[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, 2002
=======================================================================
HEARING
before the
COMMITTEE ON FINANCE
COMMITTEE ON APPROPRIATIONS
COMMITTEE ON GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
and the
COMMITTEE ON WAYS AND MEANS
COMMITTEE ON APPROPRIATIONS
COMMITTEE ON GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
MAY 14, 2002
__________
JCS-4-02
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Joint Committee on Taxation
______
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COMMITTEE ON FINANCE
MAX BAUCUS, Montana, Chairman CHARLES E. GRASSLEY, Iowa
COMMITTEE ON APPROPRIATIONS
ROBERT C. BYRD, West Virginia, TED STEVENS, Alaska
Chairman
COMMITTEE ON GOVERNMENTAL AFFAIRS
JOSEPH I. LIEBERMAN, Connecticut, FRED THOMPSON, Tennessee
Chairman
------
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
C O N T E N T S
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Page
Press Release of May 8, 2002, announcing joint review............ VI
Opening statements............................................... 1
WITNESSES
Internal Revenue Service, Hon. Charles O. Rossotti, Commissioner. 9
Internal Revenue Service, Hon. Larry Levitan, Chairman, IRS
Oversight Board................................................ 66
Department of the Treasury, Hon. David C. Williams, Treasury
Inspector General for Tax Administration....................... 75
General Accounting Office, Mr. James R. White, Director, Tax
Issues......................................................... 90
SUBMISSIONS FOR THE RECORD
Hon. Max Baucus prepared statement............................... 142
Hon. Mary L. Landrieu questions for the record for David C.
Williams....................................................... 144
Hon. David C. Williams, response to submitted questions.......... 145
Hon. Mary L. Landrieu questions for the record for Larry Levitan. 148
Hon. Larry Levitan, response to submitted questions.............. 149
JOINT REVIEW OF THE INTERNAL REVENUE SERVICE, 2002
----------
Tuesday, May 14, 2002
The joint review met, pursuant to notice, at 10:00 a.m., in
room 215, Dirksen Senate Office Building, Hon. Kent Conrad
presiding.
[The press release announcing the hearing follows:]
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JOINT REVIEW OF THE STRATEGIC PLANS AND FISCAL YEAR 2003 BUDGET OF THE
INTERNAL REVENUE SERVICE
----------
TUESDAY, MAY 14, 2002
U.S. Senate,
U.S. House of Representatives,
Joint Committee on Taxation,
Washington, DC.
The joint review met, pursuant to notice, at 10:00 a.m., in
room 215, Dirksen Senate Office Building, Hon. Kent Conrad
presiding.
Senators present: Conrad, Grassley, Landrieu, and Reed.
Congressmen present: Houghton, Portman, Coyne, and Horn.
OPENING STATEMENT OF HON. KENT CONRAD, A U.S. SENATOR FROM
NORTH DAKOTA
Senator Conrad. The committee will come to order.
I am not Senator Baucus. Senator Baucus, as you know, is on
the floor with an amendment on the trade bill. We expected a
vote around 10:45. So, Senator Baucus called me yesterday and
asked me to chair this hearing, which I will do. We will break
at around 10:45 for that vote.
We appreciate very much the attendance of the witnesses,
and Senator Grassley has joined me here. Shortly, he, too, will
have to go to the floor because he, along with Senator Baucus,
is managing that bill on the floor. We appreciate his being
here for the beginning of the hearing this morning.
It has been almost four years since Congress enacted IRS
restructuring and reform legislation. Since then, we have seen
a significant turnaround in this important agency. Although we
cannot make taxpayers love the tax collector, we can eliminate
some of the frustration taxpayers experience by ensuring that
IRS employees conduct themselves as professionals and as public
servants.
Congress insisted that the IRS put a greater emphasis on
serving the public and meeting the needs of taxpayers in order
to restore public confidence in the IRS. It appears that we are
beginning to succeed.
Today, those charged with the oversight of the agency are
presenting the annual reports that we required of them in that
1998 law. The reports we will hear today indicate that customer
service and general tax administration have been improved.
Let me just go to the chart that shows tax administration
reorganization has been completed, total returns up 5 percent,
electronic returns filed up 110 percent, well ahead of what was
predicted, speed of refunds up 30 percent, telephone accuracy
up 7 percent, and public approval ratings up 35 percent. So,
significant gains in each of those areas.
As a common thread in previous appearances before the
Finance Committee, we discussed with the Commissioner the
reduction in enforcement efforts, a situation that has raised
concerns by both Democrats and Republicans.
Let us go to that. Enforcement revenue is down 9 percent,
individual audits down 52 percent, small corporation audits
down 73 percent, large corporation audits down 33 percent,
collection liens down 21 percent, collection levies down 82
percent, collection seizures down 98 percent, criminal
convictions down 27 percent.
Finally, a common thread in today's presentations is the
continuing need for modernizing IRS's aging computer systems.
Let me go to that chart.
Looking at system modernization. The Y2K program has been
completed. Management oversight. We get mixed reviews.
Communication 2001 and CAM, completed. The CADE, the
cornerstone project, has been delayed. Seven major system
projects are still in development. The updated employee
equipment, the new laptops, well under way. In fact, that has
occurred.
So we see progress in a number of areas. Certainly, in
terms of the concern that we had with public reaction, a
substantial improvement.
Still, we have major concerns. IRS indicates that the
compliance rate for individual taxpayers is about 83 percent,
which means that roughly 1 in 6 individuals is non-compliant.
The IRS estimated the individual tax gap in 1992 at $95
billion. That is the difference between what is owed and what
was being paid back in 1992.
Adjusted for inflation would be $120 billion today. When
the results of abusive shelters, offshore credit cards, and
other current schemes and scams are added in, today's total gap
has been estimated by some outside observers to run as high as
$200 to $300 billion.
Why does that matter? Well, what it says to us, if people
were compliant and companies were complying with the tax laws
that would exist, is we would have no budget deficit. We would
have no increasing debt.
Instead, we would be continuing on the path we were on,
paying down debt and having budget surpluses. This is
critically important when the baby boom generation is about to
start to retire.
Speaking as a former tax administrator, there is nothing as
frustrating as being able to identify taxes that are due and
owing, but which cannot be collected. The great frustration is
for all other taxpayers and the vast majority of people, vast
majority of companies, are paying what they legally owe.
It is very difficult for them to accept that they are
meeting their responsibilities and others are ducking theirs.
That is not fair.
Speaking as chairman of the Senate Budget Committee,
progress in collecting some of these obligations that we know
are out there would make it easier to put our fiscal house back
in order without having to make a single change in the Internal
Revenue Code.
I do not want to conclude without calling attention to the
fact that today's remarks by Commissioner Rossotti will mark
his last appearance as Commissioner at this joint review.
Mr. Commissioner, you took on one of the most difficult and
thankless jobs in government and found yourself not merely
running the IRS, but turning an 85-year-old bureaucracy in an
entirely new direction.
We will be forever grateful for your leadership. You and I
have met many times, both publicly and privately, and I have
enormous respect for the extraordinary energy and attention you
have devoted to the task.
I think you can be forever proud of your public service.
You have set a very high standard as Commissioner, which will
make the task of finding your successor even more difficult.
With that, I will turn to Senator Grassley for opening
remarks that he might make. As I understand it, the agreement
was that all members would have a chance for an opening
statement, then we would go to the witnesses.
OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR
FROM IOWA
Senator Grassley. Well, first of all, I thank you for
chairing this meeting, a meeting that we anticipated should
take place once a year because some of the problems we found
pre-Charles Rossotti in the IRS was that the Congress had not
been doing a very good job of oversight of the IRS.
And when any agency, not just the IRS, has such a long
leash, there is an effort for people to become more dictatorial
as they approach serving the American people.
This hearing--and this is the fourth one of these
hearings--was to bring all of the committees of Congress, both
House and Senate, appropriators as well as tax writing
committees, together in an oversight role of IRS at least once
a year to focus on the problems at IRS. It does not relieve any
of the various committees of our ongoing responsibility
throughout the rest of the year to do an adequate job of
oversight.
And too often we in Congress think our only job is
legislating, whereas, maybe a more important job is to make
sure that what legislating we have already done throughout the
decades is adequately enforced and the law is properly executed
according to Congress' will by those who have that job to do
it.
So I think that this is a very good forum to go in depth in
one environment to look at how one agency of the Federal
Government is doing.
With that background, I had the good fortune of serving on
the National Commission of Restructuring the IRS with
Congressman Portman and former Senator Kerrey of Nebraska.
I also had involvements over a long period of time with
former Senator Pryor of Arkansas in writing taxpayers' bills of
rights, particularly the first one, working with him in that
effort.
These efforts on my part, both serving on the Commission
and being concerned about taxpayers' rights, have been directed
towards achieving a proper balance between service to the
taxpayers and providing law enforcement that recognizes the
rights of taxpayers and to have the IRS be a consumer-friendly
organization with the motive behind that being that
constituents would not fear the IRS any more, or in fact not
fear the IRS at all, as you do not fear other government
organizations when you go to them for help.
The idea is that if the taxpayers get the proper amount of
help and there is a proper environment, particularly for
answering those first questions and getting a right answer to
those questions, that is the best way to collect the money that
Senator Conrad has pointed out may not be coming in.
Also, to make sure that we make proper use of all of the
tools that are there to make sure that taxpayers do comply. One
of the things that Senator Conrad talked about was auditing, as
a percentage of the total, being down.
But also, what Commissioner Rossotti has put in place, that
he has really upped the matching, technical and mechanical
matching of information that is a non-personnel way of catching
those who might cheat on their income tax as a way of foregoing
or doing more efficiently a process of collecting taxes.
Anyway, all of those things are part of an effort to bring
a balance to the taxpayers' bill of rights, but also to make
sure that every dollar is collected.
Now, some believe that these twin goals cannot be achieved,
that somehow they are mutually exclusive. That is not the case.
I look forward to today's hearing that will discuss the
progress made in achieving the goals of taxpayers' rights on
the one hand, and what needs to be done about guaranteeing
taxpayers get all their rights, and on the other hand
collecting every dollar that is due, where we are on that, and
what more needs to be done in regard to that.
And then, like my chairman pro-tem, Senator Conrad,
thanking Commissioner Rossotti for his service to the people. I
know some view me, as a Senator, as one of your toughest
critics. It is certainly no secret that I take strong interest
in the works of the IRS.
But let me say that sometimes lost in the many letters that
I send to you, Commissioner Rossotti, is my belief that you do
a fine job as tax commissioner.
I was a strong advocate for having a person like you with
business experience as the new Commissioner and not another tax
lawyer that had been the pattern throughout the history of the
IRS.
I think that your tenure has shown this to be a good
approach, in other words, a business administrator approach to
leading the agency. I hope that the present administration
nominates a new IRS commissioner that will have a very strong
background in business as you did.
So, I thank you once again for your service.
Senator Conrad. Thank you, Senator Grassley.
I should indicate that this is a joint hearing of the
Senate Finance Committee, the Senate Appropriations Committee,
the Senate Governmental Affairs Committee, and the House Ways
and Means Committee, the House Appropriations Committee, and
the House Government Reform Committee. This is an unusual joint
hearing.
Representing the House Ways and Means Committee is
Congressman Houghton, who is next.
OPENING STATEMENT OF HON. AMO HOUGHTON, A U.S. REPRESENTATIVE
FROM NEW YORK
Congressman Houghton. Thank you very much, Mr. Chairman.
Good to be here. I will make this brief.
I want to thank you very much for having this hearing. I
want to thank Senator Grassley. It is nice to see Senator Reed
coming in here. We are going to be down in your State over the
weekend with the Canadians, Jack.
Senator Reed. I am going to be there to greet you.
Congressman Houghton. Great. Wonderful. Wonderful.
And then also, my associate here, Mr. Coyne. He and I work
very closely together on the Oversight Committee of Ways and
Means Committee. Then, of course, Steve Horn, who is
representing the Government Reform; all wonderful members of
Congress.
You said wonderful things about Mr. Rossotti, and I would
echo those. However, the true test of a man's career is really
in the next phase: not what he has done, what he has put in
place. I have a feeling that what you put in place is very
good. You have got a new organization. You have a sense of what
the auditing function should be and beefed up. You have got
great plans for technology. The critical thing, obviously, is
going to be who replaces you.
So I wish the IRS well. I wish the commission well. I think
the fact that we are working together here is extraordinary,
and I thank you very much, Mr. Chairman.
Senator Conrad. Thank you, Congressman Houghton, very much.
And thank you for the contributions that you have made, with
your background. I think it has made a real difference, and we
appreciate it.
It is good to have Congressman Coyne with us as well, and
Congressman Horn.
Congressman Coyne, welcome. Why do you not proceed?
OPENING STATEMENT OF HON. BILL COYNE, A U.S. REPRESENTATIVE
FROM PENNSYLVANIA
Congressman Coyne. Thank you very much, Senator.
Today's session is the fourth annual hearing on the
Internal Revenue Service, held jointly by the House/Senate
committees that have jurisdiction over aspects of the Internal
Revenue Service.
In adopting our current joint House/Senate hearing mandate,
we hope that this proceeding and the proceedings that follow
would clarify the voice of Congress and provide the IRS with
clearer direction.
I think that this process has helped to some degree in
achieving our goals. The Ways and Means Committee recently
approved a taxpayers' rights bill that contains a host of tax
administration changes that will benefit taxpayers in their
dealings with the IRS.
Enactment of this legislation should be a priority in the
107th Congress by both Houses. The Ways and Means Committee's
Oversight Subcommittee has continued its tradition of holding
hearings on the tax return filing season and the
administration's proposed budget request.
Based on our review, I thank the IRS for an excellent 2002
filing season. I also hope that we can all support full funding
for the IRS's fiscal year 2003 budget, as requested by the
President. I am convinced that the IRS must have the tools and
resources to do its job well.
As we discuss the IRS's overall strategic plans and need
for adequate staffing and funding, I want to thank Commissioner
Rossotti and the IRS employees that he has led nationwide for
their dedicated work and long-term commitment to excellence in
government.
Thank you very much, Senator.
Senator Conrad. Thank you very much, Congressman.
Next, we will hear from Congressman Horn, who is here
representing the House Government Reform Committee. I know that
just recently you had the opportunity, Mr. Commissioner, to
spend some extended time with Congressman Horn and his
associates on that committee. So, this will be another chance.
Congressman Horn, it is always good to have you on this
side.
OPENING STATEMENT OF HON. STEVE HORN, A U.S. REPRESENTATIVE
FROM CALIFORNIA
Congressman Horn. Well, thank you very much, Chairman
Conrad. I appreciate the opportunity to represent the House
Committee on Government Reform at this third important meeting.
I want to start by commending Mr. Rossotti for his
outstanding service as Commissioner of Internal Revenue over
the last five years.
Commissioner Rossotti's term of office expires in November,
and he will be sorely missed. I hope we can find a successor of
his caliber, although that will indeed be a challenge. We need
to seek a chief executive officer in this job.
When Mrs. Malone, my ranking Democrat, and I talked to
President Clinton, he saw the idea and he passed on the way to
do it with Secretary Rubin. The next thing I knew, about six
months or a year, I run into the IBM chief executive officer.
He said, boy, you have sure got something for me to do. I said,
that is right. Let us hope it is a good one.
That is exactly what we ought to be doing this time, is
getting a chief executive officer. I said to the President,
look, every Republican, every Democrat, has had either tax
accountants, tax lawyers, et cetera. I do not have anything
against them. But when you have an organization of over 100,000
people, we need people that are executives.
The focus of today's hearing is on the long-term strategic
objectives of the Internal Revenue Service and the agency's
progress in implementing them.
Commissioner Rossotti has developed an excellent strategic
road map to take the Internal Revenue Service where it needs to
go. However, the journey will not be easy, although there are
signs of modest progress. The agency still faces daunting
management challenges that must be overcome before its
strategic objectives can be achieved.
The Internal Revenue Service has chronic financial
management weaknesses. Its financial systems simply cannot
produce reliable and timely data to support its day-to-day
operations. The agency's inability to make effective use of
information technology is another chronic problem.
The Internal Revenue Service appears to be recovering from
past failures and has developed a sound modernization
blueprint. It now faces the major challenge of implementing
that blueprint.
Computer security is yet another significant challenge for
the Internal Revenue Service, as it is for most federal
agencies. Until these core management challenges are overcome,
the Internal Revenue Service will be unable to provide first
class customer service to American taxpayers and effectively
enforce the tax laws for the benefit of all honest taxpayers.
As Commissioner Rossotti is well aware, I am especially
concerned about the agency's abysmal performance in collecting
delinquent tax debts. That is what got me into this back in
1996, and we put on the books the way to get debts around from
the other agencies, the cabinet agencies.
The IRS has made no effort, though, in its own sense, to
collect tens of billions of dollars in tax delinquencies. Back
in 1996, it was $60 billion sitting there and nobody was doing
anything about it, allegedly because of the inadequate staff
resources. At the same time, however, the agency has resisted
the idea of using private contractors to assist in its
collection efforts.
I understand that the Internal Revenue Service is now
developing legislative proposals to use private sector
collection agencies. This is long overdue. Most other federal
agencies have been using private collection agencies for years,
and with great success.
There is no reason why the Internal Revenue Service cannot
do likewise. I hope that the agency will submit its legislative
proposal soon, and that my colleagues on the committees of
jurisdiction will support those proposals.
Thank you, Mr. Chairman.
Senator Conrad. Thank you, Congressman Horn. Thank you for
your thoughtful comments.
Also with us today representing the Senate Appropriations
Committee are both Senators Landrieu and Senator Reed.
Senator Reed, you are up.
OPENING STATEMENT OF HON. JACK REED, A U.S. SENATOR FROM RHODE
ISLAND
Senator Reed. I will be extremely brief, Mr. Chairman, just
to welcome the Commissioner and his colleagues, and thank him
for his service.
I think the second day on the job, you joined Senator John
Chafee and I to brief some of our visitors from Rhode Island.
Thank you, Mr. Commissioner.
Amo, we look forward to your visit. All of Rhode Island is
getting ready. We have all of our trinkets ready, so we
encourage you to come, stay, and spend.
Bill, it is good to see you.
Thank you, Mr. Chairman.
Senator Conrad. Thank you, Senator Reed.
Senator Landrieu, also from the Appropriations Committee,
welcome.
Senator Landrieu. Thank you, Mr. Chairman.
I just have a statement for the record, because I am
interested in hearing the progress we are making on this very
difficult challenge from the witnesses.
Senator Conrad. The statement will be made part of the
record.
[The prepared statement of Senator Landrieu follows:]
OPENING STATEMENT OF HON. MARY L. LANDRIEU, A U.S. SENATOR FROM
LOUISIANA
Thank you, Mr. Chairman. It is a pleasure to be here
representing the Appropriations Committee at this joint review
of the Internal Revenue Service and its progress in
implementing the reforms under the Internal Revenue Service
Reform and Restructuring Act of 1998.
I share some concerns about ensuring that the IRS continues
to operate effectively, efficiently, and most importantly with
an emphasis on putting its customers first. All Federal
agencies should operate with these principles in mind. This is
particularly true of the IRS because every American taxpayer
comes in contact with the IRS in some way every year. So
customer service must be the best.
Commissioner Rossotti, you deserve our congratulations.
Your five year term as Commissioner marks a turning point in
the history of the Internal Revenue Service. You have led the
IRS through a successful reorganization from the geographical
structure of the past to one focused on taxpayer needs.
According to the Roper opinion research organization customer
satisfaction with the IRS has increased 44 percent in the last
two years no doubt because of initiatives like the E-Filing
program and the improvements you have brought to the telephone
service. Forty-six million taxpayers used e-filing, six million
more than last year. Over a four-week period in March, 74
percent of all callers got through on the toll-free line,
exceeding the IRS's goal of 71 percent for the year. These are
just a few of the many accomplishments the IRS has achieved
during your tenure, Commissioner Rossotti. Certainly there is
room for improvement, but you and all of the people at the IRS
have built a solid foundation upon which to achieve further
success.
The decline in the number of enforcement actions the agency
has pursued concerns me, however. There was an increase this
past year in tax levies, liens, and seizures, but the total
number of enforcement actions are way below the number the
agency conducted as recently as 1999. While I do not wish a tax
audit on a disproportionate number of people and I certainly do
not believe that they should be used in a coercive manner,
effective enforcement actions help to maintain the integrity of
the tax system.
I am looking forward to hearing the testimony on how the
IRS plans to expand its enforcement activities with the funding
it has requested for FY '03. The budget request includes
funding for an additional 1,179 full-time equivalent employees
for the IRS. Enforcement activities would be increased by 1,857
FTE. According to the IRS, 76 percent of the FTE will come
about through the ``Re-application of efficiencies and workload
savings'' and not necessarily the hiring of actual revenue
officers. I would like some clarification about how all of this
is going to work and whether it will allow the IRS to bring the
number of audits and enforcement actions substantially closer
to the levels we have seen in the past.
Mr. Chairman, on the Appropriations Committee we have a
responsibility to ensure that government agencies have the
resources to accomplish their goals and to fulfill their
missions. Therefore, thorough and effective tax collection is
necessary. The IRS has set an ambitious agenda for itself in
the enforcement area and in the areas of customer service and
information systems management. I want to make sure that it has
the resources to continue the progress it has made.
Thank you again, Mr. Chairman. I look forward to hearing
from our witnesses.
Senator Conrad. Now we will turn to our witnesses. We have
got four outstanding witnesses before the committee this
morning, starting with our Commissioner, Commissioner Rossotti.
Welcome. Please proceed.
STATEMENT OF HON. CHARLES O. ROSSOTTI, COMMISSIONER OF INTERNAL
REVENUE, WASHINGTON, DC
Commissioner Rossotti. Thank you very much, Mr. Chairman
and members of the committee.
First, let me just acknowledge and express my gratitude for
all the comments you made about me in the office. Your support
throughout this period has been tremendous and is probably the
only reason that I have managed to make it through four and a
half years.
It certainly is appropriate at this point to step back, as
the committee is doing, and see how well we are following the
direction that we were given in the Restructuring and Reform
Act.
We were given a mandate in the Restructuring Act, and even
before that, as Senator Grassley noted, by the National
Commission on Restructuring the IRS. The Commission articulated
both the challenges and problems that the IRS faced, as well as
setting the stage for passage of the act itself.
As I see it, the direction in the act and in the commission
requires fundamental change in the entire way that the IRS
operates and executes its mission, which includes serving
compliant taxpayers, as well as ensuring compliance with the
tax laws.
I strongly agree with Senator Grassley's statement we are
not trying to move a pendulum, as some use the metaphor,
between taxpayers rights on the one hand and enforcement on the
other hand.
Instead, we are looking to improve the whole way that the
IRS operates in all of its dimensions. This does mean radical
change in everything about the agency, its mission, goals, the
way we measure performance, organization structure, training,
technology, and business practices, all of this directed
towards improving our performance against our mission.
While RRA did provide a mandate for this fundamental
change, it is also important to note that the ongoing job of
the IRS in administering the tax system did not stop, nor did
it even slow down.
In other words, we were being asked to modernize and change
while still administering the world's largest, most complex,
and constantly changing tax system.
I think of it a little bit like driving a race car around
the race track while the pit crew is running around alongside
trying to figure out how to change the engine without slowing
down the car.
I have used that analogy a few times, so I decided in this
hearing I would try to put some examples around it. On the
first chart up there, I have listed some of the things that
have been happening in the tax system as a whole over the last
five years.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
One important point to note is that, simply because of the
growth in the economy, the workload of the IRS grows every
year. In five years, that accumulates to some big increases: 12
million more tax returns, $527 billion more in gross revenue to
collect, and so on.
Also, we note that the Tax Code itself is constantly
changing. Over this period, we had 19 laws passed and 293 Tax
Code provisions changed.
Of course, there are always what we call ``special
projects'' that we have to do, such as the century date change
which occurred during this period, administering last year's
advance tax refund program, providing administrative relief to
the victims of the September 11th terrorist attacks, and
responding to the anthrax threats.
Now, that was what was going on in the background, so to
speak, in the tax system. We have put up now a couple of other
charts that show some of the internal changes that were taking
place in the IRS and in the tax administration system during
this period. There were so many we could not fit them on one
chart, but we have got two to summarize them.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
RRA itself had 115 provisions requiring IRS action, and
some of those, such as provisions for innocent spouse relief,
collection due process, offers and compromise, and notification
of taxpayers about third party contacts, generated, as you can
see in those numbers, hundreds of thousands of additional
cases, some of them very complex cases, that we had to handle
and resolve.
On top of that, of course, in order to implement the
changes as noted on the chart on the righthand side there,
major internal changes took place. Our entire organization
structure was changed. We eliminated the old geographic
structure and put in a new customer-focused organization.
As part of that, nearly every senior management and
executive job in the IRS was abolished and redefined, and in
most cases re-competed. Of course, following Section 1204, our
entire system of measuring performance of employees and
organizations was abolished and reconstructed.
So when we take together the combination of workload and
Tax Code growth on one hand, and massive change in response to
RRA itself, it did pose a major challenge, as any large
institution would have seen it.
I am pleased to report that all of the activities on both
of these charts were executed successfully during this period
without any major misstep, although certainly there were
problems, setbacks, and issues that occurred along the way.
I think what is most gratifying, is that these changes have
already resulted in the IRS being in a better position to serve
the public more effectively. That point has been recognized, or
at least has begun to be recognized, by the public.
As you can see in this next chart that is going up, there
were two respected surveys that we used to track performance
over time. One of them goes back to the early 1980s, and that
is the Roper-Stark survey. It shows, as you can see, that our
rating increased significantly in the past three years, after
hitting an all-time low in 1998.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
The other survey done by the University of Michigan, which
is shown by the red line, also showed considerable increase in
satisfaction among individual taxpayers, in fact, the largest
favorable gain of any of the 30 federal agencies that they
surveyed.
Not to put too much emphasis on surveys, but I believe that
the public's attitude towards the IRS is fundamentally
important to the health of the tax system. I do not see how it
can be acceptable for the government agency that affects more
Americans than any other agency to also be the lowest rated.
So, changing that was a mandate in RRA 1998, and we are
beginning--although I certainly stress beginning--to deliver on
that mandate. There are some tangible indicators that back this
up.
Many are in my testimony, but just to cite a few: in the
2001 filing season, we achieved--in fact, exceeded--our goal of
46 million electronically filed 1040 returns. Our Web site,
irs.gov, had two billion hits.
On the questions that taxpayers ask us on tax law and
accounts over the telephone, our accuracy rates were up to 83
and 89 percent respectively, which is a significant increase,
as the Chairman noted, over where we used to be, although there
is certainly still room for improvement.
On the compliance side, our near-term goal was to at least
stop the decline. We have begun to do that by stabilizing our
activity levels, audits, and collections in other areas, while
also--we think this is very important--putting increased focus
on the most important areas of non-compliance, such as misuse
of devices like offshore accounts and trusts to hide income,
use of very complex tax avoidance transactions by corporations,
failure to pay employment taxes, and erroneous refund claims.
As a matter of fact, combatting what we call the actively
promoted tax schemes is our highest compliance priority and we
are using every strategy and every tool we have, ranging from
taxpayer education to criminal investigations, to focus on that
particularly important area.
Having noted that there is progress, we believe, in
improving service and at least in stemming the long-term
decline in compliance, I have to say that neither aspect of the
IRS mission is being, today, executed at what I think any of us
would consider a satisfactory level.
There are major gaps remaining in both our level of service
to compliant taxpayers, and even more so, perhaps, in our
ability to address even the important areas of non-compliance.
For example, every year we are unable to address millions
of specific cases involving taxpayers who we know with
reasonable certainty are not paying all they owe. We simply
have to put them aside for lack of capacity.
I think these remaining deficiencies undermine the
effectiveness and fairness of the tax system in the short run
and continue to pose serious long-term risks to the
government's revenue stream in the long term.
So what is the course for the future? Well, I believe that
the plan is actually well laid out. In fact, planning has not
been our problem. We have had, I believe, good plans.
Now we have some of the key building blocks in place, such
as the new organizational structure, new management team, new
performance measures, and new strategic planning process to
help us put our resources where they are most needed.
So I think, with sustained and skillful management and
adequate resources, it is possible for performance on all
aspects of IRS's mission to improve steadily over the years to
come.
One of the essential building blocks for success is our
business systems modernization program. Last year and this
year, the IRS plans to implement three critical pieces of this
future system architecture: a new communications system for our
telephone traffic, and the first new installations of a new
security infrastructure, and a database to maintain taxpayer
records.
Over the long run, these systems will allow us to respond
more accurately and promptly to taxpayers and to increase the
productivity of all of our employees, including our compliance
employees.
As important as it is, however, business systems
modernization by itself will not close the gap in our
performance. We need, in addition, adequate, qualified staff
resources. Over the last five years, while the increase in
workload that we noted on those charts occurred, the number of
IRS employees continued to decrease.
This year and in future years, the growth in the economy
will continue. So in order to close that gap and cope with the
increased workload, we do need some additional staff resources.
In the 2003 President's budget, we have asked for a net
staff increase of 1,179, which, because of productivity gains,
will produce about three times that much in performance.
So let me conclude by saying, Mr. Chairman, that I think
the course that we have laid out, and as provided for in the
2003 budget, is the correct one. If we are given modest but
consistent increases in operational resources, adequate funding
of modernization, and, we hope, very good management internally
of these resources, I believe we can close the gap and fulfill
the mandates that you, the Congress, and the public gave us in
the Restructuring Act.
Senator Conrad. Thank you, Commissioner Rossotti.
[The prepared statement of Commissioner Rossotti follows:]
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Senator Conrad. Now we will hear from Larry Levitan, the
chairman of the IRS Oversight Board. Welcome. Please proceed
with your testimony.
STATEMENT OF HON. LARRY LEVITAN, CHAIRMAN, IRS OVERSIGHT BOARD,
WASHINGTON, DC
Mr. Levitan. Mr. Chairman and members of the Joint
Committee, thank you for holding this hearing and inviting me
to testify.
Mr. Chairman, the IRS is far from a perfect agency, but, as
shown in the charts that you had earlier, it is making
significant progress in improving itself.
The Oversight Board oversees the IRS in accordance with the
responsibilities assigned to it in RRA 1998. These duties
closely resemble those of a corporate board of directors, but
are tailored to fit a public sector organization.
Carrying out these duties requires that the Oversight Board
focuses attention on key strategic issues that can really make
a difference in the long term.
Our governance efforts fall into three major categories:
strategic planning, budgeting, and performance monitoring.
After reviewing the IRS's strategic plan and getting
external stakeholder comments, the Oversight Board approved the
IRS strategic plan and believes it is an excellent plan. The
challenge is not in the planning, but in the execution of that
plan.
The Board's process is more extensive than the approval of
a formal plan. The Board is focused on establishing a strategic
planning process and a discipline linked to critical functions
such as budget formulation, executive evaluation, performance
management, and operational planning. Ensuring the appropriate
linkages and alignment among these efforts is critical to the
successful implementation of the strategic plan.
Probably the most critical challenge that both the IRS and
the Board faces this year, is finding a new Commissioner as
Charles Rossotti completes his five-year term. RRA 1998
requires the Oversight Board to recommend candidates to the
President for the position of IRS Commissioner.
The Oversight Board has exercised this responsibility by
partnering with the Treasury Department to develop a position
and candidate specifications describing the qualifications
needed, and hiring a search firm to identify qualified
candidates.
The Oversight Board believes the next Commissioner must
have the experience and competence necessary to ensure that the
IRS continues the transformation that was started under
Commissioner Rossotti's leadership.
Mr. Chairman, last year I reported that the President's
fiscal year 2002 budget did not adequately support the IRS's
strategic plan and failed to provide enough funding for
technology modernization and other vital operations.
Although much of the difference in budget requests was
related to systems modernization, there was a difference of
$138 million for IRS operations. This funding would have
provided for 1,300 additional FTEs that would have directly
impacted the IRS's ability to implement its strategy of
immediately improving customer service and enforcement levels.
In retrospect, I believe our judgment last year was
correct. Neither the IRS nor the Oversight Board is satisfied
with the state of the IRS's performance. Enforcement activity
has fallen for many years, while at the same time several areas
of non-compliance are troublesome and need more attention.
My written statement includes some examples, such as K-1
matching and offshore credit cards. The Board does not believe
that the IRS will have adequate resources to follow up on many
of the cases that are identified by these new programs.
During the formulation of the fiscal year 2003 budget, the
Board worked closely with the Department of Treasury.
Nonetheless, the Board's recommended 2003 budget is $92 million
higher than the administration's proposed budget.
Because of emerging issues, the Oversight Board is now
concerned that the administration's 2003 budget will not allow
the IRS to make progress in enforcement activities that are
necessary.
Our greatest concern is a potential $70 million negative
adjustment to the IRS budget for a 4.1 percent pay raise for
federal civilian employees. The Board urges Congress to fund
any pay raises over the 2.6 percent proposed in the President's
budget.
Collecting taxes is a thankless job, and stories of failing
resources at the IRS seem to strike a sympathetic ear among
taxpayers. However, the reality is much different. Honest
taxpayers across the country--and they are in the vast
majority--must pick up the tab for those taxpayers that cheat.
An IRS that can enforce the tax laws fairly for all serves
honest taxpayers by ensuring all taxpayers are paying what they
owe in accordance with the tax laws passed by Congress.
Let me close by also thanking Commissioner Rossotti for the
outstanding job he has done during the past five years. We
believe the country owes him a debt of gratitude for public
service he has given us during this period.
Thank you.
Senator Conrad. Thank you, Mr. Levitan, for that very
strong testimony. And thank you for the role that you play.
Congress wanted this Oversight Board so that we had an
independent look at what was occurring, and you have certainly
provided that. For that, we are grateful.
[The prepared statement of Mr. Levitan follows:]
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Senator Conrad. Next, we have Mr. David Williams, who is
the Inspector General of the Treasury Department.
Let me indicate that a vote has started on the Senate
floor. It just started, so we have got about 14 minutes left.
My intention is that we will have Mr. Williams complete his
testimony, and then those of us that have to go to the floor to
vote will do that. Then we will continue with Mr. White.
Mr. Williams, welcome.
STATEMENT OF HON. DAVID C. WILLIAMS, TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION, WASHINGTON, DC
Mr. Williams. Thank you, Mr. Chairman and members of the
committees. I appreciate the opportunity to appear before you
today to discuss the changes and reforms that have taken place
at the IRS since the passage of the IRS Restructuring and
Reform Act of 1998.
In 1998, the IRS undertook a course of dramatic change.
These changes were prompted both by issues that the Congress
identified in a series of hearings, and through opportunities
imagined by the new Commissioner and the Secretary of Treasury,
who worked closely with key congressional committees.
The changes consisted of reforms, fundamental
organizational design alterations, and a desperately needed
modernization plan for the IRS's outmoded computer systems.
The organizational design plan would take the IRS from an
old line governmental hierarchy to a modern, customer-focused
organization. The forms were designed to address taxpayers
rights and to strike at abuses. The modernization effort was to
catch up with technology to support the emerging organization
in an imaginative fashion.
These important and fundamental changes faced serious
challenges. The culture of the organization for good and bad
reasons, was very resistant to sudden change. Second, these
decisive changes needed to occur within an organization that
was nearly blinded by a lack of management information systems,
meaningful research capacity, and performance metrics.
Thus far, the early course of the reforms have had
successes: a comprehensive strategy for the future was
constructed and a broad-fronted implementation plan was set in
motion.
Through this effort, problems were honestly identified and
solutions constructed. Also, I believe that credibility was
restored and a positive, constructive relationship was
established between the agency and the Congress, largely as a
result of the efforts and leadership of the Commissioner.
During his tenure, the IRS succeeded in achieving an
unbroken record of successful filing seasons, despite a growing
workload. However, some of the change initiatives stalled and
others have occurred at an agonizingly slow pace.
For example, enforcement actions against individuals and
businesses that purposefully conceal tax liabilities, or even
refuse to submit tax returns, have fallen dramatically, despite
concerns that tax cheating remains at high levels. Also,
customer service, especially in the area of tax law guidance,
needs major improvement.
The IRS has made progress in modernization of its
information technology systems and some benefits to taxpayers
have been delivered, such as improvements in the capacity to
handle and route taxpayer telephone calls.
However, most modernization projects have experienced cost
and schedule overruns and have delivered less than expected.
These setbacks are particularly threatening in light of the
fact that so many other reforms are dependent on modernization
of the computer systems.
In addition, computer security has often taken a back seat
to other priorities and has left the quest for adequate
security levels a distant one.
TIGTA's audits and investigations indicate that, despite
some impressive recent progress, the IRS is still vulnerable to
outside hackers and internal abuse.
For example, TIGTA has identified significant weaknesses in
controls over external access to Internet gateways and
weaknesses to the IRS network operating systems.
In addition, during fiscal year 2001, TIGTA conducted 446
investigations of IRS employees improperly accessing
confidential tax information.
In regard to the reform efforts outlined in RRA 1998, there
were 71 provisions that impacted taxpayer rights. TIGTA
auditors have assessed the IRS's compliance with 22 taxpayer
rights provisions and found that the IRS has fully implemented
3 provisions, and is generally compliant with 2 additional
provisions.
Notable RRA 1998 provisions that have not been fully
implemented include informing taxpayers of their rights when
liens or levies are planned; providing notices of tax
liabilities to each spouse noted in a joint return; and
ensuring that collection statute extensions are only obtained
with an installment agreement or levy release.
These issues were among those that served as the impetus
for reform legislation, and TIGTA believes the taxpayer rights
provisions are important and will continue to oversee the IRS's
efforts to comply. Encouragingly, allegations of 1203
violations have dropped significantly.
In closing, I would like to say that the IRS is now
entering a very challenging period. Much of the IRS's progress
and credibility and unwavering march toward reform is
attributed to the leadership of the Commissioner, whose term
will expire in November.
It is particularly essential that his replacement continue
his legacy and possess outstanding qualifications as a change
manager and reformer.
Thank you.
Senator Conrad. Thank you very much for that excellent
testimony.
[The prepared statement of Mr. Williams follows:]
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Senator Conrad. We are going to go now to vote, as we have
seven and a half minutes remaining.
I am going to ask Congressman Coyne to assume the gavel.
Mr. White, if you would proceed with your testimony, then we
will go to questions. We will return as promptly as we can.
Congressman Coyne. Mr. White, you can proceed.
STATEMENT OF JAMES R. WHITE, DIRECTOR, TAX ISSUES, U.S. GENERAL
ACCOUNTING OFFICE, WASHINGTON, DC, ACCOMPANIED BY STEVEN
SEBASTIAN, ACTING DIRECTOR,
GENERAL ACCOUNTING OFFICE
Mr. White. Thank you.
Mr. Chairman and members of the committees, we are pleased
to participate in this joint review of IRS's progress since the
passage of the IRS Restructuring and Reform Act.
As requested, our statement includes a series of figures
giving an overview of IRS's recent performance. The figures are
in the appendix.
In the interest of time, I will briefly summarize what the
figures illustrate.
Since 1995, as has already been discussed, IRS's workload,
measured by tax returns filed, has increased, while staffing
has decreased.
At the same time, IRS reallocated these shrinking resources
with a disproportionate decline in compliance and collection
staffing and more emphasis on both service to taxpayers and
information systems' operations and investment.
The reallocation of resources shows some signs of beginning
to improve taxpayer service and accuracy of telephone
assistance has improved, but the compliance and collection
programs have seen large and pervasive declines. For example,
in audit rates, collection cases closed, uses of liens and
levies, and raw productivity without adjusting for quality.
Mr. Chairman, IRS is at a critical juncture. Commissioner
Rossotti has said he will be stepping down in November, about
halfway through the 10 years he estimated would be necessary to
modernize IRS.
During his tenure, IRS has made important progress at
laying the management foundation for a more modern agency, able
to respond to taxpayer needs faster, more accurately, and at
lower cost.
Progress includes the transition to a new organizational
structure and a new strategic planning, budgeting, and
performance management process which IRS used to identify 2,300
positions for reallocation to higher priorities.
Progress also includes a new employee evaluation system
aligned with the mission of the agency. In addition, IRS has
made progress developing a sorely-needed measure of voluntary
compliance, establishing the system's infrastructure,
delivering systems applications, and establishing the controls
and capabilities needed to effectively acquire and deploy
modernized systems.
I said earlier that IRS is at a critical juncture. While
progress has been made, the foundation for a modernized agency
is not complete, and neither is the structure to be built on
top, the reengineered business processes that would deliver
better service.
To continue modernizing, IRS must successfully manage some
significant risks that threaten progress. One area of risk is
IRS's compliance and collection programs which, as noted, have
declined, sometimes dramatically, since 1996.
Many view these programs as critical for maintaining the
public's confidence in our tax system. If honest taxpayers
believe that large numbers of their neighbors or business
competitors are not paying their fair share, then voluntary
compliance could be adversely affected.
A decline in voluntary compliance would undermine IRS's
modernization efforts, and the commissioner has emphasized the
need to reverse these trends.
Another risk area is systems acquisition and deployment.
Since 1999, Congress has provided almost $1 billion for
investment in IRS's business systems. Despite the progress in
building management capacity, IRS is not where it needs to be
in implementing management controls and capabilities, which
increases the risk of not delivering systems capabilities on
time and within budget.
Timing is critical. As IRS goes forward, the risk of not
having all these controls grows because systems
interdependencies and complexity increase dramatically during
the later stages of projects. That is, during detailed system
design, development, and implementation. IRS is now in this
stage on several large projects.
Certain aspects of performance management are another risk
area. IRS needs to have comparable performance measures over
time and a date suitable for assessing performance. IRS needs
to more routinely conduct evaluations of its programs.
IRS needs to better link performance and resource use.
Current inadequacies and missed opportunities limit IRS's
understanding of the reasons for its performance and ability to
identify cost-effective improvements.
A final risk area is financial management. While IRS has
received unqualified audit opinions, it has not been able to
generate financial management information in a timely manner.
This leaves management less informed in making decisions about
how to improve performance.
Mr. Chairman, IRS is partway through what is intended to be
a major reorganizational transformation. Real progress has been
made laying a foundation. To avoid delays, realizing the
promise of modernization for improved service to taxpayers
while ensuring compliance with tax laws, the new Commissioner
should be willing to work within the existing general framework
for modernization and will also have to successfully manage the
risks I have outlined.
This concludes my statement. I would be happy to answer any
questions.
[The prepared statement of Mr. White follows:]
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Congressman Coyne. Well, I would like to thank all of the
panelists for their testimony here today, and yield to Mr.
Houghton for any questions he might have.
Congressman Houghton. Thank you, Mr. Chairman.
While all these wonderful comments have been made about
you, Mr. Rossotti, I would sort of capsulate this in saying
that you are the most successful tax official since St. Paul.
[Laughter.]
Now, I wonder, if St. Paul had had a $10 billion budget and
100,000 employees, whether he would ever have written his
epistles. But, anyway, we are delighted to be with you, and Mr.
Levitan, Mr. Williams, and Mr. White. Thank you very much.
I want to talk about money a little bit because you have
suggested approximately $500 million to $1 billion increase
this year in your budget. That goes from $9.9 to $10.4 billion.
You have got a lot on the plate. Obviously, you have put in
process some of the things which will continue after you have
left.
But in order to help us, can you tell us a little bit about
what you see as your swan song as you move off, and what some
of the money needs are going to be? I mean, you are talking
about moving to 80 percent electronic filing by 2007.
Is that going to cost money, is it going to save money? In
terms of increasing your auditing, is that going to cost money
or is it going to save money? The difficult thing is, there
will be a new person in your chair that will not have the
confidence, the associations, and the background that you have
had, and it is going to be difficult when you look ahead.
So rather than just going on a year-to-year basis, maybe
you can take a look over the next hill and share with us some
of your thoughts.
Commissioner Rossotti. Yes. I think that is an excellent
question and it is one that the Oversight Board has asked and
we have tried to answer as best as we can. I think we are
getting some better answers.
I think, while it gets to be very complicated in the
budgeting and so forth, you can really boil it down to two
things that are going to be needed on a consistent basis. I am
going to refer to this chart in minute, but let me just
summarize them.
What we need is some modest, on the order of 1 to 2 percent
a year, real growth in our operational resources, which is
primarily our staff. It could be, in some cases, contracts, as
Mr. Horn has noted. But whichever way it is, it is about a 1 to
2 percent increase in resources.
The other piece, is the funds to modernize the technology
which will produce productivity gains. The combination of those
two will allow us to both meet the increasing workload and, I
believe, close the gap to increased productivity.
If you look at this chart, you can see what we have
proposed in 2003 in the President's budget. At the top, you
notice that there is a requirement for 3,452 full time
equivalent personnel at a cost of $259 million, which we will
apply, if we get those, directly to the top priority tax
administration programs, predominantly in compliance, but some
of them to meet customer service needs.
However, we are also projecting in this budget a net
savings, if you will, or a reapplication, a productivity gain
equivalent to about 2,287 personnel, which are the result of
our internal management and modernization improvements. So, we
are really only asking for a net increase that would be funded
by the Congress of 1,165.
Another way to put it is, with a funding increase that pays
for 1,165, we get about a three times multiple in terms of
effective delivery of services.
If we can continue to do that year after year, which is an
aggressive assumption because that involves significant
productivity growth higher, by our calculations than what the
private sector and the financial world has accomplished. But if
we can continue to do that for year after year, we believe that
we can eventually close the gap.
Now, the other piece of it, which is not in here, is
funding the modernization itself because that is what
generates, for the most part, the growth in productivity.
So if you put those two pieces together and you do them
consistently means that you are successful in your internal
management, on the one hand, and on the other hand we achieve
some relatively limited net growth in our operational
resources, I believe we can succeed.
Now, let me just say that I think there is a problem here
with this, not in the planning and not in our ability to carry
it out, but in what actually happens in some cases.
Even though we propose this and it is in the President's
budget and it appears to be funded, in actuality it turns out
not to be funded, at least not the way that it appears to be.
The best example I have about this is the pay raise.
Last year, the Congress passed a pay raise--this is in
2002--that was one percentage point higher than what was in the
President's budget. It was in order to make civilian pay equal
to military pay, which is a fine thing to do, but there were no
funds provided for that. Therefore funding the pay raise was
equivalent to basically putting the money into one pocket and
taking the money out of the other pocket. For any one year, you
might be able to do that, but now there is a potential for even
a bigger difference, 1.5 percent, this year.
Should that happen, that would be a total of 2.5 percent.
That is $115 million a year. That basically offsets the net
increase that we were proposing, and we end up essentially
treading water and not going anywhere.
Also, in the President's budget there were some legislative
proposals that would help us to achieve productivity gain. Some
of those were passed by the House, but they have not yet been
acted on.
We are basically banking on very aggressive productivity
gains, as you can see here, very successful implementation of
new systems, however the margin is very thin.
So if things happen that undermine even that thin margin,
what we end up with, is basically making some progress, but
really not closing the gap that we have. That is where I think
the biggest risk is.
Congressman Houghton. Can I just follow up, just for a
minute?
Congressman Coyne. Sure.
Congressman Houghton. Well, in other words, you are saying
that you will be asking maybe for 1,000 people a year for the
next few years.
Commissioner Rossotti. Yes, 1,000 to 2,000.
Congressman Houghton. And that will take care of not only
what you need in terms of your internal organization, but also
increasing the auditing.
Commissioner Rossotti. Right. I mean, most of those people
would go to compliance, which is auditing and collections. The
people that we would save would be from things like electronic
filing, reducing the submissions processing, the back office,
or just leveraging the productivity of the people in auditing.
Congressman Houghton. And the investment for electronic
filing and the efficiencies will sort of take care of itself.
But you are worried about these other things coming in, where
the ideas are great but the funding is a little shallow.
Commissioner Rossotti. Well, I think that what we end up
with in the 2003 budget that is sort of summarized in this
chart, if that funding were truly provided that would enable us
to do the things there, hire the 1,165 people and also get
enough money for the modernization, if that were really done
and if we were very successful--and I do not disagree with Mr.
White--these challenges in making these things happen and
making these systems actually go in and getting these
productivity gains are not a small thing. They are very, very
hard.
But if you could achieve those things, and if you did it
consistently year after year, you would be able, I believe, to
cope with the increasing workload and gradually close the gap,
which we have a very, very large gap right now in our
compliance, in our enforcement, and to some degree in our
customer service.
So I think there is a formula there. There is a plan that
could work, but it does not have a lot of leeway in it. In
fact, it has a lot of risk in it. But it is at least a feasible
plan.
I think part of the risk is internally what we have to
manage, but part of it is external because, when we get the
money assigned for these activities, but then you get things
like unfunded pay raises, you are blocked.
Congressman Houghton. Thank you very much.
Congressman Coyne. Thank you, Mr. Houghton.
Commissioner, can the IRS improve customer service, while
at the same time adequately enforcing the tax law?
Commissioner Rossotti. Mr. Coyne, I, after four and a half
years here, absolutely believe that not only can it do that,
but it has to do that if we want to have a successful tax
administration system.
I think that the basic fundamental point about the American
tax system is that most of the money comes in from people who
are honest people paying their taxes voluntarily. Even if we
do, as we do, estimate that there is $200 billion-plus that is
not being paid, that still leaves $2 trillion that is being
paid by people who are paying voluntarily.
It is only reasonable that they should be treated properly
and get the rights that they are entitled to, and if they need
help, that they should be able to get it. They also, I believe,
are well served by our using our enforcement powers to make
sure that those people who are the minority that are not paying
are not allowed to get away with that.
So I think the charts that I showed earlier, and the
response to the public, show that the public will not always
hate the tax collector. I think that if you treat people
properly, they have reasonable expectations and they will
respond.
The only conflict, if there is a conflict, is in resources.
It does take some resources to answer phones and it takes some
resources to do audits. So, to some degree, you have a conflict
in terms of resources.
But even there, if you are efficient in serving your
compliant taxpayers, you may reduce the number of cases of
people getting behind, and even reduce the load on your
compliance resources.
So as a matter of good public policy, as well as a matter
of efficient management of the tax system, I am one who
believes that there is no way that you can effectively, over
the long run, run a tax system that depends on voluntary
compliance when you have 78 percent of the public, as they said
in 1998, basically not having any respect for the agency. I do
not think that can be acceptable.
So my answer is, unequivocally, you not only can, but I
think you have to. The only qualification I make on it, is it
does pose a need for having adequate resources to cover both
ends of the mission.
Congressman Coyne. As you prepare to end your tenure, and
very successful tenure, as Commissioner, what two or three main
points do you plan to share with the new Commissioner to ensure
that the IRS stays on the course that you have so successfully
set during your time?
Commissioner Rossotti. Well, I would mention a couple of
things right off the top of my head.
One, is the question you just asked, and which Senator
Grassley teed up in his comment, really is a fundamental point.
There are people who believe that people will always hate the
tax collector, and that is inevitable.
I think if you accept that, you have lost the battle before
you start. You really then cannot even respond to people's
complaints properly because you can dismiss any complaint as
being just driven by the fact that people will always hate the
tax collector.
I think you have to set a goal, which is proper in any
business organization, to keep your customers happy, your good,
paying customers, collect your receivables, and do both halves
of the mission. So, that is a basic point. If you lose sight of
that dual objective, that, I think is a mistake.
The other thing, on a more tangible level, is having a
strategy that determines how you get out of the hole that we
are in, because we are most certainly in a hole in terms of
inability to fully execute our compliance, and even our
service, mission.
The plan that we have come up with that has been endorsed
by the Oversight Board and was endorsed in the President's
budget, is not asking for massive increases in the size of the
agency, but asking for modest increases and trying to do most
of it through internal productivity.
That is a basic strategy. I believe it will work, but that
is a difficult strategy to pull off. It is a real challenge for
the Commissioner and the whole leadership of the agency.
Certainly it requires some budgetary support on a sustained,
ongoing basis.
I think those are two very important strategic points that
are very uppermost in my mind.
Congressman Coyne. Thank you very much.
Mr. Horn?
Congressman Horn. Thank you, Mr. Chairman.
I would like all of the witnesses to answer this. As you
know, the audits and the other tax law enforcement activities
have declined dramatically in recent years. What does the IRS
need to do to improve tax law enforcement? Let us start with
Mr. White down there. Has GAO got a feeling on this?
Mr. White. I agree with the Commissioner's emphasis on
productivity. One of the problems in the area of compliance and
collections has been a decline in raw productivity. That is
measured by cases closed per unit of staff time, per staff
hour, per staff year, without adjusting for the quality, the
length of time it takes to work cases.
The Restructuring Act imposed some additional requirements,
but IRS has not done a quantitative analysis to get a good
handle on what is behind these declines in raw productivity. So
one step is understanding what is behind this decline in raw
productivity and turning that around.
Congressman Horn. Mr. Williams.
Mr. Williams. The small business and self-employed element
of the organization is conducting a reengineering effort right
now of exam and collection effort. I think it is important to
look at reengineering.
Certainly, there has been an incremental fall in
productivity of each employee and of the cases, and that needs
to be better understood. If reengineering can help, that would
be great.
I think also consideration of focusing on issues rather
than entire returns would have a huge payoff, focusing on a
certain line in the 1040 rather than on a group of people's
1040s.
Research. There is some real hope that we have for the
National Research Program, that it will provide the kind of
intelligence that will allow us to target lawbreakers in big
payoff areas.
The IRS has done a good job, CI particularly, of
publicizing successes. That is important. Many enforcement
initiatives are dependent on computer programs. There are
things that we can do right now, to write computer programs
that will cause violators to just fall out of the sky, but the
big payoff is coming when the modernization completes itself.
Congressman Horn. Mr. Levitan.
Mr. Levitan. At the risk of repeating some of the points, I
think they are right on target. First, we need to send a
message. We need to send a message that the IRS is following
up, that we are successfully prosecuting many cases and that
needs to be publicized so the public does hear that.
We need to do a better job of identifying where to put the
limited resources that we have, and there the National Research
Program is going to provide valuable information. We strongly
support that.
New initiatives in high-priority areas such as foreign
credit cards and K-1 matching should provide significant
information.
Modernization over the long term--and I emphasize long
term, unfortunately--is going to help significantly. So there
are many things that the IRS can do. I think, though, as I have
said before, to some extent that is playing around the edges.
None of that is going to make a material difference unless the
administration and Congress does some important things.
There are two things I think that are critically important.
Number one, is the complexity of the Tax Code. The complexity
of the Tax Code invites errors. Errors take significant
resources from the IRS that then cannot be used for
enforcement.
I think also complexity invites cheating. If we can
simplify the Code, we can make a major impact in both of those
areas.
Finally, you have heard this over and over again, I think,
from all of the panelists here, we need to have adequate
resources to accomplish our task.
Congressman Horn. Commissioner Rossotti, you have heard
your colleagues. What does the Internal Revenue Service still
need to do to improve tax law enforcement?
Commissioner Rossotti. Well, I think that all of the
comments that have been made by my colleagues here are correct
and they reiterate a lot of the things that we are doing to
focus resources, increase productivity, make sure that we are
working the right cases and the right issues as opposed to just
diluting our resources. So, those are all part of our
strategies.
I do want to recap, though, by pointing out that none of
this, by itself, will work, will solve the gap without some
level of increase in qualified staff. I mean, when we have
thousands of cases of taxpayers who are high income taxpayers
who are hiding substantial amounts of income in offshore
accounts, we are now getting the information that is telling us
who they are.
There is not any way that we can effectively deal with
those taxpayers without having a very skilled person with a
considerable amount of training go out and deal with that
taxpayer or the representative, or a special agent if it is a
criminal case. We need those skilled people. We really have a
very, very thin line right now in the enforcement area of those
people.
Just to quantify one example. I will give this to quantify
how big this gap is. If we only take individual taxpayers with
incomes over $100,000 a year, and these are taxpayers who have
reported, never mind those who did not file or did not report,
but if we take those that are over $100,000 income, there about
9 million of those returns.
Well, we know of about 1.2 million of those returns which,
with reasonable degree of accuracy, we believe, have a
sufficiently understated tax, that they should be audited by a
field auditor--not by document matching, but a field auditor.
So there are 1.2 million that we know of of high-income
taxpayers that should be audited.
Our capacity today to do those is 54,000. That is 54,000
out of 1.2 million, not total, but of those that we know of.
That leaves 1,150,000 that should be audited that we are simply
putting aside for lack of resources every year. That is a big
gap. That is before we ever get to special programs like
offshore credit cards. We have a long way to go to have
adequate resources to deal with those cases.
Congressman Horn. I will wait until the Chairman sits. We
will have another round. I just got my five minutes over, but I
take it we will have another round.
Senator Conrad. We will. Congressman Portman has arrived, I
am told.
Congressman, if you would like to make an opening
statement, it would certainly be appropriate, or if you would
like to proceed with questioning, whichever you prefer.
OPENING STATEMENT OF HON. ROB PORTMAN, A U.S. REPRESENTATIVE
FROM OHIO
Congressman Portman. Thank you, Senator. I think I will do
a little of both. First of all, thank you very much for
chairing the joint hearing. This is very important, and is done
every year since the Restructuring and Reform Act was enacted.
In fact, it was almost five years ago to the day that the
report was issued by the Commission on Restructuring and
Reforming the IRS, and many veterans are here with us in the
room today. We were in this very chamber many times during the
Commission's deliberations, having hearings and talking to some
of the same people.
I think we have made considerable progress since that time
five years ago, and since four years ago when we passed the
Restructuring Reform Act, which was largely based on the
Commission's work. I do think we have a number of challenges. I
think those have been identified today.
The primary challenge, of course, is in the area of
compliance, enforcement, audits. We have seen the rate drop
off. I think what we have heard today is a list of at least a
half dozen different things that the IRS is currently doing to
address that. Those are all appropriate.
I could not agree more that it is not mutually exclusive to
have good enforcement and good taxpayer service. In fact, the
theory behind the Commission's report, and I still believe it
even with the evidence of the drop-off, is through good
taxpayer service, we can increase compliance.
This has been the experience of all of the service
organizations in America over the last couple of decades and it
can be the experience of the IRS, but we do need to devote more
technology, more resources, and among other things, have better
data and better analysis.
Mr. White talked about the fact that we do not have good
analysis currently of what is going on. It is true. TCMP was
discontinued after 1988. So when the Commissioner talks about
$200 billion that we know is not being collected, we do not
know that number. I am very supportive of moving ahead for that
reason with the NRP, despite some of the risks.
And those 50,000 taxpayers--I hope I am not one--who have
to undergo that will have a much less obtrusive experience with
the IRS than we had with TCMP. But it is necessary to get that
data to begin to address what I view is the largest challenge
facing the IRS.
I have a couple of questions, if I might, Mr. Chairman.
First, to Mr. Levitan and if the Commissioner would be
willing to chime in as well, that would be helpful. The purpose
of setting up the Oversight Board was really threefold: one, to
bring expertise that you bring, Mr. Levitan, from the private
sector and others on your board; second, was to provide for
more accountability so that you had a body that actually was
accountable for the reforms or lack of reforms; but third was
continuity.
This is significant, with the Commissioner's departure at
the end of the year. As you know, we have five-year staggered
terms. Although it took us a while to get the Board up and
going, the Board has now been intimately involved in the
reengineering and restructuring of the IRS.
Do you believe that the continuity is there for us to have
a smooth transition to the next Commissioner, and could you
give us a status report on your process that I know you are
undergoing to select a list of candidates which you will then
provide to the President and to the Treasury Department?
Mr. Levitan. Yes. First, let me talk about where we stand
with finding a new Commissioner. The Board worked very closely
with the Treasury Department, first, to put together a set of
specifications for the position. So everybody--the Board, the
Treasury Department, the Secretary of the Treasury and the
White House--were all in agreement with what we were looking
for.
From the comments I heard from each of the members earlier,
I think you would be very pleased with what that statement said
and the kind of capability and experiences that we expect the
next Commissioner to have.
We then hired a search firm. The search firm brought to us
a number of candidates who met qualifications and have
expressed some interest in the position. The Board did some
further work in vetting those individuals, and then we have
sent to the President a number of candidates that the Board
believes are both qualified and interested to serve in this
position.
The ball is now in the President's court. I know the
Secretary of the Treasury is very much involved to make a final
selection to nominate an individual.
Congressman Portman. And just to clarify for a moment, that
list of candidates you sent forward is to be considered by the
administration, but they may go outside that list, I
understand, to choose a Commissioner.
Mr. Levitan. Yes, that is exactly correct. It is a
Presidential appointment, therefore, it is up to the President
to make that decision.
However, I am encouraged in that I think the most important
thing we may have done is develop, and then have agreement, on
the specifications because we can now all turn to that and say,
does the individual meet those specifications.
Second, I think the Board will be very involved as a new
Commissioner is both nominated and approved by the Senate. We
will work with that individual to help provide that continuity.
Most importantly, I think it is the processes that have
been put in place at the IRS under the Commissioner's
leadership that will provide, really, the mechanism to help
ensure that we do have continuity.
The question was asked of the Commissioner of what advice
he would give to the next Commissioner. The advice I would
give, and will give, is really, stay the course. We have an
excellent plan in place. It is very well documented. We have a
good team. We just need to execute that plan ferociously and
make it work.
Congressman Portman. Commissioner.
Commissioner Rossotti. Well, I think that what Larry said
is excellent. I mean, they have fulfilled the mission that was
given to them, as far as I can see from serving on it to assist
in identifying a new Commissioner.
It was very carefully thought through in terms of the
specifications. They made complete sense to me. Obviously,
there is still more to do. You have got the Secretary, the
President, and the Congress that have to actually make a
selection. But I think, as it was envisioned by your Commission
and legislation, it seems to me that it is working pretty well.
Congressman Portman. One other question, quickly, Mr.
Chairman, if I might, that has to do with the overall direction
of the IRS. As you know, we were strongly supportive in the
Commission of a reengineering and restructuring of the IRS
along taxpayer lines with some pain and some dislocation that
has now occurred.
There has been discussion recently about some of the
frustrations that have resulted, not just with employees
learning to live with the new system, but also the fact that
some taxpayers would fall in different categories. For
instance, a corporate taxpayer that also has individual tax
issues.
Looking back, Mr. Commissioner--and Mr. White and Mr.
Williams, you may want to comment on this as well--do you think
it was a good idea to undertake the restructuring of the IRS
along taxpayer lines? Do you think it is something that ought
to be continued, and how do you think it can be improved?
Commissioner Rossotti. Well, obviously, I do think it was.
I think some of the, we call them growing pains, that you are
talking about are inevitable when you make that much of a
change. Actually, a lot of those have actually settled down
already in the last year. I think what you are left with, is a
structure that really will allow a Commissioner to, first of
all, have people who are really accountable and for dealing
with major blocks of the performance of the agency.
One of the things that amazed me when I started to look
into it, was everything came together at the Commissioner and
the Deputy Commissioner. It was essentially everything coming
together through many, many layers of management. It did work,
because for years people had gotten used to it, but it was not
something any business organization would have really
countenanced.
Now, the transition to get there was quite difficult, but
we are basically behind that now and we are into fine tuning.
So, I think that it will work. I do not think anybody is
saying, go back to an old structure.
It is one of the building blocks that I think the new
Commissioner is not going to have to worry about, other than in
any organization, no matter what you do to divide an
organization that is very large into pieces, you then have the
issue of how you coordinate across the pieces. I do not care
what you do, you would have that issue.
But I think, as a way of dealing with accountability
internally and customer focus externally, it is a good
situation to leave to the new Commissioner.
Congressman Portman. Mr. White or Mr. Williams, quickly,
any comments?
Mr. White. GAO believes that it was very appropriate to try
to achieve a better balance between service to taxpayers and
enforcement. We think that the plan--and we have said this for
years--there is, as the Commissioner said, a well-laid plan.
One of the advantages, one of the strengths of this plan, is
that it integrates a number of different aspects of tax
administration.
So it is an integration of performance management,
performance measures, better information systems, the
organizational structure of IRS. The fact that it is attempting
to integrate all of this is a strength of the plan. It also
makes it more difficult to implement. Any one of those aspects
of the plan would be very difficult alone. Trying to do it all
in a coordinated fashion is more difficult.
IRS, as I said in my statement, has made real progress over
the last four and a half years in implementing the plan,
beginning to implement it and developing the plan.
There are a number of risks going forward: the decline in
compliance and collection programs, putting in place the
capabilities to better manage systems' investment, performance
management including financial management issues that a new
Commissioner is going to have to deal with, and deal with soon.
Congressman Portman. But you would say, stay the course
with regard to the restructuring, with a caveat that, on the
compliance side, you have a list of initiatives.
Mr. White. Absolutely. Yes. If you do not stay the course,
if a new Commissioner does not stay the course, there is a real
strong likelihood that that would significantly delay realizing
the benefits of modernization.
Congressman Portman. Mr. Williams.
Mr. Williams. I think there is always a lag time between
the time you make an investment and the time you begin to
experience the payoff. Certainly, IRS felt that. When the ship
first began to turn, there was a degree of chaos and not much
return for a huge investment. That really has turned around,
and I feel very confident in the decision that was made and the
course that was taken.
If I was concerned at this moment, it would be that,
because of some unforeseen investments that had to be made, the
units are not being able to complete staffing up. There was the
pay raise. I am hearkening back to some of the things Larry
said.
There was also the shift of resources that were required
post-9/11. The paradigm for a security threat completely
changed from an insider or one or two people to an organized,
sophisticated assault that could close us down in collecting
the several trillion that it takes to operate the government.
That left the IRS short and it left completion of RRA '98 a bit
short.
Congressman Portman. You were generous to leave out tax law
changes in there.
Mr. Williams. That is a really good point as well.
Congressman Portman. Thank you, Mr. Chairman.
Senator Conrad. I would like to ask each member of the
panel, what is your single greatest concern about the Revenue
Service going forward, and what should be done to address that
concern?
I will start with you, Commissioner.
Commissioner Rossotti. Well, I think that the huge gap that
we have that I think we all acknowledge between what we know we
should be doing, especially in the compliance area but it is
also there in the service area, that gap, together with the
fact that the workload compounds, if that situation continues,
if we do not make progress in closing that gap, and the only
way we could do that is some combination of increased resources
and increased productivity, if we do not close that, I really
think we have a serious threat to the tax system.
I always look at the glass being half full, and I do think
it is half full because we have made progress and we know how
to fix it. But if you just kind of stayed where we are, let the
workload grow as it has been growing over the last five years,
that we are not able to close the gap that we have in
compliance, that we just get bigger, at some point people begin
to, lose confidence, and the whole confidence that the tax
system is based on is threatened.
So I think that, while we know how to fix it and I think we
can fix it, the other side to it is, it is not in a stable
situation. I mean, it just simply is not in a stable situation.
If we kind of keep where we are, stay where we are from a
funding and productivity standpoint and continue to add all the
things that we added over the last five years, at some point
you are going to have a real breakdown.
Senator Conrad. What would be the single most important
indicator that you would look to to determine whether or not
serious progress was being made?
Commissioner Rossotti. Whether serious progress is being
made? Well, I think that on a day-to-day basis you can look and
see whether the effectiveness of our operational indicators,
whether we are doing the day-to-day things that need to be
done--processing returns, answering phones, getting better
accuracy, auditing the people that should be audited, which is
not only how many we do, but doing the right ones, collecting
the overdue debts, which Congressman Horn always reminds me of
every time I see him--those things, we can measure. I think, if
they are going in the right direction, at least on a trend,
then ultimately I think we are making some progress in closing
the gap.
I do think that our compliance study, our National Research
Program which Congressman Portman mentioned, we will get in
about two years from now. That will give us a very important
point of measurement as to the degree of compliance and where
the non-compliance is.
So we will have the measurements, I think. Some of them are
more current on a day-to-day basis and some of them come
periodically, like the NRP. We will know. But I think if what
happens is that we continue to have even more and more cases
that we know of that people are not paying their taxes and we
cannot do anything about it, we still are not able to fully
satisfy even the people who we are sending notices and letters
to, and we cannot even answer them, I think that you have a
real deterioration of the basic revenue stream of the country.
Senator Conrad. Let me ask Mr. Levitan the same question.
What is your greatest concern?
Mr. Levitan. While I am very concerned about the status of
enforcement, as the Commissioner has talked about, I think the
thing that I am focused on now is the execution and
implementation of the modernization program. The IRS has to be
modernized. It is not a question of, should it be, will it be.
It has to be.
Senator Conrad. And what is your assessment of where we are
with the modernization?
Mr. Levitan. We have an excellent plan in place. We have
been working at that plan now for about three years.
Performance of that execution has been mixed, at best. We have
accomplished a lot, but we have missed target dates, we have
been over budget, we do not have all of the capabilities.
Our prime contractor performance has been disappointing. We
need to get better at executing and making modernization work.
The IRS has to get a lot better in managing the process. I
think GAO has done a superb job in laying out exactly what they
need to do, and we support that entirely.
The prime contractor has got to get a lot better at meeting
their targets, at delivering quality results on budget and on
schedule. We need to improve our capability to accomplish that.
Senator Conrad. Mr. Williams, what would you say? What is
your greatest concern for the Revenue Service going forward,
and what needs to be done about it?
Mr. Williams. I would also say, Senator, the business
systems modernization concerns. There are so many reforms and
so many abilities to contain costs that are dependent upon the
success of that, that no matter what its status, it becomes
very important.
It is troubled. We are now three years into it. We have
spent $1 billion. I think there are some legitimate doubts that
we have $1 billion in value as a result of that investment.
We have checked eight projects through the development
phase. They have been, on average, 89 percent more costly than
was projected and one year behind in the schedule. The customer
communications project, which is great--it took us out of the
human router business--was 31 percent over cost and 9 months
behind. The IRS needs to develop a project management process
that is repeatable and is much better at estimation of both
costs and time. The prime contractor was hired primarily to
help us, to help the IRS strengthen in those areas where we had
been traditionally weak. They did not deliver. They are not
good at estimating time and cost, and we are having to jettison
functionality as the projects come onstream. That worries me a
lot.
As far as a fix, I think we need to slow down, do a few
projects well. I think there is agreement that that is to be
done.
With regard to prime, there has already been a shoot-out
with regard to CADE failures. A very strong warning shot was
sent off by the Commissioner and the CIO to the prime to try to
understand IRS better, to try to understand the core business
processes.
Senator Conrad. When you talk about CADE, there are people
listening who have no idea what that means. That is the
Customer Account Data Engine. Is that not what that stands for?
Mr. Williams. It is, Senator. That is going to contain
everyone's account.
Senator Conrad. Information. That is the single most
important piece of modernization, is it not?
Mr. Williams. It is. A second one is STIR, and those are
two important ones to watch.
Senator Conrad. And STIR stands for?
Mr. Williams. I can better tell you what it is for. It is
to provide the infrastructure, and especially the security, for
the entire operation to go forward with. If those stumble, so
many of the good reforms and initiatives are held up and we
will have to just continue to invest in manpower.
Senator Conrad. Let me go back to the Commissioner. The
Customer Account Data Engine was supposed to start Phase 1 of 5
last fall, but the project has been delayed twice. Why was it
delayed, and will that have a ripple effect on other projects?
When do you believe it will be completed?
Commissioner Rossotti. Actually, the original schedule when
we passed the design milestone last June, was that it was
supposed to be delivered in a pilot phase in February, and then
in a live phase in July. Basically, compared to that, we are
six months behind.
Our current target is to put a pilot phase in the third
quarter, in the July-August timeframe, and to actually go live
with the next filing season in January. But it did lose six
months.
I do note that with the renegotiation we have with the
prime, that they did agree to absorb essentially all of the
cost increase of that delay. So, that was an important thing
that we were able to work out.
As to why it was delayed, the design phase of this requires
not only designing a new database, but figuring out how to
integrate it into the old system, and we have two of these co-
existing at the same time. Frankly, that is the harder part.
Designing the new database is hard, but it is a question of how
you make it work with the old one.
I think that the biggest single thing that caused the delay
was just a slower than expected understanding--and this is not
an easy thing to do--on the part of the project team of some of
the intricate details of how they were going to make the new
system work with the old system.
So when we got into the design phase, there were some
holes, there were some things that were missing, and there were
just some complexities that were overlooked.
Senator Conrad. Are you confident that the new schedule
will hold?
Commissioner Rossotti. Well, having been in the systems
business for 28 years and having usually been on the other side
and being asked that question, I always add a little bit of
qualification.
Will they deliver this system, will we get it into
operation, will it be the first building block of CADE, I think
there is nothing about this that says that is not going to
happen. Will it hit the precise milestones there on the target
now? I would not want to stand up and guarantee that that is
going to happen month by month.
But the two big things that Mr. Williams noted that really
are the two key building blocks that we are trying to put in
place here, one is the security infrastructure, the other the
customer database, those are really the foundational elements
of this whole thing.
Getting them in the first time is really quite tough. I was
in the business myself for 28 years. My former CIO, who was
there for the first two and a half years, was in it about 25
years. I have got a very experienced CIO now, and some other
people who have come in from the outside.
We all look at this and say, this is really hard. It pushes
the boundaries of a lot of things, not so much in the fact that
a taxpayer database is such an extraordinary thing, but as in
the scale that we deal with, and most particularly----
Senator Conrad. Interaction.
Commissioner Rossotti [continuing]. Really tangled system
that we are coming with from the past. You put those things
together, and that is where we are having our problems. We are
not having our problems designing the new system.
Now, the good news to this, and I guess I am sometimes
criticized as being an eternal optimist, and maybe that is a
good thing or I would have never taken this job in the first
place. [Laughter]. But the one thing about this, is getting
these two pieces in place for the first release is awfully
tough, and we have had some delays.
I will say, when we get done with those--and we will get
through them. We do have people working. They do provide a
tremendous amount of learning that has never been available in
the past.
I mean, we can say CADE is six months late, or we can say
it is 25 and a half years late. It was really in the late
1970s--and this is not exaggeration--that the first designs and
proposals were put in place to replace what was then already in
the late 1970s a more than 10-year-old system.
Ten years is pretty long in the computer business. So, 25
years ago we had a 10-year-old system that we were proposing to
replace. Now we are 25 years past that, and that is basically
where we are.
I think what is going to happen, is that we are going to
slog our way through. That is really the word I would use. We
are going to slog our way through to getting these first
releases up. We absolutely are following the lessons that we
have learned from doing this.
We have slowed down our plans numerous times and readjusted
them when we needed to. We will do that again, and we will take
advantage of that to improve some of the things that we need to
in internal management. GAO has been excellent in identifying
those.
I will say, we have made some improvements. The Enterprise
architecture, which was the real blueprint of how the whole
thing fits together, was a critical component that was not easy
to do. GAO noted that many times. That is in really good shape.
We have that in place now.
The release planning that coordinates different pieces that
go in together is improved. The scheduling cost estimating,
that area, and some of the contracting certainly needs more
work.
So, bottom line, it is a tough, high-risk area. You would
never take on this project unless you absolutely had to. But
the IRS is 30 years behind, and there is not much I know of you
can do except make it work.
Senator Conrad. Let me just say, as a former tax
administrator, I think I have some understanding of the
extraordinary complexity of migrating from the system that was
to what is going to be. When one looks at the extraordinary
complexity, frankly, I was never too concerned about the design
of a new system, new database management system for going
forward.
The concern I always had was the migration. For anybody
that knows, the systems that were in place trying to go from
that to what is being fashioned is absolutely an extraordinary
undertaking. I think all of us are concerned about meeting
these deadlines, but more than that, of having a system that
functions and functions efficiently. The jury is still out.
I think that would be the fair thing to say. But all of us
have got a high interest in making certain that this functions
for the taxpayers of the country and maintains the revenue
system of this country. That is at the heart of the ability to
defend this Nation. It is at the heart of the ability to
improve homeland security, improve the education of our people,
and all of the other things that the Federal Government has a
responsibility for.
So, we understand the importance of this. This is not just
a matter of some computer system, this is a matter of the
functioning of the government to do the things that the people
of this country want done.
Commissioner Rossotti. I agree, Senator. Could I just
finish up with one point that maybe I think is important going
forward for Congress, as well as our oversight group?
Senator Conrad. Yes.
Commissioner Rossotti. There are a lot of different kind of
mistakes you can make in the systems business, and I probably
made most of them in the 28 years that I was in the business.
But there is one mistake that, as Yogi Berra used to say, is
the wrong mistake.
The wrong mistake is to say, if we do not make this
schedule, we are going to lose credibility and we are going to
lose our money, or we are going to be fired, or whatever people
are worried about, so we are going to make this schedule come
hell or high water.
Usually what happens, is you end up with hell or high water
when you do that. When you are dealing with these complex
things, the most important thing that you always have to keep
in mind is that, if you do not deliver something that is
actually a quality product, you have really lost completely.
So if you are behind schedule, which you frequently become
in this business, the thing that the top management has got to
give as direction is, all right, we do not like that, we are
going to figure out how to get better schedules in the future,
but we have got to focus on quality and make sure we actually
deliver what needs to be delivered.
As long as I have been here and the people who have worked
with me, we have taken that approach. I think it is extremely
important that everybody involved recognize that nobody likes
to have a project that is behind schedule or an over-cost, and
you try to avoid that in every way. But there is an even worse
thing than that, which is to put in something that does not
work at all or that is not really solving the problem.
Senator Conrad. I could not agree more.
Congressman Horn?
Congressman Horn. Thank you, Mr. Chairman.
Mr. White, does the General Accounting Office have a figure
for the uncollected taxes that are in the Internal Revenue
Service?
Mr. White. We do. I can have Steve Sebastian, who is from
our financial management group, come up and answer that
question.
Congressman Horn. I would just like a fast answer as to how
many billion is uncollected, then I will let everybody else get
into it. But that has to be the base.
Mr. Sebastian. I will try and make this as quick as
possible. As of the end of fiscal year 2001, the IRS had $239
billion in unpaid taxes, penalties and interest. About $20
billion of that is estimated to be collectible.
Congressman Horn. You say how many?
Mr. Sebastian. Twenty billion.
Congressman Horn. Twenty billion. In the predecessor to
Commissioner Rossotti, the figures that I saw then were that
there were $60 billion. Then when the Commissioner noted that,
oh, yes, we also have $110 billion, I said that I think it is a
scandal, as far as I am concerned. That is what led me to put
the debt collection bit in there. We are doing that now
throughout the executive branch, and we need to do it and make
it more effective in the Internal Revenue Service.
Now, Commissioner Rossotti and I have gone over that for
five years together, and you are doing a great job. But why is
it that we cannot use private collectors and get the job done?
If I was sitting out there listening to this now on C-SPAN,
I would say, good heavens. I do my taxes. Why are we not doing
those people that have $20 billion, $239 billion? We are
looking for dollars everywhere we have. We have a war going on
and we cannot find all the money for all the appropriations,
and so forth, and so on.
I just think I would say, what are they trying to do, just
let their cronies that are middle class and up get away with
murder? I think it is outrageous. I could not understand why
Ways and Means and Finance did not do that years ago. What are
they hiding?
I think, gentlemen, for those of you that are on Finance
and Ways and Means, you ought to get the private collectors in
to get the taxes. That is my last point on this.
Senator Conrad. Thank you, Congressman Horn.
Let me just say, that is a deep concern. I will tell you my
foremost concern going forward, aside from the systems
questions. Those are fundamental management questions. That is
obviously a key to any operation.
But my overriding concern is, we have got $200 to $300
billion of taxes that are owed and due that are not being
collected. At least, that is the best estimate. We do not have
a clear idea of how big it is, but we know it is big. That goes
right at the heart of the fairness and the credibility of the
system, because the vast majority of taxpayers, individuals and
companies, are paying what they legitimately owe.
It is unacceptable that others skate by. It is unacceptable
that people are engaged in tax scams, tax avoidance, tax fraud,
these offshore operations, to shove the tax burden onto the
honest people.
We have got an obligation to go after those that are
dishonest, whether they are individuals or corporations, and
insist that they pay their fair share of this tax burden. Now,
that is a fundamental requirement of government.
Mr. Rossotti, what needs to be done to assure the vast
majority of taxpayers that they are not being played for
chumps?
Commissioner Rossotti. Well, I think that what we are
trying to do in the short term, within the limits of our
resources, is to make sure we apply our resources where they
will do the most good. We really do not have the resources to
go after every case or to collect every receivable. We just do
not. So what we are focusing on, with, I think, better
information than we used to have and more that we're
collecting, is the top priority areas.
Of the top priority areas, the number one category, are
what we call the promoted tax schemes. This is deliberate,
systematic tax evasion. It covers the wide spectrum of the tax
system. This includes use of these devices like offshore credit
cards and trusts to hide income. It does include the
manipulation of the corporate tax code to defer or eliminate
income, but it also includes people that are just filing
erroneous refund claims.
Senator Conrad. Where do you think the biggest problem is?
In these things that you have mentioned, if you had to
prioritize these five things that you have mentioned, what is
the biggest?
Commissioner Rossotti. The biggest one, in dollars, is the
use of the devices to hide income. It is not all offshore. Some
of it is offshore. These are trusts, credit cards, things of
that kind. We have enough information now to say that, in terms
of the promoted tax schemes, the systematic, deliberate tax
evasion, that is the biggest one. I would say that the
corporate-type shelters are the second biggest one.
Senator Conrad. All right.
And what is being done? What is being done to go after
these things?
Commissioner Rossotti. Well, that is where we are focusing
our efforts within the limits of our resources.
Senator Conrad. Do you need more resources to do these
things?
Commissioner Rossotti. Well, let me just put it this way.
In the very short term, since this is our top priority, we are
simply devoting our resources to it. What that does, is
undermines our ability to handle every other kind of compliance
problem, such as collecting overdue debts, such as auditing
even $100,000-a-year income taxpayers.
So the answer is, yes, we do need more resources in order
not to undermine other aspects of compliance, but for the
moment, for this particular area, we are handling this by
simply reallocating our resources to it. As I mentioned, we
have a whole strategy for each one of these that basically
boils down to, first of all, systematically identifying both
the promoters and the taxpayers.
Our top priority in enforcement is with the promoters. I
have the numbers here. We have gotten much more active in doing
injunctions, together with the Justice Department, against
promoters. Prior to 2001, I think there had only been one
injunction against a promoter for years. Now I think the number
is 14 that we have done in the last year or so, and several
more that are actually pending.
The other thing we are doing, in addition to the
injunctions, is working with the Justice Department to figure
out a way to pursue, in some cases, both criminal and civil
activity at the same time. This is a great problem that we
always had, because as soon as something appeared that had
criminal potential, it put a freeze on doing everything else,
and it can take two or three years to do criminal proceedings.
So, now we are doing parallel investigations.
With respect to the participants, we have been using
devices such as audits of the promoter records, as well as
subpoenas--or summonses, as they are called--from other parties
like the credit card companies to get data regarding who the
participants are in these schemes. Then we are farming the
information out to both our criminal and civil people.
Now, we are also using a lot of communication devices to
try to warn people off from these schemes. What we want to try
to do, is not only go after the people that are doing them, but
try to prevent more people from coming in. There are a certain
set of people who are sort of willing to be sucked----
Senator Conrad. Persuaded.
Commissioner Rossotti. Persuaded. That is right. And we are
working with a lot of industry groups and business groups to do
that. So, we are definitely on the case here. We are also using
certain disclosure initiatives.
The Treasury has recently come forward with a package of
proposed disclosure initiatives, some of which are legislative
and some of which are regulatory, for forcing promoters and
taxpayers to disclose some of the more complex corporate
returns.
Our basic philosophy that we have, is if people are
claiming they are engaging in ``legitimate'' tax planning, then
they should not have any objection to disclosing it to us so we
can take a look at it and see if we agree that it is legitimate
tax planning. So, we think disclosure is a very important
thing. I know there are some legislative considerations in the
Senate Finance Committee about that.
Senator Conrad. Thank you. I am going to have to go.
Congressman Portman has an additional question or two. I am
going to turn it over to Congressman Houghton. First of all, I
want to thank him very much for being here throughout the
hearing. We appreciated very much your being here.
Congressman Portman, thank you very much for coming over as
well, and for all the work you have done in this area. We
appreciate it.
I want to thank all of the witnesses. We very much
appreciate your contribution to the work of the committee and
the Congress in this area.
Finally, to Commissioner Rossotti, thank you for your
public service. I know very well it would have been much easier
for you to stay in your very successful business and to
continue in all of the things that you were involved with in
the community as well. You rose to the challenge. You came at
perhaps the single most difficult moment for the Revenue
Service, and I think everybody here owes you a debt of
gratitude for taking this challenge on. We appreciate it.
Congressman Houghton?
Congressman Houghton. Thanks very much.
Congressman Portman?
Congressman Portman. Thank you, Chairman Houghton, and
thank you, Senator Conrad, for holding this hearing and for
bringing focus to these issues. These hearings are supposed to
be an opportunity for the Senate and the House to come
together, which is rare, on a bicameral basis, but also for the
nine different committees and subcommittees to come together
with their staffs--staffs are still represented here in the
room--to be able to make sure that we are within the
congressional oversight function, communicating and
coordinating well with each other. I think these hearings have
been extremely helpful in doing that and, again, bringing focus
to some of these very tough issues we face at the IRS.
So, I thank the organizers, and I thank the panel for being
willing to come before us. This is at least one where you can
deal with a lot of different committees and subcommittees at
once, which I know is a frustration for you as well. This came
out of the restructuring legislation, as well as the five-year
term for the Commissioner. In the past, there had not been a
specified term. There was a concern that the turnover at the
IRS, both at the level of Commissioner, the Deputy Secretary,
and the Secretary, where many reforms were begun but not
completed, was one of the problems at the IRS. There was not
that continuity of reform.
We appreciate the fact, Commissioner Rossotti, that you
were willing to step up to the plate four and a half years ago,
now, and take on this very difficult task, and that you were
willing to fill out your entire five-year term. I told Chairman
Houghton, I think we should have made it a seven-year term. We
could always pass legislation along those lines. [Laughter.] We
cannot do it today.
But when you look back, we really began this seven years
ago. We are five years into the legislation. I have heard it
said that it is really a 10-year process. Many of us hoped it
would be more like a five-year process. Are we halfway there?
Probably. But I do not think we are seeing the fruits yet of
the work.
I think the marginal fruit increase from the burdens placed
on the system and from the changes, I think, will begin to be
seen over the next several years, only if we keep our eye on
the ball.
In hearing some of the concerns today raised about the
challenges we face, particularly on the compliance side, we do
need to redouble our efforts in terms of enforcement, auditing,
being sure that the proper amount is coming in to the IRS.
On modernization, it is worse than we said it was. Seven
years ago, many of us were making the statement that we had
spent $3 billion in the previous decade on modernization for
little or no result.
In a sense, we underestimated the challenge, because we are
really not talking about a problem that existed seven years
ago, but one that dated back really to the 1960s, with 1970s
technology. So, we are paying the price now of years and years
of neglect.
Again, we need to be sure that we are keeping the pressure
on. Chairman Levitan brings very important experience to bear
on this, and I appreciate his unwavering commitment to this.
I know he is going to serve his entire five-year term, and
I hope to continue that continuity, as well as your other board
members. But this is something where you have got to keep our
feet to the fire here in Congress and at the IRS.
The final comment I want to make, is with regard to all
these issues, the modernization, but of course the performance
measurements, I think they are very important. We did not get a
chance to get into those as much today as I wish we had. But
this is a sea change at the IRS and a culture shift.
You need to be sure that you are keeping their feet to the
fire, Mr. White, on your comments on performance measurements
that are seen over the years. The Commissioner has started
something very unique in the Federal Government where, instead
of measuring how much money an enforcement person brings in,
you are measuring competence, professionalism, and courtesy to
the taxpayers, and other measures of performance that are more
like business measures.
In terms of electronic filing, we set, on a task, to have
80 percent electronic filing. As you know, we are at about 50
percent now, I understand, maybe the high 40s, but we seem to
have a lag there and we seem not to be making the marginal
gains. So, we need to look at some changes there. Chairman
Houghton has focused some on that with our recent legislation.
There are other issues that you need to come to us on. The
deadly sins, for instance. The House passed legislation, H.R.
386, recently which adjusted the deadly sins to give the
Commissioner some more discretion, and added one for browsing.
We did that on the recommendation of the IRS to try to improve
morale and to try to improve enforcement and collections.
With regard to tax complexity, Mr. Levitan wisely raised
that as an issue. It always gets unsaid at these hearings, yet
in the Commission's report we ended up, as Mr. Houghton will
remember, making that one of the strong recommendations, even
though it was really outside of our ambit.
We pushed the envelope and said, here are 60 specific
changes. We have not done those. In fact, we have increased the
complexity of the Code during the last five years rather than
making it easier for the IRS. So, you need to keep our feet to
the fire on that.
Mr. Rossotti, I know you are leaving at the end of the
year. But the other three gentlemen here, and I hope you in
your private sector capacity, will continue to come to us and
tell us what we need to do to refine the Restructuring and
Reform Act from 1998 and to look at the underlying Code,
particularly on the complexity side, and with regard to
specific problems that you face, because Congress sometimes
tends to focus on a problem and then forget about it and to
leave it behind.
I will tell you that Mr. Houghton, myself, Mr. Conrad, and
others, will not leave this behind. We will keep at it, despite
other distractions that come up. The latest concern and the
latest issue, we are absolutely committed to making this work.
And whether it takes 8 years, 10 years, or 12 years, we need
your continued input and we appreciate your giving us that
today.
Thank you, Mr. Chairman.
Congressman Houghton. Well, thank you very much. Thank you
for all you have done in setting up the Commission, the board,
and all your interest in the whole structure here.
So, Mr. White, Mr. Williams, Mr. Levitan, and particularly
you, Mr. Rossotti, thank you very much. Unless there are any
other questions, the hearing is adjourned.
[Whereupon, at 12:02 the hearing was concluded.]
[The prepared statement of Senator Baucus follows:]
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Questions for the Record Submitted by Senator Landrieu for David
Williams, Treasury Inspector General for Tax Administration
Coordination with Homeland Security Office
Mr. Williams's written statement notes the security challenges the
IRS faces in the wake of the terrorist attacks of September 11. I am
pleased with the cooperation between TIGTA and the FBI. You apparently
meet with them on a daily basis. What is less clear is the extent to
which TIGTA and the IRS works with the Office of Homeland Security,
headed by Governor Ridge. Could you describe the role the Office of
Homeland Security has played in TIGTA's security planning?
Compliance and Enforcement Activities
Every witness at the Joint Review discussed their concerns with the
declines in enforcement actions by the IRS. From FY '96 to FY '01, the
number of face to face audits have declined 72 percent, correspondence
audits have declined by 56 percent, liens have declined by 43 percent,
levies by 86 percent, and seizures by 98 percent. Mr. Williams's
written statement attributes this overall decline to a long-term
reduction in enforcement staffing, the redirection of resources to
customer service functions, and fear of section 1203 allegations.
Has the IRS established criteria for how many audits it needs to
conduct to have reasonable confidence in the integrity of the tax
system? How many additional enforcement personnel does TIGTA believe
the IRS needs in order to conduct enough enforcement actions to ensure
the integrity of the tax system?
I understand that the IRS has requested an additional 1,179 Full
Time Equivalent positions for FY '03 for the entire agency, but will
add 1,857 FTE for compliance and enforcement activities. According to
material my office received from the IRS, about 76 percent of these
1,857 FTE will come about through the ``Re-application of Efficiencies
and Workload Savings.'' Does TIGTA believe that the administrative and
management savings in other areas of IRS will actually result in more
enforcement actions? If so, how many more enforcement actions will be
conducted?
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Questions for the Record Submitted by Senator Landrieu for Larry
Levitan, Chairman, IRS Oversight Board
Enforcement Actions
Every witness at the Joint Review discussed their concerns with the
declines in enforcement actions by the IRS. From FY '96 to FY '01, the
number of face to face audits have declined 72 percent, correspondence
audits have declined by 56 percent, liens have declined by 43 percent,
levies by 86 percent, and seizures by 98 percent.
You note in your testimony that the enforcement work the IRS does
is extremely labor intensive. The Administration has proposed
increasing the staffing for enforcement actions by 1,857 FTE, largely
through the re-application of resources. Does the Oversight Board
believe that the Administration's budget plan to increase the FTE for
IRS enforcement actions by re-applying resources will actually result
in an increase in the number of enforcement actions?
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