[JPRT 106-JCS-4-99]
[From the U.S. Government Publishing Office]



 
                   STRATEGIC PLANS AND BUDGET OF THE
                     INTERNAL REVENUE SERVICE, 1999


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

                              JOINT REVIEW

                               before the

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

                                and the

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

                       One Hundred Sixth Congress

                             First Session

                               __________

                              MAY 25, 1999

                               __________

                                JCS-4-99

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


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

BILL ARCHER, Texas, Chairman         CHARLES B. RANGEL, New York

                      COMMITTEE ON APPROPRIATIONS

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

                     COMMITTEE ON GOVERNMENT REFORM

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

                          COMMITTEE ON FINANCE

WILLIAM V. ROTH, Jr., Delaware,      DANIEL PATRICK MOYNIHAN, New York
    Chairman

                      COMMITTEE ON APPROPRIATIONS

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

                   COMMITTEE ON GOVERNMENTAL AFFAIRS

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



                            C O N T E N T S

                              ----------                              
                                                                   Page
Press Release of May 19, 1999, announcing joint review...........    vi

                                WITNESS

Internal Revenue Service, Hon. Charles O. Rossotti, Commissioner.    12

                       SUBMISSIONS FOR THE RECORD

Statement of Senator William V. Roth, Jr.........................    73
Questions submitted for the record by the Honorable Michael P. 
  Forbes and the responses of the Honorable Charles O. Rossotti..    77

                                APPENDIX

Joint Committee on Taxation, Report of the Joint Committee on 
  Taxation Relating to the Internal Revenue Service as Required 
  by the IRS Reform and Restructuring Act of 1998 (JCX-24-99), 
  May 20, 1999...................................................    89



JOINT REVIEW OF THE STRATEGIC PLANS AND BUDGET OF THE INTERNAL REVENUE 
                             SERVICE, 1999

                              ----------                              


                         TUESDAY, MAY 25, 1999

    The joint review met, pursuant to notice, at 11 a.m., in 
room 1100 Longworth House Office Building, Hon. Bill Archer, 
Chairman of the Joint Committee on Taxation, presiding.
    [The press release announcing the hearing follows:]

    [GRAPHIC] [TIFF OMITTED] T7610.001
    


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

                              ----------                              


                         TUESDAY, MAY 25, 1999

                          House of Representatives,
                               Joint Committee on Taxation,
                                                    Washington, DC.
    The joint review met, pursuant to call, at 11 a.m., in room 
1100, Longworth House Office Building, Hon. Bill Archer, 
Chairman of the Joint Committee on Taxation presiding.
    Representatives present: Archer, Portman, Kolbe, Forbes, 
Horn, Coyne, Hoyer, and Kucinich.
    Senators present: Stevens, Grassley, and Kerrey.
    Chairman Archer. The Committee will come to order.
    Today, we continue the important work that was begun by the 
Congress in the IRS Restructuring and Reform Act of 1998, which 
we passed last July.
    This Act was, I believe, a major victory for America's 
taxpayers. It was the first major reform of the IRS since 1952, 
and it was long overdue. In passing the Act, we made it clear 
that the IRS is to put taxpayers first. We included in the Act 
an arsenal of almost 100 new taxpayer rights and protections 
including a shift in the burden of proof and protections for 
innocent spouses, who usually are women.
    The IRS Restructuring and Reform Act also provided for 
improved oversight of the IRS and held IRS employees 
accountable for their actions. The Act struck an appropriate 
balance between protecting taxpayers and providing the 
necessary tools to fund the government.
    I am proud to be a part of the Congress that put America's 
taxpayers first and protected America's taxpayers from IRS 
abuses.
    While the IRS Restructuring and Reform Act is landmark 
legislation, it is only a first step. Ultimately, I believe 
that the true answer is to provide America with a new tax 
system--one that is fairer, simpler, less intrusive, less 
costly, and that creates more economic growth.
    Until that day comes, we must do all we can to ensure that 
America's taxpayers are treated fairly. We must ensure that the 
spirit, as well as the letter, of the IRS Restructuring and 
Reform Act is fulfilled.
    I am disappointed that the White House has not fulfilled 
its obligations under the Act. The Act called for the President 
to nominate members of the new independent IRS Oversight Board 
within 6 months after the date of enactment, and that was 
January 22 of this year. It is now over 10 months after the 
date of enactment, and no nominations have been made.
    While American taxpayers work hard each year to pay their 
taxes on time, the White House is 4 months late in setting up 
the independent IRS Oversight Board as Congress required. 
That's just not fair and sets exactly the wrong example. I urge 
the President to fulfill his obligations and nominate members 
of the IRS Oversight Board right away.
    We, the Congress, must also fulfill our obligations under 
the Act and continue the diligent oversight that ultimately led 
to its passage. The requirement for the joint review that we 
are having today stems from the concerns of the National 
Commission on Restructuring the IRS that the several 
Congressional committees with jurisdiction over the IRS will 
pull the IRS in different directions.
    This joint review provides an opportunity for all the 
committees of jurisdiction to receive the same information 
regarding the long-range goals of the IRS and to provide a 
coordinated review of the IRS's goals and its progress in 
achieving them.
    I support Commissioner Rossotti's efforts to implement the 
provisions of the IRS Restructuring and Reform Act and to 
modernize the IRS so that it can deal more effectively and 
appropriately with taxpayers. I recognize the task of 
modernizing the IRS is not an easy one and it may take some 
time. Until broad tax reform can be achieved, I believe that 
implementing the IRS Restructuring and Reform Act will further 
the goals of increasing voluntary compliance with the tax laws 
and ensuring that America's taxpayers are treated with the 
dignity and respect they deserve.
    Commissioner Rosotti, I look forward to hearing your views 
on what has been done and what needs to be done to achieve 
those goals.
    I now recognize Senator Grassley for any comments that he 
might like to make.
    Senator Grassley. First of all, I want to agree with others 
that you, Commissioner Rossotti, are doing an excellent job, 
particularly considering the systemic problems that existed 
within the bowels of the IRS bureaucracy, and you are probably 
tired of hearing that because you wonder whether those 
compliments are sincere, but I have heard that they are sincere 
and they are not in fear of having an IRS audit on the person. 
So I hope you will take those as sincere comments from all of 
us.
    We have come a long way in the last year, but of course we 
have much further to go. Chairman Archer, you should be 
commended for making sure that this mandatory hearing before 
the statutory deadline was actually held. Thank you.
    It is also too bad that the Administration can't seem to 
meet the required deadlines, at least in regards to the 
appointing of the extremely important Oversight Board.
    Given the inherent problems within the IRS, I do have a 
number of concerns about how the restructuring law is or is not 
being implemented. Of course, the number one concern is getting 
the Oversight Board up and running. The Administration has 
really dropped the ball here. They not only have not gotten us 
the nominees, but a couple of the ones that were leaked are 
serious disappointments that I might have trouble supporting.
    Then we see these neatly placed press stories about how the 
new law allegedly has negatively affected enforcement 
collections. The insinuation is that IRS agents are so afraid 
of violating provisions of the new law that they have held back 
on enforcement.
    First of all, these articles failed to mention that many of 
these enforcement figures were down before the law was enacted. 
Also, we concluded that many of the methods used in these 
enforcement actions should, in fact, be illegal; and so we hope 
that a certain percentage of these enforcement actions would go 
down.
    Secondly, some of the taxpayer protection provisions, now 
apparently dubbed by some as 10 deadly sins, are a very 
important part of this restructuring bill. Some are saying 
Congress went too far in passing them. Well, all of them 
required some kind of willful misconduct or assault and 
battery, retaliation or threats.
    Now if an employee engages in any of that conduct, there 
should be firings as the law prescribed. We are not going to 
start watering down these protections just because there is an 
effort by some who never supported the law in the first place 
to undermine its effectiveness.
    I hope you share my views on this, Commissioner, and I look 
forward to your testimony. If I have learned anything in the 
last 16 or 17 years that I have been involved with the 
protecting of taxpayers' rights, we have to be ever vigilant, 
otherwise we are going to be outlasted and outdone by the 
permanent bureaucracy. Thank you, Mr. Chairman.
    Chairman Archer. Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman. I want to commend you 
for your leadership in holding this bicameral IRS joint review 
and doing so ahead of schedule. I wish the White House was 
taking these statutory deadlines set out in the IRS Act as 
seriously as you are, especially with regard to the Oversight 
Board, which are crucial to the long-term reforms we all seek.
    I had the honor to serve as co-chairman with Senator Bob 
Kerrey, who is here, of the National Commission on 
Restructuring the IRS in 1996 and 1997. Senator Grassley and 
Congressman Coyne to my right were also invaluable members of 
that panel.
    In the Commission report, called A Vision for a New IRS, 
and in the subsequent Restructuring Act based on the 
Commission's recommendations, a very clear vision was laid out 
to transform the IRS to better serve taxpayers in the new 
century.
    Among those key changes enacted just last year were to 
first make taxpayer service the top priority of the IRS; 
second, to reorganize the IRS along customer service lines; 
third, to level the playing field between taxpayers and the 
IRS--the Chairman has talked about that, the over-50 new 
taxpayer rights--and, finally, to provide incentives to reach 
up to 80 percent of electronic filing over the next 10 years.
    There are many other recommendations, but those were some 
of the key strategic ones that I wanted to touch on in the 
context of this review today to ensure that those reforms took 
place and that they were sustained over time. We also created a 
more accountable management structure at the IRS, the Oversight 
Board providing expertise, continuity and accountability at the 
top, and finally a more effective oversight structure on 
Capitol Hill.
    I believe this joint review today is one of the key aspects 
of the Restructuring Commission, a key aspect to improved 
oversight of the IRS by Congress.
    During the Restructuring Commission's work, we found that 
there was inadequate coordination between the seven 
Congressional committees that shared IRS oversight 
responsibility, all of which are represented here today; and 
too often in the past we found those committees have had to 
focus on putting out the small brush fires which occur within 
their jurisdiction without looking at the overall forest fire 
that had developed over the years at the Internal Revenue 
Service.
    I believe that is already changing. I believe we saw it 
firsthand in the way that the committees worked together in the 
development of the Act, but this IRS joint review provides us 
with a specific statutory mechanism year in and year out to 
ensure that Congress will focus on the big-picture issues that 
affect the IRS and that we will, as much as possible, speak 
with one voice to you, Commissioner, and to your people on the 
overall direction and progress of the agency.
    So our purpose today is not so much to get into the details 
of the individual issues, but rather the objective today should 
be to focus on the big picture, focus on some of the longer-
term issues such as the IRS budget, the implementation of the 
Reform Act provisions which Senator Grassley just talked about, 
the reorganization plan which the Commissioner is beginning to 
put in place, and to do so in a coordinated and focused way.
    Again, Mr. Chairman, I am delighted we are here at this 
unprecedented gathering, the first joint review. I look forward 
to hearing Commissioner Rossotti's testimony, and I look 
forward to the input and expertise from my colleagues who serve 
on the various committees represented here today. Thank you, 
Mr. Chairman.
    [The statement of Congressman Portman follows:]

    [GRAPHIC] [TIFF OMITTED] T7610.002
    
    [GRAPHIC] [TIFF OMITTED] T7610.003
    
    Chairman Archer. Thank you, Mr. Portman. The Chair observes 
that Senator Roth was unable to be here with us today because 
he is occupied with an amendment on the Senate floor and a 
Finance Committee hearing. Without objection, the record will 
be held open for any statement that he would like to make and 
for any statement of any other Member that unavoidably could 
not attend today's hearing.
    The Chair now recognizes Senator Kerrey.
    Senator Kerrey. Thank you. I would simply say that I look 
forward to the testimony of Commissioner Rossotti, and I regret 
that the Oversight Board has not only not been appointed, but 
had they been appointed, that Oversight Board would be present 
at this hearing today.
    Under the law, the Oversight Board has the authority to 
review budget and strategic plan, and it would have made this 
hearing a lot more constructive. I know that the Administration 
has started to get them vetted and that creates some time lags, 
but I do look forward someday to seeing Mr. Rossotti before 
this committee, but also with all of the other members of the 
Oversight Board.
    Chairman Archer. Mr. Coyne.
    Mr. Coyne. Thank you, Mr. Chairman. I would like to take 
this time to welcome Commissioner Rossotti and look forward to 
hearing his testimony. In the interest of hearing from the 
Commissioner, I would like to submit my statement for the 
record.
    Chairman Archer. Without objection the entire written 
statement by any Member will be included in the record.
    [The statement of Mr. Coyne follows:]

               Opening Statement of Hon. William J. Coyne

    Today's session is the first annual hearing on the Internal Revenue 
Service held jointly by the House and Senate committees having 
jurisdiction over aspects of the Internal Revenue Service. As we begin 
our bipartisan review, I look forward to discussing with the IRS 
Commissioner recent improvements in administration of our tax laws and 
his vision for the future. The IRS restructuring and reform legislation 
enacted last year has already had a positive effect on the taxpaying 
public. Much, however, still remains to be done.
    Taxpayers already are benefitting from a new IRS management team 
and a modernized tax system. The 1999 filing season is proof that 
improved taxpayer services will make a difference. IRS telephone lines 
and walk-in return preparation assistance now are available 24 hours a 
day, seven days a week. Taxpayers nationwide already are seeing the 
impact of reformed innocent spouse rules, improved taxpayer 
notification of audit issues, and clearer IRS forms and instructions. 
Soon funding will be provided by the IRS to taxpayer clinics--through 
schools and tax-exempt organizations--to provide legal assistance to 
those needing help to resolve their tax cases.
    With each of our Committees and Subcommittees conducting oversight 
of the IRS, our messages to the IRS Commissioner and employees often 
are conflicting or raise different priorities. The authors of the joint 
hearing mandate hoped that this proceeding would clarify the voice of 
Congress and provide the IRS with clearer directions.
    With this goal in mind, I look forward to our discussion of the 
IRS's strategic plans and proposed budget for fiscal year 2000. 
Specifically, I must emphasize that Commissioner Rossotti strongly 
urged the Ways and Means Oversight Subcommittee to support full-funding 
of the IRS's fiscal year 2000 budget, as requested by the President. I 
am convinced that the IRS must have the tools and resources to do its 
job well, and that proper funding is a critical step to a successful 
restructuring and reform of the IRS.
    I hope that we all can agree that it's time to evaluate where we 
are and give the IRS a chance to perform. The agency is in the midst of 
a major reorganization. Congress' clear and consistent message to the 
IRS should be one of active support, guided by a long-term commitment 
to excellence.

    Chairman Archer. Senator Stevens.
    Senator Stevens. Thank you very much, Mr. Chairman. I 
appreciate the opportunity to be with you also, and I would 
like my statement to appear in the record as though read. I do 
want to congratulate you, particularly, for holding the hearing 
on time.
    I have just left the Library of Congress where we have made 
more progress on the digital program there, and I am amazed at 
the speed with which the IRS is adopting the digital mode and 
electronic filing.
    And as Chairman of Appropriations, I am very interested in 
the fact that I am told if a taxpayer files a return which has 
a refund coming electronically, that will be back to the 
taxpayer in 6 to 8 days, rather than 6 to 8 weeks and that the 
cost is less than one-tenth of handling the return if filed in 
the normal way on paper.
    I think we are coming a long way towards making some 
savings. You, Senator Grassley, Senator Roth and others, should 
be congratulated for the basic Act. This Reform and 
Restructuring Act is working. It follows to a great extent the 
progress that we made in terms of the bill that came out of the 
Governmental Affairs Committee and in terms of the basic 
concepts of restructuring the whole Federal Government.
    I am delighted to know that as we are proceeding here that 
we are going to have more and more input from all of the 
committees that are affected, and I look forward to working 
with you. I do thank you for the opportunity to be with you 
today.
    Chairman Archer. Thank you, Senator.
    [The statement of Senator Stevens follows:]

                    Statement of Senator Ted Stevens

    I want to thank Chairman Archer for scheduling this hearing and for 
the opportunity to discuss the changes taking place within the IRS with 
Commissioner Rossotti. Part of those changes are as a result of the IRS 
Restructuring and Reform Act of 1998, while other improvements are the 
result of advances in technology and data gathering. These changes are 
important to the overall goal of improving IRS customer service for the 
American people.
    With the new improvements in technology we are seeing more returns 
filed electronically. According to Commissioner Rossotti's printed 
statement, the amount of returns filed on-line in 1998 increased by 161 
percent compared to 1997. This should mean more efficient processing 
and review of returns.
    We are all used to waiting six to eight weeks to receive our refund 
checks, if we are entitled to a refund. Now I am told that a taxpayer 
who files electronically and has his refund direct-deposited into a 
bank account can get his money in as little as eight days--not eight 
weeks. That is a real improvement and it is very cost effective--
costing the IRS only 3.9 cents to direct-deposit a refund into an 
individual's bank account versus 45 cents to issue a traditional check.
    The IRS has also made improvements in reducing the cost of 
collecting revenue. According to the IRS, the cost of collecting $100 
dollars in 1997 was 44 cents. This was the lowest cost since 1982. As 
Chairman of the Senate Appropriations Committee I am interested in 
seeing this type of agency efficiency. As former Chairman of the 
Governmental Affairs Committee I am interested in seeing IRS strive for 
concrete goals in customer service. This is what we envisioned by the 
Government Performance Results Act developed in that committee.
    I represent a State where many of the people still do not have 
running water or a centralized delivery system for electricity, much 
less access to the Internet for electronic filing. Universal 
availability of these on-line services should include all of Alaska and 
the rest of rural America. This is something we are working on and I 
urge my colleagues and the IRS to keep that in mind when we talk about 
improvements in service and technology.
    Lastly, we should understand that the best reform possible is the 
simplification of the U.S. Tax Code.

    sChairman Archer. Mr. Kolbe.
    Mr. Kolbe. Thank you, Mr. Chairman. I don't have an opening 
statement, but would just like to thank you for having this 
hearing and would like to say that in my responsibility as 
Chairman of the subcommittee that funds the IRS, I am pleased 
we can say that our subcommittee, in a bipartisan way, has met 
the needs of the IRS.
    We fund their requests, the Administration's requests, in 
order to carry out the mandates of the Reform Act, and 
certainly we will continue to do so to meet these needs. I look 
forward to hearing the testimony of Commissioner Rossotti and 
the comments of my colleagues. Thank you.
    Chairman Archer. Mr. Forbes.
    Mr. Forbes. Mr. Chairman, I will also submit my opening 
statement for the record. I just would look forward to hearing 
from Mr. Rossotti on a couple of key issues, particularly 
eliminating the confusion that I think exists, particularly now 
under reorganization, but in all fairness has existed upwards 
of half a dozen years in some of the regional service centers 
as to what their exact mission is.
    I think there is still some confusion about what those 
missions are, whether it is customer service or processing. I 
look forward to hearing from you on retraining, particularly 
sensitivity training and how that would be delivered; and 
finally on a growing and continued concern by Members of 
Congress on taxpayer privacy. Thank you for being here.
    [The statement of Mr. Forbes follows:]

         Opening Statement of Representative Michael P. Forbes

    Commissioner Rossotti, thank you for being here this morning. In 
1997, Congress held a series of hearings where the American people saw 
the Internal Revenue Service almost literally on trial. They saw a 
parade of witness come before Congress to testify about the naked abuse 
of power over at the Internal Revenue Service.
    We saw current and former IRS agents who had to testify in secret 
because they feared for their lives. We saw ordinary citizens, 
taxpayers, who talked about how an audit turned their entire lives 
upside down, with some of them suffering great financial loss that will 
never be recovered. We saw a government agency totally out of control, 
lacking accountability, an agency where one is guilty until proven 
innocent.
    We saw and heard all this and we acted to put a stop to it. We 
enacted sweeping reforms of the IRS to make it more efficient and 
taxpayer friendly, and we provided critical new protections for the 
American taxpayer to make the IRS more accountable.
    In a sense, the Internal Revenue Service Restructuring and Reform 
Act put the IRS on probation. Today, we see in part if they are 
behaving themselves.
    The IRS has a work force of around 100,000 people, this compares to 
the 50 largest business organizations in America. The IRS is projected 
to process during the 1998-1999 tax filing season that is just winding 
down over 228 million tax returns, including over 126 million 
individual returns, and it expects to have issued over 93 million 
individual refunds, while collection $1.7 trillion.
    The IRS has offices in every State in the Nation, and the National 
Treasury Employees Union is one of the largest labor unions in the 
country. The IRS deals with over 12,000 financial institutions and 12 
Federal Reserve banks in some 600 locations.
    Turning such a massive troubled ship around is not easy and it 
cannot be done quickly.
    But, from what I have seen and heard from talking to Commissioner 
Rossotti at Appropriations hearings, IRS employees in my Long Island 
district and ordinary taxpayers, Charles Rossotti is doing an excellent 
job of doing what Congress asked him to do, make the IRS, more 
efficient and more accountable.
    Charles Rossotti is the first nontax lawyer to head the IRS since 
World War Two and it is his outsider's viewpoint and experience that 
have made his efforts to date so successful. In the private sector 
Charles Rossotti knew his organization would not be successful without 
putting customer service No. 1 on his priority list.
    The IRS's previous mission statement read in part: ``The purpose of 
the Internal Revenue Service is to collect the proper amount of tax 
revenue * * *''
    Today, under Commissioner Rossotti, that mission statement reads: 
to ``Provide America's taxpayers with top quality service by helping 
them to understand and meet their tax responsibilities and by applying 
the tax law with integrity and fairness to all''.
    Thanks to the reform enacted by Congress and the leadership of 
Commissioner Rossotti we are starting to reinstall the attitude of 
customer service at the IRS, putting the word service back into the 
Internal Revenue Service.
    Certainly mistakes will be made, but we can correct those mistakes. 
Uncovering and correcting those mistakes is in fact the very reason we 
are here this morning.
    I look forward to Commissioner Rossotti's testimony and continuing 
to work with him to ``Provide America's taxpayers with top quality 
service.'' They deserve and expect nothing less.

    Chairman Archer. Mr. Hoyer.
    Mr. Hoyer. I too want to congratulate you on having this 
joint review, which I think is historic, in having this many 
Members of both the Senate and the House convene to oversee the 
implementation of a very significant change in how the IRS is 
managed and how it operates.
    I want to congratulate Mr. Portman and Mr. Kerrey on their 
leadership, as well, on this issue. I was not always the most 
enthusiastic supporter of their efforts, although I think there 
have been very positive results from the passage of the bill 
and in fact, I voted for the conference report, although I did 
not support it initially. I want to state at this hearing at 
the outset, that as a Member of the Treasury Postal Committee 
since 1983, I have seen the IRS develop and develop its 
problems and frankly not come to grips with some of the 
problems that it had.
    And I had a discussion with Secretary Rubin about 4 years 
ago with reference to the management of IRS and suggested, as I 
know others on this panel suggested, that what IRS needed was a 
manager, not a tax lawyer, not somebody who was interested in 
policy, but somebody who was interested in how to serve the 
taxpayer best and manage a very large enterprise that was 
complex, but critically important to the operations of 
government.
    I want to use my time to congratulate Secretary Rubin and 
Deputy Secretary Summers. Mr. Chairman, I know that you have 
been involved longer than I, but I don't know of any Secretary 
of the Treasury since I have been in the Congress who has paid 
more attention to management issues than Secretary Rubin.
    All have paid attention to policy issues, but Secretary 
Rubin, in fact, paid very close attention to management issues. 
And prior to the adoption of the Act made substantial changes, 
the most significant of which was to ask Commissioner Rossotti 
to take a 5-year contract, not just an 18-month or 2-year, 
which we saw a cycle of Commissioners which really wasn't long 
enough to get a handle on what they needed to do and do it.
    Mr. Rossotti, I want to congratulate you for your positive 
involvement in making sure that the Reform and Restructuring 
Act works and making sure the IRS functions in a business 
manner--businesslike manner and a customer-friendly manner.
    I think this hearing will be positive because you have a 
positive report to give us, and I look forward to hearing that. 
And I am very appreciative, Mr. Chairman, that we have this 
collegial environment--where we have split responsibility but 
joint responsibility in making sure that the taxpayers get the 
best possible service, the most honest and fair service that 
they can get. Thank you, Mr. Chairman.
    Chairman Archer. Thank you, Mr. Hoyer. Mr. Horn.
    Mr. Horn. Thank you, Mr. Chairman. I commend you for 
bringing us all together and focusing on this very important 
matter. I want to thank Members of my committee on both the 
Democratic and Republican side.
    We started on this in 1993-1994 when Mr. Condit chaired the 
Management Subcommittee of then House Government Operations; 
and we all saw what was happening, and we weren't too happy 
with that. So out of this, as you know, came the chief 
financial officer, the strategic plan, the balance, the fiscal 
sheet and so forth.
    When we took over in 1995 on a bipartisan basis, we wrote 
the President and said, Mr. President, there is an opening here 
and we hope you will find a chief executive--previous 
Administrations under whether Republican or Democratic auspices 
either put a tax accountant, as fine as they are, or a tax 
attorney in that position, and it was very clear the IRS needed 
better management than that.
    We found their debt collection was really nonexistent. We 
passed a law that affected everybody but the IRS, and we hope 
the relevant authorization committees will include the IRS 
under that law. It is absolutely wrong to have over a hundred 
billion dollars in uncollected debts and another pile we were 
shown by Mr. Rossotti's predecessor there was a $60 billion 
group, and they had no real organization to deal with that.
    And I am delighted to also praise Secretary Rubin because 
after we wrote the President to get a chief executive-type in 
there, not more tax accountants and tax lawyers, he went out 
and talked to some of the major industrialists in America as to 
who he could bring in as a Commissioner.
    I think Commissioner Rossotti was a splendid choice. When 
he testified before us a year ago, he said he would shift the 
entire focus of the agency from one which focuses solely on 
conducting our own internal operations to one which puts far 
more emphasis on trying to see things from the point of view of 
the taxpayers and emphasizing service and fairness to 
taxpayers.
    A few months after that testimony, July 22, 1998, the IRS 
Restructuring Act was signed into law, and I commend Mr. 
Portman and the others who were very deeply involved in it. The 
initiatives presented by the Commissioner last year go hand in 
hand with the broad array of provisions in the IRS Reform and 
Restructuring Act, and we held an annual meeting with the 
Commissioner, which just happened to be on April 15, and he 
told us the first steps that he has implemented toward 
restructuring and refocusing the agency.
    In addition, we have held very candid discussions on the 
challenge that lies ahead--and there are many--and I wish the 
Commissioner well. And I hope that it isn't just 5 years--I 
hope it is 10 years because when you turn around a corporate 
culture, you have got to do it.
    There are many fine people in the IRS, and he has the 
responsibility, since he cannot put any political appointees in 
there, to promote from the bureaucracy the people that share 
his vision, and that will be a tough assignment that is 
essential to the success of his goals and strategic plan. Thank 
you, Mr. Chairman.
    Chairman Archer. Thank you, Mr. Horn. Mr. Kucinich.
    Mr. Kucinich. Thank you, Mr. Chairman. It is an honor to 
join with you and the members of the panel. I am also pleased 
to be here with my good friend, Mr. Horn, with whom I worked 
very closely on these issues relating to IRS reform and 
particularly with respect to the matter of collection of debts.
    Good morning, Commissioner Rossotti. I want to thank you 
for being here with us this morning to tell us about some of 
the changes that you made to make the IRS more taxpayer 
friendly. Without taxes, our government could not provide the 
protections, benefits, and services Americans depend upon. 
Thus, it is imperative that the IRS successfully fulfill its 
mission to collect taxes.
    I appreciate the difficulty of completing this monumental 
task; however, it is important that taxpayers are treated with 
respect and are given information that they need to meet their 
responsibilities. Furthermore, we need to ensure that our 
resources are appropriately directed at ensuring that everyone, 
including large foreign-controlled corporations doing business 
in the United States, pay their fair share. I look forward to 
your testimony, Mr. Rossotti. Thank you.
    Chairman Archer. Thank you, Mr. Kucinich. Commissioner 
Rossotti, you have heard comments by Members which preface your 
presentation. We do have your complete statement which will, 
without objection, be included in the record. I understand that 
you have requested 15 minutes for your oral presentation and we 
are happy to grant you that.
    I join with my colleagues in complimenting you on the job 
that you have done and the personal sacrifices that you have 
made to be able to take on this very, very difficult job. We 
are happy to have you before us and we will be pleased to hear 
any comments that you would like to make to us.

                   STATEMENT OF MR. ROSSOTTI

    Mr. Rossotti. Thank you very much, Mr. Chairman, and all of 
the Members for your gracious comments. I will try not to take 
all of the 15 minutes and follow your lead in being ahead of 
schedule. I am certainly pleased to be here at this first joint 
hearing on the Internal Revenue Service.
    Since the beginning of 1999, I have testified on eight 
occasions before most of the committees represented here, and 
we have covered a wide range of topics, such as the budget 
request, the 1999 filing season, and implementation of the 
restructuring law. So, I think at today's joint hearing, we 
have an excellent opportunity to discuss broadly how all of 
these pieces fit together.
    I believe that, although each of the provisions of the 
restructuring law individually is very, very important, the 
bill as a whole says something even more important; I think 
what it said was that the IRS must change direction. We must 
not only collect taxes, but we must think of our job as serving 
the people who are paying the taxes, America's taxpayers.
    I have been in office 18 months, and I have become more 
convinced, as a matter of fact, that we can succeed in this 
mandate that the Congress gave us. I do not believe that this 
mandate implies or requires less effective tax collection. I 
really believe that we can have a tax agency that simply does a 
better job on all aspects of our mission.
    So, today, what I would like to do is discuss how we are 
interpreting and implementing the mandate that we believe we 
have and how it relates to the resources that we will require. 
I would also like to thank the Joint Committee staff for 
preparing this analysis which provides good commentary on many 
of the details of our program.
    Let me start with a few of the intangible, but nevertheless 
some of the critically important, changes that we are making. 
As required by the RRA, we have restated our mission to clarify 
the purpose of the agency.
    And, equally, to make this mission a reality, we have also 
reformulated our goals, which are the standards by which we 
will measure our own performance in achieving our mission. And 
there is a chart over here which lays out the new mission and 
the three goals.
    [Chart 1 follows:]

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    Mr. Rossotti. As stated on there, there are three goals, 
and the first two are directly derived from the mission 
statement. They describe the two ways that we serve the 
taxpayers.
    Individually, we must provide each taxpayer the service 
that he or she expects and the rights that the taxpayer 
deserves. But, collectively, we must also serve all taxpayers 
by administering the law fairly, ensuring that those who do not 
comply are not allowed to unfairly burden the rest.
    Finally, we have a third goal, which is to conduct our 
mission with the fewest possible resources, which we believe we 
will achieve by providing a high quality and productive work 
environment for our employees.
    We will not achieve our mission unless we achieve all three 
goals. And if we do achieve all three goals, we will, by 
definition, collect taxes efficiently as well as fairly. 
Clearly, this is a difficult task which requires balancing 
multiple objectives; but it is not impossible, nor is it one 
that is fundamentally different from the task that almost every 
large business organization faces.
    In my previous company, we helped large clients design and 
build computer systems. We had to make each of our clients 
satisfied so they would give us repeat business and good 
references so we could stay in business. But we were also a 
publicly owned company and we had to be profitable so we could 
keep our shareholders satisfied.
    What this meant was that we had to charge our customers 
adequate prices for our services, and we had to collect our 
bills on time. And not uncommonly, this meant that we sometimes 
had to ask our customers to pay more than they might have liked 
or pay faster than they might have liked.
    Further, we depended on retaining good employees and making 
them productive so we could serve our clients. In other words, 
to succeed in our business, we had to achieve and reconcile 
multiple objectives, just as we do here at the IRS.
    So, one of the most important steps we have already taken 
is to clarify our mission and goals and make it clear to 
everyone that we do have to achieve multiple objectives, all 
three goals.
    Now, one of the most powerful means of communicating this 
to each and every employee is through a new system of balanced 
performance measurements which we are beginning to implement 
throughout the agency this year. This system translates our 
mission and goals into very operational terms in regard to 
customer service, collections, examination, and other 
functions.
    We are currently conducting extensive training for every 
executive and manager in the IRS in the system, and we are also 
revising our job descriptions and appraisal systems for almost 
all of our employees so they will be aligned with our mission 
and those three goals.
    Now, it is important--it is very important to do that, to 
articulate our mission and our goals and our measurements; but 
we will also not succeed unless we actually revamp the way that 
we go about doing our business.
    Within the IRS and in other private and public 
organizations, there are innumerable successful examples of how 
we can improve our way of doing business. These improvements 
hold out the prospect of advancing all three of our goals and 
not to a minor extent, to a major extent.
    Over here there is a chart entitled ``Improved Business 
Practices Advance All Three Strategic Goals,'' and it lists 
some of the areas for improvement in IRS business practices.
    [Chart 2 follows:]

    [GRAPHIC] [TIFF OMITTED] T7610.005
    
    Each one of these broad areas actually implies hundreds of 
more specific changes in the way business is done. We have, at 
the present time, a process in place to set priorities for 
these improvements, to focus on those that can be done in the 
next 12 to 18 months.
    In that time frame, we settled on 161 near-term actions, 
and those include many of the taxpayer rights provisions. That 
is only a small beginning of what we can achieve longer term as 
we get into our new modernized structure and technology.
    Let me illustrate with a few examples how these kinds of 
improvements can advance all three goals. As Congress noted in 
the Restructuring and Reform Act, and Senator Stevens noted in 
his opening statement, increased electronic filing of returns 
holds great promise for improvement in speed, accuracy, and 
cost of filing.
    However, the opportunities for electronic exchange of 
information are not limited to the filing of returns. Linking 
practitioners and eventually taxpayers to the IRS in a secure 
way over the Internet will allow many account issues to be 
solved faster and more efficiently.
    And internally improved electronic exchange of information 
will provide our employees with the information and the 
expertise that they need to resolve taxpayers' problems more 
quickly and more accurately. These kinds of improvements 
advance all three goals, reducing time spent by taxpayers 
dealing with the IRS, reducing the number of phone calls, and 
freeing up our compliance employees to focus on compliance 
issues, rather than just retrieving or correcting information.
    A second example, one of the most efficient actions the IRS 
can take, is to head off taxpayer errors before they occur. As 
an example of how to accomplish this, we are working with the 
Small Business Administration to develop specialized services 
for small businesses, especially start-up businesses, to help 
the entrepreneurs obtain everything they need to meet filing 
and paying requirements. Right now, this comes in the form of a 
CD-ROM as well as an Internet site. It also includes staffing 
SBA business information centers with people to answer tax 
questions.
    Now, since it is very costly for both the taxpayer and the 
IRS to resolve an issue after a small business taxpayer has 
filed incorrectly, every such problem prevented not only 
increases compliance directly, but it frees up IRS resources to 
deal with more serious compliance issues.
    A third example is that most of the tax issues with large 
businesses where many dollars are at stake revolve around 
interpretation of the tax law when applied to a specific set of 
business circumstances.
    The rapid increase in international business, for example, 
increases the importance of such issues as how income is 
apportioned among many corporate entities in many countries. 
Determining the accuracy of such accounting in audits that may 
take place many years after the business transactions have 
occurred is extremely difficult and inefficient for both 
taxpayers and the IRS.
    By addressing such issues before the fact, for example with 
advanced pricing agreements, or by examining more 
contemporaneous analysis presented by the taxpayers, as is now 
required by regulation, the likelihood of correct 
interpretation can be increased and the cost of compliance for 
the taxpayer and the IRS can be reduced.
    Finally, my last example, collecting. All businesses must 
collect money due from customers. There is a vast amount of 
experience and technology that has been developed to make this 
process efficient and effective.
    The essential elements of these proven practices are to 
identify collection risks as quickly as possible and to 
intervene either through phone calls or visits or by mail to 
resolve the issues as early as possible in a way that is suited 
to the financial circumstances of the customer.
    These are proven and widely known ways of improving 
collections. And in applying them, the customer not only 
benefits, in the IRS case in reduced interest charges and 
penalties, but also the likelihood of the IRS receiving payment 
is much greater.
    This method of collection offers major opportunities for 
improvement for the IRS and taxpayers, especially given that 
today's methods are very slow and relatively inefficient.
    Many of these improvements will produce additional revenue, 
although they will not show up under the statistic that is 
commonly known as enforcement revenue, which has traditionally 
been given undue importance because of the lack of measurement 
of overall compliance.
    A 2 percent increase in compliance as a result of these 
kinds of business improvements will equal 100 percent of the 
revenues that we get from case-oriented enforcement actions. I 
would note that the Joint Committee staff report has an 
excellent discussion of these issues.
    These kinds of improvements do, however, require 
investments to fund changes in organization, training, and, 
especially, technology. This process of continuous change and 
improvement to enhance performance, which is what our whole 
modernization program is all about, is actually no different 
from what practically every business in America must do to 
remain competitive. The major difference at the IRS is that we 
have more catching up to do.
    Now, at many of the hearings so far, I have been asked what 
are the resources needed to accomplish the mandate. At this 
hearing, I would like to step back from the details of our 
current budget request and consider the relationship between 
the IRS mission, programs, and resources over the next few 
years.
    Looking at the chart, which is entitled ``IRS Resources & 
Workload,'' we can see, in the last 5 years, the IRS has been 
shrinking in size relative to the economy and this trend will 
continue through fiscal year 2000.
    [Chart 3 follows:]

    [GRAPHIC] [TIFF OMITTED] T7610.006
    
    The economy has grown in real terms by 20 percent, while 
the number of full-time employees has been reduced by about 13 
percent. The IRS has shrunk by about 30 percent, and it is 
important to note that 70 percent of IRS employees deal 
directly with taxpayers in providing information or in working 
on specific cases.
    Thus, for the most part, this shrinkage has resulted in 
less activity, especially in the most expensive case-oriented 
activities such as examinations, criminal investigations, and 
collections.
    For example, the number of individual returns with over 
$100,000 of income has increased by 56 percent over the last 5 
years while the number of such returns examined has decreased 
by 21 percent. The recent press publicity about the decline in 
examination coverage simply reflects this basic arithmetic.
    Clearly, the path the IRS had been on cannot continue. To 
simply continue doing business the same way while the economy 
grows and resources decline will eventually undermine the whole 
tax system.
    Fortunately, as I have discussed briefly here today, and in 
more detail in the document submitted for the record, I believe 
there is a better way, and that is to take advantage of 
improved management and business practices and new technology 
to improve the way that we accomplish our mission and goals.
    In terms of resources, I believe this approach is captured 
in our third goal on the chart, which is to improve 
productivity through a quality work environment. Translated, 
what this simply means is that we can do the job with a limited 
workforce at approximately the current level even while the 
economy grows and while we improve service, if we make the 
necessary improvements and investments.
    This would continue to allow the IRS to shrink in terms of 
full-time employment relative to the size of the economy. And 
in budget terms, this is also important since the cost of the 
workforce for pay and benefits is about 70 pecent of the 
budget. This approach, however, does depend critically on 
obtaining assured investment funds every year for improvement 
of our organization business practices and technology; and in 
our budgets for the coming years, we will request funds for 
these investments.
    I appreciate the support that we have received from the 
committees that oversee the IRS, all of the committees, and 
look forward to working with all of the committees on the task 
ahead. Thank you, Mr. Chairman.
    Chairman Archer. Thank you, Commissioner, and thank you for 
synopsizing your full statement, which we will definitely 
review.
    [The statement of Mr. Rossotti follows:]

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    Chairman Archer. I have just one question to ask you. Your 
organization, the IRS, is a very large organization with almost 
a hundred thousand employees. An effective management reform 
requires accountability at all levels across the country.
    How can you ensure that changes that are directed from the 
top are actually implemented at all levels of your 
organization, particularly if there are any people who are 
resistant to change within the organization?
    Mr. Rossotti. Well, of course, this is part of what the 
change process is like in any large organization; and, I think 
anyone would say there is no single answer, no one answer to 
that question.
    I will just tick off some of the things that I think are 
important. One is to make clear what direction the change is 
supposed to be in. I think this was part of the problem when I 
arrived. There was talk about change and there were 
recommendations coming in, but it was hard to act because it 
was not crystallized.
    I think in articulating the goals and principles in our 
mission statement, we have communicated this very widely 
throughout the organization.
    And, secondly, translate it into job performance, 
measurement, and appraisals. We are doing that for nearly every 
employee and certainly every executive and manager.
    A third thing is to pick people at the top who can provide 
leadership. Through the provisions that you have enacted in the 
Restructuring and Reform Act, we have more flexibility to do 
that than we had before.
    With me today are some of the members who have come in from 
the outside, as well as some members who have been willing to 
stay on and take on new responsibilities from the inside, to 
provide leadership at the top, and we are continuing that 
process.
    The final point is that we are reorganizing. One of the 
main reasons for reorganizing is to have clearer accountability 
for actually delivering end-to-end results to a specific set of 
taxpayers and have a management team that can be held 
accountable. As it is now, responsibility is pretty fragmented 
because of the complex evolution of the IRS organization.
    Having said all of that, I think those are pretty proven 
ways of doing as you suggest. I think that, notwithstanding all 
of those proven ways, it is going to take some time. I don't 
think that there is any quick solution. I think we have to 
sustain this activity over a period of years to succeed.
    Chairman Archer. Thank you. Senator Grassley.
    Senator Grassley. Thank you very much for your statement 
and your good work. I have just two questions.
    Enforcement collections may be down, as that has been the 
trend--my understanding for awhile, but what are the overall 
numbers for collections? Haven't collections of taxes increased 
substantially over the last year?
    I could just as easily argue that new taxpayer protections 
have led people to increase their voluntary compliance so that 
you don't need as much enforcement.
    Mr. Rossotti. I don't have all of the numbers here with me, 
Senator, but certainly overall collections are growing and the 
enforcement part of that only represents 2 percent of the total 
amount. So I think the thrust of your statement is accurate.
    I think what is important about what has been reported is 
that we do have to effectively target our enforcement in those 
places where it really is necessary, where there is deliberate 
noncompliance and where there are major compliance issues, 
because that is only fair to the rest of the people.
    But I think that the kinds of practices that we have talked 
about here have the opportunity to allow us to do that by 
basically more carefully focusing our enforcement resources 
where there is a real hard-core need to do that and using other 
techniques to basically encourage, educate, or otherwise prompt 
and assist people who are willing to comply to do so. And that 
is what our whole balanced program is all about.
    So, I guess my feeling is that I am one who believes that 
we can achieve all three goals. I don't believe that we have a 
choice to make between effective tax collection and proper 
treatment of taxpayers. I think our job is to reconcile all 
three of these objectives, and I believe that is quite possible 
to do.
    Senator Grassley. My last point would be to ask you in a 
summary sort of way to tell us what you are doing to make sure 
that the taxpayers bill of rights are fully implemented?
    Mr. Rossotti. Of course, there are over 70 provisions in 
the RRA that affected taxpayer rights and some are complex.
    We have put, since the bill went into effect, a major 
amount of our resources and leadership into implementing each 
and every one of those provisions. One of the significant ways 
of doing this is through training, and we have already 
delivered in this fiscal year over 2\1/2\ million hours of 
training just on the Restructuring and Reform Act provisions.
    Having said that, I will be honest with the committee. We 
have a great deal more to do. Some of the provisions, in 
particular, are very, very important; but they also are 
complex, such as the innocent-spouse provision which was 
mentioned by the Chairman in his opening remarks.
    These provisions come from new and different methods of tax 
administration than have been used in the past, so we have a 
significant job of interpreting these provisions and then in 
training our employees.
    We have identified 161 near-term priorities, things to 
implement in the next 12 to 18 months. More than half of them 
are items specifically related to implementing the taxpayer 
rights provisions. So we have made a significant amount of 
progress.
    We have met statutory deadlines in all cases, but we have 
not fully trained all of our employees to a level that we are 
satisfied with. So for the remainder of this fiscal year and 
into the next fiscal year, this will remain a significant 
priority for all of us in the leadership in the agency.
    Senator Grassley. Thank you, Commissioner Rossotti and Mr. 
Chairman.
    Chairman Archer. Mr. Portman.
    Mr. Portman. Commissioner, I want to commend you for your 
new mission statement, your goals, and business practices that 
are in front of us this morning.
    I would like to talk about management and some other 
issues, but I think it is more important to focus on the 
collection and enforcement side because, in terms of your 
strategic direction, that is where I am hearing the most 
concern raised.
    GAO commented that the effect of the diversion of resources 
from traditional collection activities may affect revenues. 
There have also been reports that collection activities have 
been reduced. You talked a little about that today.
    We have seen some press accounts with regard to a provision 
of the Reform Act that was enacted last year that has to do 
with making IRS employees more accountable for their actions 
by, in essence, saying that they would be terminated for 
certain very egregious acts.
    Press reports have said that IRS personnel are reluctant to 
engage in enforcement activities because of the fear of 
reprisal or termination of employment.
    First, in general, how do you think changing the way the 
IRS deals with taxpayers has and will affect revenue going 
forward? If you can, give us some specifics in terms of the 
business practices. I look at the chart at improved 
collections, electronic information exchanges being improved, 
use of technology being improved, identifying problems earlier. 
I am giving you some suggestions and maybe some answers, but 
how do you think that revenues will be affected over time, and 
we will all be held accountable for this because we will know 
in a few years.
    Secondly, if you can, respond regarding reports about the 
fear of reprisal or termination because of the Restructuring 
Act provisions. Do you think that is a widespread problem 
within the IRS? Do you think that enforcement is not at an 
appropriate level because of those provisions?
    Mr. Rossotti. Well, your question covers a lot of 
territory. Let me divide the answer into two parts. One is what 
has actually been happening, a clarification of that and what 
we can do about it.
    When you look at what has been happening in terms of what 
is called the ``traditional case-oriented enforcement,'' 
especially on the collections side, there are three things that 
have been affecting this.
    One is simply the budget reductions and the fact that we 
have fewer staff and since the case-oriented activities are 
very personnel intensive, if you have fewer staff, you do less 
case-oriented enforcement actions.
    The second thing is that there are significant additional 
uses of staff as a result of the backlog of old cases and the 
sort of deficit in customer service that had accumulated, as 
well as the new procedural provisions that we are implementing 
from the Restructuring and Reform Act.
    For example, the due process and collections provisions, 
which are very important provisions, require a significant 
amount of manual intervention before you can take a collection 
action. In the initial period of implementation, that by itself 
would have reduced some of the collection activities. So you 
have those additional requirements.
    And, then, third are the psychological factors you 
mentioned which certainly include the various investigations 
that we had internally related to misuse of enforcement 
statistics in the prior period, as well as the new provisions, 
such as section 1203, which is the one that I think you are 
referring to which imposes mandatory termination.
    Those are issues that have certainly caused confusion and 
anxiety in our workforce which we need to work on allaying. I 
don't think that anyone in our workforce would probably dispute 
the fact that if someone is found guilty of some of these 
serious issues of misconduct they should suffer a penalty. The 
difficulty is clarifying what constitutes one of those 
offenses.
    In terms of what we are doing about those three things, we 
have to divide what we do immediately and longer term. 
Immediately, we have to work on clarifying and implementing 
effectively some of the provisions of the RRA. But we have a 
lot more work to do to implement these provisions effectively.
    For example, we have to do more training for our employees 
to explain how to implement these new taxpayer rights 
provisions and still operate efficiently. We have to do a 
better job clarifying what section 1203 means so people can 
understand what I believe is the intent of the Congress, which 
is that provisions are not intended to affect good employees 
who are doing their job in the normal course of events, but are 
intended only for serious issues of misconduct.
    Those are things that we are all working on today and will 
have in effect in the near term. I also should note in terms of 
pure revenue effect, in the short term the reduction in 
collection--our collection actions this year represent about 
one-tenth of 1 percent of our total revenue collections. So it 
is not that it is unimportant, but it is not something that is 
having a major impact overall in terms of total collections in 
the near term.
    Long term is what is most important. If we basically have 
two paths, we could try to go back to the old path of 
predominantly case-oriented and relatively slow intervention, 
which I think is not economical and probably would not be 
practical given the new provisions that are on the books, or we 
could try to do business in a more modern way which says 
basically we do everything that we can through technology and 
education and other means to head off problems and make 
taxpayers compliant on their own, which most taxpayers are 
willing to do, and then be much more effective in intervening 
quickly and on a very targeted basis where that is necessary.
    That is basically the strategy that is behind this. That is 
not a quick thing to do because technology is a big part of it. 
Training and organization are a big part of it, but the 
modernization program is aimed at doing that.
    None of this is rocket science. In business and in State 
tax agencies, some of my colleagues with me have done this in 
other venues. You can improve collections and improve service 
at the same time. You have to take enforcement actions in some 
cases. You have some taxpayers who are not compliant. We don't 
want to forgo that tool, but it needs to be done at the 
appropriate time in the appropriate way.
    Chairman Archer. Senator Kerrey.
    Senator Kerrey. Thank you very much, Mr. Chairman. 
Commissioner Rossotti, can you talk about how your life is 
going to change under the law with an Oversight Board?
    Mr. Rossotti. Of course, I can only speculate a little bit 
because it is not here yet, but I think the predominant aspects 
of this Board that the authors such as yourself had in mind are 
going to be extremely valid. Specifically, the notion of having 
a relatively small, but experienced, group of people who will 
invest the time to understand in depth what all these different 
kinds of changes are all about, to challenge these proposals, 
to be a group that has some credibility to validate that these 
programs make sense, to help us explain the importance of the 
changes that we are making, and also, of course, to vet the 
budget on, hopefully, a multiyear basis.
    I can't do this at the appropriation level yet, but at 
least internally we need to look at the changes on a multiyear 
basis. With the Board, I would anticipate that, based on the 
statutory responsibilities and just normal practice, they would 
look at us to come forward with some multiyear plans for our 
changes and what we expect to get in return for it.
    So I view this Board as potentially a--just as a corporate 
board would be, as a group of experienced people who are 
willing to invest their time to understand, in some depth, the 
issues that face a given organization, to challenge the 
management to come forward with programs on a multiyear basis, 
and to solve those problems.
    And, if they agree with them, to then be a supporter of 
those programs and explain to the broader public why those 
programs make sense.
    Senator Kerrey. Under the law and, in fact, prior to the 
enactment of the law, there was a great debate about how much 
authority to give this Board. We, for example, struck 
authorities in law enforcement, in tax policy, in the taxpayer 
advocate--originally the Board was to recommend three 
individuals to be the taxpayer advocate. In your case you were 
given new authorities as well as a 5-year term under law.
    I appreciate very much that the President selected you and 
recommended you, but as a consequence of elections, you never 
know who the new Commissioner is going be. Now we do. Unless 
you decide to leave, we know that departure won't occur as a 
result of a political decision. And, as a result, it is easier 
for you to manage changes, the wrenching difficult changes.
    But the Board also has considerable authority. It is not an 
advisory board. Dare I mention it, it has the authority to 
recommend your removal to the President. It has authority to 
review your budget, is directed under law to meet once a 
quarter, and it is supposed to select the chairman from the 
private individuals on the Board.
    I say that because there is an urgency not just to get the 
Board over to the Senate and confirmed and appointed, but there 
is a reason we are anxious to get that Board, because it is 
difficult to implement the law without that Board there with 
its full authorities. The vision was that the Board was to 
establish a relationship between the Congress and the IRS.
    It was to help increase Congressional confidence, 
especially with budgets, but also in other areas. There is this 
whole issue of compliance versus customer service. That is an 
issue that the Board is empowered to examine, although with 
some limits.
    I wonder if you can act as the Board because you have given 
this testimony many times, eight times apparently, but if you 
were the Chairman of the Board, what would you tell this joint 
committee as far as the amount of money that has been 
recommended?
    Are there going to be strains internally between the 
tremendous amount of retraining that has to occur with all of 
the structural changes and the increase in demand and the 
increased complexity of returns?
    Can you--you said you think you can get the job done, but 
can you talk to us as if you were the Chairman of the Board 
about the strains that are going to be there with increased 
volume and increased complexity and increased training with a 
budget that is basically inflation adjusted and going to be a 
cut? I guess $8.1 billion is the President's request.
    I am going to be anxious to hear what the Chairman and the 
Ranking Member have to say in that regard because it is going 
to be very difficult to carry the law out if you don't get the 
appropriate amount of resources.
    Mr. Rossotti. Yes. One of the things that boards do is to 
look very carefully at the investments that an organization is 
proposing to make and whether you are going to get a return and 
whether that makes strategic sense. We are precisely in a 
position where we need to make investment in technology and in 
training and reorganizing, and we are going to have to be 
making those requests for the investment money every year.
    While the nature of an investment is that you put up the 
money now and you get the return later, I think one of the 
reasons that you have a board of experienced peopole is to take 
a close look at those kinds of proposals and say yes, we as a 
group believe that we should make these investments; that they 
will achieve appropriate returns in terms of meeting these 
goals; and that they are the best options that anyone can come 
up with, and we stand behind the idea that these should be 
made.
    That was contemplated in the legislation and that makes 
sense to me, especially in a time like we are in now where we 
do have to make these investments. We know that the IRS has not 
been that successful in some periods in the past in putting 
that money to good use. It was understood that it needed to be 
done, but it didn't always pay off in the way that was 
expected.
    So here is an opportunity to have a group of people who 
have nothing at stake other than their public service and who 
have a great deal of experience in terms of their prior life to 
take an objective look at it and say does it make sense or 
doesn't it make sense?
    If they say it doesn't make sense, we won't do it. If they 
say that it makes sense, we can, hopefully, come to the 
Congress and to the public with greater assurance and say look, 
we have to do this. We have reviewed these and vetted them, and 
they think this makes sense. That is sort of what I see the 
process being once we get this process rolling.
    Chairman Archer. Mr. Coyne.
    Mr. Coyne. Thank you, Mr. Chairman. Commissioner, if 
Congress for whatever reason was not to grant the $8 billion 
request that the President has made for Fiscal Year 2000, what 
programs would be unfunded or underfunded?
    Mr. Rossotti. As you know, it is already a very tight 
budget. I think there is nothing easy or obvious that you could 
defer or take out of the budget that I am aware of.
    In reality, what would happen, I believe, is that we would 
have to make a choice between deferring the investments in 
technology and management, which are going to basically produce 
these returns that we need to have, or we would continue to do 
what we have been doing the last years, which is basically not 
to hire as people leave and reduce the workforce even more, 
thereby eroding the ability to conduct our daily activities.
    So it isn't a choice that is a good one. And even with the 
funds that are requested in the budget, we will not really have 
everything that we would have liked to have had, obviously; but 
it would be at least enough to continue some hiring, to 
stabilize to some level the workforce, and to make some 
progress on the investments that we need to make. So the budget 
situation doesn't have a lot of flexibility in it, is what I 
think it comes down to.
    Mr. Coyne. Thank you. What percentage of individual 
taxpayers file voluntarily without the need for any IRS 
enforcement action?
    Mr. Rossotti. Well, in terms of filing, virtually all file. 
But a better way to explain this is that about 98 percent of 
the money that comes in comes in without any direct 
intervention by us other than to provide information and 
assistance. So the enforcement-oriented activities account for 
about 2 percent of the revenue that is collected, slightly over 
2 percent.
    Mr. Coyne. So 98 percent of the money due to the IRS from 
individual taxpayers comes in without any enforcement 
procedure?
    Mr. Rossotti. About 98 percent of the money that is 
collected comes in without enforcement action.
    Mr. Coyne. Thank you.
    Chairman Archer. Mr. Kolbe.
    Mr. Kolbe. Thank you, Mr. Chairman.
    Commissioner Rossotti, let me ask you a couple of questions 
on specific things that I am interested in. I know during the 
current filing season you have had to reduce some of your 
activities in terms of getting Y2K compliance. And now that the 
tax filing season is over, I wonder if you can give us an 
update as to where you think you are on the testing and 
readiness for Y2K.
    Mr. Rossotti. Yes, I think that is one of the things that 
is pretty good news in terms of what we were able to achieve. 
As you pointed out, we were alerting people to the concern that 
because of all of the changes that had been made in the 
systems, we might have significant errors or problems during 
the tax filing season. We actually did not have very many at 
all which was a great milestone.
    We have completed about 93 percent of the renovation work 
on the systems. We are just cleaning up some smaller pieces 
that need to be done and what is remaining is further testing 
and integration.
    So beginning actually very soon, we will be beginning 
another version of our major test where we push the clock 
forward and test everything from front to back, and then we 
will be doing a final version of that in the fall beginning 
October 1.
    I don't mean to say that there is still not a lot of work 
to do--there is--but I think we have passed some very important 
milestones, especially with the filing season. I think we can 
have reasonable confidence that we will be able to complete the 
remaining work on time.
    Mr. Kolbe. You are reasonably confident then that you are 
going to be fully in compliance by January 1?
    Mr. Rossotti. Yes.
    Mr. Kolbe. I am pleased to hear that report because if does 
represent a significant improvement over certainly a year ago 
and over some improvement in March when you appeared before our 
committee.
    Let me ask you about the tax systems modernization. 
Obviously this ties into much of what has been talked about 
here. The technology investments are certainly critical for 
this. You alluded to this when you made mention of the fact 
that the IRS has not always been successful with its 
investments in the past. I think we can safely say it has been 
something of a disaster.
    We have really blown somewhere around $4 billion to $5 
billion in terms of integrating that into a complete system. I 
believe you are going to be coming and asking for the money 
that was appropriated last year; you are going to be asking for 
the first dollop of that to be spent. And I would like to know 
where you think we are in terms of the design, the 
architectural design, of the system, of a new system that you 
are working on?
    Mr. Rossotti. Yes. That is one of the most important and 
expensive things that needs to be done, and I think having now 
been here 18 months, I can say, looking at the IRS computer 
systems, that they truly are one of the real impediments to 
being able to provide the kind of service and compliance that 
we want.
    We have very old systems, and they present, I think, an 
ongoing risk of being able to sustain our business. We 
absolutely need to do this, but it is a huge challenge, because 
it is so big and so old.
    Now, where we are, I think, is that there are several 
important elements that need to be in place to make this 
program successful going forward. One is to have an overall 
architecture and set up some technology standards, how we are 
going to manage this program, which is something that didn't 
exist before.
    That had been done before I got here. Before I got here, 
there was a good job of a technology blueprint that was laid 
out, technology standards and some high level outlines of what 
needed to be done.
    A second thing that needed to be done is that internally we 
had to reorganize our information technology resources so they 
could be managed in a coherent and single way, and we did that 
beginning in October of last year.
    We took all of these diverse pieces and put them 
organizationally under one individual, Mr. Cosgrave, who is 
here with me, which was the third major piece, recruiting a 
leader for this organization who had the experience to be able 
to manage such a huge operation. Mr. Cosgrave came in from the 
private sector with 25 years of experience and has brought a 
great deal of leadership to this.
    The fourth one was, of course, to go out and engage the 
services of a private sector contractor, which we call a PRIME 
contractor, which we did through a competition. As you know, we 
selected Computer Sciences Corporation. They came on last 
December.
    The final piece of this is to put in place a more detailed 
plan and a more detailed process for managing all of this which 
is what we have been working on. We had to get CSC on board to 
begin to do that, and we have done that.
    We have been working on it for 6 months, and now we are 
just in the process of coming over to the Congress, as provided 
by the legislation, to ask for just the first set of money out 
of the information technology account.
    We are asking for about $35 million, which will be for 
detailed planning of the first initiatives that we expect to 
launch. The first actual development projects that we hope to 
launch will be actually within the next few months, assuming 
that we get the funding released; and we will hopefully begin 
to get some of that implemented in the following calendar year, 
after the year 2000, before the 2001 filing season.
    That will be oriented towards our taxpayer service, our 
communications, our telephone service, our Internet service 
with taxpayers. That will be our first project that we hope to 
begin to implement. That is kind of a broad outline.
    By the end of September, we also hope to have an updated 
plan that will lay out for the next 3 to 5 years the major 
programs that we will be doing year by year. There will be many 
that fit into this overall architecture.
    I think we have a very organized program. It is a very 
high-risk and challenging program, but I think we have put in 
all of the known things or are in the process of putting into 
place all of the known management techniques that need to be in 
place to make such a program successful.
    Mr. Kolbe. Thank you, Mr. Chairman.
    Chairman Archer. Mr. Forbes.
    Mr. Forbes. Following up on Mr. Kolbe's question if I 
might, Mr. Rossotti--and I think the history is checkered, to 
be generous, three very critical GAO reports and Congress 
feeling the need both in fiscal year 1998 and again in fiscal 
year 1999 to lay out specific instructions to the IRS relative 
to IRS systems modernization.
    I continue to join with many of my colleagues, Mr. Kolbe 
and others, to express grave, grave concern. Your summarizing 
of where the IRS is right now in correcting the ills of the 
past, I hold great hope in what you have laid out initially; 
but it is continuing to be troubling that almost a decade after 
the Congress authorized IRS to upgrade and modernize its 
information technology systems that we seem to be--maybe 
struggling isn't a fair word now, given what you just told Mr. 
Kolbe regarding where you are in improving the information 
systems.
    But I don't think that it can be lost on this committee and 
the Members of Congress that this is a critical part, as you 
well know, of effecting the IRS's strategic plans and your 
reorganization plan in a very successful way.
    So I would just suggest that I remain very, very concerned 
that we may be hearing a lot of well-intentioned efforts and 
plans laid out, but effecting those plans, I think, is very 
much a concern, I would venture to say, and I would hope that 
we are going to look favorably a year from now on the great 
progress that is made on the modernization system.
    Please correct me if I'm wrong, but I can't help but think 
that this is just a critical piece of the restructuring and 
reform efforts that Congress has asked the IRS to undertake.
    Mr. Rossotti. Mr. Forbes, I can't disagree with anything 
that you have said. It is absolutely critical. I really don't 
think that you can administer the tax system of the United 
States in any kind of efficient or effective way over the long 
term with the computer systems that we have in place.
    They really are not acceptable and not adequate in terms of 
efficiency and service, but also in terms of some of the things 
that I know Mr. Horn is interested in terms of controls and--
financial controls. We just don't have systems that have those 
things built in to modern standards. It is absolutely true what 
you say.
    Secondly, I can't disagree with the fact or the point that 
you made that it is a high-risk operation. I mean, it is 
something that has not been as successful in the past as it 
should have been. And even in the private sector, this kind of 
large-scale change coming from way behind to where we are is 
not an easy thing to do.
    I will say this, that it is an important point from my 
personal point of view and I know that my colleagues that have 
come in to work on this feel the same way--that we are going to 
manage this program very, very closely on a project-by-project 
basis.
    We have broad plans that we will come forward with because 
you need those to set priorities, but when it comes to going 
forward with any particular project, this will be divided up 
into many specific projects.
    We have an executive steering committee, we have a program 
management office, and we have the PRIME contractor; and we 
insist on having a business case and a clear set of proposals 
for every phase of every project before we move forward, which 
is why, actually, we haven't even come before the Congress 
yet--we are now--but for the first 6 months that we had our 
PRIME contractor we did not come and ask for any of the money 
sitting out there in the account because we didn't feel that we 
were ready to say how we were going to manage this next phase. 
And now we are only coming forward with planning money for the 
next increment.
    This does not guarantee that we won't make some mistakes 
and some projects won't go awry, because that happens in this 
kind of a business; but it won't be $4 billion and 5 years 
before we find out. That is probably one of the few things that 
we could guarantee.
    Mr. Forbes. Thank you.
    Chairman Archer. Mr. Hoyer.
    Mr. Hoyer. I would like to follow up with your comment on 
the 98 percent. What you meant by that, of the 100 percent 
collected, 98 percent is voluntarily submitted and not the 
result of enforcement efforts. Am I correct on that?
    Mr. Rossotti. Yes. It simply means of the total money that 
we actually collect, a little over 2 percent comes in from 
case-oriented actions like audits and collection. It is not the 
same thing as what would be collected if everybody paid every 
dollar.
    Mr. Hoyer. That is the follow-up that I wanted to get. 
Obviously, although the United States is probably better than 
any other nation, at least industrial nations in the world, we 
are--what portion now is paid of what is owed?
    Mr. Rossotti. That is the other number. If everybody paid 
everything that they should pay under the law, how much do we 
actually pay? Unfortunately, we don't have very reliable 
information because the last study done is 11 years old.
    But the best number extrapolated from the old data says it 
is about 87 percent. I would not put a lot of faith in that 
number, Mr. Hoyer, because again it was based on studies that 
were done 11 years ago.
    Again, the Joint Committee staff has done a good job in 
this report of explaining this problem. Apart from all of the 
other things that we need to do, we need better information and 
data. We need to rebuild our capital in that area as well as 
other areas by coming up with more effective analysis and 
studies of where noncompliance is and isn't, because these 
numbers are based on very old studies; and I don't think that--
the extrapolations are so old, they are not very reliable.
    Mr. Hoyer. Clearly that would help us. Let me follow up on 
the enforcement issue. There was an article that occurred 
February 28, 1999, by Albert Crenshaw in which Mr. Kolbe, our 
Chairman, who has been very concerned about doing what the 
Commission found important, and that was providing the 
requisite resources to carry out the job--I thought that was a 
very useful contribution that the Commission made also--and it 
was incumbent upon the Congress not to change the rules every 
year so that there would be some continuity to the process.
    But with respect to the enforcement side, there have been a 
number of questions there and we have talked about it, but Mr. 
Kolbe made a statement that nowhere in the mission was 
collection of taxes articulated, but we did articulate how we 
want to be fair to the taxpayer.
    Mr. Kolbe made another observation. If you had a police 
department that all of the time after they made an arrest the 
person said I didn't do it, and they said, ``oh, I am sorry'', 
and left, we wouldn't have an effective law enforcement 
process.
    If you extrapolate 3 to 1, 4 to 1 dollars spent for dollars 
collected, and we have cut enforcement both in FTEs and in 
terms of dollars available to them, what impact do you think 
that is having on collections?
    Mr. Rossotti. Could I just go back to one of your other 
points? There is nothing about our mission statement that says 
we are not going to be effective in collecting money because 
part of the mission statement----
    Mr. Hoyer. I was quoting Mr. Kolbe.
    Mr. Rossotti. I think it is a very valid point and that is 
why I made this chart and showed what is intended. If we 
administer the law fairly and effectively, we will collect the 
taxes because that is what it means to administer the law 
fairly and efficiently and part of that is applying enforcement 
resources where necessary.
    We want to be sure that we use them effectively and target 
them where they need to be used and provide the right kind of 
encouragement and service to those who are trying to comply so 
we get that 98 percent up.
    But as far as effect, clearly, if all you do is cut your 
resources as we have done here, and, as I mentioned in my 
opening statement, it mathematically follows if you reduce the 
number of revenue agents and increase the number of returns, 
you are going to reduce the number of audits. That is going to 
have some direct revenue effect.
    I think the strategy that we need to follow, given that we 
do have limited resources, is to certainly not continue the 
shrinkage. I think that is what the budget proposal was. We 
cannot continue the shrinkage.
    We have to have the staff. We cannot just continue reducing 
while the economy grows. But if we can stabilize the staff and 
make the investments in improved practices and improved 
technology, we will use our enforcement resources where they 
can do the most good, and we will use our other techniques to 
conserve those resources so they are only used where they need 
to be used.
    I think that is basically the strategy that we are 
following and we can follow. If you talk about collections, for 
example, frankly we are not using our collection resources 
today very efficiently. Mr. Horn and I have talked about this 
at length.
    Part of the reason--a big part of the reason is technology. 
But a big part is also old practices and old organizational 
structure. We are using about 90 percent of our collection-
officer time and our phone-collection time on very old 
accounts, more than a year or two old in some cases.
    It is not because the collection officers are doing 
something wrong. It is simply that the whole structure is set 
up that way. It has evolved that way over many years.
    As we reform that process and begin to reorganize, we will 
be able to focus those resources where we can do both the 
taxpayer and ourselves more good by getting in there and 
resolving those issues quicker and getting the money quicker, 
reducing interest and penalties and conserving the amount of 
resources that we use.
    This does require investments. We cannot just turn on a 
switch. We need better data about the taxpayers, and a 
different structure to manage this collection operation. This 
is just an example of how I think we can improve on all of our 
goals at the same time if we do it right.
    Mr. Hoyer. Mr. Chairman, I know my time has expired, but 
you had indicated getting the 98 percent figure up. My own view 
is, and one of the things our committee has discussed for a 
long time, particularly when we had significant budget 
deficits--and Chairman Archer will remember, certainly, in the 
1980s where we had anywhere between $100 billion plus in 
uncollected revenues due to the Federal Government--if it is 87 
percent, whatever that figure is, it seems to me that is the 
figure that we are really looking at getting up because that is 
revenue due under whatever tax rates that we have. The failure 
to pay, putting a greater burden on those who are paying.
    Mr. Rossotti. The only point there is that there is more 
than one way to do that. And some of the ways that we are doing 
it today are not particularly efficient, and that is what we 
can improve through this process.
    Chairman Archer. Mr. Horn.
    Mr. Horn. Thank you very much, Mr. Chairman and 
Commissioner. You are obviously clairvoyant as to what I would 
deal with here. Is there any further authorization that you 
need as the Commissioner and that the Internal Revenue Service 
needs in order to effectively use the authority that you have 
to collect the debts that are over a hundred billion dollars in 
one pile and 60 billion dollars or more in the other pile? Do 
you need anything else under law in order to do your job?
    Mr. Rossotti. Well, I think in terms of flexibility to 
rearrange things and to change the way that we do business, we 
really got a lot of that in the Restructuring and Reform Act.
    What I think we need the most is sustained support in the 
form of investment funding, especially for technology over a 
period of years, but not only technology, also to retrain. The 
training is a smaller part of the money than the technology; 
but I think, as Senator Kerrey noted, it really is equally 
critical.
    It doesn't do any good to have tools if the people don't 
know how to use them. We need to retrain--especially our 
collection officers, but really our whole workforce. They are 
the first ones to ask for this training. It is not that we are 
pushing this on them. They are saying give us the help that we 
need.
    What I think we need more than changes in the law is 
support over a period of years, 3, 4 years, to go down this 
path, to stay on the course and to get the investment funds 
that we need which are mainly for technology, but not only for 
technology because the training and the management piece is 
also very important.
    I think if we get that, the good news here is that we, 
especially in the collection area, can emulate practices that 
are proven elsewhere, both in State government and the private 
sector.
    Mr. Horn. When I talked to one of your predecessors years 
ago, I said what about the use of private collectors, and I was 
told there are privacy laws. We can't do that.
    I said, Wait a minute. All you have to do is give them the 
address and what they owe the IRS. If there is an argument on 
what they owe, obviously the IRS personnel ought to work with 
them on that.
    It seems we have been missing a lot when we haven't used 
private collectors to collect these debts. What is your feeling 
on that?
    Mr. Rossotti. We have discussed this.
    Mr. Horn. I would like this one on the record.
    Mr. Rossotti. In my previous role in business, we did a lot 
of work on collections, and we worked with a lot of private 
collection agencies, and at the right time there could be an 
opportunity to do that.
    I have to say honestly right now we have much preparatory 
work to get our data organized. One of the things we found when 
we had an experiment was that the data is so poor that what you 
would turn over to a private collection agency, if you could 
get by the privacy laws, isn't going to make them very 
effective.
    I think our first priority has to be to basically organize 
our information and organize our process. When we get that, I 
think there might be an opportunity to augment certain segments 
of collection with the private sector. I have done that 
previously, but today I would be hard pressed to do that.
    Mr. Horn. Would you need authorization in order to use 
private collectors?
    Mr. Rossotti. I don't know. I would have to research that.
    Mr. Horn. I would hope when you look at that you would seek 
the authority if you don't have the authority. You are being 
crippled. You can't do your job unless you have that additional 
arm.
    One other aspect, bankruptcy laws. A lot of that debt I am 
told by various and sundry people are people that have gone 
into bankruptcy. Should some thought be given as to a pattern 
and practice over time where somebody takes a bankruptcy, has 
never paid a dime to the Internal Revenue Service, and what do 
you think? Is there any way you can get a strategy here to get 
them somewhere down the line? The rest of us pay our taxes, and 
to see those people getting away with this bothers the average 
citizen.
    Mr. Rossotti. I have to honestly say bankruptcy is a 
complicated area, and I wouldn't want to venture a comment 
because I don't honestly know enough--the interaction between 
bankruptcy law and the tax law gets to be pretty complicated. I 
would be glad to look into that and get back to you, but I 
don't feel that I can answer you right now.
    Mr. Horn. I would appreciate if you could give some 
thinking to that.
    The last point is interchangeability here of information 
between Federal agencies. For example, if one is seeking a Pell 
grant in this country, one of the major means of access to 
higher education, there is a needs test there.
    What is the relationship between the Department of 
Education and IRS? Can they check your files at all to see if 
the person is really eligible, because I know one study was 
done a year ago or so that found here is a guy with a $100,000 
who is in for a Pell grant when thousands are standing in line 
trying to get it.
    Mr. Rossotti. Again, this is a specific question and I hate 
to--I think there is some work going on in that area, but I 
don't think that we have an accurate answer. But I can get back 
to you specifically from the Department of Education.
    Mr. Horn. Mr. Chairman, I would certainly like the answers 
at this point in the record.
    Chairman Archer. Without objection, so ordered.
    Mr. Horn. Thank you very much.

          The Effect of Serial Bankruptcies on Tax Collection

    The Bankruptcy Code has few restrictions on the filing of 
successive bankruptcy cases, except that a debtor may not generally 
obtain a discharge of debts in a Chapter 7 (liquidation) case if the 
debtor previously obtained a discharge of debts in a bankruptcy case in 
the prior six years. A debtor may file a succession of Chapter 11 
(business reorganization) or Chapter 13 (debt adjustment) cases without 
seeing any to completion. While a debtor's Chapter 11 or 13 case is 
pending, the Service is automatically stayed from attempting to collect 
any prepetition taxes the taxpayer might owe. But serial filings may do 
more than temporarily disrupt collection.
    In the Bankruptcy Code, Congress gave a favored (``Priority'') 
status to many prepetition unsecured tax debts over the prepetition 
unsecured debts a debtor may owe to other creditors. This priority 
status is generally given by the Bankruptcy Code to income taxes and to 
other taxes incurred in the three years preceding the taxpayer's 
bankruptcy petition. (Trust fund taxes and the trust fund recovery 
penalty, on the other hand, never lose their priority status under the 
Bankruptcy Code.) If the Service timely files its claim for priority 
taxes in a Chapter 11 or 13 case, the debtor is required to pay the 
priority tax claim in full under the debtor's confirmed plan. Priority 
taxes are also excepted from discharge. Congress intended that such 
taxes should be fully paid in bankruptcy or remain collectible from the 
debtor after bankruptcy.
    Taxpayers are able to frustrate the Bankruptcy Code's priority and 
discharge scheme for taxes by filing successive bankruptcy cases. 
Income and other non-trust fund taxes entitled to priority status in a 
taxer's first case may ``age'' beyond priority status while the first 
case is pending. By dismissing the first case after taxes have aged 
sufficiently and then filing a second case in which the taxes are no 
longer entitled to priority treatment and are no longer excepted from 
discharge, the taxpayer may escape the obligation to fully pay the 
liabilities. Many courts have remarked on the abusive nature of this 
practice. See, e.g., In re Waugh, 109 F.3d 489, 493-94 (8th Cir. 1997). 
Noting that the statute of limitations on collection of a tax debt is 
suspended under the Internal Revenue Code while collection is prevented 
by a taxpayer's bankruptcy case, these courts have also suspended the 
Bankruptcy Code's tax priority and discharge exception periods. Other 
courts have not, in light of the absence of any express provision for 
doing so in the Bankruptcy Code.
    In an August 28, 1996, letter to the National Bankruptcy Review 
Commission (NBRC), Chief Counsel proposed that the Bankruptcy Code be 
revised to clarify that priority tax periods are tolled while 
collection was prohibited during a prior bankruptcy case. This proposal 
was approved by the NBRC and is included (as to income taxes) in 
parallel sections of bankruptcy reform legislation that has been 
considered by the House and Senate in 1999--section 805 of H.R. 833 and 
section 705 of S. 625. While the administration has expressed 
reservations about several other provisions of the bankruptcy 
legislation being considered this year, the administration letters 
prepared by the Justice Department have generally supported these 
tolling provisions.
        Disclosure of Information to the Department of Education
    The Internal Revenue Service can only disclose tax information to 
the Department of Education if such disclosure is authorized by I.R.C. 
Sec. 6103. Section 6103 provides that tax information is to be kept 
confidential unless the taxpayer consents pursuant to section 6103(c) 
or disclosure is permitted by some other specific provision of the 
Internal Revenue Code. Under current law, two Code provisions 
specifically authorize disclosures to the Department of Education. They 
are I.R.C. Sec. Sec. 6103(m)(4) and (l)(13). Under section 6103(m)(4), 
the IRS may provide the Department of Education, upon written request, 
the mailing address of taxpayers who owe an overpayment of Pell grants 
or who have defaulted on student loans administered by the Department 
of Education for the purpose of locating such taxpayers to collect such 
overpayment or loan. Under section 6103(l)(13), the IRS may provide the 
Department of Education, upon written request, certain tax information 
to carry out its Income Contingent Repayment Program. Theses two 
provisions do not address disclosures to determine eligibility for 
financial assistance.
    The Higher Education Act Amendments of 1998 added a provision to 
Title 20 authorizing the Department of Education to confirm with the 
IRS four discrete items of tax information for the purpose of verifying 
information reported by applicants on student financial aid 
applications. This provision, however, did not amend the Internal 
Revenue Code, nor did it amend section 6103 of the Code, and thus does 
not operate as an exception to I.R.C. Sec. 6103. Accordingly, there is 
no present disclosure authority which specifically authorizes the 
release of tax information to the Department of Education for the 
purpose of verifying the eligibility of applicants for Pell grants. The 
Department of Treasury and the IRS are, however, presently engaged in 
discussions with the Department of Education and the Office of 
Management and Budget regarding the use of section 6103(c) consents to 
accomplish this goal.

    Chairman Archer. Mr. Commissioner, we would like to wind 
this up no later than 1:00, because I know that you have other 
things on your schedule. I would like to follow up, if I may, 
for just a moment or two.
    You commented about taxes that are uncollected. Is there 
any way that you can develop a standard to have some degree of 
certainty as to what taxes are due that you are not collecting?
    Mr. Rossotti. Yes, there is. There was work done on this. 
There was work done in the 1980s. This is very important to do 
and can be done and needs to be done in order to help us guide 
our activities.
    I wasn't here, but I understand there was some proposal 
made to do a study some years ago that was not favorably 
received by Congress because it was viewed as too burdensome on 
the taxpayers; and, therefore, that was put on the shelf and 
nothing has been proposed since then.
    I believe it is one of the things that we need. Since I 
have been here, we have not yet come forward with a proposal on 
how to solve that, but I think we need to. In order to guide 
our enforcement activities and inform the Congress and the 
public and basically to just run the agency effectively, we do 
need to know what taxes are not collected and where, 
specifically, those areas of noncompliance are; and, frankly, 
we are flying blind because the last study was done in 1988.
    I don't have a proposal to put on the table now, but over 
the next year, or perhaps somewhat longer, I believe it is an 
obligation that we have as an agency to come and propose a 
solution to that problem that will minimize that impact on 
taxpayers, but will still give us the information that we need.
    Chairman Archer. So we may expect that coming from you 
sometime in the future?
    Mr. Rossotti. Yes.
    Chairman Archer. I worry about that because there are so 
many gray areas in any income tax, and there are particularly 
massive gray areas in our income tax that I am not sure how you 
can ever have a standard with any degree of certainty as to 
what taxes are owed or not owed without taking an awful lot of 
cases to court to determine legally what is noncompliance.
    And, in addition, I am worried going into the next century 
about your ability to adequately examine transactions that use, 
to a greater and greater degree, the smart card which can load 
up unlimited amounts of money on a computer chip, on a plastic 
card, and transfer it without trace anywhere in the world.
    And that, frankly, is one of the reasons why I want to 
abolish the income tax and go to a consumption tax where there 
is a higher degree of certainty and you don't run into those 
kinds of problems. I don't know whether you have given any 
thought to that. I am curious as to what you believe might be 
done if you have given thought to it.
    Mr. Rossotti. We have given some thought, but we don't have 
a proposal to bring forward. There are gray areas, so any 
estimate you come up with is not going to be extraordinarily 
reliable; but it can be more reliable than what we have now, 
which is 11-year-old information.
    In terms of the very things that many of the Members of the 
committee have been mentioning, we need to ensure that there is 
compliance, and at the same time do it with limited resources 
and provide good service to taxpayers.
    The key to that is using your resources in areas where 
there is the highest chance of noncompliance. In other words, 
focusing on where it is going to be necessary and that is what 
you need information for that we don't have today.
    For example, more than half of our audits of individual 
returns are selective. The decision to select a particular 
return for audit is done through a statistical formula which 
attempts to predict statistically what the probability of error 
is on that particular return. It doesn't mean that it is 
deliberate, just the probability of error in this return. This 
precedent is well established in the private sector.
    The trouble is, in order to use it effectively, you have to 
refresh these models. You have to look constantly at what the 
different pattern of errors is. As tax law changes, you have to 
adjust for that.
    Well, our scores are really based on that data that is over 
11 years old, which is really a very unsatisfactory thing. So 
we need to go through some sort of a process to get this 
information, and it does require some burden on the taxpayers 
because you have to do some additional audits to get that 
information.
    I hope in the next year or so we will come up with a 
proposal that is carefully thought out, how we can meet this 
need in the least burdensome way to taxpayers, because it is a 
requirement. GAO has noted it, as has the Joint Committee staff 
reporting here.
    Chairman Archer. Thank you, Mr. Commissioner.
    Does any other Member wish to inquire? Mr. Portman.
    Mr. Portman. Commissioner, this has been very helpful and I 
want to commend the staff of the Joint Committee on Taxation 
for putting together an excellent report that was also part of 
the statutory requirement.
    I have one final question. We talked a lot about compliance 
today and enforcement issues. We talked about some of the 
taxpayer rights and information technology and some of the 
challenges that you face in your budget. You have undertaken an 
ambitious task here with the mission statement and goals and 
business practices.
    I guess the one final thing that I would like to ask you, 
if you would share with this panel and for the record as you 
undertake these enormous challenges, what you see as the 
biggest risks involved in ensuring that this kind of 
fundamental change does, in fact, occur.
    Mr. Rossotti. Well, I think broadly speaking--there are a 
lot of very specific risks such as specific technology 
programs. But the biggest risk, the hardest thing is to 
basically, as I sometimes describe it, we are rebuilding the 
house as we are living in it.
    We are trying to collect the taxes and administer the law 
and change the--adapt to changes in the law. At the same time, 
we are rebuilding and rethinking how we are doing this. And, I 
think Mr. Forbes noted it, frankly this does cause confusion. 
It causes confusion in our workforce.
    It causes potential errors that occur, and I think as long 
as we can contain those within a reasonable range and we can 
continue to get support and understanding among especially the 
Members of our oversight committee, that we are managing these 
as best as we can, I think we will stay on the path and pick up 
steam as time goes on in our performance. But we clearly are in 
a transition period for the next couple of years.
    I think this is actually one of the things that the 
Oversight Board was intended to help us deal with, is to have a 
group of people that would be looking at this very carefully, 
and as there are risks and issues that come up, also to help to 
deal with them, but also to reassure people that we are doing 
the right thing in our overall programs so we don't get 
derailed along the way.
    I would summarize it by saying we are on a path, and I 
personally believe that if we get the investments and sustain 
this path, it will lead us to a better way of doing tax 
administration and compliance.
    But there are ditches on both sides of the path, and we 
could fall off them on either side. We could get diverted 
because of budget reasons or crises that come up, because of 
lack of confidence that this program is going to work, many 
things like that. So I think if we can manage those risks and 
stay on this path, I think there is a good destination there at 
the end.
    Mr. Portman. Thank you very much. Let me tell you that I 
think the Board can help you construct the vehicle that will 
keep you out of the ditch. Getting the Board in at the ground 
level with these massive changes, as Senator Kerrey alluded to 
earlier, now is the time.
    We are undergoing this tremendous transition, and they can 
provide you with the expertise and the continuity also beyond 
your 5-year term to be able to be sure that these changes are 
implemented.
    Chairman Archer. Are there further questions?
    Senator Kerrey. I have an answer to a question that I asked 
earlier.
    Chairman Archer. Wonderful.
    Senator Kerrey. Before I do, let me publicly say that we 
wouldn't be here today were it not for you making a decision to 
support and mark this bill up. The Speaker was supportive. 
Democratic leader Gephardt was supportive.
    It was the House action that tipped this thing and gave us 
the momentum that we needed for legislation, and I very much 
appreciate your leadership.
    Commissioner Rossotti, the answer to the question that I 
was asking earlier was next year when you have a budget 
submission, it is going to be different than this year, and 
that is, under the law the Board--you will submit a budget to 
the Board and whatever budget the Board approves, it will then 
be submitted to the Treasury Secretary, which will then go to 
the President.
    And the President has to submit, unrevised, that budget to 
the Congress. He can submit his own budget in addition--he may 
submit the exact same budget, but we will have a comparison. We 
will have what the Board says is needed for the IRS as well as 
whatever makes its way through OMB, which we think is very, 
very important.
    We want this independent board--which has 5-year terms just 
as you do--we want this independent board to be able to do its 
own independent analysis of what the budgetary needs are for 
the IRS. It should be an interesting year next year.
    Chairman Archer. Mr. Hoyer.
    Mr. Hoyer. I think that will make the budget process even 
more interesting, Mr. Chairman. I will bet you they don't come 
in lower. I bet the Board will feel we need to invest more in 
the IRS and not less, and I think they will probably be right.
    Mr. Rossotti, I want to again welcome you; and I want to 
thank the Chairman for his leadership in convening this joint 
review. I think if we had more joint hearings of this type we 
would be a lot more efficient and effective Congress; and very 
frankly, we would give to our managers a lot more time to 
manage and a lot less time to come up here and talk to all of 
us discretely as opposed to collectively.
    Senator Kerrey. If you would yield. An alternative is we 
can change the rules of the Senate and the House to give the 
authorizers the authority to appropriate as well.
    Mr. Hoyer. Or, we can change the rules to have the 
appropriators continue to do what they do best without having 
to involve themselves with the authorizers.
    Chairman Archer. We may have slightly expanded this joint 
review beyond our purview.
    Commissioner Rossotti, thank you very much. I think you 
have to feel very good about the bipartisan support that you 
have with the Members of Congress. We have great reliance and 
trust in you, and we wish you well; and we are open to any 
suggestions that you have as to how we need to improve any of 
the legislative aspects of this to permit you to do your job 
better. Thank you.
    Mr. Rossotti. Thank you very much, Mr. Chairman.
    Chairman Archer. The committee will be adjourned.
    [Whereupon, at 12:55 p.m., the committee was adjourned.]

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