believe, particularly on that $53 million, our 
positions are not that far off from GAO. But let me explain.
    Another thing I would say is that I followed very closely 
the work that GAO has done in reviewing and auditing the work 
of modernization, and I think they are doing an outstanding 
job. By and large, I do agree with their conclusions.
    In looking at funding for modernization in technology, the 
Board is really recommending three items. One is the money for 
laptop and desktop computers. It has nothing to do with the 
slowdown. It's needed today and should be spent today.
    Secondly is multi-year funding for the ITIA account. That 
is again something to provide for additional management 
capability of the overall program. It will not increase 
expenditures actually in 2002, but will allow the IRS, with 
close oversight of GAO, Congress and others, to manage the 
program more efficiently.
    On the $53 million difference between ourselves and the 
President's budget, we have looked at the detailed plan that 
the IRS has put together for modernization. We have also looked 
at the impact of the slowdown that was just implemented. We 
believe that the IRS can effectively utilize that money in 2002 
and will allow us to go faster and get more done but still do 
it in an efficient manner.
    Now, as far as the key question that you asked, are the 
goals realistic and can they be obtained, on modernization, the 
goals have to be obtained. The only question is, how long will 
it take and how much will it cost. Unfortunately, the answers 
to those are that it's going to take too long and it's going to 
cost too much. But, the primary way that the Board has looked 
at it is that we would like to see the job done as quickly as 
possible, consistent with the IRS' ability to both absorb 
change and to manage the program effectively. We believe that 
they could do that, that they could use that $53 million and, 
therefore, be further down the road.
    Is it absolutely necessary expenditures for 2002? No. But 
the impact will be that they'll be further down the road and 
they will get the job done faster by being able to put more 
resources to work.
    Mr. Williams. Mr. Chairman, our primary concern is that the 
ITIA fund would run out of money completely, or that the 
releases would be delayed for the wrong reasons, in the 
appropriation process. So we would support the idea of multi-
year funding.
    We have another concern, though. Modernization stumbled 
significantly as it came out of the starting blocks. To date, 
we have spent $400 million and nothing has happened to improve 
service to taxpayers. We're worried that the modernization 
hasn't caught its balance yet, and until it does, flooding more 
money could result in exactly the kind of problems that you 
suggested. We would like to see the first projects completed 
and we would like to think that IRS learned from some rather 
substantial mistakes that were made early on by the prime 
contractor and by the IRS itself before accelerated funding is 
considered.
    Chairman Thomas. Chairman Levitan, if you think you have 
difficulty meeting two days every other month, we do this once 
a year. So we are not going to get the kind of progress if we 
assume that these hearings are sufficient for an oversight 
function.
    Frankly, I'm less concerned on where the three of you 
agree. We can put those in our pocket and walk away. My concern 
is where you don't agree. We are going to be conducting ongoing 
written dialogue in which, if you do disagree, we want you to 
present your argument as to why you disagree, so that we can 
create periodic monitoring sessions, notwithstanding not having 
the oversight.
    I agree with you, Mr. Chairman, that it may cost too much 
and it may take too long, but it has got to be done. We don't 
have any friendly takeovers or hostile takeovers on the 
horizon. It's ours, and we have to deal with it, 
notwithstanding the frustrations associated with it. All I want 
from the resources available is the best possible achievable 
goal setting, prioritization, monitoring, and then follow up, 
so that we can actually show progress--not matter how slow--
moving in the direction that we need to go.
    I look forward to the Board getting a few more months under 
its belt, to continue this ongoing dialogue with the other 
monitoring agencies. Thank you very much for your testimony.
    The gentleman from New York.
    Mr. Houghton. Thanks very much.
    Mr. Williams, you talked about $400 million just a minute 
ago. Where did it go?
    Mr. Williams. There has actually been a nice amount of 
progress in certain areas, and a troubling level of progress in 
others. The IRS has developed the platform and infrastructure 
for all of the improvements, the architecture plan is 
completed, and IRS has developed a project management 
discipline.
    The projects themselves, the things that will actually 
change the level of service, in all too many instances, have 
been cut back, are late and are over budget.
    Mr. Houghton. Is that because there wasn't enough money or 
it wasn't applied, or the management was a little lax, what?
    Mr. Williams. I have concerns with the delivery of the 
prime contractor, the consortium. They have been consistently 
late. I would also say, that the project management discipline 
that's been selected, the Enterprise Life Cycle, hasn't been 
followed very well. Many times the project is 90 percent done 
and the prime tends to move forward without completing the 
rest. You can't do that in projects of this magnitude and where 
issues of justice and taxpayer rights are involved. It has to 
be complete in a way that perhaps you would not find in private 
sector deliverables.
    Also there was inappropriate sequencing. The IRS started 
the project work before the blueprint was done, and had to go 
back and retrofit some of the initiatives.
    Also, there was a lapse in the area of management 
information systems development that was overlooked in the 
beginning, and it's vital to administering the program. 
Management information is still being organized for old 
bureaucracy, not for the new business units. That has to all be 
redeveloped.
    Mr. Houghton. Let me ask Mr. Levitan, do you feel the 
management has been a little lax in this area?
    Mr. Levitan. The modernization, which started probably 
around two years ago, got off to a slow start. The IRS did not 
have the management capabilities. The prime contractor did get 
off to a slow start. I'm not sure that they had all of the 
right kinds of people with the right kind of experience on 
board.
    Over the past year, I believe significant progress has been 
made in addressing those issues. Management processes have 
improved significantly----
    Mr. Houghton. You mean they've gotten better people?
    Mr. Levitan. The IRS has gotten additional people and 
they've gotten stronger people with more experience. They have 
put into place better and improved management processes.
    Are they enough? Are they a hundred percent? No, they're 
not. That effort does need to continue. GAO has pointed out 
specifically things that need to be done to improve it. We 
agree with those things.
    Mr. Houghton. If another $400 million was thrown at this 
issue, with the people you have now, do you think it would be 
better spent?
    Mr. Levitan. First let me say I do not believe that $400 
million has been wasted. I think that much has been 
accomplished and they are much further down the road. I think 
that the processes that are in place, and the people that are 
in place, with the continued improvement that must be made, I 
think will move them along and get the job done.
    Mr. Houghton. Finally, I would like to ask Mr. White a 
question.
    Mr. White, in your testimony you talked about the number of 
IRS employees going down by about a third, in terms of 
following up on these collection cases, and that is 
substantiated by your chart on page 7, tax delinquencies.
    I guess one of the things I have always talked to the 
Commissioner about--and, Mr. Levitan, you've heard me say 
this--is that one of the unique things of our system is the 
element of trust we have in it. If people feel that now they 
can take advantage of the system because there aren't the 
people to run it, it really does more than just destroy the 
numbers. It destroys the underlying support that we have.
    How do you feel about that?
    Mr. White. Mr. Chairman, I think you raise an excellent 
point. Many people, inside and outside IRS, are concerned with 
those declines for exactly that reason. Our tax system does 
depend on people believing that their neighbors are paying 
their fair share and that their business competitors are paying 
their fair share, and without that trust that others are paying 
their fair share, there is a concern that people may be less 
compliant in filing their taxes.
    One of the problems at IRS is that they currently do not 
have a measure of voluntary compliance, the extent to which 
people are voluntarily complying with the tax laws. They last 
measured it in 1988, and because of changes in the economy and 
the tax law, that is now outdated information.
    IRS does have an effort underway to try to develop a new 
measure of voluntary compliance, but right now, they are 
managing blindfolded in this area. They don't know the 
consequences of the kind of declines that I talked about in my 
statement.
    The STABLE initiative is designed to increase staffing in 
this area, as well as in the area of customer service, so that 
is part of their plan to address this issue.
    Chairman Thomas. I thank the gentleman.
    Does the gentleman from Pennsylvania wish to inquire?
    Mr. Coyne. Thank you, Mr. Chairman.
    Mr. White, given GAO's concerns as expressed by you in some 
of the operations of the IRS, is it your recommendation that 
the Board's budget be adopted, or do you want to take a 
position on that?
    Mr. White. Again, we can answer that in two pieces. I will 
let Mr. Hite briefly respond on the business systems 
modernization piece, and then I would like to come back and 
talk about the operating portion of the budget.
    Mr. Hite. With respect to the ITIA funding request, and 
whether it would be $397 or $450 million, we have not put forth 
an official GAO recommendation on the dollar amount.
    Our position has been, the way the Appropriations Act of 
'99 was set up, the moneys that are appropriated for business 
systems modernization are not available to IRS for use until 
they put forth these incremental expenditure plans to the 
Appropriations Committees for approval of release of the money 
for a specific increment of work to be done, with specific 
objectives to be accomplished during that increment.
    That's an additional control surrounding the use of 
appropriated funds that, in our view, mitigates the necessity 
to have a precise amount of money appropriated in the ITIA 
account, based on a specific, well-defined need for that year. 
It's the incremental release and the controls in place for 
assuring there's a justification for that incremental release 
that mitigates that need.
    So, again, we have not taken a position and made a 
recommendation with regard to 397 versus 450 million.
    Mr. White. And with respect to the operating portion of the 
budget, where there are some differences between the Oversight 
Board and IRS, some of those differences, for example, are due 
to inflationary, nonpay costs that would be borne. IRS believes 
that they can cover those costs out of their budget, and until 
we see IRS lay out some facts about the negative consequences 
of failing to get that additional budget money, it is difficult 
for us to support the increase.
    Mr. Coyne. Should we take from your testimony that it's not 
a desirable thing to be shelving these tax delinquencies?
    Mr. White. We are very concerned about what that does to 
the temptation to not fully comply with the tax laws, that the 
taxpayers see that and get concerned about whether their 
neighbors and competitors are paying their fair share.
    Mr. Coyne. Is there any evidence in your finding that, if 
the budget were increased, if there were more resources 
available to the IRS, that there would be less shelving of the 
tax delinquencies?
    Mr. White. We do believe that the budget increase that IRS 
is asking for this year, compared to last year, does target 
areas where improvement is needed at IRS. The STABLE initiative 
is targeted on the compliance enforcement area. It is aimed to 
increase the number of full time equivalent staff there. It is 
also targeted on another area of need, telephone customer 
service.
    Mr. Coyne. Mr. Levitan, what will happen to the IRS 
taxpayer service, the walk-in and telephone assistance, and 
taxpayer compliance generally, if there is not adequate funding 
as recommended in your proposal?
    Mr. Levitan. We have reviewed the IRS' plans if they do not 
receive the funding for inflationary costs and other mandatory 
costs, which account for about $137 million. The net impact is 
that they will have 1,300 fewer people.
    Now, 1,300 fewer people is not going to have a huge change 
on the service or the enforcement levels, but what STABLE was 
meant to do was to say let's provide a one-time increase, 3,800 
people, to start to address these areas so that we can stop the 
level of performance degradation, stabilize it, and start to 
provide some level of improvement while we wait for 
modernization.
    More people are not the right answer to fix the IRS' 
problems. More people is like sticking your finger in the dike 
to stop the leaking while we rebuild the dike. That was our 
recommendation, to finish STABLE as it was originally designed, 
bring the level of people to that point, and then hold it 
relatively on a stable, even basis as we move forward. So it 
will have some impact on service and on enforcement. Exactly 
how much, I can't tell you.
    Mr. Coyne. Thank you.
    Chairman Thomas. I thank the gentleman very much.
    If there are no additional questions, obviously, the 
purpose of the legislation was to make sure that the Internal 
Revenue Service functioned to its best capacity and in 
delivering the performance of its currently much needed 
services.
    But my concern is that, in creating the Oversight Board, we 
have the traditional watchers and we have a new watcher. Our 
role is to watch the watchers. It is going to be much easier 
if, in fact, there is clear communication and, from a written 
point of view, I will request and hopefully you will provide 
assessments of each other's examination of the IRS.
    It really doesn't serve, in my opinion, the purposes of the 
legislation to come and hear three separate voices and then 
``we thank you very much for the testimony''. And we arrive 
next year and hear three separate voices.
    If, in fact, there is agreement in terms of your analysis, 
we need to know where that agreement is. Where there is 
disagreement, we need you to discuss those areas of 
disagreement and attempt to come to an area of agreement. We 
will provide the umbrella for that dialogue to occur.
    All of us, I think, have the same intention. Our goal is to 
make sure that, however much it costs, and for however long it 
takes, we have measurable, achievable goals and we move toward 
accomplishing what all of us want.
    Perhaps the goal I will finally state is one that's 
unachievable; that is, a smoothly functioning, responsive, 
Internal Revenue Service, as long as we have a voluntary tax 
system in which the collection of that money is essential to 
provide the revenue to run the government.
    You have an extremely difficult job, Mr. Levitan. Mr. 
Williams has a few other responsibilities under his umbrella, 
and the GAO, in terms of its money available in the job that it 
has, also has a difficult one.
    Thank you very much for your performance and testimony 
today. I look forward to the continued written dialogue that I 
will share with members of this Joint Committee, so that we can 
talk about the goals that were set and achieved at the next 
hearing.
    With that, the oversight hearing is adjourned.
    [Whereupon, at 10:25 a.m., the hearing was concluded.]
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