[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
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77-620 WASHINGTON : 2002
____________________________________________________________________________
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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
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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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